After decades of
quiet existence serving the
nation's financial institutions,
lender-placed insurance (also known as
force-placed insurance) has recently become
the target of several state and federal
agencies, who oversee mortgage lenders.
The agencies are calling for changes in how
lender-placed insurance is used to insure the
properties of mortgage borrowers. The
changes come in an atmosphere of increased
consumer protection, and are an outgrowth
of the turbulence that has characterized
the mortgage lending industry over the
past four years.
Three unrelated events have
taken place in just in the past three months
that call for changes to lender practices
regarding lender-placed insurance:
New Guidelines from Fannie Mae to
Proposed changes announced by the Consumer Financial
Protection Bureau (CFPB), to be
implemented in 2013
A New York State Investigation into
Lender-Placed compensation to Financial
Receiving the most immediate attention is the
Servicing Guide Announcement from Fannie Mae, issued
in March 2012 (read it
here), which would directly affect all FNMA
Fannie's proposed changes include a required
amount of insurance, required deductibles, specific
type of insurance carrier, and required
Within hours of the Announcement's release, both
FNMA servicers and lender-placed insurance providers
began campaigning against the changes, claiming that
they could not be implemented in the required time
frame. Even the Mortgage Bankers Association
of America requested that the changes would be
impossible to implement.
The result was Fannie Mae issuing a Servicing
Notice on May 23, 2012, which postponed
implementation of the changes until further notice.
In April, the CFPB released a four-page summary
of a proposal that it said "would put the 'service'
back in mortgage servicing."
The summary touched on many parts of mortgage
servicing, including the practice of issuing
lender-placed insurance. It notes certain
"abuses" committed by mortgage servicers, no doubt
referring to the very largest mortgage lenders.
Calling for changes similar to the changes called
for by Fannie Mae, the CFPB changes are far
reaching, since they would affect just about every
mortgage lender / servicer in the nation.
CFPB issued a Bulletin in April 2012, announcing
its intention to get the "surprise" out of
servicing. called "is considering
s reach includes all lending institutions, making
New York is demanding a detailed
accounting of the expenses,
claims payments and profits of
nine insurance groups it says
are involved in the business in
New York, and telling them it
plans a hearing in May on the
While equity lending has been a boon for
lenders, the administration (servicing) of
equity loans - for insurance compliance - can
As a mortgage loan, insurance
coverage should be maintained at all times, in
order to protect the lender's interest.
But equity loans, with many lenders, are originated and
serviced in the installment loan department,
which are not set up for escrows, and other "1st
Thus, for insurance purposes, it's like
fitting a square peg into a round hole.
In addition to compliance, there is always the issue of cost.
have several options - with differing
complexities and costs - to
ensure proper due diligence and insurance compliance.
Equity Loans – What is the Actual Risk?
Consider that equity loans…
Rarely, if ever, go to foreclosure
Almost never result in loss, due to
uninsured physical damage (i.e. a fire) to the
Have floating balances, making it hard to
monitor, or later force place, for the proper
amount of insurance
Do not command the high level of insurance
documentation as do 1st mortgages (from
insurance carriers and agents).
Might possibly be simultaneously tracked by
another lender - the first
mortgagee. A duplication of procedure
Equity loans do then present risk to the lender,
risk that is extremely low, and certainly not
equal to the average 1st