How to comply with CFPB lender-placed insurance regulation
Updated August 23, 2022
On January 17, 2013, the Consumer Financial Protection Bureau
(CFPB) released the changes to CFR Part 1024 Real Estate Settlement Procedures Act (Regulation X) that implemented specific provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) that relate to mortgage servicing.
This whitepaper will define 9 steps that servicers need to take to comply with Regulation X (Real Estate Settlement Procedures Act or RESPA) concerning lender-placed insurance.
Strategic Decisions with Regard to Lender-Placed Insurance
Prior to implementing these 9 steps, mortgage servicers should take time to inventory their servicing capabilities with regard to collateral insurance tracking.
Below are two items we consistently observe while working with small to mid-size lenders who track insurance in their loan servicing departments.
- Inefficient outbound notifications – Most servicers are not set up to provide efficient outbound notification letter workflows.
- Risk Transfer – Small servicers do an adequate job of tracking homeowner policy expirations, but the vast majority of servicers are unaware of whether these policies protect them as mortgagees or lienholders.
Lenders who track insurance internally should review their policies and procedures to ensure that personnel, workflows, and technology solutions are available prior to beginning implementation of the 9 steps.
For more information on insurance tracking, please review Miniter’s Complete Guide to Force-Placed Insurance.
The CFPB includes the definition of force-placed insurance in the Regulation. These definitions are broader than the definitions included in Dodd-Frank.
What is force-placed insurance?
Force-placed insurance, also known as lender-placed or creditor-placed insurance, is a technique that a lender (i.e., lienholder) uses to protect its financial interest in a property. When a lender force-places insurance, they are purchasing an insurance policy for a property to replace a borrower’s homeowner’s insurance policy that has lapsed, was insufficient, or has been canceled.
This can occur due to non-payment of premium, filing false claims, etc.
Force-placed insurance is necessary because it protects:
- the property,
- the homeowner,
- and the lender.
Hazard insurance protects a property that is securing a mortgage loan. Hazard insurance provides coverage for losses caused by fire, wind, flood, earthquake and other perils for which the lender requires insurance.
This definition includes homeowners, flood, earthquake, and wind insurance. Since flood insurance is regulated by FEMA, the CFPB is careful to exclude the peril of flood when addressing force-placed insurance.
The Regulation defines force-placed insurance as: “hazard insurance obtained by a servicer on behalf of the owner or assignee of a mortgage loan that insures the property securing such loan.”
The Regulation also defines what is not considered force-placed insurance.
- Hazard Insurance required by the Flood Disaster Protection Act of 1973
- Hazard Insurance renewed by the escrow agreement
Implementation of Definition:
#2: Escrow Loans
Currently, Regulation X (RESPA) requires servicers to make timely disbursements from a borrower’s escrow account and to advance funds if necessary, as long as the borrower’s mortgage payment is not more than 30 days past due.
The Regulation states:
“A servicer is considered unable to disburse funds from a borrower’s escrow account to ensure that the borrower’s hazard insurance premiums are paid in a timely manner only if the servicer has a reasonable basis to believe either that the borrower’s hazard insurance has been canceled (or was not renewed) for reasons other than nonpayment of premium charges or that the borrower’s property is vacant.”
Implementation for “Escrow Loans”:
Implementation requires a servicer to renew the borrower’s hazard insurance regardless of escrow funds availability or stage of delinquency, unless they receive a cancellation notice for reasons other than non-payment of premium, or if the property is known to be vacant.
#3: Basis for Obtaining Lender-Placed Insurance
The Regulation states:
“A servicer may not assess on a borrower a premium charge or fee related to force-placed insurance unless the servicer has a reasonable basis to believe that the borrower has failed to comply with the mortgage loan contract’s requirement to maintain hazard insurance.”
RESPA uses the word “reasonable” in this section. The CFPB provides examples of “reasonable” for both escrowed and non-escrowed loans:
- Escrow Loans: “a reasonable time leading up to the expiration date (e.g. 30 days) that the servicer has not received a renewal bill.”
- Non-Escrow Loans: “reasonable basis to believe a borrower has failed to maintain hazard insurance if, for example, a servicer receives a notice of cancellation or non-renewal from the borrower’s insurance company.
Implementation will require policies and procedures to ensure that the servicer is force-placing insurance only when it is reasonable to believe that a borrower has failed to comply with the mortgage loan contract insurance requirement.
#4: Requirements before Charging Borrowers for Lender-Placed Insurance
The Regulation requires a servicer to deliver to the borrower (or place in the mail) a written notice with the appropriate disclosures at least 45 days before any premium charge or fees are assessed.
Force-placed insurance may be placed if the servicer has not received verification that the borrower has continuous hazard insurance in place.
A model letter has been created by the CFPB to ensure the appropriate information is included in the 45 day notice. This notice has been independently tested by a consulting firm contracted by the CFPB.
Implementation of “Requirements Before Charging”:
Create a new and more complex workflow for verifying borrower insurance. The borrower may provide necessary contact information to the servicer, and it is up to the servicer to use this contact information to verify insurance.
To satisfy the “reasonable basis” requirement from step 3, the servicer must use this information to contact the borrower’s insurance carrier to obtain a copy of the cancellation or non-renewal document before charging the borrower for force-placed insurance.
#5: Reminder Notice to Borrower
The lender must send a reminder notice, with similar disclosures as the initial notice, at least 15 days before any premiums or fees may be assessed. This reminder has two formats.
The first format is used when a servicer has received no insurance information, and the second is when the servicer has received borrower insurance information, but this information does not verify continuous coverage.
- When no insurance information is obtained, the reminder notice cannot be sent until 30 days after the original notice was placed in the mail. This reminder notice is titled “Second and Final notice” contains the same information as the initial notice as well as the good faith estimate of the annual insurance premium.
- The reminder notice is a different form letter when borrower insurance information was received and verified with a lapse in coverage. This notice is also titled “Second and Final notice."
This notice states that the borrower will be charged for insurance the servicer obtains for the period of time where the servicer is unable to verify hazard insurance coverage unless the borrower provides the servicer with hazard insurance information for such period. There is no requirement for a good faith estimate on this notification.
- Renewal or replacing force-placed insurance: force-placed insurance renewal requires that the borrower must be given a written notice 45 days prior to renewing force-placed insurance. This renewal notification has also been designed as a form letter.
Implementation of the “Reminder Notice”:
The reminder notice has both timing and content requirements. The timing requirements can change from 30 days to immediately depending upon borrower insurance information that is submitted.
In addition, there are two form letters used as reminder notices. Their use depends on the type of response from the initial notification.
In the event that the borrower does not respond to the initial notification, the servicer must send the first type of reminder notice form letter not earlier than 30 days after the initial notification form letter was put in the mail. In the event a borrower provides insurance information, the servicer must first verify this information. If this verification process shows a lapse in coverage, then the second reminder form letter must be sent to the borrower. Once this notice is put into the mail, the servicer must wait 15 days before charging the borrower for the lapse in coverage.
A renewal notice titled “Please Update Insurance Information” must be sent when the servicer changes force-placed insurance carriers, or 45 days prior to the annual renewal of the insurance certificate for that borrower’s collateral.
At Miniter, we provide a notice 30 days after the 45-day notice as a courtesy to the borrowers of the institutions we serve, and remind them of the benefits of securing their own insurance before force placement occurs.
#6: Mailing the Notices
The Regulation states:
“The servicer delivers to the borrower, or use first class mail for all borrower notices.”
Implementation of “Mailing the Notices”:
The Regulation de-couples the timing of the first and second notices. After the initial notice is placed in the mail, the servicer must wait 30 days from this date until the reminder notice can be sent. Assuming the borrower does not respond, the servicer can place the reminder notice in the mail any time after the 30 days have elapsed. Once the reminder notice is put into the mail, the servicer must wait 15 days after the mailing date of the reminder notice before charging the borrower.
As you implement your workflow for these requirements, it is difficult to implement a “mail date” as compared to a “print date” for the notifications. If you are designing your workflow around “print date”, please take into account weekends and holiday weekends.
As a best practice, we would suggest implementing a 33 day period for reminder notices, and an 18 day period for charging the borrower.
#7: Cancellations of Lender-Placed Insurance
A lender or its servicer must fulfill two requirements within 15 days of receiving proof of coverage from the borrower.
- First, the insurer must be notified to terminate the force-placed flood insurance.
- Second, the lender must refund all premiums for which it charged the borrower for any period where the force-placed flood insurance policy and the borrower’s policy overlap.
Implementation of “Cancellation of Lender-Placed Insurance”:
The servicer may be required to implement a three-step approach to this workflow depending on the type of insurance evidence received from the borrower. In the three-step workflow, the borrower submits the basic contact information for their insurance carrier. This written information is not in the form of an insurance document such as a declaration page.
- The servicer will have to verify insurance coverage with the borrower’s insurance company (preferred) or insurance broker and obtain a lienholder or mortgagee notice from the insurance company.
- The servicer must cancel the force-placed insurance certificate that was in place for the borrower’s collateral as of the effective date of the new borrower policy.
- The servicer must calculate a premium refund, and apply for this refund within 15 days of initially receiving the borrower’s written information.
The 15 day period is based on refunding unearned premium.
One technique to eliminate the 15-day refunding period is to negotiate the force-placed master policy with in-force certificate premiums paid monthly in arrears as compared to annual certificate premiums paid up-front. Using a “monthly in arrears” master policy will enable the servicer to bill only for earned premium, which will eliminate the majority of un-earned premium refunds.
#8: Limitations of Lender-Placed Insurance Charges
Dodd-Frank language that states all charges related to force-placed insurance assessed to a borrower by or through the servicer must be bona fide and reasonable. The regulation further defines bona fide and reasonable as “a charge for a service actually performed that bears a reasonable relationship to the servicer’s cost of providing the service, and is not otherwise prohibited by applicable law.”
Implementation of “Limitations of Lender-Placed Insurance Charges”:
The servicer should periodically review the master policy to ensure that premium rates are reasonable. This can be easily done by asking your insurance provider for a quote from a different insurance market. The CFPB is not chartered to regulate insurance, but periodically quoting your business from other markets should satisfy this requirement.
#9: Relationship to the Flood Disaster Recovery Act of 1973
The Regulations states:
“If permitted by regulation under section 102(e) of the Flood Disaster Protection Act of 1973, a servicer subject to the requirements of this section may deliver to the borrower or place in the mail any notice required by this section and the notice required by section 102(e) of the Flood Disaster Protection Act of 1973 on separate pieces of paper in the same transmittal.”
Implementation of “Flood & Hazard Notifications” Basis for Obtaining Force-Placed Insurance”:
The servicer is allowed to mail both force-placed hazard and force-placed flood notices in the same envelope. This will only work when expirations of these borrower hazard policies align.
Loan Servicers – Next Steps
Loan servicers had until January 10, 2014, to comply with the Regulation issued for force-placed insurance under Regulation X (RESPA). For larger servicers whose annual lender-placed insurance premiums exceed $1 million, there was not as much impact as these changes were made by their insurance tracking outsource partner; however, the most significant impact has been to small and mid-size lenders who service loans in house.
Lenders that track borrower insurance in-house typically use “write-your-own” systems to force-place insurance when required. Insurance tracking workflows vary widely within these organizations and many small loan servicers were not prepared to adopt these requirements. If insurance tracking is to remain in the loan servicing department, implementation of the 9 steps must have been completed way back in 2013.
The alternative to implementing these insurance tracking workflows is to outsource the entire insurance tracking and force placement process to a competent third-party insurance tracker. If an institution makes the decision to outsource insurance tracking, lead time for implementation of the outsource service will take from three to nine months.
For more information on Outsource Force-Placed insurance tracking, please review Miniter’s Complete Guide to Force-Placed Insurance.