By PAUL SULLIVAN
Published: August 17, 2012
FORCE-PLACED insurance isn't high up on most people's list of mortgage worries, not when so many people are in danger of losing their homes. But it's been high up on mine ever since my wife and I had to battle our mortgage provider to remove flood insurance it had bought for us — and we didn't need — for a condominium we owned in Florida.
While we eventually convinced our lender that we had adequate flood coverage, I spent many hours on the phone over many months before I got the insurance removed. I've since spoken to other people who had similar, if not worse, struggles.
So I've been glad that the Consumer Financial Protection Bureau has taken up the cause. It released rules last week that deal with various aspects of mortgage servicing, the next step in its process to make lenders more accountable to borrowers.
There are legitimate reasons for force-placed insurance. It protects a lender's interest in a property when the borrower lets property or hazard insurance lapse. Mortgage contracts contain clauses that stipulate that the borrower needs to maintain proper insurance.
But force-placed insurance has become problematic in two main areas. In some cases, insurance — for hazard, flood or wind coverage — was purchased for homeowners without giving them enough time to buy their own policy, and when the premiums were taken out of their monthly mortgage payment, it put them behind on their loan. (I should mention that the cost of force-placed insurance is almost always higher than the market rate.) In other cases, borrowers were told they had to have coverage for something they did not think they needed and it was purchased for them anyway.
In the worst cases, the cost of force-placed insurance pushed people who were already struggling financially into foreclosure. But even the best cases were not that great: people, like me, who eventually got the insurance removed after months of frustrating calls and repeated faxes of information.
I wrote about the Consumer Financial Protection Bureau's initial proposals on force-placed insurance in April. These include stricter rules on when and how lenders notify borrowers that this insurance is going to be bought for them.
The bureau's goal with the rules is to educate consumers on the costs and coverage limits of force-placed insurance, said Moira Vahey, a spokeswoman. But the homeowners I've talked to say the rules don't go far enough, particularly because they fail to impose penalties large enough to force lenders to be more responsive to consumers.
The consumer agency said it would accept comments until Oct. 9 and would issue the final rules in January.
The homeowners told me they were pleased with the agency's proposal to require lenders to tell consumers how much force-placed insurance would cost them. The bureau suggested that lenders send a letter to consumers stating in bold type what the price of the insurance would be and noting it was "probably more expensive than insurance you can buy yourself." The proposed letter also states that force-placed insurance "may not provide as much coverage as an insurance policy you buy yourself."
But as Brian Penny, a former employee at Balboa, a force-placed insurer owned by Bank of America until last year, who has now become a whistle-blower, noted, the letters could easily be overlooked by consumers if they continue to be mailed in nondescript envelopes.
Ms. Vahey said the bureau had not considered requirements for the envelopes but that was an area open for comment.
The homeowners told me they worried that banks and insurers could still charge whatever they wanted for the force-placed insurance. The proposed rule states that the "charges would have to bear a reasonable relationship to the servicer's cost of providing the service." But a borrower and a lender might have different definitions of what is reasonable.
The proposed letter does not provide a phone number or Web site for help if the lender does not comply.
Ms. Vahey said the form letters were not intended "as much to report violations as to educate the consumers." But she added that the bureau has a supervisory role over the lenders.
To get more ideas about the rules, I called two people who I thought would be at opposite ends of this debate: Mr. Penny, the whistle-blower, and Ed Delgado, chief operating officer of Wingspan Portfolio Advisors, which as a servicer for banks monitors insurance coverage on mortgages and handles foreclosures, short sales and other mortgage matters.
Mr. Penny said the rules should require more disclosures on the relationship between the lenders and the force-placed insurers.
"When you call to complain about your insurance, you're talking to that insurance company," Mr. Penny said. "People don't know that. They think they're complaining to B of A about QBE when they're actually complaining to QBE about QBE." QBE is one of the largest force-placed insurers.
He said he feared that the penalties, as written in the rules, would not be applied. "It's very easy to hide that stuff," he said. "They can make all the rules they want, but I don't see how they can enforce these rules."
On the other side, Mr. Delgado said he thought the rules were stating the obvious. "Some of it just seems to be a reinforcement of common sense — make sure payments are applied, fix your errors," he said.
He suggested requiring the lenders to communicate more with the borrower. Instead of just mailing a letter, he said, it would be better if the lenders called before the insurance policies lapsed. (This is a service his company does not provide, but he said it could.)
"Sending a letter may not always work," Mr. Delgado said. "Making a call to verify residency and then determine the intent to maintain or secure insurance on the property would work better. What if the letter never hit the target? My bias is that communication come from multiple levels."
Mr. Delgado said he recently had to deal with force-placed insurance when he sold his house. But he said he was glad his lender had called him.
"They said I was in breach of agreement on my insurance and they were going to provide insurance," he said. "They were so focused on the lapse of insurance. I said, 'Check out my statement. My balance is zero because I just paid off my loan.' "
More communication certainly can't hurt. But from my experience, it is up to consumers to be vigilant and persistent — no matter how frustrating it is to repeatedly call, e-mail and fax the force-placed insurance company.
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