Despite the express exclusion of the “business of insurance” from the authority granted to the Consumer Financial Protection Bureau (CFPB), recent regulations promulgated by the CFPB will indirectly, if not directly, affect both property insurers and insurers who offer force-placed or creditor-placed insurance1. While the CFPB does not directly regulate insurance, insurers should not presume they are safe from the effects of the CFPB’s authority.
Early drafts of the Dodd-Frank Act legislation gave CFPB the authority to regulate certain aspects of certain insurance products that are sold in connection with the extension of credit, including title, credit life and private mortgage insurance. Those provisions did not make it into the final version of the Dodd-Frank Act and, ultimately, "the business of insurance" was excluded from the CFPB’s authority.2 However, the Dodd-Frank Act contains specific provisions that restrict how mortgage servicers may use force-placed insurance and the CFPB was granted authority to “prescribe rules” prohibiting “unfair, deceptive, or abusive acts or practices” by persons who offer or provide consumer financial products.3 It is those regulations that will affect parts of the insurance industry.
In January 2013, the CFPB finalized new regulations for mortgage servicers regarding the use of “force-placed insurance.”4 Force-placed insurance – also referred to as creditor-placed insurance – is insurance purchased by a mortgage servicer to protect the property that serves as security for a mortgage loan. The insurance is referred to as “force-placed insurance” in the regulations and will be used herein. It is defined in the Dodd-Frank Act as “hazard insurance coverage obtained by a servicer of a federally related mortgage when the borrower has failed to maintain or renew hazard insurance on such property as required of the borrower under the terms of the mortgage.”5
The new regulations directly regulate the activities of mortgage servicers (“servicers”) but there will be indirect effects on insurers that write property insurance and forced-placed insurance. The Mortgage Servicing Rules under the Real Estate Settlement Procedures Act (Regulation X) 12 C.F.R. Pt. 1024 take effect on January 10, 2014 and will change the traditional practices of mortgage servicers.6
Despite recent statements in the media, force-placed insurance is not a substitute for traditional homeowner’s insurance. The nature of the risks and the coverages provided are different. Under many mortgage loan agreements, borrowers are required to insure the property that serves as collateral or security for the loan. Generally, to satisfy this condition for residential property, a borrower will obtain a homeowner’s policy that provides coverage for the buildings, contents and liability coverage for the insured. When underwriting a property insurance policy, an insurer considers factors including claim history, credit-scores, proximity to fire department services and the location and condition of the property. In contrast, force-placed insurance is underwritten largely based on the nature and quality of the loan portfolio. Force-placed insurance is designed to protect the interest of the lender or servicer in the property that serves for security for the mortgage. It may provide coverage only up to the outstanding amount of the mortgage and it does not generally provide liability coverage for the borrower.
If the borrower does not maintain the required insurance, the lender or servicer may secure force-placed insurance to protect its interest in the property. Traditionally, under the terms of many mortgage loan agreements, the expense of the force-placed insurance is charged back to the borrower. Due to the different risks and the differences in the products, the cost of force-placed insurance may be greater than the cost of homeowner’s insurance.
The new regulations provide guidance in implementing certain provisions of the Dodd-Frank Act. Specifically, the Dodd-Frank Act provides that servicers of “federally related” mortgages must have a reasonable basis to believe a borrower has failed to maintain property insurance prior to purchasing force-placed insurance and that servicers of “federally related” mortgages must comply with “appropriate” regulations issued by the CFPB to “carry out the consumer protection purposes of [the Dodd-Frank] Act.7
The new regulations restrict the ability of mortgage servicers to use force-placed insurance at the borrower’s expense as has been the tradition for many years. Servicers will no longer be able to immediately charge the expense of force-placed insurance to borrowers. Rather, they will be required to provide a total of 45 days’ notice and two separate notices before charging the expense to a borrower.8 The regulations provide that creditors may be required, in some circumstances, to advance funds to pay the premiums for a borrower’s homeowner’s insurance policy.9 There may be circumstances under which a servicer may no longer impose the cost of force-placed insurance on the borrower.10
Under the Dodd-Frank Act, a borrower may not be charged for force-placed insurance until after the servicer sends two notices reminding the borrower of its obligation to maintain property insurance as well as a statement that the creditor does not have proof of insurance, how to provide proof of insurance and that the creditor may obtain insurance at the borrower’s expense.11 The CFPB regulations add more conditions, restrictions and notice requirements. For example, the notices must contain a statement that the force-placed insurance may cost “significantly more” than the borrower’s insurance and that it may provide less coverage.12 The notices are also required to contain many details including information about the loan requirement, how to contact the servicer, the address of the property, etc.13 The first notice will have to be sent at least 45 days in advance of charging a premium or assessing a fee for force-placed insurance.14 A reminder notice will be required if there is no response to the first notice. The reminder notice may not be sent until 30 days after the first notice.15 These notices are prerequisites for charging borrowers with the premiums or fees for force-placed insurance.16 Additional detailed notices are required if the creditor receives information about insurance but no evidence of insurance17 and also when force-placed insurance is renewed.18
When a mortgage payment is more than 30 days overdue and the borrower has an escrow account, the servicer will no longer be permitted to charge the borrower for force-placed insurance unless the creditor is unable to disburse funds from the escrow account to pay the premiums for the borrower’s own insurance. A mortgage servicer is considered to be unable to disburse funds when the servicer has a “reasonable basis” to believe that: (1) the policy was cancelled or not renewed for reasons other than nonpayment of premiums; or, (2) that the borrower’s property is vacant.”19 The fact that the funds in an escrow account are insufficient to pay the premiums does not constitute an “inability to disburse.”20 In such a situation, a servicer will be required to advance the funds to pay the borrower’s insurance premiums.21 Funds that are advanced may be recouped from the borrower except for any periods of time in which the borrower had insurance in effect.22
The CFPB anticipates that a reasonable basis for determining that a policy was cancelled for reasons other than nonpayment may occur when: (1) notice is received from the borrower that a policy was cancelled and there is no evidence of a new policy; (2) a servicer receives notice of cancellation or non-renewal from the insurer before payment on the policy is due; or (3) the servicer does not receive a premium payment notice before the expiration date of a policy.23 The CFPB did not provide similar guidance for determining whether a servicer has a “reasonable basis” to believe if a property is vacant.
According to the CFPB, the regulations are intended “to help borrowers avoid unwarranted and unnecessary charges,” to provide “accurate information” about the cost of force-place insurance, and to “encourage borrowers to take appropriate steps to maintain their [property] insurance policies.”24 The CFPB stated that while “[b]orrowers pay for force-placed insurance,  they do not select the insurance provider or have other ways of providing consequential feedback to the insurance provider regarding its services.”25 The CFPB also expressed a concern that “incentives like commissions paid to servicers or their insurance affiliates may cause servicers to prefer purchasing force-placed insurance or renewing pre-existing force-placed insurance."26 In its attempt to discourage or at least restrict the use of force-placed insurance, the CFPB’s regulations may have several unintended consequences, particularly for personal lines property insurers.
Impact on Issuers of Force-Placed Insurance and Property Insurers
The effect of requiring servicers to advance funds to pay the premiums for a homeowner’s policy means that those policies are likely to remain in effect beyond when they would normally be cancelled. A homeowner’s policy could remain in force even after the policyholder fails to make premium payments or there are insufficient funds in escrow to make the payment. For many insurers, this may represent a material change in the risk. When a mortgage payment is overdue and the borrower has insufficient funds in escrow to pay insurance premiums, one has to consider whether the borrower is able to maintain the property. One may also wonder whether the borrower has abandoned the property.
In its summary of the regulation, the CFPB states that “[w]hen a servicer is receiving bills for the borrower’s hazard insurance in connection with administration of an escrow account, a servicer who elects not to advance to a delinquent borrower’s escrow account to maintain the borrower’s hazard insurance, allowing that insurance to lapse, and then advances a far greater amount to a borrower’s escrow account to obtain a force-placed insurance policy unreasonably harms a borrower.”27 This statement, however, ignores the fact that force-placed insurance and homeowner’s insurance are very different products, designed for different purposes and underwritten differently.
There is some risk to the servicer that a homeowner’s policy will not provide coverage for a loss that occurs during the time the servicer is required to given notice and advance funds. This may be the case, for example, if the borrower has vacated the premises or is renting the property to someone else as most homeowner’s policies do not provide coverage when a property is vacant for sixty days or if the property is not occupied by the owner. Policy conditions may include a duty to maintain a property or mitigate damages after a loss. If a loss occurs and these conditions are not met, there may not be coverage for the borrower or the servicer.
Under the insurance laws of many states, an insurer is required to give only ten days’ notice when cancelling for non-payment of premiums. It is likely that a homeowner’s policy could be cancelled before the servicer receives the cancellation notice and is able to advance funds. An insurer may provide a grace period for the late payment of premiums but nothing in the CFPB regulations requires an insurer to reinstate a cancelled policy. What happens if an insurer refuses to reinstate a homeowner’s policy? The regulations do not address that situation and one can only expect that servicers would be able to force-place insurance. It presents a dilemma for servicers who will want to protect themselves during the 45-day notice period. Either they will advance funds for the homeowner’s insurance (assuming they can do so in a timely manner) or they will force-place insurance and take the risk they will not be able to charge the expense back to the borrower.
The regulations may also affect the force-placed insurance market. Will the restrictions on the ability to charge the expense to borrowers and the duty to advance funds result in less use of force-placed products? Or, perhaps, a demand for a different product or cost structure? Interestingly, the restrictions on the use of force-placed insurance will apply only when the borrower has an escrow account. There was an early attempt in the rule-making process to include mortgages for which there is no associated escrow account and the CFPB has indicated that it may revisit that issue at a later date.
The CFPB has clearly designed these regulations to provide plenty of notice to borrowers and to give them time to secure their own insurance coverage before being responsible for the cost of force-placed insurance. There is no question that the regulations will cause some degree of upset in parts of the insurance industry.
1. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 § 1002, 12A Stat. 1376 (2010).
3. Id. at § 1003.
4. Bureau of Consumer Financial Protection, Mortgage Servicing Rules under the Real Estate Settlement Procedures Act (Regulation X) (2013) (hereinafter CFPB Mortgage Servicing Rules), available at http://files.consumerfinance.gov/f/201301_cfpb_final-rule_servicing-respa.pdf.
5. Dodd-Frank Act, Title VIII, Subtitle E, § 1463(a).
6. CFPB Mortgage Servicing Rules.
7. Dodd-Frank Act, Title VIII, Subtitle E, § 1463(a).
8. 12 C.F.R. § 1024.37(c)(i)-(iii), (d)(1). Hereafter, shortened citations “§ 1024” to mean “12 C.F.R. § 1024.__” in effect after January 10, 2014.
9. § 1024.17(k).
10. Id. at (k)(ii).
11. Dodd-Frank Act, Title VIII, Subtitle E, § 1463(a).
12. § 1024.37(c)(2)(ix)(9).
13. § 1024.37(c)(2)(i) – (xi).
14. Id. at (c)(i).
15. Id. at (d)(1).
16. Id. at (c).
17. See CFPB Mortgage Servicing Rules at 707.
18. § 1024.37(e).
19. § 1024.17(k)(5)(ii).
20. Id. at (k).
22. Id. at (K)(C).
23. CFPB Mortgage Servicing Rules at 707.
24. Id. at 245-246.
25. Id. at 561.
27. Id. at 59.