How would you like it if your lender forced a hazard insurance policy on you even if you were already covered? It happens, and now the feds’ Consumer Finance Protection Bureau is asking consumers, through Oct. 9, 2012, whether home owners deserve better treatment.
It’s great to see the CFPB doing what the federal government is supposed to do — standing up for consumers by proposing a rule that would force mortgage lenders to treat home owners fairly when they force them to buy home owners, flood, or even wind insurance.
When you buy a house with a mortgage, you promise to keep the house insured against whatever disasters befall your home — by buying a home owners insurance policy and possibly wind or flood insurance, too. If you don’t (or can’t) get that insurance, the lender has the right to buy its own policy (known as force-placed insurance) and pass along the cost to you.
But troubles arise because not only do lenders not get a very good deal (these policies cost more and cover less than the insurance you buy yourself), they sometimes buy policies for home owners who don’t need them.
The CFPB proposal rightly insists that before a lender can hit you with a sky-high priced insurance policy, it must:
- Give you at least two notices telling you to go get your own insurance before it buys a policy for you. One notice would be required at least 45 days before charging for force-place insurance coverage, and a second notice would be required no earlier than 30 days after the first.
- Warn you about how much the lender’s policy is going to cost you.
When the lender does get a policy for you, the CFPB says two other rules should apply:
- The lender ought to refund your money if it charges you for an insurance policy that you didn’t need because you really did have your own policy.
- If your lender includes insurance policy costs in your escrow, but there’s not enough money in escrow when the renewal bill comes, the lender will have to pay for the policy anyway and then raise your escrow payment to cover the cost correctly.
Why might I be slapped with force-placed insurance?
Just because your lender hasn’t force-placed an insurance policy on you in the past is no reason to think it won’t do so in the future. You could find yourself with an expensive, force-placed policy if:
- You do something that causes your own insurance company to cancel your home owners policy (say you file a fraudulent claim).
- Insurance companies stop offering policies in your area and you can’t find replacement coverage.
- You don’t escrow for insurance and you fail to renew your policy.
Basically, any time your insurance lapses, you can be force-placed because you promised not to let it lapse.
The problems with force-placed insurance
On the surface, the idea of force-placed insurance is fair and reasonable. If you don’t have a home owners policy and your home burns down, you probably won’t have enough cash in the bank to pay off your mortgage. And there won’t be a home for the lender to foreclose on and sell to get its money back. So it’s reasonable to require you to live up to your promise to insure the property.
Below the surface, though, there are issues:
- Lenders collect payments from the insurance company providing the force-placed policies. That’s a conflict of interest since it incents them to go with the company offering the highest referral fee versus the one offering the best value to home owners.
- Sometimes the lender makes a mistake and says you don’t have a home owners policy when you do. If you call to get this mistake corrected, you likely end up talking to someone at the insurance company, not the lender’s office. If you do have insurance, the force-placed insurance company loses a customer, so the person you’re talking to at the force-placed insurance company has no incentive to fix the error.
- Force-placed can apply to flood insurance, too. Your property can be in a flood zone even though your home isn’t. That happens when the flood zone covers only part of your property — the part your home isn’t on. Convincing the insurance company person that this is the case can be challenging.
- Sometimes insurance companies pull out of markets. Florida, for example, had to set up a state wind insurance fund because home owners were unable to get coverage after big hurricane losses there. Between the time the insurance companies pulled the plug and the state set up the wind insurance pool, home owners couldn’t get coverage and were force-placed by their mortgage companies.
The federal government is sticking up for consumers, and consumer groups will support the proposal. But if you think the practice by lenders is unfair, let the feds know you support the proposed rule.