Force-Placing Hazard Insurance vs. Flood Insurance?
Maybe the servicing department has argued over how to force-place hazard insurance and/or Flood insurance. There are some similar but very different rules in places that may lead to confusion.
So since the CFPB's new servicing regulations took effect in 2014, force- placing hazard insurance has been a bit more difficult. They wrote a tough rule because they saw lenders over-charging borrowers for hazard insurance that they didn't need. Force-placed insurance was, surprise surprise, determined to be more expensive 99% of the time (often for less coverage).
But while many of us consider Flood insurance to be a form of hazard insurance, there are actually entirely different rules in place that may lead to confusion.
Hazard Insurance
Your servicing department will (should) tell you that before you can force- place hazard insurance, you'll need two separate notices. An Initial Notice (45 days before force-placement) and a Reminder Notice (15 days before force- placement). It is a good idea to use the model forms provided because the language and format of these disclosures is strictly regulated.
Hazard Insurance vs. Flood Insurance
Flood insurance is not considered "hazard insurance" under the CFPB's 2014 servicing rule. Therefore, the restrictive rule on force-placed insurance (described above) does not apply to Flood insurance. So I believe that's where the confusion comes from. While we commonly think of Flood insurance as a form of hazard insurance, that's not how the rule was written.
Flood Insurance
But there are plenty of similar requirements that apply with force- placing Flood insurance. But the important thing to remember is that this is not related to the CFPB's 2014 servicing rule because they are different in significant ways.
Here are some key requirements:
Lender is required to force-place Flood if it determines insurance is "inadequate"
Before force-placing, however, the lender must give notice to the borrower
The notice does not have any specific content or formatting requirements
Lender can force-place Flood within 45 days of giving notice
Once 45 days have passed, Lender can charge borrower from first day that insurance lapsed
Lender must terminate force-placed insurance within 30 days of receiving notice that Flood insurance is adequate
If borrower can prove that he/she had coverage in place, the lender must refund any overlapping fees
So many of these items are similar to the CFPB's 2014 servicing rule, but that can make it that much more confusing. So just a note to keep these separate!
In Other News:
Which state was the most active in regulatory enforcement's in Q1? Hint: it probably won't surprise anyone here. Read that and more in this summary of enforcement actions so far this year here.
For more info on everything Flood, the FDIC does a good job of summarizing it. Available here.
Did you know that, according to some, young Americans lack basic concepts of geography? Here's a summary of a study done by National Geographic. In 2006, 90% of young adults could not place Afghanistan on a map and 70% could not find Iran or Israel. According to my own study done last week, 100% of the readers of this newsletter/blog/whatever at least know the difference between South Boston and the South End.
How do you fight bureaucracy but also meet regulator demands for documentation? I don't know. Suggestions?
I don't know the answer to that, at least not yet. But not knowing the answer doesn't mean you're a failure. If you ask yourself a tough question (and pose it to others, perhaps), you'll have a good chance of later uncovering the solution. We like to think that Sir Isaac Newton immediately understood the law of gravity at the moment he was struck on the head by an apple, but in reality it took years of investigation.
"[T]here is no substitute for discipline. No amount of intellectual prowess or personal charisma can make up for the inability to identify a few simple things and stick to them over time."
- Patrick Lencioni
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