Federal law restricts when and how a mortgage servicer can make you pay for expensive insurance it buys on your behalf.
In the past, it was relatively common for a mortgage servicer to wrongfully buy expensive insurance coverage that protected the lender's (but not the homeowner's) interest. And then charge the homeowner for it. This kind of insurance is called "force-placed insurance" or "lender-placed insurance."
But now, federal law restricts when and how servicers may purchase force-placed insurance on your behalf. Also, homeowners must receive specific notices before the servicer purchases a force-placed insurance policy.
What Is Force-Placed Insurance?
Most mortgages and deeds of trust require that the homeowner maintain adequate insurance on the home to protect the lender's interest in case of fire or another casualty. This type of insurance also covers the loss of your personal property if it's stolen, damaged, or destroyed.
If you let your homeowners' insurance coverage lapse, assuming you don't have an escrow account, the servicer can purchase insurance coverage at your expense. Again, this type of insurance is called "force-placed" or "lender-placed" insurance.
Force-placed insurance doesn't cover your personal belongings. Also, these insurance policies tend to be costly because of the uncertainty about what might happen to the home if the borrower isn't keeping up with the bills.
How Federal Law Restricts Force-Placed Insurance
Under federal law, the servicer must reasonably believe that the borrower has failed to maintain insurance coverage on the home before purchasing a force-placed insurance policy.
For example, if the borrower's insurance agent or provider contacts the servicer to inform it that the bill is overdue, this contact would provide a reasonable basis for the servicer to think that coverage isn't in place.
The servicer must then send two notices to the borrower before obtaining force-placed insurance. The notices must request that:
- the borrower get hazard insurance for the property, and
- the borrower submit proof of insurance, such as a copy of the insurance policy declaration page, an insurance certificate, or the policy, to the servicer.
Timing of the Required Notices
The servicer must send the first notice at least 45 days before purchasing a force-placed insurance policy. The servicer must then send a second notice (a reminder notice) no earlier than 30 days after the first notice and at least 15 days before charging the borrower for force-placed insurance coverage. This notice must include the cost of the force-placed insurance or a reasonable estimate. (12 C.F.R. § 1024.37).
If the Loan is Escrowed, the Servicer Must Generally Pay the Existing Policy
The servicer generally must keep an existing insurance policy in place if the borrower has an escrow account from which the servicer pays the insurance bill, even if the servicer needs to advance funds to the borrower's escrow account.
But the servicer doesn't have to continue existing coverage and can purchase a force-placed policy if it has a reasonable basis to believe that:
- the borrower's insurance is being canceled for reasons other than nonpayment or
- the property is vacant. (12 C.F.R. § 1024.17).
What Happens if the Borrower Provides Proof of Insurance Coverage
If the borrower provides evidence that insurance coverage is in place, the servicer must:
- cancel the force-placed insurance within 15 days of receiving evidence of existing insurance, and
- refund any premiums charged for duplicate coverage to the borrower. (12 C.F.R. § 1024.37).
What to Do If Your Servicer Improperly Force-Places Insurance on Your Property
Servicers sometimes wrongfully buy pricey force-placed insurance for a borrower's home even though the borrower already has coverage and, in some cases, even after the borrower provides evidence of that insurance. Because force-placed insurance is so expensive, a homeowner having trouble making payments or is behind on the loan might go into foreclosure when it becomes much more difficult to get current.
If your servicer improperly places insurance on your home, you can send the servicer a "notice of error." Under federal law, if you send your servicer a notice of error (a letter) letting the servicer know that it made a mistake on your account, the servicer is supposed to fix the error within a specific period.
Getting Help
If your servicer doesn't respond to your notice of error, consider talking to an attorney, especially if a foreclosure is imminent or has already started.
You may also file a complaint with the Consumer Financial Protection Bureau (CFPB). The CFPB will send your complaint to the servicer and try to get a response, generally within 15 days.
But be aware that sending a notice of error or filing a complaint with the CFPB is highly unlikely to stop foreclosure proceedings. You'll most likely need an attorney's assistance to halt a foreclosure.
Legal Information & Books from Nolo
