In the past, it was not uncommon for a mortgage servicer to wrongfully impose expensive insurance coverage that protected the lender's—but not the homeowner's—interest and charge the homeowner for it. This kind of insurance is called "force-placed insurance" or "lender-placed insurance." But now there's a federal law that imposes restrictions on when and how servicers may purchase force-placed insurance on your behalf.
As of early 2014, a servicer can't buy force-placed insurance unless there is a reasonable basis to believe that the borrower has failed to maintain insurance coverage in accordance with the requirements of the loan documents. In addition, homeowners are entitled to receive certain notices before the servicer purchases the force-placed insurance policy.
A mortgage servicer (or "loan servicer") is the company that collects monthly payments from the borrower. The servicer also:
(Read more about servicers.)
Most mortgages and deeds of trust require that the homeowner maintain adequate insurance on the home so that the lender’s interest is protected in case of fire or other casualty. This type of insurance also covers the loss of your personal property if 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, which is called force-placed or lender-placed insurance. This type of policy does not cover your personal belongings.
Force-placed insurance policies tend to be costly because there is uncertainty about what might happen to the home if the borrower is not keeping up with his or her bills. (Learn more in Nolo’s article What Is 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 would provide a reasonable basis for the servicer to think that there is no coverage.
The servicer must then send two notices to the borrower prior to obtaining force-placed insurance. The notices must request that:
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 of the cost. (12 C.F.R. § 1024.37).
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 to do this.
Exception. The servicer does not have to continue existing coverage (and can purchase a force-placed policy) if it has a reasonable basis to believe that:
If the borrower subsequently provides evidence that he or she has insurance coverage in place, the servicer must:
Servicers sometimes wrongfully buy pricey force-placed insurance for a borrower’s home even though the borrower already has coverage in place and, in some cases, even after the borrower provides evidence of that insurance. Because force-placed insurance is so costly, a homeowner who's already having trouble making payments or is already behind on the loan might go into foreclosure when it becomes that much more difficult to get current on the loan.
If your servicer improperly force-places insurance on your home, you can send the servicer what’s called a “notice of error.” Under federal law, if you send your servicer a notice of error—basically, a letter—letting the servicer know that it made a mistake on your account, the servicer is supposed to fix the mistake within a specific time period. (Learn more about how to resolve common servicer errors.)
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 lodge a complaint with the Consumer Financial Protection Bureau (CFPB). The CFPB will send your complaint to the servicer and try to get a response, normally within 15 days.