In the past, it was not uncommon for a loan servicer to wrongfully impose expensive insurance coverage on some people's homes that protected the lender's, but not the homeowner's, interest -- and charge the homeowners for it. This is called force-placed insurance. However, there is now a rule that imposes restrictions on when and how mortgage servicers may purchase force-placed insurance on your behalf.

Under Consumer Financial Protection Bureau (CFPB) rules that became effective in early 2014, a mortgage servicer (the company you make your monthly mortgage payment to) cannot obtain 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.

Read on to learn more about the CFPB rule on force-placed insurance and how it can help you.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act imposed new requirements, effective January 10, 2014, on mortgage servicers, including a rule on force-placed insurance. (The CFPB, which was established by the Dodd-Frank Act, actually issued the mortgage servicing rule.)

What is a mortgage servicer? A mortgage servicer is the company that collects monthly mortgage payments from the borrower. The servicer also:

• keeps track of the mortgage account balance on behalf of the owner of the loan
• manages the escrow account
• handles loss mitigation requests, and
• pursues foreclosure in the case of a defaulted loan.

What is force-placed insurance? Most mortgages 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, the mortgage servicer can purchase insurance coverage at your expense. This 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?)

Rule on Force-Placed Insurance

Under the 2014 rule, 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 borrower obtain 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 of the cost.

If the Loan is Escrowed, the Servicer Must Generally Pay the Existing Policy

Pursuant to the rule, 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:

• the borrower’s insurance is being canceled for reasons other than nonpayment, or
• the property is vacant.

What Happens if the Borrower Provides Proof of Insurance Coverage

If the borrower subsequently provides evidence that he or she has insurance coverage 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.

For More Information

To learn more about the rule that provide protections to borrowers in connection with force-placed insurance, go to the Consumer Financial Protection Bureau’s website.

You can find the regulations on force-placed insurance in 12 CFR § 1024.37. The regulations covering escrow accounts are in 12 CFR § 1024.17.

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