My Mortgage Lender Says I Don't Have Homeowners' Insurance, But I Do!

Dealing with a lender that doesn't believe you've complied with your obligation to maintain homeowners' insurance.

Contracts to purchase real estate using a mortgage or deed of trust typically require the person buying the house to purchase homeowners’ insurance. This protects both the homeowner and the mortgage lender in the event that the home is destroyed or damaged by fire, flood, or any of various other calamities.

Paying the annual premium for your homeowners’ insurance is typically arranged in one of two ways. Either you will be responsible for paying it on your own or your lender will require that you pay a portion of your upcoming premium along with your mortgage payment (monthly or however often your payment comes due). The lender then places that money into an escrow account with which to pay the homeowners’ insurance bill when it comes due.

No matter how you are paying for your policy, however, the lender will be keeping close tabs to make sure it is kept up every year. Under certain circumstances, the lender may make a mistake and take action based on the belief that you have no valid insurance coverage. Receiving such notification from your your lender can be a shock when you know you’ve paid several hundred dollars for that year’s coverage!

This article will discuss why this lender mistake might have happened and what you can do about it.

Why Your Lender Might Believe You Have No Insurance Coverage

The usual reasons that your lender might mistakenly believe that you lack adequate insurance coverage include that:

  • the lender has not received proof of coverage of your homeowners insurance (perhaps because you changed carriers and forgot to advise the lender)
  • the lender has received proof of coverage but the lender or the company it hired to handle customer service on your loan has made a mistake and hasn’t given you credit for the fact you have coverage, or
  • you have insurance coverage but your lender and you have a difference of opinion as to whether the policy meets the requirements of your mortgage or deed of trust contract, including for special flood or wind insurance.

What Could Happen If Your Lender Thinks You Don’t Have Homeowners’ Insurance

A lender that believes one of its mortgage-holding homeowners lacks insurance will purchase property insurance on that person’s behalf, so as to protect its monetary interest in the property. This is called “lender-placed” or “force-placed” insurance, because the homeowner has no choice about it.

Of course, the lender will charge you for the premiums for force-placed insurance. Unfortunately, the rates tend to be much higher than for property insurance you would buy on the open market. These rates are not based on the characteristics of your individual home but on all the properties in your lender’s portfolio, regardless of their particular features or physical condition.

The rates can also be influenced by what will get the lender the most amount of money, especially if it uses its own insurance subsidiary to purchase the force-placed insurance. For example, premiums for force-placed insurance quadrupled between 2004 and 2011, according to the Center for Economic Justice.

Another downside to force-placed insurance is that it typically doesn’t cover personal property or personal liability. These become important if, for example, your jewelry is stolen, your sports equipment is destroyed in a garage fire, or you are held responsible for damage or injuries to other people who perhaps slipped and fell at your home or were bitten by your dog.

Force-placed policies also don’t cover additional living expenses if you are displaced from your home due to it becoming unlivable or requiring major repairs.

How to Undo Lender’s Purchase of Force-Placed Insurance

To get your lender to reverse its action, your first step, assuming you really do have insurance, is to provide your lender with copies of your homeowners’ policy. Under the Real Estate Settlement Procedures Act (RESPA), a lender has to terminate the force-placed insurance within 15 days of receiving confirmation of your existing insurance coverage. The lender also has to refund all force-placed insurance premiums and fees during the period in which your own insurance coverage was in effect.

Make sure that your policy includes a mention of your lender and that it meets the requirements in your mortgage for minimum insurance. If there has been no lapse in insurance for your home, the lender should cancel the force-placed insurance and refund you the premium in its entirety.

What to Do If You’ve Sent Proof of Insurance to Your Lender But It Still Won’t Refund You for Forced-Place Insurance

If you’re getting no action from your lender, start by sending it (or its loan servicer) a written notice to dispute the error. This is called a Qualified Written Request (QWR) or a Notice of Error (NOE).

You can get a sample notice of error from the Consumer Financial Protection Bureau (CFPB). Make sure you include your name, home address, mortgage account number and the nature of the error. Don’t send it on a payment coupon! Mail the letter to the address for complaints. You can find this address on your mortgage statement or on your lender’s website.

Under RESPA, a lender has five days, not including weekends and public holidays, to acknowledge your notice of error. After that, your lender has about 30 days, not including weekends and public holidays, to respond to you by either correcting the error, asking for more information, or explaining why it has found that no error has occurred.

Step two is to make a complaint to the Consumer Financial Protection Bureau, which oversees mortgage lenders and the companies they hire as servicers. You can do this on the “Submit a complaint” page of the CFPB website.

After you submit your complaint, the CFPB will work on your behalf to get a response from the lender. Your lender will have 15 days in which to respond, and you’ll have 60 days to give feedback on what your lender says about the force-placed insurance.

Your third step is to make a complaint to the regulatory agency in your state that oversees insurance companies. State insurance departments keep an eye on the insurance industry in order to protect consumers. They license insurance companies, such that insurers can face fines or having their licenses suspended or revoked if they behave badly toward consumers. (See the National Association of Insurance Commissioners website to find out the contact information for the insurance department in your state.)

Avoiding Future Disputes With Your Mortgage Lender Over Insurance

In the future, keep a close eye on the paperwork you get from your insurance company, your lender, or any other company acting on behalf of your lender.

For example, if your mortgage payment includes escrow and your payment amount suddenly jumps up, that is a red flag that you might have an insurance-related issue. Two, if you change homeowners’ insurance carriers, make sure the coverage between your policies is continuous and uninterrupted. Also notify your lender of any changes you make in your homeowners’ insurance, and provide proof of your new coverage directly to the lender.

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