CFPB Issues Final Rule On Force-Placed Hazard Insurance

Transcription

1 CFPB Issues Final Rule On Force-Placed Hazard Insurance Introduction On January 17, 2013, the Consumer Financial Protection Bureau ( CFPB ) issued its final rules regulating Mortgage Servicing, including a final rule on Force-Placed Hazard Insurance. Below is a summary of the Force-Placed Hazard Insurance Final Rule for your enjoyment or dread, as the case may be. The Final Rule is Effective January 10, Legislative Background To understand where we are, it s a good idea to get a picture of how we got here. So here s a telescopic summary of the paper avalanche that leads to the Rule. implements RESPA. Including background, discussion and commentary, the Mortgage Servicing Rules are 753 pages. The first 645 pages contain the CFPB s rational for the rules. So the good news is that the actual Mortgage Servicing Rule amendments are only 108 pages, 97 of which add a new Subpart C Mortgage Servicing to Regulation X. Within the 97 pages of Subpart C of Regulation X, there are 12 new Sections ( ). According to the CFPB s summary, there are nine major topics covered in the Final Rule. On July 21, 2010, the President signed into law H. R. 4173, the Wall Street reform bill entitled, Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank ). The bill has 848 pages and addresses a number of important issues within the financial services industry. Within those 848 pages, is, among other things, Title X, the Consumer Financial Protection Act of 2010, which created the CFPB, and Title XIV, the Mortgage Reform and Anti-Predatory Lending Act ( Title XIV ). Title XIV is only 76 pages (when you get to it). Now, within Title XIV are 8 Subtitles (A-H), one of which is Subtitle E Mortgage Servicing ( Subtitle E ), just 10 pages. Within Subtitle E are five Sections ( ), which is where we find Section 1463, amending the Real Estate Settlement Procedures Act of 1974 ( RESPA ). Section 1463 is a mere 2 pages. On January 17, 2013, under the authority of Title X and Title XIV, the CFPB released its final rule entitled Mortgage Servicing Rules under the Real Estate Settlement Procedures Act (Regulation X), amending 12 CFR part 1024, which We are interested in topic number four, in Section of the new rules, entitled, Force-Placed Insurance. Section , is 21 pages, including commentary and model forms. We are going to skip most of the 1601 pages to talk about 21 pages of Force-Placed Insurance. Compliance Matters is published by WNC Insurance Services, Inc. and intended for informational use only. WNC Insurance Services, Inc. is not engaged in rendering legal advice or recommendation. If you require legal guidance, please consult your legal counsel or a professional law practitioner. For comments, please

2 page 2 of 9 Force-Placed Hazard Insurance Rules New Definitions Flood Insurance Not Included. Our discussion of the new Mortgage Servicing Rules begins with three important definitions: mortgage loan, hazard insurance and force-placed insurance. In general, a mortgage loan means a loan secured by residential real property, not commercial property and not home equity lines of credit. (Sections and ) Section defines hazard insurance as follows: Hazard insurance means insurance on the property securing a mortgage loan that protects the property against loss caused by fire, wind, flood, earthquake, theft, falling objects, freezing, and other similar hazards for which the owner or assignee of such loan requires insurance. In Section (a)(1), force-placed insurance means: For the purposes of this section, the term forceplaced insurance means hazard insurance obtained by a servicer on behalf of the owner or assignee of a mortgage loan that insures the property securing such loan. At first glance, one might conclude that these rules regulate flood insurance based upon the definitions of hazard insurance and force-placed insurance quoted above. Such is not the case. Section (a)(2)(i) states that insurance required by the Flood Disaster Protection Act of 1973 does not constitute force-placed insurance under this section. Thus, the new rules do not apply to Flood insurance. Escrowed Loans No Force-Placement for Non-Pay The final rules prohibit a servicer from purchasing forceplaced insurance if the escrow account contains insufficient funds to pay for the borrower s hazard insurance. However, rather than explicitly requiring a servicer to advance funds into a delinquent escrow account, the CFPB simply prohibits purchasing force-placed insurance when the borrower s insurance is cancelled for non-payment. If a servicer does advance funds to pay for the borrower s insurance, the rules explicitly state this is not force-placed insurance. Section (a)(2)(ii). Timely Payment: If a borrower s mortgage payment is more than 30 days overdue, and hazard insurance payments are escrowed, a servicer may not purchase force-placed insurance, unless the servicer is unable to disburse the escrowed funds to pay for the hazard insurance in a timely manner. (Section (k)(5)(i)) Unable to Disburse: A servicer is unable to disburse escrowed funds if the borrower s hazard insurance was canceled or non-renewed for reasons other than nonpayment of premium or if the borrower s property is vacant. (Section (k)(5)(ii)(A)) Not Unable to Disburse: A servicer is not unable to disburse escrowed funds simply because the account contains insufficient funds to pay for the hazard insurance. (Section (k)(5)(ii)(B)) Recoupment of Advances: A servicer may seek repayment from the borrower for the funds the servicer advanced, unless otherwise prohibited by applicable law. (Section (k)(5)(ii)(C)) Small Servicers: A small servicer (owning and servicing less than 5000 loans) may purchase force-placed insurance rather than disburse escrowed funds, if the cost of the force -placed insurance is less than the amount that will be disbursed to pay for the borrower s coverage. (Section (k)(5)(iii)) Force-Placement Requirements Reasonable Basis Consistent with Dodd-Frank, the right to force-place hazard insurance is no longer merely a contractual right found in the loan documents. The lender must now have a reasonable basis to believe that force-placement is necessary. A servicer may not assess on a borrower a premium charge or fee related to force-placed insurance unless the servicer has a reasonable basis to believe that the borrower has failed to comply with the mortgage loan contract s requirement to maintain hazard insurance. (Section (b)) According to the CFPB commentary to Section (b), a servicer may satisfy the reasonable basis standard if the

3 page 3 of 9 servicer acts with reasonable diligence to ascertain a borrower s hazard insurance status and does not receive evidence of insurance coverage in response to the notification requirements set forth in Section (c). Here are the notification requirements. Force-Placement Requirements Written Notice Servicers must meet three general requirements before a borrower can be charged for forced-placed coverage. They are: (i) Send a 45 Day Notice Letter to the borrower; (ii) Send a 15 Day Reminder Notice Letter to the borrower, 30 days after the first notice letter; and (iii) Fail to receive proof of continuous hazard insurance coverage that complies with the loan agreement, before the end of the second notice letter period. (Sections (c)(1) and (d)(1)) Here s my summary of the notice letter requirements. FIRST NOTICE Forty-Five Day Notice: At least 45 days before coverage is force-placed, a servicer must send a written notice to the borrower containing the following information; 1. The date of the notice; 2. The servicer s name and mailing address; 3. The borrower s name and mailing address; 4. A statement in bold text requesting proof of hazard insurance for the borrower s property, identified by its physical address; 5. A statement that the servicer does not have evidence of hazard insurance, as identified, past the stated expiration date; 6. A statement in bold text that the servicer has purchased or will purchase, the required hazard insurance at the borrower s expense; 7. A statement requesting the borrower to promptly provide the servicer with insurance information; 8. A description of how the borrower may provide the requested insurance information to the servicer; 9. A statement in bold text that the servicer s insurance: a. May cost significantly more than the borrower s insurance; b. May not provide as much coverage as the borrower s insurance; 10. The servicer s telephone number for borrower inquiries; and 11. If applicable, a statement advising the borrower to review additional information provided in the same transmittal. (Section (c)(2)) Format Note: Certain portions of the 45 Day Notice Letter need to be in bold text, as noted above. (Section (c) (3)) Although this can be confusing, the CFPB provided a model template, form MS-3A, to assist with compliance. We have attached the CFPB model forms to this memorandum. Additional Information: A servicer may not include within the 45 Day Notice Letter any information other than as required by Section (c)(2). However, a servicer may reference additional information provided on a separate paper. (Section (c)(4)) SECOND NOTICE Fifteen Day Reminder Notice: At least 30 days after the first notice, a servicer must send a reminder notice to the borrower at least 15 days before coverage is force-placed (Section (d)(1)). The reminder notice must respond in either one of two ways, No Coverage or No Continuous Coverage: No Coverage: If the servicer did not receive proof of insurance after the first notice, the reminder notice must contain the following information: 1. The date of the notice; 2. A statement in bold text that the notice is the second and final notice; 3. A repeat of the information stated in the first notice (2-11, above); and 4. The cost of the force-placed insurance, in bold text, stated as an annual premium. (Section (d)(2) (i))

4 page 4 of 9 No Continuous Coverage: If the servicer received proof of insurance after the first notice, but the proof does not demonstrate continuous coverage, the reminder notice must contain the following information: 1. The date of the notice; 2. A statement in bold text that the notice is the second and final notice; 3. The servicer s name and mailing address; 4. The borrower s name and mailing address; 5. A statement in bold text requesting proof of hazard insurance for the borrower s property, identified by its physical address; 6. The cost (or estimated cost) of the force-placed insurance, in bold text, stated as an annual premium; 7. The servicer s telephone number for borrower inquiries; 8. A statement that the servicer has received the hazard insurance information that the borrower provided; 9. A statement requesting the borrower to provide missing information; 10. A statement that the borrower will be charged for the servicer s insurance during any gap in the borrower s coverage; and 11. If applicable, a statement advising the borrower to review additional information provided in the same transmittal. (Section (d)(2)(ii)) Format Note: Certain portions of the 15 Day Reminder Notice Letter need to be in bold text, as noted above. (Section (d)(3)) Although this can be confusing, the CFPB provided model templates, forms MS-3B and MS-3C, to assist with compliance. We have attached the CFPB model forms to this memorandum. Additional Information: A servicer may not include within the 15 Day Reminder Notice Letter any information other than as required by Sections (d)(2)(i)-(ii). However, a servicer may reference additional information provided on a separate paper. (Section (d)(4)) Updated Notice: If new insurance information is received after the 15 Day Reminder Notice Letter was put into production, the servicer is not required to update the notice with the new information if the notice is sent to the borrower within a reasonable time after being placed into production. The CFPB commentary states that five business days is a reasonable time. (Section (d)(5)) Renewal Requirements Written Notice Servicers must meet two general requirements before a borrower can be charged for a renewal of forced-placed coverage. They are: (i) Send a 45 Day Renewal Notice Letter to the borrower, (ii) Fail to receive proof of continuous hazard insurance coverage that complies with the loan agreement, before the end of the notice letter period. (Section (e)(1)) Renewal Acceleration: If a servicer receives proof of borrower s coverage showing a lapse in coverage between the expiring force-placed coverage and the start of the borrower s coverage, the servicer is not required to wait until the end of the 45 Day Renewal Notice Letter period before charging the borrower for force-placed coverage in effect during the lapse. (Section (e)(1)(iii)) RENEWAL NOTICE Forty-Five Day Renewal Notice: At least 45 days before force-placed coverage is renewed, a servicer must send a written renewal notice to the borrower containing the following information: 1. The date of the notice; 2. The servicer s name and mailing address; 3. The borrower s name and mailing address; 4. A statement in bold text requesting proof of hazard insurance for the borrower s property, identified by its physical address; 5. A statement that the servicer purchased force-placed insurance on the borrower s property and charged the borrower for the insurance because the servicer did not receive evidence of hazard insurance;

5 page 5 of 9 6. A statement that: a. The force-placed insurance the servicer previously purchased expired or will expire; and b. (In bold text) Because hazard insurance is required on the borrower s property, the servicer intends to renew the insurance it previously purchased; 7. A statement in bold text informing the borrower: a. That insurance the servicer purchases may cost significantly more than hazard insurance purchased by the borrower; b. That such insurance may not provide as much coverage as hazard insurance purchased by the borrower; and c. The cost (or estimated cost) of the force-placed insurance, stated as an annual premium; 8. A statement requesting the borrower to promptly provide the servicer with insurance information; 9. A description of how the borrower may provide the requested insurance information to the servicer; 10. The servicer s telephone number for borrower inquiries; and 11. If applicable, a statement advising the borrower to review additional information provided in the same transmittal. (Section (e)(2)) Format Note: Certain portions of the 45 Day Renewal Notice Letter need to be in bold text, as noted above. (Section (e)(3)) Although this can be confusing, the CFPB provided a model template, form MS-3D, to assist with compliance. We have attached the CFPB model forms to this memorandum. Additional information: A servicer may not include within the 45 Day Renewal Notice Letter any information other than as required by Section (e)(2). However, a servicer may reference additional information provided on a separate paper. (Section (e)(4)) Frequency of Renewal Notices: The renewal notice must be sent to the borrower before the anniversary of the forceplaced coverage purchase date. A servicer is not required to provide a renewal notice more than once a year. (Section (e)(5)) Mailed Notices: All mailed notices must be sent via first class mail or better. (Section (f)) Cancellation Requirements 15 Day Timeline Within 15 days of receiving proof of a borrower s hazard insurance that complies with the loan contract, a servicer must: 1) Cancel the servicer s force-placed insurance; and 2) Refund and credit to the borrower all force-placed insurance charges for any period of overlapping coverage. (Section (g)) Force-Placement Limitations Except for State regulated insurance charges and flood insurance charges, all force-placed insurance charges must be bona fide and reasonable. (Section (h)(1)) A bona fide and reasonable charge is a charge for a service actually performed that bears a reasonable relationship to the servicer s cost of providing the service, and is not otherwise prohibited by applicable law. (Section (h) (2)) If permitted by federal flood regulations, a servicer may mail hazard insurance notices with flood insurance notices on separate pieces of paper in the same transmittal. (Section (i)) Further Questions You can review the complete text of new Mortgage Servicing Rules, including the CFPB preliminary discussion, commentary and form templates on our website at If you have questions about this article, please contact a WNC representative or the author, Jordan N. Gray, Esq., SVP, Compliance and Legal Affairs, WNC Insurance Services, Inc., at or at JGray@WNCFirst.com.

6 page 6 of Appendix MS-3 is added to part 1024 to read as follows: APPENDIX MS-3 TO PART 1024 MODEL FORCE-PLACED INSURANCE NOTICE FORMS Table of Contents MS-3(A) Model Form for Force-Placed Insurance Notice Containing Information Required By (c)(2) MS-3(B) Model Form for Force-Placed Insurance Notice Containing Information Required By (d)(2)(i) MS-3(C) Model Form for Force-Placed Insurance Notice Containing Information Required By (d)(2)(ii) MS-3(D) Model Form for Renewal or Replacement of Force-Placed Insurance Notice Containing Information Required By to (e)(2) MS-3(A) MODEL FORM FOR FORCE-PLACED INSURANCE NOTICE CONTAINING INFORMATION REQUIRED BY (C)(2) [Name and Mailing Address of Servicer] [Date of Notice] [Borrower s Name] [Borrower s Mailing Address] Subject: Please provide insurance information for [Property Address] Dear [Borrower s Name]: Our records show that your [hazard] [Insurance Type] insurance [is expiring] [expired], and we do not have evidence that you have obtained new coverage. Because [hazard] [Insurance Type] insurance is required on your property, [we bought insurance for your property] [we plan to buy insurance for your property]. You must pay us for any period during which the insurance we buy is in effect but you do not have insurance. You should immediately provide us with your insurance information. [Describe the insurance information the borrower must provide]. [The information must be provided in writing.] The insurance we [bought] [buy]: May be more expensive than the insurance you can buy yourself. May not provide as much coverage as an insurance policy you buy yourself. If you have any questions, please contact us at [telephone number]. [If applicable, provide a statement advising a borrower to review additional information provided in the same transmittal.]

7 page 7 of 9 MS-3(B) MODEL FORM FOR FORCE-PLACED INSURANCE NOTICE CONTAINING INFORMATION REQUIRED BY (D)(2)(I) [Name and Mailing Address of Servicer] [Date of Notice] [Borrower s Name] [Borrower s Mailing Address] Subject: Second and final notice please provide insurance information for [Property Address] Dear [Borrower s Name]: This is your second and final notice that our records show that your [hazard] [Insurance Type] insurance [is expiring] [expired], and we do not have evidence that you have obtained new coverage. Because [hazard] [Insurance Type] insurance is required on your property, [we bought insurance for your property] [we plan to buy insurance for your property]. You must pay us for any period during which the insurance we buy is in effect but you do not have insurance. You should immediately provide us with your insurance information. [Describe the insurance information the borrower must provide]. [The information must be provided in writing.] The insurance we [bought] [buy]: [Costs $[premium charge]] [Will cost an estimated $[premium charge]] annually, which may be more expensive than insurance you can buy yourself. May not provide as much coverage as an insurance policy you buy yourself. If you have any questions, please contact us at [telephone number]. [If applicable, provide a statement advising a borrower to review additional information provided in the same transmittal.]

8 page 8 of 9 MS-3(C) MODEL FORM FOR FORCE-PLACED INSURANCE NOTICE CONTAINING INFORMATION REQUIRED BY (D)(2)(II) [Name and Mailing Address of Servicer] [Date of Notice] [Borrower s Name] [Borrower s Mailing Address] Subject: Second and final notice please provide insurance information for [Property Address] Dear [Borrower s Name]: We received the insurance information you provided, but we are unable to verify coverage from [Date Range]. Please provide us with insurance information for [Date Range] immediately. We will charge you for insurance we [bought] [plan to buy] for [Date Range] unless we can verify that you have insurance coverage for [Date Range]. The insurance we [bought] [buy]: Costs $[premium charge]] [Will cost an estimated $[premium charge]] annually, which may be more expensive than insurance you can buy yourself. May not provide as much coverage as an insurance policy you buy yourself. If you have any questions, please contact us at [telephone number]. [If applicable, provide a statement advising a borrower to review additional information provided in the same transmittal.]

9 page 9 of 9 MS-3(D) MODEL FORM FOR RENEWAL OR REPLACEMENT OF FORCE-PLACED INSURANCE NOTICE CONTAINING INFORMATION REQUIRED BY TO (E)(2) [Name and Mailing Address of Servicer] [Date of Notice] [Borrower s Name] [Borrower s Mailing Address] Subject: Please update insurance information for [Property Address] Dear [Borrower s Name]: Because we did not have evidence that you had [hazard] [Insurance Type] insurance on the property listed above, we bought insurance on your property and added the cost to your mortgage loan account. The policy that we bought [expired] [is scheduled to expire]. Because [hazard][insurance Type] insurance] is required on your property, we intend to maintain insurance on your property by renewing or replacing the insurance we bought. The insurance we buy: [Costs $[premium charge]] [Will cost an estimated $[premium charge]] annually, which may be more expensive than insurance you can buy yourself. May not provide as much coverage as an insurance policy you buy yourself. If you buy [hazard] [Insurance Type] insurance, you should immediately provide us with your insurance information. [Describe the insurance information the borrower must provide]. [The information must be provided in writing.] If you have any questions, please contact us at [telephone number]. [If applicable, provide a statement advising a borrower to review additional information provided in the same transmittal.]