Is a 300% Mark-Up On Lender-Placed Insurance Justified?
April 30th, 2008
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How many ways can a borrower get absolutely hit over the head with fees in the loan process? If you think about it, it is amazing how many fees are involved with the lending process. I mean you have fees such as the “document preparation fee;” the “email fee” (a fee some mortgage brokers will charge you to receive and print out an email); the oh-so-wonderful “admin fee;” the Yield Spread Premium (“YSP”); the Service Release Premium (“SRP”); and on and on and on. Unless you’re highly sophisticated in the loan industry, it is virtually impossible to know what is customary, normal, or reasonable.
What’s worse is that these fees do not stop at the origination phase. The abusiveness of fees in the loan process can even continue well into the servicing of your loan. Specifically, borrowers can get price-gouged in their impound accounts.
In basic terms, an “impound account” is a trust account established by the lender to hold the borrower’s money to pay for real estate taxes, and insurance premiums. These accounts are a measure that lenders take to mitigate the chance that a borrower will default on his loan. For instance, impound accounts assure the lender that the borrower’s property taxes are timely paid (to avoid liens) and that the borrower’s insurance is paid on time (to avoid uninsured loss.) Borrower’s are taught to view impound accounts as a good thing because the borrower does not have to worry about paying taxes or insurance himself because the lender “takes care of it.”
There’s the background, and here’s the rub. What the lender fails to mention when they purchase insurance on a borrower’s behalf via an impound account, is that they will opt to purchase an exorbitantly high priced insurance. In fact, as I have recently discovered (because it happened to me), the “lender-placed” insurance that the lender will purchase is about three times (3 times!) as expensive as the insurance the borrower can procure for himself! To make matters worse, unless the borrower is savvy concerning his real estate costs, he will never know that he is paying too much for his insurance. Unfortunately, the lender can make this excessive purchase without any forewarning and/or explanation to the unsuspecting borrower.
Certainly, every borrower would want to know if he is being assessed a fee more than three times the normal cost. Personally, I cannot think of the situation where I would willingly pay over a 300% markup to have someone purchase something for me. As a real estate attorney, I consider myself sophisticated concerning real estate issues. However, up and until last week, I had no idea how the lender-placed insurance system (or gimmick) works. When I caught on, I personally called my lender to inquire about this practice. I spoke with three representatives, including a supervisor, and was met with the typical “I don’t know” response. Interestingly, all representatives did openly admit to the fact that if the lender purchases the insurance on behalf of the borrower it will be about three times as much the price the borrower would pay if the borrower pays for it on his own.
I wonder how many teetering borrowers have been pushed into default as a result of this practice? Only the lenders would be able to tell us. As a legal practitioner, I view this lender-placed insurance practice as posing a huge risk to loan servicers for a nationwide class action. Maybe it will take a class action lawsuit to expose and stop this practice in the future. The bottom line is that this practice needs to stop. Not only is it highly unfair to the unsuspecting borrowers in the national mortgage marketplace, it exposes lenders and servicers to substantial liability.
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Attorney Jeffrey L. Hogue is a partner at the San Diego law firm of Hogue & Belong. Mr. Hogue is also a founder of the Mortgage Accountability Association.
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October 13th, 2008 at 6:59 pm
Jeffrey, not only is 3 times or sometimes 5 times more expensive but it is also a “stripped-down” version of a HO policy.
Because of what you mention in your article, more than a year ago we started developing a new insurance product to eliminate Force-Placed insurance. And we did. A few months ago we filed 4 patents on a new product that is voluntary, it includes a property and flood policy, and the insurance carrier is Lloyds. We are now ready to sell the product and we are appointing a few Agencies throughout the Country.
The punitive nature of Force-Placed has created a 10 billion/yr. business/monopoly for the Force Placed Insurance Companies that is imposible to break without viable alternatives that benefit the Homeowners.
February 11th, 2009 at 3:05 pm
Jefferey,
I am confused by your contentions that borrowers are unaware of lender placed insurance costs and the characterization that it is tantamount to an ambush. My background includes time spent within community banks and most recently underwriting financial institution insurance, with a focus on collateral protection.
First some facts:
1)Most, if not all, loan provisions have a clause detailing actions the institution will take in the event primary insurance, which is required as part of the loan agreement, lapses. The idea that a borrower is caught of guard would only be legitimate if they did not read the documents they were signing. Furthermore most contain language stating that the insurance procured will be for the banks benefit only, and at substantially higher cost.
2)In terms of the higher costs of the insurance this is a necessary increase. Banks do not want to place insurance, it is costly in terms of FTE’s and even though most are passed on to the borrower it actually costs them to continuously check for required insurance and then report the necessary properties. Futhermore there is a school of thought that higher lender placed insurance coverage serves as an incentive to the borrower to find better, cheaper coverage elsewhere.
I think we can all agree that occasionally there are unintentional lapses of primary insurance coverage. When this occurs most institutions will only charge for the specific number of days that coverage was required, as most insurance carriers have a pro rata clause.
As far as ways to improve this process perhaps its better to find a solution that already is proven and exists on the market instead of developing a new one that requires substantial involvement by the borrower. A solid case can be made for full blanket, mortgage impairment insurance. Usually mortgage impairment insurance works in conjunction with a bank’s lender placed program but the full blanket, ex-checking variety allows the institution to stop checking for required insurance. Endorsements can be added that then state even if an institution finds a borrower has lapsed coverage, they are still protected. While the bank bears the cost of this coverage, as it is impossible to pass through, the resulting reduction in operational expenses spent tracking and placing provides an offset. The only potential issue is that few insurers allow this to be a dual interest policy, so the borrowers equity may not be protected.
Just a few thoughts,
Chris
April 1st, 2009 at 8:23 pm
Lender-placed insurance is insurance placed on a piece of property by your lender to protect their interest. If, for any reason, you cannot obtain an insurance policy, your lender must take precautionary steps to ensure that coverage is in place to protect their interest. Lender-placed insurance is not meant to protect your personal belongings, and borrowers cannot file any personal claims under lender-placed policies. This is why it is vital for you to maintain your own insurance.
Generally, lender-placed insurance is coverage to protect against damage to the property being financed or leased only. Liability coverage is excluded.
Yes, lender placed insurance is 2 to 5 times more expensive than your regular insurance policy. For example, when you purchase a homeowners policy, the insurance company who will supply the coverage has the opportunity to gather information on your property. The insurance company evaluates the types of materials your house is made of (wood, brick, stone), where it is located (suburbs, inner city, fault line, flood zone), and what type of environment surrounds your house (river, cliff, lake). After the statistics are gathered, companies do a risk analysis. The premium amount is generated through the underwriting of this risk analysis. With lender-placed insurance there isn’t an opportunity to perform a risk analysis and underwrite a premium tailored to your property. Therefore lender placed insurance is minimal coverage with higher rates than if you had underwriting done on your individual policy.
August 9th, 2009 at 10:32 pm
Okay.
My story (ongoing)
I had a lapse on my commercial property for a disputed amount of time between February 2007 and July 2007. Without question, I had a policy by July 2007. My normal rate is less than $1500/month. In September 2007, WAMU took out insurance for me for February 2007 thruough July 2007.
NO future time was covered under the Forced insurance, ONLY a time in the past. $37,000 was the cost.
No rollback provision in my contract so far as forced placed insurance.
What I told WAMU (now CHASE). If WAMU states that every loan customer who has had a lapse is automatically covered by this “retroactive” insurance, I have nothing to say. They will not say that to me. What that means is, once they determine that the building is standing, they get the “retroactive” insurance. That is cherry picking and maybe worse.
joe lee
September 14th, 2009 at 8:50 pm
Actually the reason why it’s 3 times regular insurance is because you are being insured site unseen. So the insurance company your Lender hires is taking a huge risk to insure everyone who defaults on their contract. Our company will cancel immediately upon a fax of an inforce policy whether it’s one day or 364 days after placement. In addition, the homeowner usually has 3 letters in hand 30 or so days apart warning they need to fax their proof or give us their agents phone, the last notice being the actual policy.