Mortgage Force-Placed Insurance

Credit unions that service mortgages oftentimes require members or owners of the property to purchase hazard insurance to cover the property securing the loan. If a member fails to provide proof of hazard insurance for their mortgaged property, credit unions may have options. This blog reviews the force-placed insurance requirements concerning federally related mortgages.

While credit union policies may require insurance, RESPA's Section 1024.37 limits a servicers' ability to charge members for force-placed insurance policies. The rule applies to federally related mortgage loans, which does not include open-end lines of credit, such as HELOCs.

Force-placed insurance means hazard insurance obtained by a servicer on behalf of the owner or assignee of a mortgage loan that insures the property secured by the loan. This rule is not applicable to flood insurance, renewing a member's hazard insurance under a member's escrow account or renewing by the borrower's servicer at its discretion, if the borrower agrees.

Charging the Member?

To impose force-placed insurance charges to members, servicers must meet several requirements. First, there must be a reasonable basis to believe the member failed to maintain the required hazard insurance per the mortgage loan contract. Next, the servicer must provide the member with two notices (a first notice and a reminder notice).

If the servicer still has not received adequate proof of insurance from the member after providing those two notices, the servicer can force-place insurance [AP1] [JW2] on the property and charge the member. However, if the servicer later receives evidence of hazard insurance that complies with the loan's contract, it must cancel the force-placed insurance within 15 days. The servicer must also determine if it must refund the member any premium charges or fees related to overlapping coverage within those 15 days after receiving notice.

The 2 Notices: Timing, Content, and Format

What should the notices entail? Well, RESPA requires the servicer deliver a first notice and a reminder notice to the member. The first notice must be delivered at least 45 days before assessing a charge on the member for the cost force-placed insurance. The reminder notice must be sent at least 30 days after the first notice.

RESPA requires certain content for both the first and the reminder notices. Among many other requirements, both notices must include a description of the requested proof of insurance and how the member may provide it. Additionally, both notices must include a statement that the force-placed insurance the servicer-purchased (or will purchase), may cost significantly more and may not provide as much coverage than member-purchased hazard-insurance.

The required reminder notice has content requirements for different scenarios, including (i) when servicer receives no insurance information after first notice is delivered; and (ii)when the member provides insurance information that does not appear to be continuous in coverage. Generally, the reminder notice must (i) state the date of notice; (ii) the fact that this notice is the second and final notice; (iii) the cost of the force-placed insurance; and (iv) a statement that the information the member sent as proof of coverage is not complete and that the member must send the missing information to avoid being charged.

The servicer must set certain information in bold text on the notices. For instance, the statements that force-placed insurance may cost more and cover less should be emboldened. Servicers are permitted to use the model forms in Appendix MS-3 to comply with the content and format rules. The notices may include the mortgage loan account number, yet no other additional information can be included.

What happens when a member updates the credit union with new information? The regulations do not impose a duty to update the notice if a credit union servicer receives new information about a borrower's hazard insurance after a written reminder notice has been put into production. The servicer would not be required to update such notice based on the new information if the notice was put into production a reasonable time before the servicer delivering the notice to the borrower or placing the notice in the mail.

If you have any questions about this blog or any suggestions about blog topics, please contact the Compliance team using compliance@americascreditunions.org.