Friday, March 9, 2012

Force-Placed Insurance $$ - The Consumer Fiance Protection Board I Missing The Mark

The Consumer Finance Protection Board ("CFPB") is trying to rein-in a common practice of mortgage companies country-wide. Very often, if a mortgage company or mortgage servicer believes that a homeowners policy has lapsed or been cancelled, the Servicer/Lender will put it's own insurance on the property. This HIGH PRICED coverage is called force-placed insurance, now euphemistically known as "Collateral Protection Insurance" or "CPI".

Presently, Lenders have the right to protect their collateral, and if the borrower doesn't insure against loss, the lender can. That makes sense. However, CPI is wildly more expensive than standard Homeowners and has been the cause of at least 25% of my foreclosure cases. The SCENARIO: A Homeowner misses paying for insurance, the lender is notified and puts CPI on, adds the cost to the escrow account payment, then the homeowner makes regular payment, but lender deems it "short", and puts money in suspense until there is enough to "make" a full payment. Within 6 months borrower is in default of mortgage payments by 3 months and foreclosure starts.

Yes, it is the borrower's responsibility to pay for the insurance as part of the agreement. But, when most get a notice stating that the lender is now paying, most borrowers believe it's their homeowners policy, at the rate they were paying, and that amount will be added to escrow charges. Not so! Because CPI is placed without any underwriting and home values (replacement) are guessed, the premiums are 2 to 5 to 20 times higher than Homeowners. CPI shows on a mortgage bill as "HAZARD" insurance, which is even more confusing.

An extreme, but real case I had (nothing is hyped): Borrowers fell behind due to a job layoff and a disability . Mortgagee refused to modify loan or grant forbearance. Borrowers filed Bankruptcy in an attempt to keep the house but the arrears were too high. Suit over predatory lending issues died due to time passing, thus the Statute of Limitations passing as well. BUT, while the Bankruptcy was still open, and before an eviction action took place, the lender send my clients a premium notice for $18,800 for CPI. The loan was just about $100K but the insurance was for $630K. That was claimed to be the amount that it would have cost to replace the house - sure. I could have purchased the entire street for $630,000!

That took all of the fight left out of my clients. They could not pay the regular payment, the arrears (even over 60 months) AND $1,566 per month for CPI (that was twice the mortgage payment). They packed up and moved. When I tried to get recompense from the lender for violating the automatic stay in Bankruptcy and for unfair and deceptive practices, the law firm for the lender sent me a nice letter saying, in essence, too bad.

At auction the house sold but the sale died. The resultant sale to a real 3rd party purchaser was for less than $20,000. The lender lost but got what it deserved, but my clients and wife's parents had to move. The lender lost twice as my clients would still be there paying a regular payment at 4% with regular homeowners, just fine.

The CFPB discussed rule would not have helped here. The lender had the right to insure but why not JUST PAY THE HOMEOWNER'S PREMIUM, and where did they get $630K. What else would you expect from a bank that told me "We don't have to do modifications. We didn't take any federal (TARP) money!"

Author's Copyright by Richard I Isacoff, Esq, March, 2012

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