CFPB Issues Mortgage Servicing Rules – Part Deux: Force-Placed Insurance
Written by Stephanie Lyon, Regulatory Compliance Counsel
My colleague Benjamin recently blogged about the mortgage servicing final rule and how it will expand the rights granted to verified successors in interest under Regulations X and Z. This second part reviews a few force-placed insurance (FPI) requirements and highlights three revisions to section 1024.37 and the model forms. The FPI notice requirements take me back to the time when my mortgage servicing department sent an FPI notice signed with my name and phone extension to over one hundred members who had nonconforming hazard insurance. The conversation went something like this:
Member: Hello, my name is Joe Smith and I received a FPI notice that states I do not have hazard insurance. Well I am calling to inform you, I do in fact have hazard insurance.
Stephanie: Mr. Smith, could you give me your account number so that I can find your account and verify this information?
Member: I don't know it and I don't feel comfortable sharing my social security number.
Stephanie: Mr. Smith I was able to pull your account from your phone number, I see that the reason you received that letter was not because you don't have insurance, but rather because you don't have the right amount of hazard insurance as stated in the mortgage agreement.
Member: Why didn't you just tell me that from the start!?
Unfortunately, credit unions had very few options when disclosing the reasons why hazard insurance was being force-placed as the current model forms lack clarity. This led to a few headaches for credit union folks and a great deal of confusion for members.
Currently, Regulation X allows servicers to force-place insurance if the servicer has a reasonable belief that the borrower has failed to comply with the mortgage loan's contract requirement to maintain hazard insurance. See, 12 C.F.R. 1024.37(b). Prior to force-placing insurance, there are a couple of notices that a servicer must provide an initial notice (45 days prior to force-placing) and a reminder notice (15 days prior). See, 12 C.F.R. 1024.37(c)(1)(i)-(ii). Section 1024.37(c)(4) and (d)(4) prohibit servicers from including in the FPI notices any information other than that required by the rule. It was unclear if this prohibition extended to language clarifying why the credit union would force-place insurance and additional disclosures required by state law. In the final rule, CFPB clarified that no additional information can be added to FPI notices even if the information is required by state law because of the potential toconfuse members and obscure the most important information. See, Final Rule, pp. 173 & 178-9.
While credit unions may not include additional information other than what is allowed under Regulation X, the final rule does address some issues that may provide for greater clarity. The first issue the final rule corrects is that it permits credit unions to include a third option when disclosing the reason why insurance has been force-placed. : (1) hazard insurance has expired or (2) will expire and the credit union has not received evidence that the borrower has hazard insurance past the expiration date. See, 12 C.F.R. 1024.37(c)(2)(v). Neither option adequately explains the case in which a borrower has hazard insurance but the amount is below the requirements stipulated in the mortgage agreement.
Effective 12 months from the date of publication in the Federal Register, the final rule adds a third option to paragraph 37(c)(2)(v) and Model Form MS-3(A) that will enable servicers to provide borrowers with notices that are more accurately tailored and potentially avoid confusing borrowers that have nonconforming FPI insurance. See, Final Rule, pp. 804-808. The option will read: (3) the borrower's hazard insurance provides insufficient coverage. See, Final Rule, pp. 176-178. This third option provides enough flexibility to cover cases in which the member purchased hazard insurance for nonconforming amounts or through a company that the lender or servicer does not allow. Additionally, if the credit union needs to include information not required or allowed by the final rule, it may do so on a separate document that can be included in the FPI correspondence. See, 12 C.F.R. 1024.37(c)(4).
The second addition to the FPI notice is the ability to include the mortgage or account number of the borrower. See, Final Rule, pp. 789. While this is a minor addition, it allows servicers to inform the member of the mortgage they are referencing and makes the communication between the servicer and the borrower easier. The rationale behind including account numbers is that some credit unions rely on this information to correctly identify the loan in question when members call in regard to the FPI notice. Do note that the inclusion of the account number is not mandatory.
The third change to the FPI section of Regulation X is the modification of the Appendix to correct discrepancies between the model forms and the text of section 1024.37. Currently the model forms MS-3(A) through (D) omit the word significantly from the statement that the insurance the servicer has purchased or purchases may cost more than hazard insurance purchased by the borrower. The amendment will amend the phrase to read may cost significantly more in each of the model forms. The new model forms also include a requirement that certain text be formatted in bold type to emphasis that text in the forms. See, Final Rule, pp. 489-490. The format used in FPI notices will be important because a technical correction in the final rule will require that when some of the same information appears in both the initial and the final notice, the format of both notices must match. See, Final Rule, pp. 171.
Needless to say, my story would have been quite different if the Mortgage Servicing rule had amended a year ago. Hopefully, the final rule will allow a conversation to go from the example above to:
Member: Hello, my name is Joe Smith and I received a FPI notice that states my hazard insurance provides insufficient coverage. An additional document that came with the notice stated that my hazard insurance coverage is $500 off what the mortgage agreement requires. I am sending you a copy of my new conforming hazard insurance with the loan number listed in the notice.
Stephanie: Mr. Smith, you are my favorite member.