Federal consumer watchdog promises crackdown on force-placed insurance
The federal government’s consumer watchdog signaled March 6 that he’ll clamp down on a type of insurance that has come under intense scrutiny amid the U.S. mortgage meltdown.
In a speech to the National Association of Attorneys General, Richard Cordray, director of the federal Consumer Financial Protection Bureau, said federal rules on “force-placed insurance” will be issued to prevent mortgage servicers from charging for this type of coverage “unless there is a reasonable basis to believe that borrowers have failed to maintain their own insurance.”
Cordray didn’t give a timetable for unveiling the new rules.
Florida attorney Marc Wites says many homeowners may be unaware of a clause in their mortgage contracts that lets a mortgage holder take out a force-placed policy to protect itself in case the homeowner’s insurance lapses for any reason, including financial troubles. The bank forces a homeowner to pay for this coverage, which often costs more than a standard home insurance. This kind of policy typically doesn’t cover a homeowner’s interest in the property or the homeowner’s belongings.
Loretta Worters, a spokeswoman for the nonprofit Insurance Information Institute, says that typically the only reason a mortgage lender would buy forced-place insurance is when a homeowner has gone into foreclosure and lacks money to pay the mortgage or the home insurance premiums.
Cordray’s announcement comes less than a month after the federal government and 49 states announced a $25 billion settlement with the country’s five largest mortgage servicers to fix what U.S. Attorney General Eric Holder called “reckless and abusive mortgage practices,” including force-placed insurance. The five mortgage servicers are Bank of America, Chase, Wells Fargo, Citibank and Ally (formerly GMAC).
“Force-placed insurance appears to be the dirty little secret of the mortgage industry,” Benjamin Lawsky, superintendent of the New York State Department of Financial Services, told The New York Times. “It is a silent killer harming both consumer and investors while enriching the banks and their affiliates.”