Article
Source: Law360
Article
06.12.13
This article was originally published in Insurance Law360 and Real Estate Law360 on June 12, 2013.
On March 29, 2013, the Federal Housing Finance Agency (the FHFA) proposed consideration of new regulations for lender-placed insurance. The FHFA requested public input on two issues — sales commissions and reinsurance activities. The FHFA also indicated that it plans a broader review of lender-placed insurance issues.
These FHFA actions follow insurance regulatory efforts in California and New York to impose more stringent limitations. Lender-placed insurance has long-raised regulatory and litigation concerns, and the prospect of new FHFA regulations is an important issue for lenders.
What Is Lender-Placed Insurance
In real estate lending transactions, standard loan documents obligate the borrower to maintain hazard insurance on real property improvements. If the borrower fails to maintain adequate insurance on that property, the lender is authorized to “force place” insurance to protect the interests of the lender on the property securing the loan. In the area of automobile loans, this type of insurance is typically called “collateral protection insurance” or “CPI.”
For loans secured by real property, this type of insurance is typically called “lender-placed insurance” or “force-placed insurance.” In either case, the lender purchases the insurance and then adds the premium to the balance of the loan, effectively charging the borrower.
The lender often outsources the administrative effort of tracking which loans have adequate insurance in place. Sometimes, lenders arrange to directly or indirectly receive commissions for placing such insurance.
Lender-placed insurance typically covers only the physical structure of a house and not its contents. This limitation is consistent with typical loan documents as well as with many statutory requirements.
In contrast, typical homeowners insurance will extend protection to both the structure as well as its contents. In addition, such privately purchased homeowners insurance may also provide liability coverage.