Insurance Requirements Keep Small Banks on Tiptoes

Community banks are feeling the pressure to comply with new lender-placed insurance requirements and following the example of large banks that already rely on automated regulatory compliance solutions.

Progressively more small community banks that traditionally included insurance in their internal mortgage banking operations are now choosing to outsource, according to market veteran, Steve Wiser, president and founder of SBS, a mortgage software company that specializes in custom-made lender-placed insurance and insurance tracking solutions for mortgage lender-servicers and insurance companies.

“They’re really being asked to do a lot to comply with regulation and many are not able to keep up with the changing requirements, so I’m seeing more of a trend of them moving to an outsource mortgage insurance tracker much like a lot of the bigger banks have already done since decades ago.”

Often, he told this publication, small- to medium-size community banks would shop for both a software system, “because they do not have enough fields in their systems” to process the growing number of requirements and cannot process all the information details required, and hardware that can store the larger volume of data. “Without automation, volume is quite high and almost impossible to process manually.”

To survive in today’s market they need more automation and outsourcing to specialized, third-party service providers, he says. It is a better strategy also because insurance is not necessarily the biggest, most important area of a lender-servicer’s business and makes sense to transfer that part of the workload to a company that focuses on outsourcing specialized lender-placed insurance services.

Regulatory changes to the Fannie Mae guidelines pertaining to lender-placed insurance are one example. Initially implemented in March 2012, Fannie’s insurance-specific requirements are anything but old news because many banks still are struggling with related requirements.

“Last March Fannie said: Here’s a new set of deductible rules, possibly limiting what carriers one can work with, possibly changing the text one needs to put on the letter, what the letter cycle should be. And by the way, you only have only three months to implement all those software changes,” he recalls.Two months later Fannie extended the deadline because it was obvious the number of required changes was way too large for mortgage lenders and servicers to implement during a three-month period.

As of February and almost one year later, he notes, it is not clear what Fannie expects from banks. “There’s talk about changing the deductible limits depending on the delinquency of a loan, and possibly placing lender placed coverage based on UPB  versus last-known replacement costs,” which also is not settled and ultimately may be calculated based on loan foreclosure parameters as well.

The process continues.

“The basic problem is that you know some requirements are going to change, but you don’t know when. But you do know that you need to comply by a certain deadline,” he says. “What we’re seeing is that people come to us because they want to be able to be in control of their own destiny. They want to have their own software, one they own and can control, because than they can make whatever changes are going to come out by whatever regulatory body.”

Furthermore, owning custom-made software enables users to understand the changes and upgrade their software system, improve their business processes and most importantly “do it all under the deadline that will be imposed on them.”

In fact, regulatory challenges described above are not limited to the lender-placed insurance space. It is everyone’s problem these days, he agrees, automation helps ease such pressures.