Insurer: LPI Has Universal Value
Amid growing controversy fueled in part by the new mortgage servicing rules to be finalized by the Consumer Financial Protection Bureau next year, the debate over the validity of lender-placed insurance is in full swing and expected to continue.
Supporters claim cost is only one of the factors that has fueled the controversy. Misperceptions and diverse state-level requirements also are at the root cause of national debate over the validity of LPI.
Consumer advocates on the other hand see a conflict of interest imbedded in this type of insurance since insurers pay to the bank a commission that is priced into the premium paid by the homeowner.
LPI “is a critical component“ in the nation’s mortgage system because it protects homeowners who otherwise would be without coverage, stated at hearing on LPI conducted by the New York Department of Financial Services in New York, John Frobose, president of American Security Insurance Co., a unit of Assurant Specialty Property that specializes in financial insurance products. “LPI exists because it meets important needs of homeowners, lenders and investors.”
The commission compensates the mortgage bank for related expenses such as billing, collections or advanced premiums, he said. It is “a safety net,” which is why lenders, regulators and mortgage investors require it is included in the terms of virtually all mortgage loans if the insurer drops one’s mortgage insurance and the homeowner fails to renew or replace it.
Furthermore, he noted, LPI rates “in New York, as in other states, are approved in advance by state insurance authorities.” Regulators require a “thorough process” that includes multiple alerts sent to the homeowners to warn them about “the possible lapse” in coverage.”
Most of the controversy is about cost, Frobose said, but LPI is more expensive than standard insurance to reflect “the greater risk that LPI carriers assume.” While higher loan risk directly affects LPI prices, insurers apply rates approved by the state regulator.
Carriers such as American Security insure each and every property in a lender’s mortgage portfolio “on which no other acceptable insurance is in effect, without regard to location, condition, occupancy or other risk factors,” he said. Assurant’s average LPI policies “cost about two times the cost of the previous policy.”
Homeowners are informed in advance about the cost. They may cancel at any time simply by providing “proof of acceptable coverage,” which means it is up to the lender’s discretion to accept or refuse a new insurance. Hearings and public debates continue. Frobose said his company is looking forward “to a constructive dialogue.”
So far, in its “Putting the ‘Service’ Back Into Mortgage Servicing” document, the CFPB has lined out several criteria about lender- placed insurance. Its LPI section titled "Options to Avoiding Costly ‘Force-Placed’ Insurance" describes how the CFPB plans to avoid unnecessarily high charges to the customer.
The draft LPI rules consist of the following six requirements:
1. In cases where the servicer thinks the borrower has allowed the property insurance to lapse, the servicer would have to ask the borrower to provide proof of insurance.
2. This communication would have to occur twice before the servicer charges the borrower for the insurance—at least 45 days before and again at least 15 days before.
3. These notices would have to provide the customer with a good-faith estimate of how much the force-placed insurance would cost.
4. The servicer must accept from the borrower any reasonable form of confirmation that the property is insured.
5. The servicer would terminate the insurance within 15 days if it receives evidence from the customer that he has necessary insurance and refund the force-placed insurance premiums.
6. Where the servicer has an escrow account to pay the customer’s insurance premiums, the servicer would continue the customers’ homeowner insurance, even if the borrower is delinquent, rather than purchasing force-placed insurance.
The proposed mortgage servicing rules will be finalized in January 2013.