Lender Placed Insurance

What to do when a borrower is more risk tolerant than you are? In most cases, the mortgage lender actually has more at stake than the homeowner, because the mortgage on the home usually accounts for more than 50% of the home's value and often exceeds 80%. In the event of a major loss, it's the lender that could end up holding the bag if the property is uninsured against flood, fire or other perils.

So it's perhaps not that surprising that a game of brinksmanship sometimes evolves, with the homeowner neglecting to renew mandatory insurance coverage and the lender having to step in and "force place" insurance.

That means the lender buys coverage for the property, and bills the homeowner through an added monthly escrow charge typically. Lender placement of insurance coverage is a touchy business, because failure to follow the rules can get a lender into trouble with regulators and litigators - not to mention with customers who are likely to become irate if they find themselves being billed for duplicate coverage.

And failure to force place coverage can get lenders into trouble as well - especially for flood insurance. Federal law requires a lender to make sure the homeowner maintains flood insurance coverage on properties located in flood hazard areas. When a policy lapses, failure to take action can lead to more trouble than aggressive lender placement.

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