Thank you, Director Thompson, for convening this event on property insurance. It’s also good to see several state insurance regulators here today.
I want to talk about force-placed insurance. Force-placed insurance was a noteworthy facet of the foreclosure crisis in 2007-2008, and remains a continuing risk for homeowners. The CFPB is responsible for enforcing mortgage servicing rules related to force-placed insurance.
Force-placed insurance works as follows: Mortgage borrowers are generally required to have in place hazard insurance on their home that provides coverage at least to the extent of the outstanding mortgage balance. If that policy lapses, servicers may be permitted, under some limited circumstances, to purchase insurance coverage and charge it to the borrower’s account.
These policies are often expensive and provide limited coverage. Unlike a standard homeowner’s insurance policy, which will often cover some repair costs and alternative lodging, force-placed insurance usually covers only the outstanding balance on the mortgage, and protects only the mortgage holder, not the borrower.
There have been numerous lawsuits against mortgage servicers and insurance companies alleging that these entities, or an allegedly captive reinsurance company, were paid kickbacks. Even if the mortgage servicer doesn’t profit from the force-placed insurance, the mortgage servicer has limited incentives to minimize the cost of the force-placed insurance or avoid the placement. The entire price of the force-placed insurance is then passed on to the borrower.
In addition to force-placed insurance, many mortgage servicers, including smaller servicers, rely on a general blanket policy insuring their entire portfolio from loss. This blanket policy usually protects the mortgage holder and servicer in the event that any individual homeowner’s policy has lapsed or is insufficient at the time of damage to the home. These policies cannot cover flood insurance, and both Fannie and Freddie require mortgage servicers to separately track the status of the homeowner’s insurance, and to force-place insurance when permissible, instead of relying solely on the blanket policy.
The CFPB has taken action to rein in some of the worst abuses. For example, several years ago, in conjunction with the District of Columbia and 49 states, the CFPB ordered the largest nonbank servicer at the time, Ocwen, to provide redress to homeowners pushed into foreclosure by Ocwen’s servicing practices. The CFPB and the states and District of Columbia specifically cited Ocwen’s “imposing force-placed insurance on consumers when Ocwen knew or should have known that they already had adequate home-insurance coverage” as a reason for the action.1
The CFPB also issued rules in 2013 that significantly limit the ability of mortgage servicers to force-place insurance. In most circumstances, servicers may not force-place insurance for borrowers who have an escrow account, which is the vast majority of borrowers. Instead, the servicers should either disburse funds from the escrow account or, in the event there are insufficient funds in the escrow account, advance funds to cover the cost of the borrower’s policy.
But, of course, there is an exception, and it is one that may have new significance as we face increasing frequency and severity of natural disasters. If the borrower’s policy is canceled for reasons other than nonpayment, including, for example, the decision by the insurer to no longer cover certain hazards in an area, then the servicer may place and charge the borrower for force-placed insurance—after complying with the notice requirements under the CFPB rules and also pursuant to the Fannie and Freddie guidelines.
The CFPB rules require two separate notices before a force-placed insurance fee is assessed—an initial notice 45 days before any assessment and a reminder notice 15 days before any assessment. Together, those notices give borrowers an opportunity to find alternative coverage—where it is available and affordable.
In this environment, the new and steeply increased cost of insuring, particularly force-placed insurance against climate risks, can put extreme pressure on a household’s financial bottom line. Distress in the homeowner’s insurance market is one very tangible way that families across the country, especially in certain geographies, are having their finances upended by climate change.
Losses associated with climate-driven weather events and natural disasters have led many property insurers to significantly increase the premiums they charge or to decline offers to renew policies altogether, primarily in California, Florida, and Louisiana. Several smaller insurers in Florida have even gone out of business. This pull back by insurers is driven, in part, by rising reinsurance costs – that is, the cost insurers pay to other financial companies to reduce some of their own risk is going up. These often global financial conglomerates that sit behind insurance companies are called reinsurance companies. As reinsurance companies’ losses are increasing, they are raising costs and pulling back. So too are the insurance companies that meet the needs of consumers.
These dynamics have led to drastically higher insurance costs for families. These increased costs compound other home affordability costs and can squeeze household balance sheets, making it more difficult to meet other debt payments and living expenses. These trends can also lead to declining home values and force homeowners, financially, to sell their home and move.
Homeowners do have some options, including state-backed plans, if they are notified that their private homeowner’s insurance is to be cancelled, not renewed, or their premium has become too expensive to afford. Homeowners may be able to access their state’s Fair Access to Insurance Requirements (FAIR) plan, though they are typically expensive and have limited coverage. Homeowners can also shop for alternatives by contacting their state’s insurance department to determine what insurers are operating in their area. They should also ask their agent why they are receiving this notice and if there’s a possibility for the insurer to reconsider their decision.
Lastly, homeowners should keep in contact with their mortgage servicer and notify them of any change in insurance to avoid the possibility of the expensive force-placed insurance. In cases where that force-placed insurance is charged, the CFPB has provided guidance to consumers about how to remove it.
The CFPB will be carefully monitoring mortgage market participants, especially mortgage servicers, to ensure they are meeting all of their obligations to consumers under the law. We will continue to work with FHFA and state insurance regulators to mitigate the negative consequences of disruptions in insurance markets.