Discussion Item on Climate-Related Financial Risk
This weekend, 118 million Americans could be living somewhere with a heat index above 100 degrees. A few weeks ago, July 3rd was the world’s hottest recorded day. That record was then broken on July 4th, tied on July 5th, and broken again on July 6th. More than 10,000 heat and rainfall records have been broken around the world in just the past month.
Losses associated with climate events and natural disasters have led many property insurers to decline offers to renew policies, primarily in California and Florida. Many other smaller insurers in Florida have gone out of business altogether.
The reduction in available insurers combined with the increased climate risk in these areas has led to drastically higher insurance costs. To add insult to injury, if a homeowners’ insurance coverage lapses and it is not promptly replaced, the lender may acquire insurance for the homeowner and then charge them for it. These force-placed insurance policies can be twice as expensive (or more) as regular insurance, since generally it is not underwritten to the specifics of the home. CFPB rules require the servicer to notify the customer whose policy has lapsed at least 45 days before charging the borrower for these policies.
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 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 more 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.1 We will be carefully monitoring mortgage market participants.
This problem is only going to get worse, and it’s incumbent on state and federal policymakers to work together to make sure homeowners aren’t crushed and that our financial system remains stable.
Discussion Item on the End of LIBOR
Let me first add my thanks to the analysts, investigators, and other staff across the agencies for bringing LIBOR to an end and ensuring a smooth transition.
In the wake of the global financial crisis, the public learned that several large global banks conspired to rig LIBOR to conceal their own financial weaknesses and to boost their bottom line. Some of these institutions would later admit to criminal misconduct and pay billions of dollars in penalties.
For years, the interest rate that underpinned hundreds of trillions of dollars of financial contracts, including many of the exploding adjustable-rate mortgages that harmed homeowners in the 2008 crisis, was a lie.
The CFPB has worked alongside other federal financial regulatory agencies to support the Alternative Reference Rate Committee to transition financial markets away from this faulty rate by providing analysis on the interplay between LIBOR and any successor reference rate on consumers and consumer finance markets broadly.
The CFPB has issued rules and guidance for industry to implement the transition of consumer financial products away from LIBOR, published information to help consumers understand and prepare for the upcoming transition, and updated the required Consumer Handbook on Adjustable Rate Mortgages (the CHARM booklet).
The criminal manipulation of LIBOR by global financial institutions was extremely costly to our country. LIBOR is now a relic of history, and we will be working to ensure that companies complete an orderly transition away from this index. Financial history is full of cycles and repetition, so policymakers must be on high alert for the emergence of future reference rates that could be exploited by bad actors in the financial industry.