Hurricane season will soon be coming to a close, but wildfire season and the winter months are right around the corner. Knowing how to implement a strong and compliant hazard and wind insurance program can help financial institutions remain protected during this “risky” time of year.
There are currently no state or federal laws or regulations that require a homeowner to maintain hazard and wind coverage. However, lending institutions should build policies that require hazard insurance on outstanding mortgaged properties to reduce the risk of uninsured losses.
Implementing a compliant hazard insurance risk management solution
Thoughtfully building a thorough hazard risk management program better protects the financial institution’s entire loan portfolio from potential uninsured loss. For this reason, Governement Sponsored Enterprises (GSEs) like Freddie Mac and Fannie Mae and many private investors require hazard and wind insurance on all outstanding properties and that the servicer monitors to ensure such coverage remains in place.
Whether required by GSEs or private investors, or enacted as part of your lending institution’s risk management program, sound collateral protection strategies should aim to ensure continual, adequate coverage is maintained on mortgaged properties. This strategy should include continual monitoring of hazard policy renewals, changes, insufficiencies, or cancellations. The financial institution should also retain an outlet for lender-placed coverage in the event that a consumer does not maintain their hazard insurance.
While there are no laws or regulations requiring hazard insurance, there are regulatory standards in place pertaining to the administration of lender-placed hazard and wind insurance.
The CFPB’s mortgage servicing rules under the Real Estate Settlement Procedures Act, known as Regulation X, or "Reg X" for short, is the primary source of regulatory oversight for lender placement of hazard insurance, with state regulations and consent orders also providing guidance on these practices. These regulations and guidances aim to ensure lender placement of hazard and wind coverage is fair and transparent for homeowners, by establishing minimum standards for the following areas:
- Informing borrowers of their responsibility to obtain and maintain hazard insurance
- Providing borrowers sufficient time to provide evidence of insurance
- Charging reasonable and accurate premium rates for lender-placed hazard insurance
- Refunding lender-placed premiums promptly that are due to the borrower by their financial institution
Related Blog: "Navigating the Complexities: Three Elements of Flood Insurance Compliance"
It is important financial institutions understand the regulations for lender placement of hazard and wind insurance to not only aid in avoiding an uninsured loss, but also to prevent costly compliance-related penalties. These laws provide guidance in three key areas: loan types requiring coverage, borrower notification standards, and policy cancellation/refund requirements.
- Types of residential and commercial loans requiring hazard coverage
GSEs (i.e. Freddie Mac and Fannie Mae) have published rules regarding the servicing of loans and their insurance requirements. It is important to understand and adhere to these servicing guidelines as they help to properly manage the risk within a lender’s portfolio.
While GSEs generally require that a financial institution monitors the consumer’s insurance to ensure coverage is maintained for the duration of a loan on residential properties, they have in recent years allowed an exception to the requirement.
Fannie Mae recognized that obtaining proof of a condominium association’s coverage was challenging for the financial institution and consumers. For this reason, lenders are now allowed to purchase blanket coverage that insures the unit owner’s shared portion of the building, as well as the common grounds (also referred to as loss assessment), and provides “walls-in” coverage with betterments and improvements. A lender can still separately monitor the existence of a condominium’s association policy and walls-in coverage and then lender-place when potential exposures are identified, but most will find the blanket coverage to be less laborious for lenders and borrowers alike.
While confirming coverage at origination is still required, a blanket policy that meets all coverage requirements will suffice as evidence of continuous coverage thereafter for condominiums. This approach will help minimize borrower frustration and reduce the necessary investment of resources into tracking down insurance on those loans. - Borrower notification requirements for lender placement of hazard coverage
If the financial institution is required by GSEs, a private investor, or their own internal risk management strategy to lender-place, they will need to follow the CFPB’s borrower notification requirements for lender placement of hazard coverage. These policies aim to keep consumers informed of their responsibility to obtain hazard insurance and make sure they are given adequate information and time to provide proof of this coverage prior to lender placement of coverage. It is critical lending institutions maintain these notification requirements to sustain a compliant, borrower-friendly hazard insurance monitoring program.
Regulations state that a lender is permitted to place hazard insurance coverage when the borrower has failed to maintain adequate coverage as required by their loan agreement.
The CFPB lays out basic criteria which must be met by the lender when sending borrowers information related to the lender placement of hazard insurance. The required criteria include:- Timing for notices (first notices, reminders, and renewal notifications)
- Notification recipients (borrowers and co-borrowers)
- Content & formatting requirements for notices
Though it is not required by law, implementing additional methods for obtaining borrowers’ insurance information can offer the best value to both the borrower and the lending institution. Proactive insurance verification methods, like carrier website verifications or agent email verifications, can provide a number of key benefits, including: - Increasing accuracy of insurance data on borrowers thru increased insurance verifications
- Improving the consumer expereince by minimizing borrower notifications
- Decreasing innacurate lender placement on borrowers' loans
- Reducing administrative work required of the lender
- Timely policy cancellations and refunds to the borrower after evidence of insurance has been provided
Federal regulations require that lending institutions cancel and refund any lender-placed hazard coverage that overlaps with the borrower’s purchased insurance. The law also states that these cancelations and refunds be processed quickly, once a borrower’s proof of hazard insurance is received.
Quickly processing lender-placed policy cancellations and refunds not only ensures lenders remain compliant within these federal standards, but also helps lenders to sustain positive relationships with borrowers.
The best course of action is to work with a specialist to cancel and refund the lender-placed coverage to ensure the insurance information received is sufficient and timely, and that the full refund amount owed to the borrower is promptly returned.
Outsourcing Insurance Tracking & Placement
One of the most effective ways to sustain compliant, borrower-friendly hazard insurance tracking and monitoring practices is to partner with a vendor that has experience performing this role on behalf of lending institutions. Cost, technological capabilities, experience, and convenience are just a few of the things to consider when selecting a vendor.
A good risk management partner will track and respond to coverage lapses or changes on behalf of lenders; a great partner will go beyond these traditional services and functions to help effectively manage enterprise level risks, protect relationships with borrowers, and simplify overall processes.
Allied Solutions has tools and resources for building an insurance tracking and placement program that offers compliant, borrower-friendly notifications and servicing practices. We take many precautionary, proactive steps on behalf of our lender clients to communicate with borrowers, so that force-placing insurance remains a last resort, versus the standard approach.
Contact us to seek expert help with building an insurance tracking risk management solution that keeps your business and borrowers in mind.
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