By PAUL SULLIVAN
The Consumer Financial Protection Bureau released preliminary plans this week to require banks to improve their mortgage servicing and become more open and accountable in their dealings with consumers.
The bureau’s preliminary plans cover areas as varied as disclosing interest rates and helping delinquent borrowers. But I was most interested in the section on force-placed insurance — hazard, flood or wind insurance that the lender buys at a price that is almost always higher than the market rate.
That is because I have had experience with this insurance. It took me four months to convince the lender on a condominium my wife and I owned in Florida that we had sufficient flood insurance. I succeeded only because of my willingness to sit on the phone for as much as two hours and then do it again a week later when nothing was resolved.
But at least I had it removed. For some homeowners, the cost of this insurance has pushed them into foreclosure.
“If consumers find that their mortgage servicers are trying to force expensive insurance on them, they would have the ability to head off this unnecessary result,” Richard Cordray, the bureau’s director, said at a news conference on Tuesday. “We have heard horror stories about people whose foreclosures were accelerated by having force-placed insurance imposed on them without notice. Even when this is clearly a mistake, you cannot get it corrected unless you can get a live human being who is willing to work with you to rectify the error. With many of the servicers, that was simply not possible.”
So as the consumer protection bureau enters a comment period for its plans, which are set to go into effect in January, I want to make some suggestions of my own, from personal experience but also from stories I have related in previous columns.
POOR DEFINITION The Dodd-Frank financial reform law requires the consumer protection bureau to act on force-placed insurance. But the wording seems to contain a glaring loophole. It states that the mortgage servicer “shall not obtain force-placed hazard insurance unless there is a reasonable basis to believe the borrower has failed to comply with the loan contract’s requirement to maintain property insurance.”
While that sounds straightforward, it may not be. In insurance parlance, “hazard” means coverage for damage to the structure caused by fire, smoke or vandalism. Coverage for flood and hurricanes is separate and is not explicitly mentioned in the law.
I called the Insurance Information Institute, and a spokesman, Michael Barry, confirmed my suspicion. The typical force-placed policy covers fire and maybe wind or hail. But in many cases, wind coverage has to be purchased separately, and flood insurance is never included in a typical hazard policy.
A spokeswoman for the consumer protection bureau, Jennifer Howard, said: “The force-placed insurance provisions would protect borrowers who are required by their mortgages to maintain insurance against hazards to the property, including special hazards such as wind, hurricane and flood damage.” But the bureau has also made clear that these plans are preliminary.
Regardless, the somewhat vague wording could give mortgage servicers the opening to continue the frustrating practice of telling people their homes are in an area that has been reclassified as a flood zone. This happened to James W. Hart Jr., whom I spoke to last year. He had lived in the same house in Longwood, Fla., for 20 years when he received a letter in 2010 saying he needed flood insurance.
“They started out the letter with buying me flood insurance,” he told me. “I said if anyone is going to be buying flood insurance, it’s me because I’m not going to buy it at your exorbitant rates.”
Still, it cost him $150 for a surveyor, not to mention six weeks of calling, to prove that his home was not in a flood plain.
CONSISTENCY COUNTS The consumer protection bureau proposed that the letters notifying homeowners about force-placed insurance be standardized and mailed twice, at 45 and 15 days, before any insurance is put in place.
Mortgage servicers like Chase, Bank of America and Citigroup have long argued that this is exactly what they do. And this is true. They send many letters. Correspondence is not the problem; getting the insurance removed is.
I checked in with James Yates, a professor of education at the University of Texas, Austin, whom I spoke with in January. Mr. Yates, who has lived in his house in Lake Travis for 21 years, has disputed the flood insurance that CitiMortgage had bought for him for the last three years. While he has paid his mortgage on time, the bank first applies the payment to the force-placed insurance and then puts what is left toward the mortgage. Because of this, Citi considers Mr. Yates delinquent on his payments, and he has had to hire a lawyer.
CitiMortgage has “continued every month to send the same computer-generated, certified letter announcing that my loan ‘is in foreclosure,’ ” Mr. Yates said in an e-mail this week.
To prevent similar situations, the consumer protection bureau wants letters notifying consumers about force-placed insurance to state how much that insurance will cost.
MAKE PENALTIES REAL The consumer protection bureau takes a carrot-and-stick approach toward the issue of getting force-placed insurance removed in a timely manner.
The bureau’s preliminary plans say that when a consumer presents proof of insurance, the mortgage servicer needs to terminate the policy and refund within 15 days any premiums that were paid.
But that doesn’t deal with the issue of how servicers respond to consumers, since long delays in talking to someone to get the issue resolved are a big problem. Not only do the delays add to consumer frustration but they also increase the chances that people will give up and pay the bill.
Rick Pullen, for instance, opted to pay the $1,500 annual premium for force-placed flood insurance on his seventh-floor condo in Fort Myers, Fla. Mr. Pullen said in January that the amount was enough to sting but not enough to make him go through hours of phone calls to have the charge removed.
The stick is the penalties in the Dodd-Frank law. When consumers provide proof of insurance but servicers fail to refund their money, the fines start at $5,000 a day for negligence and go up to $1 million a day for what the law calls “knowing violations.”
Also, the proposals do not seem to take into account the costs that borrowers must incur to prove that they have the insurance they are supposed to have. Mr. Hart is out the $150 he spent for a surveyor, and if Mr. Yates prevails in his case he will have to cover the legal costs of far more than that.
ACCOUNT FOR ABSURDITY The bureau’s preliminary plans do not address the most confounding element of force-placed insurance — dealing with how arbitrary and, at times, ridiculous it is.
Uyen Tieu spent two years fighting to have a force-placed flood insurance policy removed from the mortgage on the condo she owns in Manhattan with her husband. She tried to explain to her bank, Chase, that while her apartment building was in a flood plain, her condo was on the fourth floor. (Flood policies cover damage when water rises from the ground; a wind policy would cover the damage if her windows were blown in and rain filled her apartment.)
When logic failed to persuade Chase, she produced the building’s flood insurance policy. But the bank did not deem the amount sufficient. After several months, she gave up and paid the $2,250 a year Chase charged her.
In February, however, Chase refunded her money — after I called to ask the bank for an explanation. That call was noted in the letter the bank sent with her refund.
Of course, most people do not have a journalist calling on their behalf. So they have to hope that whatever rules the Consumer Financial Protection Bureau passes will be enforced and go far enough.
NYT
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