BILL ANALYSIS �
AB 1603
Page 1
Date of Hearing: April 10, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 1603 (Feuer and Eng) - As Introduced: February 6, 2012
As Proposed to be Amended
SUBJECT : MORTGAGE SERVICERS: FORCE-PLACED INSURANCE
KEY ISSUE : SHOULD THE FORCED IMPOSITION OF HOMEOWNER'S
INSURANCE BY MORTGAGE SERVICERS BE SUBJECT TO GREATER CONTROLS
IN ORDER TO PREVENT WIDELY REPORTED ABUSES?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
A customary feature of home loans is that the lender or mortgage
servicer can obtain insurance coverage on its own initiative,
and bill the borrower for the cost of that insurance, if the
lender or servicer believes the homeowner lacks coverage. This
authority to "force-place" an insurance policy makes sense in
order to protect the lender's security interest in the house.
It has become controversial however because servicers are
alleged to be abusing their rights under this authority. While
reported problems may simply reflect the overall tumult within
the mortgage servicing industry in light of the massive number
of foreclosures over the past few years, many industry observers
contend that it is profitable for servicers to force-place a
policy for two primary reasons. First, the cost of these
policies is added to the amount due from the borrower each
month, and payments made by the borrower are applied first to
these insurance policies, before principal and interest, which
often precipitates default and foreclosure on otherwise
up-to-date loans. While it may seem counterintuitive to push
borrowers into unnecessary default, industry critics argue that
the servicers' business model gives them a financial incentive
to maximize short term fees over the long-term servicing of the
loan. In addition, consumer advocates complain that
force-placed insurance policies are often obtained with premiums
of many times the cost of standard homeowners' insurance. In
some cases these insurance policies are placed with an insurance
company affiliate of the servicing company, resulting in fees
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and commissions for both companies.
This bill would enact some basic substantive protections to
ensure that servicers do not force-place insurance without a
reasonable basis for doing so and appropriate notice to the
borrower and an opportunity to address any problem. The bill
would also largely restrict a servicer from force-placing hazard
insurance on a mortgaged property (or requiring the borrower to
obtain or maintain such insurance), in excess of the greater of
replacement value, the last-known amount of the coverage, or the
outstanding loan balance. Finally, servicers would be
prohibited from force-placing insurance with an affiliated
company or any other entity in which the servicer has an
ownership interest. Violations of these provisions could be
remedied by the borrower or by a public prosecutor.
SUMMARY : Regulates the practice of force-placing replacement
homeowner's insurance by mortgage servicers. Specifically, this
bill :
1)Prohibits a mortgage servicer from obtaining force-placed
insurance unless there is a reasonable basis to believe the
borrower has failed to comply with the loan contract's
requirements to maintain hazard, flood, or homeowner's
insurance.
2)Provides that if the borrower's hazard, flood, or homeowner's
insurance policy has been paid through an escrow account, the
mortgage servicer shall advance payments to continue the
borrower's policy, unless the borrower or insurance company
has canceled the policy.
3)Provides that a mortgage servicer shall not impose any charge
on a borrower for force-placed insurance unless the mortgage
servicer has met all of the following conditions: the mortgage
servicer has mailed a specified written notice to the borrower
and failed to receive a response, reminding the borrower of
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his or her obligation to maintain the relevant insurance on
the property securing the mortgage loan; a statement that the
mortgage servicer does not have evidence of insurance; a
statement of the procedures by which the borrower may
demonstrate that the borrower has current insurance coverage
for the property; a statement that the mortgage servicer may
obtain insurance coverage for the property at the borrower's
expense if the borrower does not provide a demonstration of
the borrower's existing coverage in a timely manner; and a
statement that the cost of the insurance coverage may be
significantly higher than the cost of the borrower's previous
coverage. For first lien loans on a mortgage servicer's
primary servicing system, the notice shall also include a
statement that, if the borrower desires to maintain his or her
existing policies, the mortgage servicer will offer an escrow
account and advance the premium due on the existing policy or
policies if the borrower takes specified actions. For single
interest coverage, the notice shall state that the coverage
may protect only the mortgage holder's interest and not the
borrower's interest.
4)Requires a mortgage servicer to accept any reasonable form of
written communication from a borrower or the borrower's
insurance agent of existing insurance coverage, which shall
include the existing insurance policy number along with the
identity of, and contact information for, the insurance
company or agent.
5)Prohibits a mortgage servicer from obtaining hazard, flood, or
homeowner's insurance for a mortgaged property, or require a
borrower to obtain or maintain that insurance, in excess of
the greater of the replacement value, the last known amount of
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the coverage, or the outstanding loan balance, unless required
by applicable requirements, or requested by the borrower in
writing.
6)Upon receipt of evidence of insurance, requires a mortgage
servicer to promptly terminate any force-placed insurance and
refund to the borrower all force-placed insurance premiums
paid by the borrower during any period during which the
borrower's insurance coverage and the force-placed insurance
coverage were each in effect, and any related fees charged to
the borrower's account with respect to the force-placed
insurance during that period.
7)Requires a mortgage servicer to make reasonable efforts to
work with the borrower to continue or reestablish the existing
hazard, flood, or homeowner's policy if there is a lapse in
payment and the borrower's payments are escrowed.
8)Prohibits a mortgage servicer from obtaining force-placed
insurance from an affiliated entity or any entity in which the
mortgage servicer has an ownership interest.
9)Prohibits a mortgage servicer from splitting fees or giving or
accepting any referral fees or anything else of value, in
connection with obtaining force-placed insurance and requires
a mortgage servicer to pay the borrower the amount of any
funds it receives as a result of obtaining force-placed
insurance in violation of this prohibition.
10)Requires any force-placed insurance policy must be placed
with an insurer admitted to do business in the State of
California.
11)Permits a borrower to bring a civil action against a mortgage
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servicer that violates this article with respect to that
borrower for the greater of actual damages or $5,000 and
reasonable attorney's fees.
12)Provides that specified public prosecutors may in addition
bring an action for injunctive relief, and for restitution,
disgorgement, or damages, as appropriate, and reasonable
attorney's fees and expenses, as well as a civil penalty up to
$10,000 with prior notice to the person charged with the
violation and the right to request a hearing.
EXISTING LAW generally regulates mortgages and deeds of trust,
including, among other things, recording mortgages and deeds of
trust, disclosures in connection with mortgages and deeds of
trust, and foreclosure procedures for mortgages and deeds of
trust. (Civil Code section 2920 et seq.)
COMMENTS : In support of the bill, the author states:
The increasing practice of mortgage servicers force-placing
insurance on homeowners is one of the more troubling
practices associated with the still unfolding foreclosure
crisis throughout California and our nation. The idea that
servicers can purchase insurance coverage for a property at
exorbitant prices and pass the burden of the payments on to
struggling families with little or no constraints is
completely unacceptable. Homeowners who are teetering on
the precipice of foreclosure and bankruptcy must not be
pushed over the edge simply to satisfy the desire of bigger
profits for servicers or insurance companies when
alternative approaches exist to protect the servicers'
obligations to bond holders and to preserve the homeowners'
goal of keeping their home.
AB 1603 ensures that alternative approaches are explored,
so that servicers can be confident a mortgaged-property is
sufficiently insured without unduly increasing the
financial burden on struggling families. AB 1603 builds
upon recent changes in federal law and the national
attorneys general settlement to provide homeowners with
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important protections and ensures that adequate enforcement
mechanisms are in place.
Controversy Regarding Force-Placed Insurance Practices By
Mortgage Servicers . "Force-placed" insurance is insurance
purchased for a property by a mortgage servicer when the
servicer believes that the hazard insurance for the property
covered by the mortgage has lapsed. While servicers have a duty
- and typically a contractual obligation with investors - to
ensure that hazard insurance is maintained on a property in
order to protect the investor's stake in the property,
supporters argue that existing practices among mortgage
servicers are rife with abuses and conflicts of interest. As a
result, supporters state, both homeowners and investors are
subject to financial losses that can easily be avoided.
In many instances it has been reported that servicers
force-place insurance policies on homeowners even though the
homeowners have not allowed their property insurance coverage to
lapse. According to many published news reports, homeowners in
such circumstances often have had difficulty getting servicers
to cancel the force-placed insurance. And even when homeowners
have allowed their hazard insurance to lapse, critics (including
many consumer organizations, investors, as well as Fannie Mae)
have argued that the cost of force-placed insurance is far
beyond any price that could be justified. In some cases,
force-placed insurance policies have reportedly cost as much as
10 times more than regular hazard insurance policies.
Supporters argue that force-placed insurance policies have
become an increasingly lucrative business - growing from $1
billion to $6 billion annually in just a few short years - for
mortgage servicers, who regularly purchase force-placed
insurance policies from their own subsidiaries or affiliated
companies. Such self-dealing creates an arguable conflict of
interest. The effect of purchasing such coverage at wildly
inflated prices is three-fold: 1) it places undue financial
stress on homeowners - increasing, in some cases, the likelihood
that homeowners end up in foreclosure, thus impeding the
economic recovery of the housing sector; 2) it increases the
burden on taxpayers - as the cost pressures from these policies
leads to greater defaults, taxpayer backed Fannie Mae and
Freddie Mac have to absorb financial losses; 3) it leaves
investors in mortgage-backed securities with financial losses as
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more of the collateral from the home goes to paying the back
dues and penalties related to force-placed insurance.
Key Reforms Accomplished By This Bill. Under this bill,
servicers would no longer be allowed to force-place hazard
insurance on a mortgaged property unless the servicer has a
reasonable basis for doing so. If the borrower's existing
insurance policy is paid through an escrow account, then the
servicer would have to continue to advance payments for that
policy unless the borrower or insurer has canceled the policy.
In the event the existing policy is cancelled or is not paid
through an escrow account, the servicer would have to notify the
borrower prior to force-placing a new policy; among various
elements, the notices would have to indicate how the borrower
could demonstrate that they have existing coverage, include a
statement that force-placed insurance might only protect the
mortgage holder and not the borrower, and include a statement
that the cost of force-placed insurance might be significantly
more expensive than the cost of the homeowner's existing or
prior coverage. The bill would also largely restrict a servicer
from force-placing hazard insurance on a mortgaged property (or
requiring the borrower to obtain or maintain such insurance), in
excess of the greater of replacement value, the last-known
amount of the coverage, or the outstanding loan balance. The
servicer would have to provide the borrower with a refund of
unearned premiums paid by the borrower or charged to the
borrower for hazard insurance force-placed by the servicer when
the borrower provides evidence that the borrower has maintained
coverage or obtained coverage such that the force-placed
insurance is not necessary and the property is insured.
Finally, servicers would be prohibited from force-placing
insurance with an affiliated company or any other entity in
which the servicer has an ownership interest. The servicer
would also be prohibited from splitting fees, accepting referral
fees, or accepting anything of value in relation to purchase or
placement of force-placed insurance. Violations of these
provisions could be remedied by the borrower or by a public
prosecutor.
ARGUMENTS IN OPPOSITION : The Association of California
Insurance Companies (ACIC) submitted a letter of opposition to
the Committee prior to the proposed amendments contending that
the bill would create a new body of law and standards for force
placed insurers who are already regulated by the California
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Department of Insurance (CDI). This argument appears to be
focused on a provision of the bill that is deleted in the
proposed amendments regarding obtaining insurance coverage at a
commercially reasonable rate. ACIC also expresses concerns with
the remedies available under the bill, contending that force
placed insurers are already heavily regulated. The grounds for
this concern are not readily apparent because the bill seeks to
regulate only the conduct of mortgage servicers in the decision
to force-place insurance coverage, not the activities of
insurance companies in the provision of that coverage.
REGISTERED SUPPORT / OPPOSITION :
Support
Center for Responsible Lending
Opposition
Association of California Insurance Companies (prior to proposed
amendments)
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334