BILL ANALYSIS �
AB 1603
Page 1
Date of Hearing: May 16, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 1603 (Feuer) - As Amended: April 17, 2012
Policy Committee: JudiciaryVote:7-3
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill regulates the practice of "force-placed insurance"-a
homeowner's insurance policy obtained by mortgage servicer.
Specifically, this bill:
1)Prohibits a mortgage servicer from obtaining forced-placed
insurance unless there is a reasonable basis to believe the
borrower (homeowner) has failed to comply with the mortgage
loan requirement to maintain hazard, flood, or homeowner's
insurance.
2)Prohibits a mortgage servicer from imposing any charge on a
borrower for force-placed insurance unless the mortgage
servicer has met specified conditions, including providing
written notification, as specified.
3)Requires a mortgage servicer, within 15 days of receiving
evidence of a borrower's insurance coverage, to terminate any
force-placed insurance and refund premiums paid during any
period of overlap between both policies.
4)Prohibits a mortgage servicer from obtaining force-placed
insurance from an affiliated entity and from splitting fees or
giving or receiving anything of value in connection with
obtaining force-placed insurance.
5)Authorizes a borrower to bring a civil action against a
mortgage servicer for any violation of the bill's provisions,
and if the borrower prevails, requires that the borrower be
paid attorney's fees and the greater of actual damages or
$5,000.
AB 1603
Page 2
6)Authorizes, in addition to (5), the Attorney General (AG) or a
local prosecutor to bring an action for injunctive relief,
restitution, or disgorgement and authorizes recovery of
attorney's fees and investigation costs, and authorizes a
civil penalty of up to $10,000.
7)Allows a mortgage servicer subject to a civil penalty to
request a hearing.
FISCAL EFFECT
1)The AG anticipates the need to adopt regulations and implement
the adjudicatory process authorized in the bill. Ongoing costs
would depend on the number of cases, but assuming at least one
new attorney position and associated support staff, annual
costs would be at least $275,000. Costs would be offset to
some extent by penalty revenues and other cost recoveries.
2)As the bill establishes a new right of action, in addition to
authorizations for the AG and local prosecutors, there will
likely be minor additional court-related costs.
COMMENTS
1)Background and Purpose . "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,
supporters of this bill argue that existing practices among
mortgage servicers are rife with abuses and conflicts of
interest.
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 published news reports, homeowners in
such circumstances have had difficulty getting servicers to
cancel the force-placed insurance. In addition, 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 justifiable price-in some cases as
much as 10 times more than regular hazard insurance policies.
AB 1603
Page 3
According to the author, "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 important protections and ensures that adequate
enforcement mechanisms are in place."
2)Opposition . The Association of California Insurance Companies
(ACIC) is primarily concerned with the private right of action
and provisions for the award of attorney's fees. The ACIC also
seeks clarification of provisions regarding affiliated
entities and referral fees, and notes that force-placed
insurers file their rates with the Department of Insurance for
approval. The Civil Justice Association of California is also
opposed.
Analysis Prepared by : Chuck Nicol / APPR. / (916) 319-2081