BILL ANALYSIS �
AB 1603
Page 1
ASSEMBLY THIRD READING
AB 1603 (Feuer and Eng)
As Amended May 25, 2012
Majority vote
JUDICIARY 7-3 APPROPRIATIONS 9-7
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|Ayes:|Feuer, Atkins, Dickinson, |Ayes:|Fuentes, Blumenfield, |
| |Huber, Monning, | |Bradford, Campos, Davis, |
| |Wieckowski, | |Ammiano, Hill, Lara, |
| |Bonnie Lowenthal | |Mitchell |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Wagner, Gorell, Jones |Nays:|Harkey, Donnelly, Gatto, |
| | | |Nielsen, Norby, Solorio, |
| | | |Wagner |
| | | | |
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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 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
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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
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
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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
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, as
specified.
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.
FISCAL EFFECT : According to the Assembly Appropriations staff,
any costs to the Attorney General would be absorbable and would
be offset to some extent by penalty revenues and other cost
recoveries.
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
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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 important
protections and ensures that adequate enforcement
mechanisms are in place.
"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
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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; and, 3) it leaves
investors in mortgage-backed securities with financial losses as
more of the collateral from the home goes to paying the back
dues and penalties related to force-placed insurance.
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 canceled 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
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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.
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334
FN: 0003930