The industry is largely ready for new Consumer Financial Protection Bureau regulations affecting procedures for "I am not going to say it was any surprise. Most people knew what was coming. I'd like to think that everybody's on board, everybody has been preparing and risk management is right on top of it but every once in a while...there is someone who says, 'What is this about?'" said Ken Evans, a compliance manager at Loan Protector Insurance Services.
"For many who have been doing business, it's been best practice for a while, but now it's required," he said.
"Now it's going to be measured. Everybody will be accountable.
"[The Consumer Financial Protection Bureau] has issued the examination standard and it's tough," Evans said.
"They are stringent," he added. "The consumer is in the driver's seat."
"This is coming in January," he warns those who may not have this part the Consumer Financial Protection Bureau's sweeping regulatory changes on their radar screen.
"As a mortgage servicer you need to get busy right now" when it comes to making the changes needed to fulfill the requirements if this has not already been done, he said.
Because of this, Loan Protector Insurance Services-a specialty niche operation that tracks the insurance and allows force placement for lenders-has been working to make sure clients are aware of and prepared for the changes, said Mike Dimas, a vice president at the company.
Evans stresses in particular five main points when it comes to the force placement of hazard policies on residential properties.
"Five things are going to change in our world," he said.
* Regulators have provided template notification letters that should be used for notifying borrowers that do not have proper insurance.
* There is required minimum timing for such notifications.
"Before force-placed insurance can be placed, an initial letter goes out," Evans explained.
"A follow-up letter must be sent no less than 30 days later and you have to wait 15 days before you can force-place insurance," he said.
"Some entities are going to wait longer than 45 days," said Evans.
"We're going to wait 56 days with our client base before force-placing because we want to make sure we are giving consumers all the advantages we can, doing our best to get voluntary insurance on behalf of the borrowers rather than force-placed," Evans said.
"The borrower should have that insurance.
"They should understand we are going to do our best to continue communicating as we have in the past with borrowers, trying to eliminate the force-placement."
* In the event refunds do need to be issued for force-placed insurance, the Consumer Financial Protection Bureau is requiring refunds be issued within 15 days.
"This is nothing new for most of the force-placed lenders," Evans said.
"But it does draw a line in the sand and it is a requirement," he added.
* When a borrower has an escrow for taxes and insurance, the servicer is generally required to continue voluntary insurance whether or not the funds have been properly escrowed by the borrower.
"This is an advantage to the consumer because it's a better deal but there are several circumstances where the force-placed might be issued instead of voluntary coverage," Evan said.
"That would be when insurance is cancelled by a carrier or a reason other than nonpayment.
"This might be the number of claims...or if a property is vacant, then the voluntary insurance would not be continued because the carrier who issues the insurance issued it understanding that a borrower was going to be living in the property.
"Dynamics change when you have a vacant property and for an insurance company, insuring a vacant property at the same rate as an occupied property would be a bad business practice," he said.
"Under those circumstances, the continuation of escrow would not be mandatory but otherwise, voluntary coverage has to be continued by the servicer."
* Servicers must be aware of how their vendors or component servicers provide their services because they will be held accountable for them.
"If a servicer uses a third party to contact their borrower and they do a poor job of doing it, it will fall back on the servicer," Evans explained.
Dimas noted that while Loan Protector Insurance Services is confident of when it comes to its compliance and will answer a wide range of questions in this area for clients, it always advises them to consult their internal compliance experts on any regulatory issue.
"We always advise that they discuss it with their compliance team, their risk team and their legal team to make sure all areas loan servicing are up to speed, including vendors," he said.
Ultimately, Evans said he believe the regulatory change is "good news for the industry because it puts a standard out there and it's a measurable standard of performance" which will help companies avoid situations such as those that recently led JPMorgan Chase to settle concerns in this area.
Under a settlement filed recently in U.S. District Court in Miami, JPMorgan Chase and insurance company Assurant would also make payments to up to 1.3 million mortgage holders nationwide who were allegedly overcharged during the last five years. The agreement would resolve a suit filed on behalf of homeowners that hold Chase mortgages. (See related story on page 1.) Wells Fargo also agreed to a similar settlement earlier this year, Evans noted.
"These are things that are industry practices that have not been in favor of the consumer," he said.
"We didn't participate in that...but certainly a lot of people did," he said.
So far the force-placed insurance changes mentioned only apply to hazard insurance and residential properties, not flood insurance-which has separate regulation-commercial properties or real estate owned.
However, this "doesn't mean those changes aren't coming," Dimas said.
"If you were a betting person, you would definitely [bet]...there are going to be some rules or requirements for commercial properties as well," Evans said.
He noted that all of the regulatory agencies expect servicers to make sure processes and procedures are automated as much as possible.
"If you can't show this is something that happens every time, you are going to be in trouble," Evans said, noting that his company's proprietary system has been designed to do this by providing, for example, a timeline print-out if needed to demonstrate compliance.
"Visual proof is something that an examiner or an auditor loves," he said.
Evans said for his company the changes have been fairly minor but important.
"Things like escrow continuation could really affect servicers because if funds aren't available they have to front that cash," he said.
Evans suggests examining the "false placement rate" to get a sense of how effective procedures used to handle force-placement on residential properties are.
"That's an effort that is wasted, force-placing when it's not necessary" and this rate should be low, he said.
He also stresses the need for due diligence in working with third parties and ensuring their compliance, although he notes it is not an easy process.
"It is painful for the client and for us," said Evans.
"There is a lot of detail needed but we have processes in place.
"We're ready for it," Evans said.