Under Dodd-Frank, the Consumer Financial Protection Bureau (“CFPB”) is authorized to issue regulations that cover the servicing of consumer mortgage loans. In January, the CFPB issued new regulations (‘the “Final Rule”) that extensively amend the mortgage-servicing rules of both Regulation X (the regulation that implements the Real Estate Settlement Procedures Act of 1974 (“RESPA”)) and Regulation Z (which implements the Truth in Lending Act (“TILA”)). The Final Rule gives mortgage servicers new obligations to address errors asserted by borrowers, implement loss mitigation and prevent foreclosures. It also places new restrictions on lender-placed hazard insurance (which the CFPB, adopting the preferred terminology of the plaintiffs’ class action bar, calls “force placed” insurance) that is purchased by mortgagees and charged to borrowers. (A review of recent litigation involving lender-placed insurance can be found here.)
The Final Rule will take effect January 10, 2014. The lender-placed insurance restrictions apply to hazard insurance, but not flood insurance. The Rule will require that servicers send a borrower two separate notices before they may place such insurance and charge the borrower for it. The first notice must be sent at least 45 days before placing the insurance. The second notice must be sent at least 30 days after the first, and at least 15 days before the insurance is placed and fees are assessed. The notices must contain an estimate of the cost of the premiums that will be charged, and they must state that the coverage may be more expensive, and might provide less coverage, than insurance the borrower might obtain on her own. Model forms for the required notices are included in the Final Rule.
Even after providing the requisite notice, the servicer may charge the borrower only if it has a “reasonable basis to believe” that the borrower has failed to maintain required coverage.
Some of the disputed issues in litigation over lender-placed insurance arise from allegations, on the one hand, that charges for the insurance are excessive, and, on the other hand, arguments that such allegations are negated by the filed rate doctrine. The Final Rule imposes a requirement that any charges the servicer assesses for lender-placed insurance “must be bona fide and reasonable,” but the rule expressly excepts charges that are regulated by the states as falling within the business of insurance. The CFPB therefore appears to acknowledge that charges approved by state regulators should not be evaluated by any other standard of reasonableness.
Of particular interest to critics of lender-placed insurance are commissions that insurers pay to licensed agency affiliates of the banks that place the insurance—payments that plaintiffs often describe as “kickbacks.” The Final Rule addresses that issue, but only to the extent it involves charges that are not subject to state regulation, and then only indirectly. The Rule defines a “bona fide and reasonable charge” as a charge for a service that is actually performed, and which bears a “reasonable relationship” to the cost of providing the service. In its comments on the Rule, the CFPB explains that this definition excludes “costs unrelated to the provision of force-placed insurance“, and costs which “subsidize servicing activities unrelated to the provision of force placed insurance.”
During the comment phase of the rule-making process, the CFPB received requests to prohibit servicers from receiving commissions on lender-placed insurance, to mandate affordable premiums for such insurance, and to impose other, similar requirements. In response, the CFPB stated that it recognized the concerns underlying those requests, but that it believes the Final Rule’s provisions “provide adequate safeguards to borrowers consistent with the regulatory scheme mandated by Congress.”