New guidelines on lender-placed insurance have been issued for servicers approved by the Federal National Mortgage Association.
The secondary lender explained that lender-placed insurance costs many borrowers significantly more than standard hazard policies, and the higher costs could make it more difficult for delinquent borrowers to bring their loans current.
So Fannie Mae’s servicing guidelines have been updated.
According to Servicing Guide Announcement SVC-2012-04 released Wednesday, such policies need to be issued at the borrower’s last known coverage amount if the loan is less than 120 days delinquent. But on loans that are at least 120 days past due, the coverage needs to be the lesser of the principal balance or 100 percent of the insurable value of the improvements.
Lender-placed policies need to be comprehensive, all perils or all risk and need to remain in place until the borrower provides proof of coverage.
Fannie said that no changes should be made to coverage amounts on borrowers who are 120 days or more delinquent if they are meeting the terms of an active forbearance plan, if they are satisfying the requirements of an active trial period plan, or if they have submitted a response package for consideration of a foreclosure prevention alternative and the servicer is either actively evaluating or has an offer pending. In addition, borrowers need to be advised about the benefits of purchasing coverage themselves, including the usually lower cost, and should be advised that their personal property might not be covered by lender-placed policies.
But if the borrower fails to meet the terms of any plan or foreclosure prevention alternative, then the new coverage requirements must be met.
For borrowers who have a property damage claim pending, the coverage amounts can’t be changed until the claim is submitted.
Deductibles for lender-placed insurance need to be $1,000 per loss occurrence when the face amount of the policy doesn’t exceed $100,000 and $2,500 when it does. Separate wind-loss deductibles need to be 2 percent of the policy amount.
Servicers need to send at least two letters to the borrower before purchasing a forced-placed policy. Borrowers need to be notified in writing when the coverage amount changes due to delinquency.
Insurance carriers must be filed and admitted in every state that the servicer services loans for Fannie. Servicers can use excess and surplus lines coverage during the filing period for up to 180 days from today. Lender-placed rates need to offer competitive premiums, and servicers need to document their process for compliance with this requirement.
Servicer now have 15 days from the date the borrower proves coverage to refund lender-placed insurance premiums.
Servicers will not be reimbursed for lender-placed premiums if they are paid to firms affiliated with the insurance company. Also not reimbursable are costs associated with tracking or administration and any other costs beyond the premiums.
“Lender-placed insurance master policies may not contain a coinsurance clause or any other provision that yields the same result as a coinsurance clause,” the bulletin stated.
If a borrower can’t afford to pay the deductible on a claim, then the servicer needs to advance the short fall and file a cash disbursement request for reimbursement. The servicer must then closely monitor the claim, repair and payment processes through completion.
When an uninsured abandoned property is damaged, it needs to be secured, and repair plans need to be developed.
On loans where an escrow account was waived, the servicer is responsible for ensuring ongoing coverage and advancing funds for the premium payment when the borrower fails to pay it. In addition, an escrow account must be established when policies lapse.
Servicers need to ensure that claims are filed when damage is discovered.
“If the property inspection reveals a hazard or flood insurance loss and the proof of loss claim is not filed, is denied, or is curtailed due to the servicer’s failure to file a timely claim, the servicer will be required to make Fannie Mae whole for any losses relating to the property damage expenses or fees incurred by Fannie Mae,” the bulletin stated.
The remaining balance of insurance loss drafts need to be forwarded to Fannie when the loan is liquidated through foreclosure or deed in lieu within 30 days of issuing the REOgram. None of the proceeds can be used for the servicer’s property recovery firm or any other servicer expenses. Servicers have 10 days to remit funds received from Fannie’s property recovery firm.
The time that servicers have to provide all information or documentation requested by Fannie’s property recovery firm is being reduced to three days from 10 days.