Anne James, a HELP Certified professional, shared this article with me and I felt it so critical that I am sharing with all of you.
You can read the original article, written by Dean Calbreath who works for the San Diego Union Tribune by clicking on this link; http://www.signonsandiego.com/news/2011/aug/20/forced-insurance-adds-to-home-woes/
George Champion III is no slouch when it comes to finance.
His grandfather, George Sr., was the chairman of Chase Manhattan Bank during the 1960s, and he has spent his own career heading real estate and investment businesses in La Jolla.
Nevertheless, he recently fell into a trap that has led to default and foreclosure for the less fortunate. Even though he survived largely unscathed, it was enough to make him launch a lawsuit against J.P. Morgan Chase, the successor to his grandfatherâ€™s bank.
The issue is â€œforce-placed insurance,â€ one of the many hidden practices that produce profits for mortgage-servicers and disaster for homeowners.
Unbeknown to most homeowners, if a home insurance policy lapses, the lender can impose its own that is typically priced far above the market price â€” sometimes so high that it can force homeowners into default or foreclosure.
It is a widespread practice. In 2010, lenders imposed $5.5 billion worth of such insurance on borrowers nationwide, up from $1.5 billion five years ago. Chase alone imposed 163,564 policies nationwide, including 20,650 in California.
The business can be profitable for the lenders, who often get fees or commissions from the insurers. It also protects them from loss.
Balboa Insurance, a specialist in forced-place insurance, says it provides â€œvaluable protection and peace of mind to financial institutions large and small.â€
Ron Wiser, a managing partner of Ohioâ€™s Loan Protector Insurance Services, has written that â€œwhen used correctly, a lender-placed insurance program is a powerful and necessary tool to achieve borrower compliance with insurance requirements.â€
In a congressional probe of banking practices this month, financial industry lobbyist Robert Couch said force-placed insurance â€œis not necessarily a conflict of interest. In fact, it may make it easier for the consumer to have services that are provided in-house versus going outside.â€
Last year, the Dodd-Frank financial reform act contained a requirement that force-placed insurance should be â€œreasonably priced.â€ The Mortgage Bankers Association â€” which has long defended the insurers â€” successful lobbied to have that portion of the law removed.
â€œThe consumer agreed to lender placement when he or she signed the mortgage,â€ John Courson, who heads the association, wrote at the time.
Championâ€™s lawyer, John Donboli of the Del Mar Law Group, countered, â€œItâ€™s just one more mechanism to transfer money from the borrower to the lender.â€
Championâ€™s troubles began in November 2009, when he inadvertently failed to renew his insurance policy. In late February 2010, he got a letter from his lender, Chase, noting that he needed to maintain insurance to meet the terms of his mortgage. By March 7, he got a new policy and sent proof to Chase.
The next month, Chase obtained a forced policy from American Security Insurance Co. and added it to Championâ€™s mortgage payments. The policy, which Champion says was five times more expensive than the industry norm, was backdated to Nov. 12, 2009 â€“ the date that Champion failed to renew.
When Champion complained, Chase said that its policy covered the risk it had incurred when he was uninsured. Champion was so upset that he sued, complaining that the price of Chaseâ€™s insurance â€œbears no fair or reasonable correlation to Chaseâ€™s expenses,â€ but instead generated â€œkickbacks and undisclosed profits to Chase.â€
Champion ended up withdrawing his suit last month after deciding it would cost more time and money than it was worth. Similar lawsuits are popping up throughout the country.
â€¢â€‰In West Virginia, Matthew and Denise Ash had been keeping current on their $91,000 mortgage. When their insurance lapsed, Chase tacked on a policy that upped their monthly payments to $1,180 from $680. Their loan went into default, allowing Chase the right to foreclose. The Ashes are fighting the foreclosure in court.
â€¢â€‰In Illinois, when Christopher Gustafsonâ€™s home insurance lapsed in December 2009, Bank of America imposed a policy through its then-subsidiary Balboa Insurance, increasing his cost by 62 percent. Balboa did not cover liability or personal property, but only insured BofA against damage to the structure. It provided BofA with $76,300 worth of coverage, even though the balance due on the loan was $47,946.
â€¢â€‰In Florida, after Margery Golentâ€™s hurricane insurance lapsed due to an error by her insurer, Zions Bancorp imposed an insurance policy and backdated it by a year. The Zions policy not only gave Golent retroactive hurricane coverage for a year in which there had been no hurricanes, but also covered wind and flood damage even though her insurance for those hazards never lapsed.
In the congressional hearing this month, Ohio State law professor Peter Swire â€” a former White House economic adviser â€” told of his own encounter.
In early 2006, Swireâ€™s lender, Washington Mutual, asked for proof of flood insurance. His State Farm agent immediately faxed WaMu proof of insurance, but unbeknown to either Swire or his agent, the bank had a policy of not processing such documents unless they contained a WaMu account number.
Without telling Swire, WaMu ignored the State Farm fax and imposed a force-placed insurance policy, which was supposed to be paid through his monthly mortgage bill.
Swire paid his mortgage automatically every month, never missing a payment. After WaMu added the insurance costs to the mortgage, the automatic payments no longer covered the entire bill, so WaMu began tacking on late fees of more than $170 per month. After Swire discovered what the bank was doing, it took him nearly two years to convince it to rescind its flood insurance and cancel the late fees, which then totaled more than $4,000.
â€œI actually feel fortunate,â€ he said. â€œMost homeowners are not banking law professors. All of those hours sitting on hold waiting for customer service gave me plenty of time to think about the flaws in our mortgage servicing system.â€
In response to mounting complaints about force-backed insurance, a coalition of the attorneys general of the 50 states is working on a regulation that would ban lenders from imposing force-placed coverage written by one of their subsidiaries or from accepting commissions, referral fees or other incentives when obtaining the coverage from independent insurers. In addition, it would require servicers to work harder to maintain the borrowersâ€™ existing policies instead of replacing them with more expensive ones.