Are Servicers Allowed to Charge a Borrower for Force-Placed Insurance Coverage?

Yes, but only after two steps. Your servicer must have a reasonable basis to believe you did not keep the hazard insurance (homeowners insurance) your mortgage requires, and it must send you two written notices, by mail or by electronic delivery you agreed to, the first at least 45 days and the second at least 15 days before it charges you. If you later send proof that you had the required coverage, the servicer must cancel its policy within 15 days and refund the cost for any period your own policy was in force.

What is force-placed insurance?

Force-placed insurance, also called lender-placed insurance, is a hazard insurance policy your servicer buys on your home when it has no evidence that your own policy is in effect. A servicer is the company that collects your payment and manages your loan; what loan servicing is explains the rest of its role. The servicer adds the premium to what you owe.

The CFPB says force-placed insurance usually costs more than a policy you buy yourself and often protects only the lender. The servicer's required notice must also warn you that it may cost significantly more and may provide less coverage than your own policy.

The federal rules described here cover hazard insurance. Flood insurance that a servicer buys because your home is in a flood zone follows a separate federal law, the Flood Disaster Protection Act of 1973.

When can the servicer buy it if you have an escrow account?

An escrow account is the part of your monthly payment the servicer holds to pay property taxes and insurance; how an escrow account works covers the basics. If your homeowners insurance is paid through escrow, the servicer must pay the premium on time as long as your mortgage payment is no more than 30 days overdue.

If you are more than 30 days behind, the servicer still generally may not force-place insurance. It must pay your existing policy from escrow instead, even if the escrow account is short, and it can then ask you to repay the amount it advanced. It may buy force-placed insurance only if it has a reasonable basis to believe your insurer canceled or refused to renew your policy for a reason other than an unpaid premium, or that the home is vacant.

One exception: a small servicer, one that services 5,000 or fewer loans that it or an affiliate owns or originated, may force-place insurance instead of advancing escrow funds if the force-placed policy costs less than paying your premium.

If your policy was canceled because the servicer did not pay the premium from escrow, the CFPB suggests talking to an attorney.

What notices must you get before you are charged?

A servicer that mails these notices must use first-class mail or better.

If you sent proof that covers only part of the time, the reminder must say the servicer could not verify continuous coverage, that you will be charged for the unverified period, and the annual premium or a reasonable estimate.

The servicer can charge you only if, 15 days after it sends the reminder, it still has no evidence that your coverage was continuous. The charge can reach back to the first day your own coverage lapsed, where state law allows.

Example: The servicer mails the initial notice on May 1. The earliest it can mail the reminder is May 31. If it mails the reminder on June 2, the earliest it can charge you is June 17, which is also more than 45 days after May 1.

How do you stop the charge or get a refund?

1. Contact your insurer to reinstate your policy or buy a new one, and get the declarations page (the summary page that lists the policy number, dates, and coverage).
2. Send written proof to the servicer the way its notice describes. The servicer must accept any reasonable form of written confirmation that includes your policy number and the name and contact information of your insurer or agent.
3. Check for the refund. Within 15 days of receiving proof of coverage that meets your mortgage's insurance requirements, the servicer must cancel the force-placed policy, refund the premium and related fees for any period when your own policy was also in force, and remove those charges from your account.

If your coverage really did lapse, you still owe for the days the force-placed policy covered the gap. If the servicer keeps the policy in place for another year, it must send a renewal notice at least 45 days before charging you for the renewal.

Are there limits on what the servicer can charge?

Yes. Federal rules require charges related to force-placed insurance to be bona fide and reasonable: for a service actually performed, reasonably related to the servicer's cost, and not barred by other law. That federal test does not apply to charges that state law regulates as the business of insurance; state insurance law governs those instead, so your state insurance department is the place to ask about the premium rate.

What can you do if the servicer breaks these rules?

Send a written notice of error. Charging you for insurance without a reasonable basis, or failing to pay your premium from escrow on time, are both errors the servicer must investigate and answer, generally within 30 business days. Rules for written communication with servicers explains what to include and where to send it. You can also file a complaint with the CFPB at (855) 411-2372. Federal laws protecting you from mortgage servicers covers your right to sue and the damages available.