Anyone who has taken out a home mortgage knows that one of the borrower's key responsibilities is to pay hazard insurance premiums on the property and not let the policy lapse.
But are you aware that if you fail to keep the insurance current or the premiums aren't paid from your escrow account, the lender or its mortgage servicer can obtain its own coverage, which may cost you more than the policy you originally chose?
How much more? Double the premium cost you had been paying? Triple? Even 10 times higher — sometimes for inferior coverage? Potentially any of the above.
A recent $140-million national class-action settlement — one of a series of cases brought against major banks, mortgage servicers and insurers — shed fresh light on a controversial business practice in the mortgage industry: alleged kickbacks in connection with such force-placed insurance policies.
Force-placed insurance has been a feature of mortgage contracts for years. It has a legitimate purpose. It's to protect the collateral for the loan, which is the house, said Florida lawyer Dennis Wall, who has written a newly published book on the subject for the American Bar Assn.
But when kickbacks and affiliate side deals drive premiums to abusive levels, he told me, "it's a bad game."
The latest settlement involves nearly 400,000 borrowers across the country whose mortgages were serviced by Ocwen Financial Corp. from January 2008 to this January.
The plaintiffs contended that Ocwen and Assurant, a large insurance company, and its affiliates "entered into exclusive and collusive relationships" whereby the insurer or affiliates allegedly paid Ocwen kickbacks, commissions and other compensation in exchange for force-placed coverage for lapsed policies at inflated premium costs to the consumer.
Ocwen and Assurant both denied wrongdoing as part of the settlement. Ocwen said it settled the case to "avoid prolonged and distracting litigation." Terms of the final settlement must be approved by a federal judge next month before the Ocwen clients can begin to file claims for recovery of overpayments.
According to the complaint, "the money paid [was] not given in exchange for any services" supplied by Ocwen. It was "simply grease paid to keep the force-placed machine moving." Borrowers frequently had no idea what was going on.
One plaintiff in the class action had been paying about $700 in premiums annually for his original hazard insurance policy, issued in 2006, but coverage lapsed in 2008 because of nonpayment.
After his servicing was transferred to Ocwen in 2011, he received a note from the company saying that it had force-placed a new policy with an annual premium three time higher — $2,180. A year later, the premium was raised to $2,244.
Another plaintiff alleged that when her servicing account was transferred to Ocwen from her original lender, the insurance premiums were not paid from her escrow account and, unknown to her, the coverage lapsed. At that point, she said, Ocwen force-placed coverage requiring much higher premium payments.
Worse yet, the coverage amount in the policy was for more than double her outstanding loan balance — $209,000 of coverage on a loan with a remaining balance of just $80,000 and did not include personal property or liability.
Still another plaintiff alleged that Ocwen force-placed an expensive new policy despite having been informed by an independent insurer that it had already written coverage for the borrower and force-placed insurance was not needed.
Consumers who filed for claims in settlements have received anywhere from $100 to $12,000 in cash relief, depending on how much they had allegedly overpaid, said Adam M. Moskowitz, a Miami lawyer whose firm has filed 13 class actions in the last few years challenging force-placed practices of banks, servicers and insurers.
Total settlement amounts have ranged as high as $1 billion in benefits and $300 million in cash relief in a final settlement with one national bank.
Though most defendants have agreed to modify their practices as part of settlement agreements, Moskowitz said force-placed insurance overcharges still may be widespread because companies find other ways to pay and receive kickbacks, such as by creative use of affiliates.
How to protect yourself against possible rip-offs like these?
First, be aware of the problem. Keep an eye on the hazard insurance premium payments out of your escrow account. If you send in payments directly, never let your policy lapse. And challenge any demands for outrageous premiums.