A lender’s determination to extend a loan or not often depends on the value of the collateral and the stipulation that the borrower must maintain insurance coverage on said collateral. A lender must determine the loan to value ratio and what they could sell the collateral for in order to mitigate their loss if the loan defaults, and be assured that their interest in the collateral is always protected. The portfolio protection program your institution chooses can mean the difference in risk vs. safety for your loan programs.
In some cases, thinking that the borrower has let their insurance lapse, lenders and servicers have imposed insurance policies, sometimes wrongfully, that are expensive and protect only themselves as opposed to the interest of the borrower, yet charge the borrower for it. These policies are known as “force-placed” or “lender-placed” policies. Read on to find out more about the intricacy of these types of policies.
Due to the issues for borrowers that have come up with this practice, the federal government imposed regulations (12 C.F.R. § 1024.37) on lenders requiring them to take steps to ensure there is a reasonable basis to believe that the borrower has not maintained the required insurance coverage, including notifications prior to purchasing a force-placed policy.
Once a lender has reason to believe the borrower has not kept their policy in place, they must send two notifications informing the borrower that they need to obtain the required coverage and that they need to submit proof of the active insurance to the lender. These two letters cannot be sent closer than 30 days apart, and the lender may not obtain the force-placed policy until 15 days after the second letter. The notice must state the cost, or a reasonable estimate of the cost, of the force-placed policy. (12 C.F.R. § 1024.37) This is a long period of time that the lender could be exposed.
Once a borrower provides proof of coverage, the lender must then cancel the force-placed insurance within 15 days of receiving the evidence and refund premiums charged for duplicate coverage. The tracking, notifications, accounting updates, payment amount retractions, and refunds create many “touches” to the loan file, thus increasing the risk for errors and creating a heavy administrative burden for the lender.
In addition, the lender must ensure their Policy & Procedures are updated with any regulation changes and implement checks to verify they are following these procedures. Further complicating the process, the lender must be able to produce the current policy on any given secured loan at any and all examinations.
An alternative safer solution to the burdensome force-placed procedure is for the lender to obtain coverage via a Blanket policy. With a Blanket policy, the lender has protection against a loss in case the borrower does not keep the required policy current. At the time of loan closing, the lender verifies the borrower has a satisfactory policy in place, after that the lender no longer needs to track their secured loans to obtain current/in-force policies. There is no need to send notifications or alter the loan payment terms to pay for the force-placed policy. No retractions and no refunds! With a Blanket policy in place, the lender no longer has to “touch” the loan file concerning insurance and is no longer required to provide current policies during an audit or exam thus reducing the number of potential findings. The compliance risks of tracking and force-placing policies are virtually eliminated with Blanket insurance protection. Choosing a blanket policy could mean the difference between risk and safety for your collateralized loan program.
Blanket 360 Insurance from Unitas Financial Services, Inc immediately makes lenders more efficient, allowing them to grow without adding staff and protect their collateral and portfolios at a higher level than can be done when tracking and force-placing insurance protection. Our innovative Blanket 360 product line includes Blanket Mortgage protection which covers all residential and commercial real estate, Blanket Equipment protection which covers all commercial autos/trucks and equipment, and Blanket Single Interest Insurance (VSI) which protects the remaining consumer loan collateral.
Read our blog post: How Lenders are more Efficient with Blanket 360 Portfolio Insurance
Is it time to improve your process, increase the ease of remaining compliant while knowing you have protection against loan loss due to collateral damage 24/7? Get in touch and we can walk you through the process of making the easy transition to Blanket protection.
