Fannie Mae Updates Lender-placed Insurance Requirements
by: Emily Ross
Fannie Mae recently released updates to its lender-placed insurance requirements. These updates must be implemented by June 1, 2014. Servicers must work with their lender-placed, or force-placed, insurance providers to implement these changes by the required change date, but are encouraged to do so before this date.
Fannie Mae has adopted the definition used by the CFPB for Lender-Placed or Force-Placed Insurance. This definition is taken from the Real Estate Settlement Procedures Act, or RESPA. It reads, “force-placed insurance means hazard insurance obtained by a servicer on behalf of the owner or assignee of a mortgage loan that insures the property securing such loan.” 12 C.F.R. 1024.37. The definition specifically excludes hazard insurance required by the Flood Disaster Protection Act of 1973 and hazard insurance that is obtained by the borrower but is renewed by the servicer.
There are three changes going into effect with this update. The first relates to a prohibition on the inclusion of servicer commission or other payments earned by the servicer. This means that the payments Fannie Mae makes, or reimburses, must not include any incentive based pay for the servicer. These commissions can also not be paid to affiliates of the servicer.
Fannie Mae defines an affiliate as:
- “an entity owned or controlled, in whole or in part, by the servicer including, but not limited to, a subsidiary or joint venture of the servicer;
- An entity that owns or controls, in whole or in part, the servicer (for example, the parent company of the servicer); or
- An entity that is under common ownership or control with the servicer (for example, two subsidiaries of the same parent company.”
Fannie Mae also states that that an entity does not fall under the “affiliated” category if they are a public entity that is publicly traded and the servicer owns less than 5% of the entity’s stock. Fannie Mae Servicing Guide, Part II, Chapter 6.
To further the separation between affiliated organizations and required force-placed insurance, Fannie Mae also changed its requirements to disallow servicers from using affiliated business for force-placed insurance. The definition of “affiliate” from above applies to this requirement also.
In addition to the two new requirements listed above, Fannie Mae is also now requiring servicers to file a lender-placed certification with Fannie Mae attesting to their compliance with the above two requirements. This certification must be contained in the Lender Record Information and can be filed with Form 582. This form is available through the Fannie Mae website and will include the necessary information with the next update.
To ensure compliance with these, as well as other force-placed insurance requirements, Fannie Mae can request copies of insurance policies as well as any contractual documents between the servicer and the insurer. The servicer will have 30 days to comply with this request.
About the Author
Emily Ross, J.D. is Regulatory Compliance Consultant at Bankers Advisory, Inc. She is a graduate of Auburn University and earned her Juris Doctor at Case Western Reserve School of Law. Emily is admitted to the Bar in Massachusetts and Vermont. She can be reached at Emily@bankersadvisory.com
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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