1. Has this happened to you?
It’s4:35 p.m.on a Fridayafternoon andyourbank’sloandepartmenthas
receivednotice thatone of itsborrowershaslettheirpropertyinsurance
lapse.There are strongstorms expectedoverthe weekend andthe entire
departmentisina panic.A call has beenplacedtothe local insurance
agentwhohandlesthe bank’scoverages, butthe agenthasleftforthe day
and cannotbe reached.The propertystill hasanoutstandingloanbalance
of $300,000, and there isno wayto get coverage onit forthe upcoming
weekend. Whatisthe bank goingto do?Unfortunately,thisisa far too commonscenario.
Enter Lender Placed Insurance
LenderPlacedInsurance is atype of insurance coverage thatbanksandlendersuse forthose instances
whena borrowerdoesnotreneworpay the premiumonthe insurance coverage onthe propertyor
vehicle inwhichtheyhave outstanding loans. Thisnonrenewal /nonpaymentcauses the coverage to
lapse andexposes the banktoa losson itsinterestinthe collateral.Thistype of policycanalsocover
REO properties. Althoughthiscoverage isforall typesof loancollateral,inthisarticle we will be focusing
mainlyonlenderplacedinsurance forthe mortgage loanportfolioforresidential andcommercial
properties.Althoughthere are several differenttypesof LenderPlacedInsurance,the mostcommon
type isa ReportingFormPolicy.Onthistype of LenderPlacedpolicy,amasterpolicyisbound andrates
are issuedforthe differentpropertytypesandstatuses.Once the policyisbound,there are no
underwritingdelaysforanypropertyinthe bank’sloanportfolio,aslongasthe propertyisreportedon
the policy.
Various Ways for Banks to Report
There are twowaysthat bankscan choose toreport borrowerlapsesandREOs:
- In House,whichusuallyutilizesanonlinereportingsystem
or
- OutsourcedTracking
In House- Whena bankchoosesto keepthe insurance
trackingin house,itisa task usuallyassignedtoone or
twoof the employeesinthe loandepartment. Itisthen
up to the bankto keepupwithCFPB compliance issues
regardingborrowernoticesandlettercycles andtoadd
and delete propertiesfromthe onlinereportingsystem
for coverage.Reportingsystemsgenerally include the
abilitytogenerate BorrowerNotifications andreports.
Typically,the bank isbilledmonthlyforthe coverages
theyhave inplace duringthe previousmonth.

2. OutsourcedTracking- Whena bankchoosesto outsource its
insurance tracking,all monitoringof the insurance ishandledbythe
trackingprovider,includingCFPBcompliantlettercycle notices.In
additiontothe insurance premiums,thereisamonthly service fee
paidto the tracking provider. One of the benefitstooutsourcingthe
insurance trackingis,thatby doingso,the employee oremployees
whohave beendoingthe insurance monitoringare freedupfor
othertasks.Thisincrease inemployeeproductivityoftenoffsetsany
feesincurredbythe trackingcompany makingita costeffective option.Inaddition,anyerrors
and omissionsliabilityassociatedwiththe trackingandmonitoringof the insurance onthe loan
portfolioisshiftedfromthe banktothe companythat isprovidingthe tracking.Thistransferof
riskis anothercost/benefittool forthe banktoconsiderwhenchoosingwhetherornot
outsourcedtrackingisrightfor theirinstitution.
Managing Risk = Good Business
Good businessmeansriskmanagement.Insurance isone tool thata bankcan use to manage itsrisk.
Whena borrowerletstheirinsurance policylapse,orwhenabank isforcedto foreclose, itisimportant
to have proceduresandprocessesinplace thatthe bankcan take to
protectits interestinloancollateral.Todoso savestime,money,
and headaches,andavoidsthe Fridayafternoonat4:30 panic. This
makesfora betterweekendforeveryone.