Our procedures to implement force-place insurance has come under some scrutiny by our regulator. Specifically, they think we are overcharging for the insurance.
Our position is that we may charge in excess of the cost. However, they believe that Section 8 of RESPA is being violated. We need some clarification, so we are turning to you.
Does charging in excess of the force-place insurance cause a violation of RESPA Section 8?
ANSWER
I am going to answer by taking you through a bit of history, wending our way into definitions, sashaying past regulatory requirements, traipsing into a seemingly dispositive doctrine, wandering over to illustrative litigation, and arriving at an observation. Enjoy the journey!
Let’s start with the uniform security instruments published by Fannie Mae and Freddie Mac, which most mortgage lenders use or adapt for their own use, state the lender’s right to “force-place” hazard insurance coverage:
The last sentence is a right that has a rather nasty reputation because there has been much consternation about the cost of force-placed insurance occasionally being many times as expensive as policies bought by borrowers on the retail market. Thus, herein lies the nub of the issue: allegations spring from the notion that one reason replacement insurance is so expensive is that the force-placed insurer handsomely compensates the lender and might be closely related to the lender. Hence, the less than thrilling whiff of Section 8 fumes fills the air!
In fact, that nasty reputation led Congress to include Section 1463(a) in the Dodd-Frank Act, which amended the Real Estate Settlement Procedures Act (RESPA) to add three subsections affecting force-placed insurance and loan servicers’ duties.
Section 8 of RESPA, which targets kickbacks and referral fees that unnecessarily increase settlement services costs, doesn’t reach force-placed insurance abuses because forced placement typically occurs a year or more into the timeline of a mortgage loan. And, because the insurance is force-placed after loan origination, the insurance is not a “settlement service” reached by Section 8. As a result, Section 1463(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended RESPA Section 6(k) and (l) to prohibit a servicer from obtaining force-placed insurance unless a reasonable basis exists to believe the borrower has failed to comply with the loan contract’s requirements to obtain property insurance. This prohibition did not take effect until the CFPB adopted regulations as part of its January 2013 Regulation X Servicing Rule, effective January 10, 2014.
RESPA defines the term “force-placed insurance” to mean hazard insurance coverage obtained by a servicer of a federally related mortgage loan when the borrower has failed to maintain or renew hazard insurance on the security property as required by the terms of the mortgage. As I’ve stated above, the statute prohibits a servicer from obtaining force-placed insurance unless a reasonable basis exists to believe the borrower has failed to comply with the loan contract’s requirements to obtain property insurance.
According to RESPA Section 6(l), a servicer of a federally related mortgage loan does not have a reasonable basis for obtaining force-placed insurance unless the following requirements have been satisfied:
The U.S. Court of Appeals for the 3d Circuit considered the allegation regarding the violation of Section 8, where force-placed insurance is a good deal for a lender because the insurer compensates the lender and may even be closely related to the lender.[i]
We are now about to enter the realm of a potentially dispositive doctrine!
The court disposed of the matter using an insurance principle, tossing the issue into the state arena that typically governs insurance practices. States regulate the insurance market to ensure that insurers don’t charge too much (and earn exorbitant profits) or too little (and be rendered insolvent because of unexpected claims) and prevent insurers from unfairly discriminating against certain insureds. Accordingly, states generally require insurers issuing policies in their states to file the rates they will charge with a state department of insurance.
Introducing the filed-rate doctrine!
ANSWER
I am going to answer by taking you through a bit of history, wending our way into definitions, sashaying past regulatory requirements, traipsing into a seemingly dispositive doctrine, wandering over to illustrative litigation, and arriving at an observation. Enjoy the journey!
Let’s start with the uniform security instruments published by Fannie Mae and Freddie Mac, which most mortgage lenders use or adapt for their own use, state the lender’s right to “force-place” hazard insurance coverage:
Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the term “extended coverage,” and any other hazards including, but not limited to, earthquakes and floods, for which Lender requires insurance. This insurance shall be maintained in the amounts (including deductible levels) and for the periods that Lender requires. What Lender requires pursuant to the preceding sentences can change during the term of the Loan. The insurance carrier providing the insurance shall be chosen by Borrower subject to Lender’s right to disapprove Borrower’s choice, which right shall not be exercised unreasonably … If Borrower fails to maintain any of the coverages described above, Lender may obtain insurance coverage, at Lender’s option and Borrower’s expense. [My emphasis.]
The last sentence is a right that has a rather nasty reputation because there has been much consternation about the cost of force-placed insurance occasionally being many times as expensive as policies bought by borrowers on the retail market. Thus, herein lies the nub of the issue: allegations spring from the notion that one reason replacement insurance is so expensive is that the force-placed insurer handsomely compensates the lender and might be closely related to the lender. Hence, the less than thrilling whiff of Section 8 fumes fills the air!
In fact, that nasty reputation led Congress to include Section 1463(a) in the Dodd-Frank Act, which amended the Real Estate Settlement Procedures Act (RESPA) to add three subsections affecting force-placed insurance and loan servicers’ duties.
Section 8 of RESPA, which targets kickbacks and referral fees that unnecessarily increase settlement services costs, doesn’t reach force-placed insurance abuses because forced placement typically occurs a year or more into the timeline of a mortgage loan. And, because the insurance is force-placed after loan origination, the insurance is not a “settlement service” reached by Section 8. As a result, Section 1463(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended RESPA Section 6(k) and (l) to prohibit a servicer from obtaining force-placed insurance unless a reasonable basis exists to believe the borrower has failed to comply with the loan contract’s requirements to obtain property insurance. This prohibition did not take effect until the CFPB adopted regulations as part of its January 2013 Regulation X Servicing Rule, effective January 10, 2014.
RESPA defines the term “force-placed insurance” to mean hazard insurance coverage obtained by a servicer of a federally related mortgage loan when the borrower has failed to maintain or renew hazard insurance on the security property as required by the terms of the mortgage. As I’ve stated above, the statute prohibits a servicer from obtaining force-placed insurance unless a reasonable basis exists to believe the borrower has failed to comply with the loan contract’s requirements to obtain property insurance.
According to RESPA Section 6(l), a servicer of a federally related mortgage loan does not have a reasonable basis for obtaining force-placed insurance unless the following requirements have been satisfied:
- The servicer may not impose any charge on any borrower for force-placed insurance unless the servicer has sent, by first-class mail, a written notice to the borrower containing:
- a reminder of the borrower’s obligation to maintain hazard insurance on the property securing the loan;
- a statement that the servicer does not have evidence of insurance coverage;
- a clear and conspicuous statement of the procedures by which the borrower may demonstrate that insurance coverage is in place; and
- a statement that the servicer may obtain coverage at the borrower’s expense if the borrower does not demonstrate existing coverage in a timely manner.
- The servicer has sent, by first-class mail, a second written notice, at least 30 days after the first mailing, containing the same information as the first notice.
- The servicer has not received from the borrower any demonstration of hazard insurance coverage by the end of the 15-day period that began on the date the servicer sent the second notice.
- The servicer must accept any reasonable form of written confirmation from a borrower of existing coverage, which must include the existing insurance policy number along with the identity of, and contact information for, the insurance company or agent, or as otherwise required by the Bureau.
- Within 15 days of receipt by the servicer of confirmation of a borrower’s existing insurance coverage, the servicer must: (1) terminate the force-placed insurance; and (2) refund to the consumer all force-placed insurance premiums paid by the borrower during any period during which the borrower’s insurance coverage and the force-placed insurance coverage were in effect, and any related fees charged to the consumer’s account with respect to the force-placed insurance during that period.
The U.S. Court of Appeals for the 3d Circuit considered the allegation regarding the violation of Section 8, where force-placed insurance is a good deal for a lender because the insurer compensates the lender and may even be closely related to the lender.[i]
We are now about to enter the realm of a potentially dispositive doctrine!
The court disposed of the matter using an insurance principle, tossing the issue into the state arena that typically governs insurance practices. States regulate the insurance market to ensure that insurers don’t charge too much (and earn exorbitant profits) or too little (and be rendered insolvent because of unexpected claims) and prevent insurers from unfairly discriminating against certain insureds. Accordingly, states generally require insurers issuing policies in their states to file the rates they will charge with a state department of insurance.
Introducing the filed-rate doctrine!
The filed-rate doctrine prohibits an insurer from charging rates other than those properly filed with the appropriate regulator. The doctrine also provides that insurance policyholders may not challenge in court a rate filed with a regulator. Instead, they must use prescribed administrative procedures with the appropriate state agency to challenge a rate. Court involvement inevitably would introduce price discrimination because winning plaintiffs would wind up paying less than other ratepayers.
The borrowers in Leo v. Nationstar Mortgage alleged that Nationstar Mortgage, their reverse mortgage lender, colluded with an insurance company and a hazard insurance agent to pocket kickbacks on force-placed insurance policies, in violation of the terms of their mortgages, New Jersey’s implied covenant of good faith and fair dealing, the Truth-in-Lending Act (TILA), the New Jersey Consumer Fraud Act, the New Jersey law preventing tortious interference with a business relationship, and the federal Racketeer Influenced and Corrupt Organizations Act (RICO). They claimed that the insurance company had inflated the rate filed with state regulators so it and the agent could return a portion of the profits to Nationstar to induce Nationstar’s continued business. In effect, the borrowers claimed they paid Nationstar more than Nationstar paid the insurance company and the agent.
The district court dismissed the claims, holding that the filed-rate doctrine blocked the claims. The 3d Circuit affirmed. Because the borrowers sought damages tied to an alleged overcharge baked into a rate filed with regulatory authorities, the filed-rate doctrine barred their claims.
Once an insurance rate is filed with the appropriate regulatory body, the court could not effectively reduce it by awarding damages for an alleged overcharge; in other words, the filed-rate doctrine prevents courts from deciding whether the rate is unreasonable or fraudulently inflated. The doctrine applied whether the borrowers challenged the filed rate as unreasonable or challenged an overcharge fraudulently included in the filed rate.
The court observed that the filed-rate doctrine sought to preserve administrative agencies' exclusive role in approving rates by keeping courts out of the ratemaking process. If the court had ruled for the borrowers, the calculation of damages would require a determination of how much the court thought the borrowers should have been charged for hazard insurance, “a new, lower-than-filed-rate price tethered only to our conception of the appropriate kickback-free rate.”
Indeed, I would suggest that the borrowers faced an even bigger obstacle because of the doctrine’s other goal: preventing insurers from engaging in price discrimination among ratepayers. If the court forced Nationstar to pay damages, it would be giving the borrowers a better price for force-placed insurance than other borrowers using a different lender but still obtaining the insurance from the same insurance company.
My observation: the filed-rate doctrine seems to be dispositive in instances as described above. The 3d Circuit pointed out that other U.S. Courts of Appeal had reached the same result, including the 11th Circuit, which dismissed a nearly identical complaint filed by the same attorneys who represented the borrowers in Leo v. Nationstar Mortgage, that case being Patel v. Specialized Loan Servicing[ii]. Similarly, the 2nd Circuit struck down a RICO claim alleging that borrowers had been “fraudulently overbilled” for force-placed insurance “because the [filed] rates they were charged did not reflect secret ‘rebates’ and ‘kickbacks.’”[iii] The 8th Circuit dismissed a RICO claim because the filed-rate doctrine prevented a RICO suit for damages relating to a fraudulent rate.[iv]
[i] Leo v. Nationstar Mortgage LLC, 2020 U.S. App. (3d Cir. July 1, 2020)
[ii] Patel v. Specialized Loan Servicing, 904 F.3d 1314 (11th Cir. 2018)
[iii] Rothstein v. Balboa Ins. Co., 794 F.3d 256 (2nd Cir. 2015)
[iv] H.J. Inc. v. Northwestern Bell Telephone Co., 954 F.2d 485 (8th Cir. 1992)
The borrowers in Leo v. Nationstar Mortgage alleged that Nationstar Mortgage, their reverse mortgage lender, colluded with an insurance company and a hazard insurance agent to pocket kickbacks on force-placed insurance policies, in violation of the terms of their mortgages, New Jersey’s implied covenant of good faith and fair dealing, the Truth-in-Lending Act (TILA), the New Jersey Consumer Fraud Act, the New Jersey law preventing tortious interference with a business relationship, and the federal Racketeer Influenced and Corrupt Organizations Act (RICO). They claimed that the insurance company had inflated the rate filed with state regulators so it and the agent could return a portion of the profits to Nationstar to induce Nationstar’s continued business. In effect, the borrowers claimed they paid Nationstar more than Nationstar paid the insurance company and the agent.
The district court dismissed the claims, holding that the filed-rate doctrine blocked the claims. The 3d Circuit affirmed. Because the borrowers sought damages tied to an alleged overcharge baked into a rate filed with regulatory authorities, the filed-rate doctrine barred their claims.
Once an insurance rate is filed with the appropriate regulatory body, the court could not effectively reduce it by awarding damages for an alleged overcharge; in other words, the filed-rate doctrine prevents courts from deciding whether the rate is unreasonable or fraudulently inflated. The doctrine applied whether the borrowers challenged the filed rate as unreasonable or challenged an overcharge fraudulently included in the filed rate.
The court observed that the filed-rate doctrine sought to preserve administrative agencies' exclusive role in approving rates by keeping courts out of the ratemaking process. If the court had ruled for the borrowers, the calculation of damages would require a determination of how much the court thought the borrowers should have been charged for hazard insurance, “a new, lower-than-filed-rate price tethered only to our conception of the appropriate kickback-free rate.”
Indeed, I would suggest that the borrowers faced an even bigger obstacle because of the doctrine’s other goal: preventing insurers from engaging in price discrimination among ratepayers. If the court forced Nationstar to pay damages, it would be giving the borrowers a better price for force-placed insurance than other borrowers using a different lender but still obtaining the insurance from the same insurance company.
My observation: the filed-rate doctrine seems to be dispositive in instances as described above. The 3d Circuit pointed out that other U.S. Courts of Appeal had reached the same result, including the 11th Circuit, which dismissed a nearly identical complaint filed by the same attorneys who represented the borrowers in Leo v. Nationstar Mortgage, that case being Patel v. Specialized Loan Servicing[ii]. Similarly, the 2nd Circuit struck down a RICO claim alleging that borrowers had been “fraudulently overbilled” for force-placed insurance “because the [filed] rates they were charged did not reflect secret ‘rebates’ and ‘kickbacks.’”[iii] The 8th Circuit dismissed a RICO claim because the filed-rate doctrine prevented a RICO suit for damages relating to a fraudulent rate.[iv]
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
___________________________________________
[ii] Patel v. Specialized Loan Servicing, 904 F.3d 1314 (11th Cir. 2018)
[iii] Rothstein v. Balboa Ins. Co., 794 F.3d 256 (2nd Cir. 2015)
[iv] H.J. Inc. v. Northwestern Bell Telephone Co., 954 F.2d 485 (8th Cir. 1992)
