Lenders – How Effective is Your Insurance Tracking for Loans?


01.14.14 Posted in Articles by

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In general, Lenders collect insurance information from borrowers to confirm that the borrower is meeting the insurance requirements in the loan to protect the lenders interest in the collateral securing the loan.  This is typically done through the collection of certificates of insurance during the loan closing process and annually thereafter.

The effectiveness of a Lender’s insurance tracking process for loans is determined by five key factors: 1) the insurance tracking process; 2) the insurance knowledge and number of the lender’s servicing staff; 3) servicing platform used by the lender; 4) insurance requirements in the loan documents; and 5) the Lender’s Mortgage Impairment insurance coverage.

We will focus our discussion on some of the strengths and weaknesses of the five factors that we find in Lender insurance tracking.

  1. The insurance tracking process can include the following differing levels of oversight.  The level at which a Lender decides to track insurance is an important business decision because it determines the amount of staff required, their level of insurance experience, type of servicing platform needed, and Mortgage Impairment Insurance purchased.
  • No insurance tracking
  • Following up on Cancellation and Non-renewal notices.
  • Collecting certificates at renewal, placing them in the loan folder and rolling the expiration dates.
  • Inputting the data on the certificate into the servicing platform with a cursory look into compliance.
  • Auditing the certificate for compliance and correcting any deficiencies in a timely manner.

For example:            A lender may choose to purchase a Blanket Mortgage Hazard Insurance policy which protects the lender’s interest in their mortgage portfolios without the requirement of tracking insurance.  Premiums for these types of policies tend to be high and are typically based on the size of the lender’s mortgage portfolio and past loss history.

  1. Staffing required to service the loan portfolio will be determined by the insurance tracking process chosen.  Auditing loans for compliance and correcting deficiencies will require higher qualified staff with insurance experience and it takes a considerably longer period of time to process each loan insurance renewal.  Careful evaluation and consideration should be taken to the realistic number of loans each servicing employee can handle when the option of auditing and correcting is chosen.

For example: If a servicing employee is handling too many loans than he/she is realistically capable of servicing, it is possible that he/she will not be able to bring all of the loans into compliance within a timely manner after deficiencies are found and therefore could inadvertently void coverage under the Mortgage Impairment policy should an uninsured or underinsured loss occur.

  1. Loan Servicing Platforms typically do not handle the insurance aspect of loan servicing well. More and more Lenders, Government Agencies, Fannie Mae and Freddie Mac are requiring a higher level of insurance tracking oversight and they are looking for servicing platforms that have the ability to track multiple coverages for each line of insurance and a system that is flexible and capable of running detailed reports at a moment’s notice.

For example: The weather service has just announced a hurricane is going to hit the Gulf Coast.  A servicer should be able to run a report within minutes which lists all properties in the line of the hurricane detailing the limits of liability for windstorm, flood coverage, deductibles, insurance carriers, expiration date and loan amount.

  1. Insurance requirements in loan documents – Many lenders are using outdated and/or improper insurance language in their loan documents and are not capturing the language being used by the insurance industry today.  This creates problems for all the professionals involved with the loan process from the bank lending/servicing staff, attorneys on both sides, insurance agents and consultants, and the borrowers themselves.

For example: If the loan insurance language for property insurance requires “all risk” coverage and the building securing the loan is near the coast, reference should be made that wind coverage is also required with a specific deductible amount since this coverage is often excluded for coastal properties and typically requires a significant deductible.

  1. Mortgage Impairment Insurance is purchased by most Lenders and Servicers.  Its primary purpose is to cover the lender’s interest in the mortgaged property in the event of an uninsured or underinsured loss.  The policy terms and conditions of Mortgage Impairment policies are not standard so the insurance tracking process should be considered when purchasing this coverage to ensure that the terms and conditions of the Mortgage Impairment policy are in line with the insurance tracking process.

For example: Most Mortgage Impairment Policies require a certain level of tracking so it is essential that the Servicing Department is performing at least the minimum level of tracking required.  Also, once a non-compliant issue has been discovered, the Lender typically has a certain period of time, typically 30, 60 or 90 days, to bring this issue into compliance.  If the issue is not compliant within this time frame, the insurance will typically not respond to an uninsured or underinsured loss.

 

Summary

Today more than ever, Lender’s need to review their insurance tracking process to identify its effectiveness by evaluating its strengths and weaknesses.  By evaluating the five key factors above, deficiencies can be identified and corrective action taken preemptively in order to successfully protect your loan collateral interest in your mortgage portfolio.



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