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Homeowners insurance and force-placed insurance

Let’s deal with the legal practices first. When you take out a mortgage, the lender always insists you insure the structure so that, should there be a fire or some other event that damages the property, there’s enough money to rebuild and so protect the security for the lender. How this works depends on the level of trust between borrower and lender. In a world where everyone is trustworthy, the borrower takes out insurance and provides evidence to the lender. Where there’s a lack of trust, the lender insures and sends the borrower the bill, i.e. adds the amount of the premium to the monthly installments. That way, if the borrower should stop paying for any reason, the lender can step in to keep paying the insurance. A compromise is found where the lender reserves the right to insure should the borrower default or leave the property empty for some time. The problem in this situation is that this insurance is no longer for the benefit of the borrower. It’s solely for the benefit of the lender. Worse, this is always more expensive, often three to five times more expensive, than the conventional policy. All these premiums are added to the outstanding loan and add to the pressure on the now delinquent borrower.

This practice is shady because many lenders seize on even the most trivial of defaults to justify a force-placed insurance policy. A borrower who has been paying all due amounts can therefore suddenly find the loan amount has increased without explanation, e.g. the borrower has already paid enough into escrow to cover the immediate insurance payments and so pays slightly less on the overall monthly repayments. There’s now evidence to show the Bank of America has been acting in a way suggesting fraud.

One example shows BoA backdating insurance for up to nine months and charging the borrower for insurance they did not actually have. Better still, this is not insurance on which there could be a claim. Yet, despite the fact insurance of this type would be unenforceable, the insurers accept the premiums and pay a commission to the BoA. This gives companies like the BoA a direct financial incentive to declare their borrowers delinquent. What makes this activity a possible fraud is that, in many cases, the BoA or other lender often owns or has a major stockholding in the insurers. If the loan is subsequently dealt with through one of the insolvency or federal programs, the loan including the insurance premiums is given preference, i.e. paid before any personal debts.

The National Mortgage Complaint Center is calling for all borrowers who feel they have been victims of the force-placed insurance scam to contact it with details. The idea is to build up evidence to see how widespread the abuse of this form of homeowners insurance has become. All this evidence may then lead to a major class action law suit against BoA and any other lenders found to have been abusing the practice. For the record, a whistleblower has posted e-mails online confirming BoA involvement in probably unlawful activity. So contact the NMCC if you have evidence that your lender took out a second unnecessary policy on top of your own homeowners insurance policy. You may well recover damages should litigation begin.

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