We are researching an external firm to provide force-placed insurance and insurance tracking services. The company says it will have to charge us a separate fee for the tracking services and cannot recover tracking costs through the premiums on the force-placed policies it underwrites for us. The company referred to a “recent multi-state settlement” that stated RESPA Section 8 prohibits insurance trackers from providing tracking services “free or below cost” and “seeking to cover tracking costs through force-placed insurance premiums.” Do you know what settlement they are talking about? If not, can you provide any other guidance or clarification?

Mar 20, 2017

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We are not sure which multi-state settlement that your proposed tracking firm is describing. However, we know that certain arrangements in which banks receive free or discounted tracking services in exchange for using a particular insurance provider have been argued to violate RESPA.

RESPA’s implementing rule, Regulation X, requires that all charges to borrowers related to force-placed insurance be “bona fide and reasonable.” A bona fide and reasonable charge is “a charge for a service actually performed that bears a reasonable relationship to the servicer's cost of providing the service, and is not otherwise prohibited by applicable law.”

The CFPB added the “bona fide and reasonable” requirement partly in response to arguments from consumer groups “that the cost of force-placed insurance is inflated by … no-cost or below-cost insurance tracking and monitoring services to servicers because the actual cost is passed on to borrowers in the force-placed insurance premium charge.”

One recent example of this arose in a class action lawsuit in the United States Court of Appeals for the Second Circuit. In that case, borrowers claimed they were overbilled for force-placed insurance in violation of RESPA because their rates did not reflect “secret rebates” and “kickbacks” that their lender received from its insurance tracker. There, the lender agreed to buy force-placed insurance exclusively from a specific provider in return for free loan tracking services. The borrowers argued that the free tracking services amounted to a discount on the force-placed insurance premiums, which the lender did not pass on to its borrowers. Ultimately, the court dismissed the case on other grounds.

These types of quid pro quo arrangements have been raised in a number of other federal courts, but we are not aware of any federal courts in Illinois that have squarely addressed this issue. However, in light of the CFPB’s sensitivity to this issue, we recommend reviewing your fee arrangements with insurance providers and trackers to ensure that tracking costs are not passed on to borrowers through force-placed insurance premiums.

For resources related to our guidance, please see:

RESPA, 12 USC 2607(a) (“No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”)

RESPA Final Rule, 78 FR 10695, 10762 (February 14, 2013) (“Consumer groups argue that the cost of force-placed insurance is inflated by . . . no-cost or below-cost insurance tracking and monitoring services to servicers because the actual cost is passed on to borrowers in the force-placed insurance premium charge a force-placed insurance provider assesses on a borrower through the servicer . . . “)

RESPA Final Rule, 78 FR 10695, 10776 (February 14, 2013) (“After consideration of the comments submitted, the Bureau believes . . . § 1024.37(h) provides clear guidance for servicers by unambiguously prohibiting a servicer from charging a borrower for a service it did not perform, or charging a borrower a fee that does not bear a reasonable relationship to the servicer's cost of providing the service, or that would be otherwise prohibited by applicable law.”)

Regulation X, 12 CFR 1024.37(h)(1) (“Except for charges subject to State regulation as the business of insurance and charges authorized by the Flood Disaster Protection Act of 1973, all charges related to force-placed insurance assessed to a borrower by or through the servicer must be bona fide and reasonable.”)

Regulation X, 12 CFR 1024.37(h)(2) (“A bona fide and reasonable charge is a charge for a service actually performed that bears a reasonable relationship to the servicer's cost of providing the service, and is not otherwise prohibited by applicable law.”)

Rothstein v. Balboa Ins. Co., 794 F.3d 256 (2d Cir. 2015) (“Plaintiffs allege that the amounts billed by GMAC were inflated because they did not reflect hidden ‘rebates’ that GMAC received from Balboa through a ‘kickback scheme’ . . . The alleged scheme is that GMAC agreed to buy LPI exclusively from Balboa and, in return, Balboa agreed to provide GMAC with loan tracking services through an affiliate, Newport. The services performed by Newport–including the identification of borrowers who defaulted on the duty to obtain hazard insurance–offset GMAC's expenses by relieving GMAC of the obligation to do those things itself. Because Balboa provided Newport's services as a quid pro quo for GMAC's LPI business, Plaintiffs characterize Newport's services as, in effect, a discount on LPI from the filed rates approved by regulators. Since GMAC still billed Plaintiffs at the filed rates, it retained for itself the entire benefit of that discount.”) (internal citation omitted)