Lender-Placed Insurance

Dodd-Frank – The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) is a federal law that, among other things, ensures homeowners are provided with detailed information to help them better understand their mortgage obligation to maintain property insurance. The Dodd-Frank Act ensures that if a homeowner allows their insurance to lapse, the homeowner is provided at least two clear notices reminding them to purchase their own insurance before the lender obtains the insurance and charges the borrower.  The first notice is sent at least 45 days before the lender places the insurance with a follow-up notice at least 15 days in advance. The Dodd-Frank Act also ensures that if a homeowner purchases their own insurance after a lender obtains a lender-placed policy, the lender’s policy is terminated, and all applicable premium refunds are returned to the borrower.

Equity – A borrower’s financial interest in a property. Equity is the difference between the value of the property and the amount still owed to the lender.

Escrow – An item of value, money, or documents deposited with a third party to be delivered upon fulfillment of a condition; most typically in the mortgage industry related to amounts to pay taxes and property insurance.

Escrow payment – The portion of a homeowner’s monthly payment that is held by the mortgage servicer to pay for taxes, property insurance, and other items that may become due.

Fannie Mae and Freddie Mac – Fannie Mae is the Federal National Mortgage Association (FNMA), and Freddie Mac is the Federal Home Loan Mortgage Corporation (FMCC). Both are enterprises created by the federal government to buy and guarantee mortgages. Fannie Mae works with many lenders and banks while Freddie Mac works mainly with savings and loans. Both enterprises allow the lending institutions to free up the money to facilitate their continued lending.

Flood Insurance – Flood insurance is the term used to describe insurance that provides homeowners with coverage for damage to their home resulting from external flood events such as those caused by extreme weather.  Pursuant to federal law, homeowners with homes located in certain designated flood areas, like areas deemed prone to flooding, are required to maintain sufficient flood insurance on their home in addition to hazard insurance. 

Flood Disaster Protection Act – The Flood Disaster Protection Act, also known as the Flood Act, is a federal law that requires that homeowners with homes located in certain high-risk flood areas maintain flood insurance on their property. 

Government Sponsored Enterprise (GSE) – A GSE is a quasi-governmental entity created by Congress to help facilitate borrowing for a variety of individuals. Fannie Mae and Freddie Mac are examples of GSEs.

Hazard Insurance – Hazard insurance includes the types of causes of loss typically covered by a homeowner’s policy such as fire, theft, sudden and accidental water damage inside the home, (such as a washing machine leak), and vandalism. This also includes weather-related events such as hail, lightning, damage, fallen trees, explosions, hurricanes, tropical storms, and winter storms.  Homeowner’s policies don’t typically provide coverage for flooding caused by extreme weather events outside of the home. Homeowners must obtain flood insurance through a separate policy provided either by the National Flood Insurance Program (NFIP), or a private insurance company.

Lapse/Cancel/Non-renewal date - The date a homeowner has failed to maintain valid and/or sufficient insurance coverage as required by a mortgage agreement. Lapses typically occur through the cancellation or non-renewal of an insurance policy, either by the homeowner or the insurance company.

Lender-placed Insurance (LPI) – Lender-placed insurance is a type of insurance obtained by a lender to protect the property if the homeowner fails to maintain the property insurance required by the mortgage agreement. LPI is also known as “creditor-placed” or “force-placed” insurance. See the National Association of Insurance Commissioners page on lender-placed insurance here.

Mortgage Agreement – Mortgage agreement means the various contractual agreements that a borrower signs as part of receiving a mortgage loan and includes, among other agreements, security instruments (often called a security deed or deed of trust depending on the state). This agreement details the homeowner’s obligation to maintain property insurance as part of receiving the mortgage loan.

Mortgage Lender – The mortgage lender is a bank or financial institution that lends money to borrowers to purchase a home. Mortgage lenders can either keep mortgage loans they originate or sell the loan to other groups (investors) in the secondary mortgage market. 

Mortgage Loan – Mortgage loan means a loan, advance, guarantee or other extension of credit from a mortgage lender to a homeowner, secured by real property.

Mortgage Servicer – Mortgage servicer means the company that is responsible for the day-to-day servicing rights of mortgage loans, including collecting mortgage payments and applying them to the homeowner’s account.   

Property Insurance – Property insurance is the type of insurance a homeowner purchases to protect their home. It covers the cost of rebuilding or repairing the home when damage occurs from covered perils such as fire, theft and weather-related events. In addition to providing coverage for the physical home, this insurance also covers personal property, such as furniture, televisions, and other items. It may also pay for additional living expenses if you need to leave your home while it’s being rebuilt or repaired and provides liability coverage to protect you if someone is injured in your home.

Secondary Mortgage Market – The secondary mortgage market is where home loans and servicing rights are bought and sold between lenders and investors and packaged into mortgage-backed securities. The securities are then sold to private investors such as pension funds, insurance companies, and hedge funds.

Underwriting – In insurance, underwriting is the process by an insurance company to evaluate and measure their risk exposure and to determine the amount of insurance premium that needs to be charged to insure the risk.