GARBAGE IN, GARBAGE OUT
Mistakes by a loan servicing department can be costly,
but protection is available with an insurance policy that offers
protection against errors and omissions.
By David L. Spiro
Technology is becoming more and more
sophisticated, allowing servicers to handle so many more
loans today than ever before. The technology, however, is
only as good as the people utilizing it.
Human error in a servicing department can create a
costly situation. It's often referred to as the "garbage in-
garbage out" syndrome.
So, how do you protect yourself when the "garbage in"
causes the property to become impaired? A solution for this
problem would be to turn to your mortgage errors and
omissions/impairment liability insurance policy. An
important consideration is whether a servicing department
will be provided with the protection it requires. These and
other questions will be reviewed here.
The right protection
Professional liability insurance also referred to as
errors and omissions (E&O) is a very complicated form of
insurance that can be so ambiguous, that most insurance
professionals rely on experts for advice.
Mortgage E&O usually refers to the investor required
liability coverage for loan servicers. There are other forms of
professional liability for mortgage lenders that will be
touched on later.
Mortgage E&O insures against a negligent act (error or
omission) that may occur in originating or servicing loans.
Mortgage impairment is designed to eliminate the process
of checking the renewal of hazard and flood insurance
policies.
Even though mortgage E&O and mortgage
impairment are two separate and distinct coverages, they
are primarily sold together under one policy form. One of
the biggest misunderstandings of the policy is that it covers
any situation that may occur. This couldn't be further from
the truth as the investor required E&O policy is very specific
in nature.
There are several common coverages offered under the
policy, some of which are explained here:
1. Failure to maintain hazard or flood insurance (physical loss or damage).
There are two parts to this coverage. The first involves
the situation where the borrower failed to maintain the
required coverage(s), for whatever reason, without the
insured's knowledge. This is a mortgage impairment
situation and the insured can file a claim for the damaged
property with the insurance company.
The second part of this coverage involves the insured's
error or omission relating to the handling of physical
damage insurance (hazard or flood insurance) covering the
borrower's property.
2. Failure to pay real estate taxes.
This covers the insured for an error or omission in
failing to pay real estate taxes on behalf of a borrower. This
can result in a loss due to seizure and sale of property.
3. Failure to determine if a property is located in a
flood zone.
This provides coverage against negligent acts arising
out of the insured's duty to determine whether a property
falls within a flood zone.
4. Failure to comply with GNMA procedures.
This provides coverage due to the insured's negligence
in complying with GNMA procedures, which results in the
loss of GNMA guarantees.
5. Failure to follow VA, FHA, SBA procedures.
This covers loss to the insured's interest should they
fail to follow proper procedures and provide required
information to a mortgage guarantee agency.
There are additional coverage parts that can be added
to meet the specific needs of the lender such as failure to
procure or maintain life or disability insurance on behalf of
the borrower. You can include Title E&O which provides
coverage should a property become impaired due to a
defective title.
Coverage can also be extended to include non-required
perils such as homeowners insurance.In most cases, the
required E&O coverages will be requested by the investors.
However, since each lender may have certain areas in which
they specialize, it is suggested they consult with their
insurance professional to help them meet their specific
needs.
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