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.
...Continued from Previous Page
Taking action
These policies come with a stipulation that once you
become aware of any situation which will cause a property to
become impaired, you must take action within 90 days
(some policies may vary on the amount of time) or coverage
will not apply. When a claim is made, the coverage will be
the lesser of the amount of the direct physical loss, market
value of the property, or outstanding loan balance. Of
course, this is subject to the policy limit.
To illustrate how this works, let's assume a property is
uninsured and burns down. The insured (lender) failed to
pay the renewal premium and has no knowledge that the
coverage cancelled. The replacement value of the property
is $100,000. The outstanding balance of the loan is $60,000.
The policy will pay $60,000 to the insured and satisfy the
investor. They now have a borrower who will bring action
for the remaining $40,000 and whatever else they can drum
up. The mortgage E&O/impairment policy will not respond
to this action.
There is a policy the lender can purchase that will
address third party actions as illustrated above. It is most
commonly referred to as professional liability or bankers
professional liability. This policy is much broader in scope
but generally excludes coverage for loans owned by the
insured or for the situations covered under a mortgage E&O/
impairment Policy. Coverage is typically defined by the
description of services provided.
An example would be: "while acting as a mortgage
broker/banker in originating and servicing of loans." Of
course, every policy, including the above example, has
conditions and exclusions that will apply. Simply speaking,
the policy compliments the mortgage E&O/ impairment
policy by picking up some of the gaps that may exist.
There are other forms of professional coverages which
have come about in recent years. There is one that allows for
the discontinuing of insurance renewal follow ups on
condominium loans while another allows it on second
mortgages and home equity loans. In these situations, there
is one annual premium based on the size of the portfolio.
These special coverages can be a major cost saver to the
lender since they no longer need to track the loans for
insurance.
Even with the best technology, servicers are still
vulnerable to the inevitable, human error. Check that your
policies are in order and make sure you are dealing with an
insurance professional who understands your needs and can
help you select the policies that are right for you.
David L. Spiro, AAI, is
chairman of Spiro Risk Management Inc. in Valley Stream, N.Y. The
company specializes in insurance programs for mortgage bankers and
brokers. Spiro is on the board of directors of the Independent Insurance
Agents Association of New York and serves on its Professional Liability
Committee. He also holds the Accredited Adviser in Insurance designation
from the Insurance Institute of America. He may be reached at (800) 566-
0801 (ext. 205).
This article was previously published in the March 2000 Issue of Servicing Management.
