When Should a Lender Order Evidence of Insurance?
When should a lender order Evidence of Insurance? Never. In the state of California home purchases and refinances are managed by an escrow company. The escrow company serves as the conductor and manages all of the legal aspects of the purchase or refinance; title, vesting, loss payable , etc. It is the Escrow Company’s responsibility to order evidence of insurance around the time that documents are being signed. Technically, a lender does not have an insurable interest in the property until after the documents have been signed, the loan has funded and/or the previous loan has been paid off.
So why are lenders ordering evidence of insurance as far out as 6 weeks before a loan is going to close? My opinion is it is a response to the mortgage melt down and tighter lending standards adopted by lenders. What does the presence of insurance have to do with the underwriting of a loan? It doesn’t affect the credit score of the borrower or have any bearing on the borrower’s income. Some bonehead at the top decided that their loans were not going to be approved until after proof of insurance was provided by the applicant listing the new lender’s loss payable clause. It doesn’t matter if the policy is issued with the wrong vesting or effective date. They just want to see their name.
If the loan is being refinanced and there is already a lender on the policy (438BFU/ lenders loss payable endorsement), the existing lender has all of the rights afforded a lender by that endorsement until the loan has been paid off. So how can the new lender legally remove the current lender until it has paid the loan off and taken title? If they were the existing lender, they would want those same rights. Traditionally insurance agents and companies have issued new policies and replaced lenders on existing policies a few days before the close of escrow as a courtesy.
Ordering evidence of insurance a month out is not only illegal, but wasteful. What if an insurance policy is issued and the applicant does not proceed with the loan? Who is going to pay the earned premium? Not the lender. In addition, Lenders never contact the insurance agent when a loan does not go through and the insurance policy needs to be cancelled. What happens if the policy is ordered and the effective changes because the closing date has been moved up or pushed back? Often that policy must be cancelled and reissued. Ordering insurance around the time documents are being signed ensures that insurance policies are not being needlessly written or endorsed.
It is my opinion that a lender does have the right to ask for proof of existing insurance for a refinance or a viable quotation for a new purchase. If the account is going to be impounded the new lender will need to know the premium amount so as to build that into the loan repayment schedule. Also a lender has the right to be sure that their new investment has adequate coverage at the time the loan closes. Lenders should not be threatening their applicants that loan approval will be delayed or not be approved at all if an existing policy is not endorsed or a new policy issued before that loan is ready to close.
This article(s) represents the views and opinions of Garrett Parkinson and not the Insurance Companies that he represents or illustrates in his articles.