SAN DIEGO, CA. – Harpaxophobia is the fear of (consumers) losing money and it drives the ICFE to learn about these schemes and issue consumer alerts when appropriate. Here is a new, somewhat negative, twist for homeowners who have mortgage insurance.

The new issue involves the rise of mortgage insurance premiums, without any sort of adverse action notice going to the insureds that has caught the attention of the Federal Trade Commission (FTC) last month.

An adverse action notice is required by the Fair and Accurate Credit Transactions Act (FACTA) when a consumer is denied credit or the cost of their existing credit has increased, or other costs, such as an insurance premiums, or security deposits go up, based on information found in their credit files, be it correct or not.

Raising mortgage insurance rates, based on negative information in one’s credit file is a form of universal default. The problem the FTC has with these increases is the insurers are doing it silently without disclosing it or the reason for the increase to the insured homeowners.

The basis of the lawsuit was the negative information found in the insured’s credit file, that triggered the rise in premiums was, in fact, inaccurate. The insured sued the mortgage insurer and, now, the FTC on March 17th filed an amicus brief in the case involving mortgage insurer Radian Guaranty, based in Philadelphia, and one of their insured homeowners. The meaning of an amicus brief, a Latin term, is “friend of the court”. It is the name of a legal brief filed with the court by someone who is not a party to the case.
In this case, the insured’s premiums for the mortgage insurance had been assessed at over $900 a month, way more, almost triple, what they had anticipated. Radian had reviewed the credit files and as a result the homeowners appeared to be a terrible credit risk, so the company priced its premiums to cover the perceived risks, which in the end, were based on faulty information in the credit files.

The FTC contends in their amicus brief filing (see below) that an adverse action notice was required to be given to the insured, because the rise was based on the credit file information.

FTC approval of amicus brief filing: The Commission has approved the filing of an amicus brief in the currently pending case Whitfield et al v. Radian Guaranty, Inc., No. 05-5017 (3d Cir.). The brief addresses a lower court ruling that held that a mortgage company was not required to provide a consumer with a Fair Credit Reporting Act (FCRA) adverse action notice even though, as a result of the information in a consumer report, the company had charged a higher mortgage insurance premium, and that premium was paid by the consumer. The district court based its holding on the fact that the lender, not the consumer, obtained the policy and was the policy’s beneficiary.

In the brief, FTC staff urges the Third Circuit to overturn the lower court’s decision, stating that it erred by ignoring the adverse action notice requirement imposed by Section 615 of the FCRA on users of consumer reports. The brief argues that setting a higher initial rate for a mortgage constitutes “adverse action,” as that term is defined in the FCRA. The brief then points out that Section 615 of the FCRA requires a user to provide a consumer with an adverse action notice whenever that user takes adverse action “with respect to” that consumer. Even though the consumer was not the policy's beneficiary, Radian’s action was “with respect to” the consumer because the consumer was required to pay the higher insurance premium.

The Commission vote approving the filing of the amicus brief was 5-0. A copy of the brief can be found as a link to this press release and on the FTC’s Web site. (FTC File No. P062104; the staff contact is Lawrence DeMille-Wagman, Office of General Counsel, 202-326-2448.)

ICFE suggests homeowners who have mortgage insurance coverage now, check with their mortgage lenders to determine their notification procedures and also if they have included a universal default provision into their loan agreements which also would cover the insurance policy. New homeowners and especially first-time homebuyers, should get their mortgage insurance quotes in advance and strive to have the universal default provisions removed.