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Court Fails to Protect Homeowners Against Excessive Insurance Cost

AARP asked a federal appeals court to prevent mortgage servicers from forcing homeowners with HUD insured mortgages to pay for excessive insurance. The court split equally on the issue, leaving the lower court’s disappointing ruling to stand.


FHA mortgage loans are insured by HUD to make affordable homeownership, a cornerstone of the American Dream, available to low income people. HUD regulations set forth the amount of flood insurance which a borrower must carry to protect the mortgage balance. Limits on what a lender can charge FHA borrowers, including for insurance, help keep homeownership affordable.

One practice that threatens homeownership is when lenders “force-place” insurance.  This involves lenders demanding that borrowers purchase insurance coverage sufficient to rebuild the home based on current construction costs. This practice would require, for example, a person with a $10,000 mortgage balance to carry insurance worth $300,000 or more.  If the borrower does not purchase the insurance, the lender buys it at a greatly inflated price.  The lender receives a huge kickback from the insurance company and passes the inflated cost of the force-placed insurance on to the borrower. If the homeowner can’t pay, the lender can foreclose on the mortgage and take the home.

Bank of America Corp. (“BAC”) Home Loans demanded that Stanley Kolbe purchase replacement value flood insurance. BAC then threatened to force-place the expensive insurance and force Kolbe to pay for it. Kolbe sued on behalf of a class of FHA homeowners to stop the practice. He argued that HUD regulations do not permit lenders to force FHA borrowers to carry flood insurance above the amount required by HUD regulations to protect the outstanding balance of the FHA loan.  

The trial court dismissed his claim, but a three judge panel of the U.S. Court of Appeals for the First Circuit ruled in his favor. BAC asked the full court to consider the dispute. BAC argued that the HUD regulations allow lenders and servicers to require borrowers to carry more flood insurance than HUD regulations require.

AARP Foundation Litigation attorneys filed AARP’s friend-of-the-court brief with the National Consumer Law Center arguing that HUD’s FHA regulations should be interpreted to prohibit lenders from imposing replacement cost value flood insurance on FHA loans. The excessive cost of force-placed insurance, which is among the most expensive available, undermines the affordability of homes and may force some borrowers into foreclosure, contrary to the goal of the FHA program to keep homeownership affordable. After AARP filed its brief, the Consumer Financial Protection Bureau issued regulations that will protect most borrowers from the high costs of excessive force-placed insurance.  But the new regulations do not apply to the HUD regulated flood insurance for FHA loans.

In a split decision, half of the full appeals court judges reviewing the case agreed with AARP’s position, while half did not. This invalidates the favorable decision by the appellate panel, and leaves the disappointing lower court ruling to stand. Dissenters wrote extensive and detailed dissents arguing that Kolbe’s argument was supported in policy and law (for various reasons) concluding that he should have been permitted to bring his case to trial.

What’s at Stake

When lenders and servicers can force homeowners to pay for excessive insurance at exorbitant rates, it can force homeowners into foreclosure, prevent them from making needed home repairs, or paying for other basic necessities. The practice of force-placing insurance, which harms borrowers and the whole community, is rampant because servicers are paid a large monetary kickback from insurers for purchasing it. Unfortunately, HUD agrees the lenders can force-place replacement value flood insurance on FHA loans.

Case Status

Kolbe v. Bank of America Corp. Home Loans was decided en banc by the U.S. Court of Appeals for the First Circuit.