Pool Insurance Issues Which May Arise

By Glicel E. Sumagaysay, Esq.*, April 13, 2012

Related Topics: mortgage insurance, mortgage compliance, mortgage underwriting

Some lenders enter into commitments with government sponsored entities (“GSE’s”) providing that loans purchased there under must be insured by pool insurance.  Pool insurance is typically obtained in order to achieve better pricing or credit enhancements for pools of loans. Such an arrangement usually entails the execution of an accompanying pool insurance agreement.

Many commitments which entail the use of pool insurance require that the lender service the loans. As with most other commitments and agreements, pool insurance agreements typically carry covenants, obligations, representations and warranties, such as that servicing will be conducted by the seller/lender, and that the seller/lender shall undertake all actions necessary and appropriate to perfect any claim. The terms also sometimes provide that the claims are to be brought by the GSE/buyer under the applicable pool insurance policy.

Additionally, should a seller/lender wish to transfer its servicing of the pool of loans, it likely will be required to obtain the GSE/buyer’s approval of such transfer. The transfer of the servicing, upon written consent from the GSE/buyer, will likely entail the assumption of the seller’s obligations under this pool insurance agreement by the transferee-servicer. Accordingly, the original seller/lender’s obligations under the pool insurance agreement, including the maintenance of such insurance and perfecting any claim the GSE may file under the pool insurance policy should be transferred to the new servicer. 

Sellers/lenders should ensure they maintain their records, specifically, as to these servicing transfer agreements containing the GSE’s written approval as they may be critical in combating issues that arise at a later date.  For example, the transferee-servicer may later attempt to pass down a repurchase or make whole demand to the original seller/lender for servicing-related issues that the transferee-servicer inherited under the transfer agreement. The basis for such repurchase or make whole demands may include the transferee-servicer’s failure to provide documents and information which were requested by the insurer in order to process a claim. The ability to retrieve the consented servicing transfer agreement which corresponds with the loan or commitment related to the pool of loans in which the subject loan is sold should provide for quick grounds to rebut any demand brought on that basis. 

Similarly, records which allow quick reference of a loan as having been delivered in a particular pool insured by the subject pool insurance is equally important in responding to any rebuttal letter brought on that basis. Some servicers may confuse its capacity as to the subject loan, throwing it into the same group as its other repurchase demands to correspondents, and neglecting to realize there is a different agreement which governs its relationship with the seller/lender. 

Other considerations related to loans bought in a pool and insured with pool insurance include whether the pool insurance policy provides the required coverage period for all the loans in the pool.  In the event the insurance coverage period does not cover all the loans in the pool, one question to ask is: which party carries the responsibility to obtain the pool insurance policy?  The foregoing inquiry differs from that of: which party carries the responsibility to maintain the pool insurance? The responses to these inquiries are usually one party and the other, respectively. Pool insurance agreements should be evaluated for the responses to these inquiries, to provide clarity as to what arguments can be made in rebuttal letters.

Further, policies should be analyzed for proper coverage of any loans subject to a demand based on an unpaid pool insurance policy claim.

*Glicel E. Sumagaysay, Esq. is a Staff Attorney for American Mortgage Law Group, P.C. The American Mortgage Law Group, PC (AMLG) has its roots in the original Prieston Law Firm, a mortgage law practice founded in 1981. 

Disclaimer: The information presented in this article represents the opinion of the author and not that of AllRegs. This article is not meant to be nor should it be construed as advice of legal counsel. The applicability of the information contained herein will vary based on the nature of each lending institution's business, under what law it was created, and its loan products and procedures. Readers are strongly urged to consult with their legal counsel and/or contact local counsel as appropriate in the various states and jurisdictions to determine the applicability of the materials contained herein to the specific facts and circumstances of each organization's programs and products and to identify other law applicable to its business operations. The information contained herein was not reviewed or approved by counsel in the respective jurisdictions.