What must servicers do if a borrower fails to obtain adequate hazard insurance?

• A. Notify the borrower of their inability to continue servicing the loan
• B. Force-place hazard insurance coverage
• C. Increase the borrower's interest rate
• D. Restrict future loan advances

Answer: (B)

When a borrower fails to obtain adequate hazard insurance, it is the responsibility of the servicer to protect the lender's interest in the property. This is typically accomplished by force-placing hazard insurance coverage. Force-placing insurance means that the servicer arranges for insurance coverage to be placed on the property at the borrower's expense. This protects both the lender and the borrower by ensuring that the property remains adequately insured against potential hazards.

The need for force-placed insurance arises because mortgage lenders require borrowers to maintain hazard insurance as a condition of the loan. If a borrower does not comply with this requirement, the lender may incur a risk if the property suffers damage and there is no insurance coverage in place. By force-placing insurance, the servicer mitigates this risk and ensures that some level of coverage is available, typically at a higher cost than what the borrower might have found independently.

This action safeguards the property and maintains the collateral backing the loan, which is critical for both the financial institution and the borrower in case of property damage or loss. In this context, force-placing serves an essential function in loan servicing and risk management within mortgage banking.