ABA Challenges Perplexing Opinion of Some Examiners on Flood Insurance

by Robert Smith

Originally Published  - May 09, 2016

Virginia O’Neill, Senior VP of the Center for Regulatory Compliance with the American Bankers Association (ABA), sent a letter on behalf of the organization to the Federal Reserve Board, FDIC, and OCC on April 22, 2016 to address growing concerns about how some bank examiners are treating the advancement of force-placed flood insurance premium. Reports to the ABA have indicated that some examiners have taken the position that advancing premium increases a loan, which would make it a MIRE event (wherein a loan is made,increased, renewed, or extended).

The ABA has requested the agencies to issue guidance on the matter, and to clearly establish whether advancing premiums constitutes a MIRE event. If so, they have asked the agencies to explain how banks may avoid creating a MIRE event in meeting their obligations for force placing flood insurance.

It would be best for the banking industry and consumers if the agencies take heed of the concerns raised by the ABA. As Ms. O'Neill so excellently describes, the prospect of treating charges for premiums as a MIRE event presents considerable challenges and complications both to the bank and the borrower. It is, perhaps, even worse in the case of the borrower. To comply with this interpretation, a bank must either estimate or wait until charges are made. While this is difficult for the bank, the borrower could end up in a frustrating position, receiving letters from multiple cycles or being saddled with additional charges.

As it is also explained in the letter, it is readily apparent that Congress' expectation in describing a MIRE event was one initiated by a borrower in the normal course of business they conduct with a lender. To extend that category over charges for force-placed flood insurance, required under the law when a borrower does not maintain insurance, is unlikely to provide real protection for either party. Keep an eye out for the agencies to reply, especially if examiners continue to penalize banks based on this opinion. With the implications involved, it may be important for the agencies to take up this question sooner rather than later.