The Loan Agreement and Force-Placing Flood Insurance
Introduction to Force Placed Flood Insurance
Force-Placed Flood Insurance is regulated by the Joint Regulatory Agencies. The Joint Agencies consist of the FDIC, Federal Reserve, OCC, NCUA, and FCA. These joint agencies have created the Final Rule for Loans in Areas Having Special Flood Hazards, which is a 190-page document that details regulation regarding force-placed flood insurance. Due to its length and detail, trying to identify key information can be challenging and time-consuming.
The purpose of this article is to outline force-placed flood insurance procedures and identify key information within and related to the Final Rule. Additionally, this white paper shares Miniter Group’s insight into force-placed flood insurance that we have gained through our experience in insurance tracking. If you would like more information regarding force-placed insurance, please review Miniter’s Complete Guide to Force-Placed Insurance.
What is the minimum force-placed flood insurance requirement?
Under the Flood Disaster Protection Act, the minimum amount of force-placed flood insurance required will be the least of three values:
- The outstanding loan balance.
- The insurable value of the property.
- The maximum limits under the National Flood Insurance Program (NFIP).
Although these are minimum amounts, a lender may require additional flood insurance above these limits. If the loan amount exceeds NFIP flood limits, loan agreements must contain excess flood insurance disclosures. Additionally, the lender is able to force place excess flood insurance, based on these disclosures.
What is the maximum coverage requirements for force-placed flood insurance?
The law and the Final Rule only address the minimum requirements needed to meet force-placed flood insurance regulations. Recently, the First Circuit Court of Appeals ruled that a lender may require a borrower to carry flood insurance up to the full replacement value of the property. First Circuit Court of Appeals: STANLEY KOLBE v BAC HOME LOANS SERVICING.
Miniter Insight: Ultimately, deciding on the amount of insurance to require between these values is a matter of measuring your risks, whether financial, reputational or some other form.
After Hurricane Katrina, borrowers formed class action lawsuits, which alleged that lenders have required inadequate flood insurance limits below the replacement cost of the property. However, lenders have also been sued for requiring unnecessary flood insurance limits above the loan balance. This is truly a “damned if you do, damned if you don’t” scenario.
Replacement cost coverage is based on the value of the property, which may be significantly higher than the outstanding loan balance. Replacement cost premiums may be concerning to the borrower.
The lender must decide between requiring flood insurance replacement cost coverage or lower insurance limits to the outstanding loan balance. Whatever the lender decides, this must be fully described in the loan contract.
When do we have to send the 45-day notice?
The Final Rule states that the 45-day notice should be sent following the date that flood insurance does not exist or becomes insufficient. They provide the example that, if a policy expires on June 30th, the 45-day force-placed flood insurance notice should be sent “as early as” July 1st.
Miniter Insight: Although this means that a notice could go out later than July 1st, we prefer to send the notice as soon as possible.
When may coverage be placed?
Force-Placed Flood insurance may be placed before the 45-day period, but no later than 46 days. For example, if the borrower’s policy expires June 30th, then the 45-day period is July 1st through August 14th, and force-placed insurance must be in place no later than August 15th.
Miniter Insight: Having insurance in place helps eliminate exposure to risks. Miniter Group offers policies that protect your institution through the 45-day period, even if a placement has not yet occurred.
When can we begin to charge the borrower for force-placed insurance premiums?
A lender or its servicer may begin to charge for force-placed insurance premiums as soon as the insurance is placed. For example, a company may place insurance and begin to charge for premiums on a policy that expires on June 30th as soon as July 1st.
Miniter Insight: We find that most lenders choose to wait until the end of the 45-day period to charge for premiums. If you charge immediately and the borrower provides proof of coverage for the period at a later date, then you must refund the borrower for all premiums paid.
Are any additional notices required after sending the 45-day notice?
No, the only required notice is the 45-day notice. However, the Agencies state that they “appreciate the benefits of additional notices” and allow institutions to provide additional notices at their discretion as long as the 45-day notice is provided.
Miniter Insight: Miniter Group provides a notice 30 days after the 45-day notice as a courtesy to the customers of the institutions we serve and as a reminder of the benefits of securing their own insurance before force placement occurs. Though not required under the Final Rule, this is in keeping with guidance derived from requirements under the MPPP and Regulation X.
How far back may we force place flood insurance?
The Agencies hold that lenders have the responsibility and authority to ensure continuous coverage. There is no express limit on how far back a lender may place or charge for premiums on force-placed insurance if insufficient coverage is discovered to exist later. However, force-placed flood insurance may not go back to a date before the lender held the master policy against which the placement is made, and the 45-day notice requirement still applies.
Miniter Insight: Although the Agencies do not define a limit, individual states may have applicable laws that do. It has also been the subject of multiple lawsuits. Your risks in this situation must be very carefully weighed, and you may want to seek legal advice.
We have received proof of coverage from the borrower. What are our obligations?
A lender or its servicer must fulfill two requirements within 30 days of receiving proof of coverage from the borrower. First, the insurer must be notified to terminate the force-placed flood insurance. Second, the lender must refund all premiums for which it charged the borrower for any period where the force-placed flood insurance policy and the borrower’s policy overlap.
Miniter Insight: While these are the only two requirements, it is worth noting again that the Agencies have no objection to additional notices. Miniter Group, for example, also sends a letter on behalf of the lenders it services informing the borrower of the cancellation as a courtesy
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Based on discussions from our lenders, many regulators hyper-focus on force-placed flood insurance. It is up to the loan servicer to closely monitor your program to avoid any challenges from the regulators.
There are details in the joint agency ruling that is up for interpretation that we have highlighted in this whitepaper.
Please consider joining our mailing list which will give you up to date information on force-placed flood insurance as it becomes available.
If you would like more information regarding force-placed insurance, please review Miniter’s Complete Guide to Force-Placed Insurance.