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Thursday, October 13, 2016

Force-Placed Flood Insurance

We are a lender that must occasionally force-place flood insurance. Could you please let us know what the timeline is for notification to the borrower? Also, how do we charge for retroactivity? And what is the required information on the insurance declarations page to show coverage?

If a lender or a servicer acting on behalf of the lender determines at any time during the term of a designated loan, that a building or a mobile home and any personal property securing the designated loan is not covered by flood insurance or is covered by flood insurance in an amount less than the amount required, then the lender or servicer acting on its behalf, must notify the borrower that the borrower should obtain flood insurance, at the borrower’s expense, in an amount at least equal to the amount required, for the remaining term of the loan.

With respect to notification, if the borrower fails to obtain flood insurance within 45 days after notification, then the lender or its servicer must purchase insurance on the borrower’s behalf. The lender or its servicer may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance, including premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount.

Under Regulation X, the implementing regulation of the Real Estate Settlement Procedures Act, the Consumer Financial Protection Bureau requires a servicer to send two written notices before a servicer can assess a force placement charge on a borrower: (1) a notice at least 45 days before assessment of a charge, and (2) a notice at least 30 days after the initial notice and at least 15 days before assessment of a force placement charge. [12 CFR 1024.37(c)-(d)] However, the lender or its servicer still would be required to send the mandated 45-day notice following the lapse of the borrower’s policy.

Regarding retroactivity, the plain language of the applicable statute provides that the lender or servicer may charge for premiums and fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount. Further, when the lender determines there is a coverage lapse or insufficient coverage, the Flood Disaster Protection Act (FDPA) requires the institution to send a notice to the borrower.

A lender or its servicer can force-place flood insurance beginning on the day the borrower’s policy lapsed or did not provide sufficient coverage, and also, as of that day, the institution can charge the borrower for the force-placed insurance. [12 CFR 1024.37(c)-(d)]

If a lender, despite its monitoring efforts, discovers a policy with insufficient coverage, the lender may charge back to the date of insufficient coverage provided it has purchased a policy that covers the property for flood loss and that policy was effective as of the date of insufficient coverage. However, if purchasing a new policy is necessary to force-place insurance upon discovery of insufficient coverage, a lender may not charge back to the date of lapse or insufficient coverage because the policy did not provide coverage for the borrower prior to purchase.

Under the FDPA, as amended by the Biggert-Waters Act, a lender or its servicer must accept from the borrower an insurance policy declarations page that includes the existing flood insurance policy number and the identity of, and contact information for, the insurance company or its agent. This is known as “sufficient demonstration,” meaning that the foregoing information and documentation are all that is required under Biggert-Waters for an insurance policy declarations page to be considered sufficient evidence of a borrower’s flood insurance coverage.

This minimum sufficient demonstration can cause concern at times, since the required information does not have to include the policy term effective dates, the current flood coverage amount, limitations and exclusions, the mortgagee’s identity, and, if the coverage is provided by a private flood policy, some documentation that the policy satisfies either the Biggert-Waters definition of private flood insurance or the mandatory purchase requirement.

Indeed, with respect to private flood insurance, the requirement to accept the declarations page as sufficient demonstration may cause lenders to accept a private flood insurance policy based on the declarations page, only to later determine that the policy is unacceptable.

Nevertheless, a lender is responsible for making all necessary inquiries into the adequacy of the borrower’s insurance policy to ensure that the policy complies with the mandatory purchase requirement. If the lender determines the coverage amount or any terms and conditions fail to meet applicable requirements, the lender should notify the borrower and request that the borrower obtain an adequate flood insurance policy.

Jonathan Foxx
Managing Director 
Lenders Compliance Group