QUESTION
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?
ANSWER
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
