Updated September 8, 2022
Introduction
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 agencies introduced the Rule for Loans in Areas Having Special Flood Hazards, back in 2020. After almost two years of waiting, the Agencies released the final rule in May 2022.
The purpose of this article is to answer common questions regarding force-placed flood insurance procedures 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.
What is the minimum force-placed flood insurance coverage 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 force-placed flood insurance coverage limit?
The Final Rule only addresses 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.
It is important to keep in mind that some states may have laws that set a maximum limit on the amount of force-placed insurance coverage that can be procured.
Miniter Insight: The lender must choose between replacement cost coverage or coverage to the outstanding loan balance. The borrower must pay higher premiums for replacement cost coverage due to the higher limits associated with the value of the property. The outstanding loan balance insurance limits are lower than replacement cost coverage resulting in lower premiums for the borrower.
After Hurricane Katrina, borrowers formed class action lawsuits, which alleged that lenders had 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.
Borrowers are more likely to question the higher premiums associated with replacement cost coverage as compared to complaints from a total flood loss where the flood insurance only covered the lender’s interest to the outstanding loan balance.
When do we have to send the 45-day notice?
In the Finale Rule, the Agencies explain that the 45-day notice should be sent following the date that flood insurance expired 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: Technically, their example indicates a notice could go out later. In general, though, we find sending the notice as soon as reasonably possible is the best practice.
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 insurance is placed.
That means, for a policy that expires June 30th, you may place insurance and begin to charge for premiums as soon as July 1st.
Miniter Insight: We find 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.
The Agencies have indicated that frequent force-placement may be indicative of compliance management system deficiencies. For this reason, internal discussions are necessary to determine if immediate charging is in the best interest of your institution.
Are any additional notices required after sending the 45-day notice?
No, the only required notice is the 45-day notice. However, the Joint Agencies state that they “appreciate the benefits of additional notices” and allow institutions to provide one or more additional notices at their discretion as long as the 45-day notice is provided.
Miniter Insight: We provide a notice 30 days after the 45-day notice as a courtesy to the customers of the institutions we serve, and to remind them 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. Compliant notices are covered in “Miniter’s Guide to Force-Placed Insurance”.
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. Additionally, 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 carefully weighed, and you may want to seek legal advice. We also find that programs incentivizing placement pose a significant risk to institutions under these conditions.
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. We believe this additional notice further helps to protect borrowers (and lenders) from unnecessary force-placement.
Conclusion
We have had discussions with many lenders, and one thing is clear: all regulators hyper-focus on force-placed flood insurance.
Based on discussions from our lenders, all regulators hyper-focus on force-placed flood insurance. It is up to the loan servicer to closely monitor their program to avoid any challenges from the regulators.
As always, there are details in the joint agency ruling that is up for interpretation. We have highlighted some of these here.
For more information on how lender-placed insurance products work together as well as additional coverages for lenders, please read Miniter’s Complete Guide to Mortgage Impairment Insurance.
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