RSK.IQ Question of the Week 3/31/14

Forced Placement of Flood Insurance when Insurance not Obtained at Closing

Bank made a business loan secured by a commercial building located in a flood zone. Flood insurance was not obtained at closing. How should the bank address this?

When a loan is secured by improved real property located in a special flood hazard area, and the bank determines at any time during the term of the loan that the building is not covered by flood insurance, or is covered by flood insurance in an amount less than the amount required, it must notify the borrower that the borrower must obtain flood insurance in the required amount, at the borrower’s expense, for the remaining term of the loan.

If the borrower fails to obtain flood insurance within 45 days after notification, the bank shall purchase flood insurance on the borrower’s behalf. The bank may charge the borrower the cost of the premiums and fees incurred in purchasing the insurance. 12 CFR 339.7.

Since the bank in this case did not obtain proof of flood insurance coverage at closing and is now aware that coverage is required, it must send a forced placement letter to the borrower and be prepared to obtain flood insurance covering the collateral properties if the borrower does not provide proof of flood insurance coverage within 45 days after notification. FDIC Compliance Manual, V-6.5.

This entry was posted on Friday, March 28th, 2014 at 6:56 pm.

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