Timeliness of Force Placed Flood Insurance Notice

Issue/Inquiry

The Bank did not notify the borrower that there was a lapse in the flood insurance coverage of the property securing the loan until 26 days after the policy expired. The borrower then obtained flood coverage 38 days after the notification. Although the Bank maintains a list of loans secured by improved real property located in Special Flood Hazard Areas (“SFHA”), it does not track the expiration date of the flood insurance policies covering these properties.

Response Summary

The lapse in flood insurance coverage is a triggering event that requires a lender to notify the borrower of the lapse, and the borrower is required to provide proof of coverage within 45 days of the notice. Providing such notice 26 days after the expiration of the policy is considered an unreasonable delay and in violation of the notification requirement. Federal examiners expect a financial institution to have appropriate policies and procedures in place that will allow it to force-placement flood insurance when necessary.

Response Detail

With respect to loans secured by improved real property located in a SFHA, if a lender determines at any time during the term of the loan that the property is not covered by flood insurance, or is covered by flood insurance in an amount less than required, then the lender is required to perform the following as stipulated by the Flood Rules:

• Notify the borrower that the borrower should purchase flood insurance in the appropriate amount, at the borrower’s expense, for the remaining term of the loan.
• If the borrower does not obtain flood insurance within 45 days after the lender has notified the borrower, the lender must purchase insurance on the borrower’s behalf. 12 CFR 339.7(a).

The Flood Rules and official guidance do not specify a timeframe by which the notice must be provided. Nonetheless, a determination of the inadequacy of flood insurance coverage is considered a triggering event. Therefore, the notice should be sent out as soon as such a determination is made.

In this case, the Bank should have determined that the improved real property securing the loan was not covered by flood insurance when the flood insurance policy on file expired. After making this determination, the Bank should have promptly sent out a notice to the borrower. By sending the notice out 26 days after the policy has expired, the Bank is in violation of the requirement to notify the borrower that the flood insurance coverage had lapsed.

While the borrower’s response to the notice by providing proof of flood insurance within 38 days of notification was considered timely, the unreasonable delay by the Bank in sending out the notice increased the risk of the property not being protected by flood insurance coverage. The purpose of the Flood Rules is to ensure that all loans secured by real property located in SFHAs and within communities that participate in the National Flood Insurance Program (“NFIP”) are insured against flood damage for the entire term of such loans.

The examination procedures of a federal regulator such as the Federal Deposit Insurance Corporation (“FDIC”) look to see whether a financial institution has appropriate policies and procedures in place to exercise its force-placement authority when necessary. FDIC Compliance Examination Manual, V. 14.

This means that the Bank must have procedures in place that will allow it to determine when there has been a lapse in flood insurance coverage. A tracking log of flood insurance policy expiration dates would be an appropriate means of making such a determination.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Monday, June 1st, 2020 at 9:33 am.