Expiration of Force-Placed Flood Insurance

Issue/Inquiry

Do banks need to send an annual renewal notice of force-placed insurance to applicable borrowers? Is there a model form to use?

Response Summary

The expiration of the force-placed flood insurance coverage is an event that triggers the force placement requirements, which includes sending a notice to the borrower. There is no model form or any prescribed language for such a notice. If the notice indicates that the borrower should obtain flood insurance at the borrower's expense, in an amount at least equal to the amount required by the regulation for the remaining term of the loan, it will satisfy the regulatory requirement. It would be better, however, if the notice indicated what the Bank will be doing if proof of coverage is not provided, so that the borrower will have a better understanding of what is happening. For example, the Bank is permitted to force-place flood insurance immediately upon the lapse of coverage rather than waiting 45 days after the notice is sent out; if the Bank will be doing this, the notice should refer to it.

Response Detail

The Flood Rules provide that if a bank determines, at any time during the term of a designated loan, that the building or mobile home and any personal property securing the loan is not covered by flood insurance, or is covered by flood insurance in an amount less than the amount required, the Bank shall 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 by the regulation for the remaining term of the loan. If the borrower fails to obtain flood insurance within 45 days after notification, the Bank shall purchase insurance on the borrower's behalf. 12 CFR §339.7(a)

This means that when force-placed flood insurance coverage expires, it is an event triggering the application of the force placement process, since it will result in the building not being covered by flood insurance. The Bank will then have to send out the required notice, just as it did before obtaining the force-placed coverage.

There is no model notification form to use or any prescribed language for such a notice. If the notice indicates that the borrower should obtain flood insurance, at the borrower's expense, in an amount at least equal to the amount required by the regulation for the remaining term of the loan, it will satisfy the regulatory requirement. The better practice, however, is for the Bank to indicate what it will be doing if proof of coverage is not provided, so that the borrower will have an understanding of what is happening.

For example, a Bank is permitted to force place coverage immediately after the existing coverage lapses, or when it determines that the borrower’s policy does not provide sufficient coverage, subject to refunding the amount charged for coverage that overlaps with coverage obtained by the borrower. The term “lapse” means the expiration date of the flood insurance policy or, if a policy is cancelled, the date of cancellation. 12 CFR §339.7(a), (b); Section-by-Section Analysis of Final Rule, Federal Register, vol. 80, no. 139

If the Bank is force placing coverage when the existing coverage expires, rather than waiting for the 45-day period after the notice is given to elapse before flood coverage is obtained, its notice to the borrower should indicate that.

In addition, if the existing force-placed coverage was obtained through a Mortgage Portfolio Protection Program (“MPPP”), MPPP guidelines require the initial notice to go out 45 days before the policy expires, with subsequent notices sent out at 15-day intervals thereafter.

 

This entry was posted on Monday, October 3rd, 2016 at 2:00 pm.