Comment Invited on New Flood Insurance Guidance

By: Jann Swanson •

In 2009 seven federal agencies that supervise banks, credit unions, thrifts, and the Farm Credit System (the regulators) revised the Interagency Questions and Answers Regarding Flood Insurance which is designed to provide guidance for lenders regarding administration of the National Flood Insurance Program (NFIP).  At that time five new questions and answers were proposed for the guidance and public comment was invited. 

Significant input was received on these questions and the regulators have, in response, adopted two questions, numbers 9 and 61 with minimal revisions and withdrawn Question 10.  Question 9 related to determination of insurable value and Question 61 to enforcement of a 45 day period for force placing insurance.  Question 10 was deemed unnecessary in light of changes to Question 9.  

Comments received on the two remaining questions were sufficient to cause regulators to rewrite them and these changes than triggered revision of an additional established question.  The regulators are now requesting public comment on these three revised questions and answers.

As written, Question 60 addressed the permissibility of a lender's acceleration of the 45-day notice period for forced placement by sending a notice to the borrower before private coverage expires.  The original answer was that the lender could send that notice but not use the notice to shorten the 45-day period.  Comments were generally to the point that the guidance thwarted the flood insurance program's purpose of ensuring continuous flood insurance coverage through the life of the loan.

The question and answer as revised:

Question 60:  When should a lender send the force placement notice to the borrower?

Answer:  "To ensure that adequate flood insurance coverage is maintained throughout the term of the loan, a lender or its servicer must notify a borrower whenever flood insurance on the collateral has expired or is less than the amount required for the property.  The lender must send this notice upon making a determination that the flood insurance coverage is inadequate or has expired, such as upon receipt of the notice of cancellation or expiration from the insurance provider or as a result of an internal flood policy monitoring system."  This answer also applies when flood insurance coverage is newly required because of a flood map change.

Question 62 covered whether a borrower could ever be charged for the cost of forced placed coverage during the 45 day notice period.  The comments on this question largely challenged the regulators' contention that a lender/servicer had no authority to change for coverage during the notice period.  Several comments addressed the goal of continuous coverage throughout the life of a loan and others raised issues of borrowers double-paying for coverage or, conversely, abusing the "free ride" possibilities of the regulation. 

The question and answer as revised:

Question 62:  When may a lender or its servicer charge a borrower for the cost of insurance that covers collateral during the 45-day notice period?

Answer:  A lender/servicer may charge for insurance coverage for any part of the 45-day notice period in which no adequate borrower-purchased flood insurance coverage is in effect "if the borrower has given the lender or its servicer the express authority to charge the borrower for such coverage as a contractual condition of the loan being made."   The answer further encourages institutions to explain their force-placement policies to borrowers - including charging within the 45 day period - and to escrow flood insurance premiums.

Question 57 which was previously finalized has now been revised to clarify when a lender is required to send a force-placement notice to the borrower.  Under the revision, the lender is required to send such a notice if all of the following are in effect:

  • The lender determines at any time during the life of the loan that the property securing the loan is located n a Special Flood Hazard Area (SFHA);
  • Flood insurance under the Act is available for improved property securing the loan;
  • The lender determines that flood insurance coverage is inadequate or does not exist; and
  • After required notice, the borrower fails to purchase the appropriate amount of coverage within 45 days.

Comments are invited on these changes and on other issues and concerns regarding compliance with the federal flood insurance statutes and regulations. Comments are due 45 days after publication in the Federal Register, which is expected shortly.