[LVINCENT]

Force placing coverage using loan balance.
Do I use the balance as of the date the policy expired or date the borrower is notified?
See scenario below:

Our current provider is calculating the coverage amount at the 2nd notice cycle. When using the loan amount for coverage the balance at the 2nd notice is typically less than the balance when we are back dating the force placed premium. Example:
Policy expired 5/12/18
Loan balance as of 5/12/18 – $53,291.83
Loan balance as of 2nd notice date – $53,034.44
Coverage amount – $53,782.04 ($757.02 premium + $53,034.44 2nd notice balance)

When we go to charge the loan and backdate to 5/12/18 it will show that we are deficient by roughly $260.00.

[jholzknecht]

The amount of insurance needed is the lesser of the balance of the loan, FEMA’s maximum amount of the value of the improvements. Apparently in your example the amount of the loan is the lowest of the three amounts.

It appears that you obtain insurance for the balance of the loan including the increase in the loan amount resulting from force placing insurance, although the math in the Coverage amount calculation does not equal the total. Your practice is conservative.

I am unable to come up with the $260 difference you mention. Do you have any explanation for the amount.

The regulators have not provided binding answers for the questions you have. Providing coverage as of the expiration date is the most conservative way to handle this situation, but as a practical matter if the customer has made an interim payment obtaining insurance in an amount sufficient to cover the reduced principal should be adequate.

[LVINCENT]

The difference that I am coming up with is from the loan balance as of 5/12/18 plus the premium $53,291.83 + $757.02 (we are currently backdating after the 45th day to charge the premium as of the policy effective date). The principal balance after the premium is added would be $54,048.85. Our coverage amount is $53,782.04.

Do you know if most banks are backdating the premium to the policy effective date?

[jholzknecht]

I know that not all banks are handling this consistently – some backdate, some don’t. I am not sure of the majority position.

Hopefully others will join this discussion and share their practice.

[Author]

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