[rcooper]

A question we just received:

I have just completed a review of all of our flood loans. I have discovered one that is underinsured and probably has been since the loan was taken out (1 year ago). The customer is not working great with us to get the difference, so we are going to force-place for it. What date should we force-place back to? Our GAP insurance usually covers the 45 letter cycle period, so we force-place to when the policy expired. I just wasn’t sure what we should do in this instance. It doesn’t seem necessary to go back 1 year, and we actually have tried working with the customer before we started the letter cycle, so there is a delay there.

[rcooper]

Answer by rcooper:
The regulation says you may charge the borrower for the cost of insurance from the date of insufficient coverage:

The national bank or Federal savings association, or its servicer, may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance, including premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount.

However, I don’t think the agencies anticipated this applying to loans that had insufficient coverage from inception the year prior. I think this paragraph was written assuming the insufficiency would be ID in a short timeframe through monitoring such as with a lapse. I am not sure if the insurance company would allow you to retroactively purchase coverage that far back – it probably differs among providers. Even if they would permit it, going back that far would only be beneficial to the customer if there had been a flood/flood damage to the property during that time. If there hadn’t been any flood damage and you are requiring them to purchase insurance retroactively for something that will not benefit them (but rather meet the bank’s regulatory requirement), I am concerned regulators might see it as a unfair to the consumer (similar to over-insuring when the insured amount would never actually be paid).

With all that said, I’d probably stick with your normal process and charge from the date you identify insufficient coverage and begin your 45 day process and let the insufficient coverage an closing fall where it may. If the bank wants to try obtain and pay for retroactive coverage back to origination, in order to try avoid a violation, you could give that a shot. But I wouldn’t be too hopeful as regulators will still be able to identify that there wasn’t a process in place to ensure sufficient coverage at closing and there was a lack of a review/monitoring system to ID insufficient coverage promptly.

[Sandy]

I was wondering if a bank receives a flood insurance policy for insufficient coverage amount and will need to force place coverage, do we force place the whole amount of coverage needed or only the difference in the amount that is required minus the amount of coverage on their policy? For example, $150,000 is what is required but the borrowers insurance policy is only $130,000. Would you force place $20,000 or the $150,000?

[rcooper]

You would force place for the amount the policy is insufficient (e.g. in your example that would be $20,000).

[Author]

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