[Chris]

Good morning, peers!

We have a loan on the books secured by a farm with several dwellings – only the farm manager’s stone residence is in a special flood hazard area, so only that building requires flood insurance. When the policy renewed last October, it was properly rated in Zone AE.

The loan was refinanced in July. Prior to loan closing, I did a preliminary review and pulled the policy from the current loan to compare to the new appraisal, which assessed a slightly higher value to that particular building. Thus we had to get the policy increased. When we got the updated policy, we failed to note the agent had changed the zone from AE to X.

Long story short, the agent actually processed this zone change back in April and we were never notified. The agent received a faulty life of loan flood update showing the building had been remapped and was no longer in a SFHA, so they changed it to a Preferred Risk Plan, and refunded our borrower a bunch of money due to the lower rated premium for the same dollar amount of coverage.

The coverage amount stayed the same (which had been increased for our loan, due to the higher appraised value on that building) – so from a dollar amount perspective, we are covered. But the building is now rated in Zone X.

I’ve been working for over 3 weeks with the agent and we’ve been in touch with the consumer too – and we are trying to get that resolved. When I last touched this issue last week, we were under the impression the customer was mailing in the payment.

Today, I find out that the customer has changed his mind. He’s selling the farm and has a contract on it to sell in mid-November.

The policy expires on 10-12-18. He doesn’t plan to renew it. I can handle the issue of force-placing on 10-12-18 and can get it rated in Zone AE at that point.

But what do I do about the current zone discrepancy? We weren’t aware of it when it got changed by the agent in April – they didn’t send us anything to notify us, we only found out through the loan’s refinancing in July (and I noticed it after the loan had closed, unfortunately).

So I’m playing clean-up now. Is a zone discrepancy a reason to force-place extra coverage, if the dollar amount of the coverage is at the appropriate level?

Thanks for your help.

[rcooper]

FEMA’s Flood Q&A’s (https://www.fema.gov/media-library-data/20130726-1742-25045-4927/interagency_q_a.pdf),
Section XIV and #’s 71,72, state if the
discrepancy is not resolved, the lender
should send a letter to the insurance
agent and/or the insurance company
reminding them of FEMA’s April 16,
2008, instruction that, in cases of
determination discrepancies, the policy
should be written to cover the higher
risk zone. Beyond that, no further action
by the lender is required. If, for its own
purposes, the lender believes force
placement is appropriate, then it should
consult the guidance on that topic found
in Sections II and X.

Keep thorough documentation of your attempts to resolve the issue and ensure you have policy/procedures in place to prevent a pattern or practice of unresolved discrepancies.

[Author]

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