[Vicki Kramer]

Good afternoon. We’re trying to understand and to improve our procedures for the correct force-placement of flood insurance. Here’s our current situation.

We have a vendor that we force-place flood insurance through, as needed. The policies are written for one-year term, but the customer is charged monthly.

A loan matured 1/22/2020 and we renewed it 2/11/2020 for a five-year term (maturity date 2/11/2025). Our renewal process is that we produce a new loan document with a new loan number. The matured loan has force-placed flood insurance with our vendor; the policy coverage period is 7/3/2019-7/3/2020.

Routinely, our Loan Ops Specialist-Insurance Clerk would not be aware of the loan renewal until the loan package reaches her desk a week or so later.

Question 1: Shouldn’t we require our loan officers and loan assistants to notify the Loan Ops Specialist-Insurance Clerk the day they renew a loan with force-placed flood insurance?

Question 2: When our Loan Ops Specialist-Insurance Clerk receives the loan package and sees that there is already a force-placed policy in effect, would she:
a) cancel the current force-placed policy that day or as of the loan renewal date,
b) and, then, force-place a new policy which would include the new loan number, new loan date, and the updated coverage amount (to match renewal loan amount) that same day or as of the loan renewal date?

We don’t want to be without coverage during the process.

Question 3: Since this customer continuously relies on the bank to force-place his flood insurance,
a) wouldn’t we be in compliance to continually charge him monthly even during the cancelling/re-writing policy days,
b) or, does the Bank have to show that during the 45-day period of writing the new policy the customer wasn’t charged?

Question 4: Doesn’t the Loan Ops-Insurance Clerk need to mail
a) the initial notice of force-placement the day she writes the new policy, and
b) then continue the process of sending the second notice within 30 days of the initial notice?

Thanks in advance for your help with this confusing process!

[rcooper]

Question 1: I agree. I would say this should occur prior to the renewal to the insurance clerk could ensure the FP insurance is still in place prior to renewal. Also, you might want to consider if you want to rely on the existing FP policy for MIREs on the same property or if you want to require the borrower to obtain a policy.

Question 2: The best process would be to require the borrower to purchase flood insurance as required by law for flood loans and in accordance with your loan contract. You can’t have a MIRE event and purchase a new FP flood policy in order to meet flood requirements – FP flood insurance is intended to be used during the term of the loan when insurance is insufficient, not at closing. (See the exceprt from FDIC exam manual below. This was also stated in the Mandatory Purchase Guidelines book that is now rescinded. Even though that guide was rescinded, I don’t know of any information that has changed that interpretation.)

With that said, I have heard that examiners are ok with renewing a loan and relying on FP flood insurance you already have in place on that property (confirm this with your examiners before you rely on this as it isn’t stated in the regulation). If your examiner says you can renew the loan with the existing FP flood insurance, check with your FP vendor to see if they can update the existing FP policy loan info associated with the policy. However, I do wonder about the gap between when the loan matured and when the renewal was done… I’m not sure how the FP policy acts during that gap…. is it still in effect, is the banks still managing it during the gap, etc.? I would want to investigate that a little further. Again, for various reasons, the best approach would be to require the borrower to purchase flood insurance rather than relying on a FP policy.

From the FDIC Exam Manual: “Force placement authority is designed to be used if, over the term of the loan, the institution or its servicer determines that flood insurance coverage on the security property is deficient; that is, whenever the amount of coverage in place is not equal to the lesser of the outstanding principal balance of the loan or the maximum coverage available under the NFIP.”

Question 3 & 4: This shouldn’t be an issue since you aren’t FP a policy at origniation.

If I’ve misunderstood your question please let me know.

Thanks for your patience.

[jholzknecht]

I agree with Robin’s answers.

Based on your statement”Our renewal process is that we produce a new loan document with a new loan number.” what you call a renewal is a refinance.

Q1 – I agree.
Q2 – You can’t make the loan unless the consumer obtains a flood insurance policy. Force placement is not an option.
Q3 – You can’t do this. See the answer to the previous question.
Q4 – The 45-day notice is not required since force placement isn’t permitted in this transaction.

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