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In a recent post close review a consumer real estate loan on a residential dwelling was discovered to have closed with a zone discrepancy between AE (flood determination) and X (flood policy). Our third-party flood vendor sent a 45 day letter requesting a policy for zone AE, the current policy has been in place since 2014 as X and is not recognized as a Grandfathered property. From the FEMA Arial photo on the Map it appears that more than a 1/3 of our dwelling falls into AE while the remainder is located in CX. The borrower is in the process of attempting to have an elevation certificate issued to determine if they can be grandfathered in to Zone X, but there is a several month delay in her area before one can be completed.
We are getting significant push back from the Borrower and the Agent who are stating the current flood policy in place is for $250,000 and will cover any flood damage incurred during an event.
Should a Lenders Force Placed Policy be issued due to the zone, alone when found post close if a policy is in place for the correct coverage amount? And if it is issued could a regulator consider it consumer harm for allowing too much insurance. Or is there a location in the regulation that allows me to move on, I thought we covered this in our recent flood training but have not been able to lay my fingers on it again.
The Force Placed Policy will be $4,407 annually on $250,000 in coverage
The Current Policy in place for Zone X is $572 annually on $250,000 in coverage
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Interesting question.
If the dwelling is in an AE zone but is covered by a policy issued for a X zone, several problems could result.
1. Federal regulators could cite a violation and possibly impose civil monetary penalties for a lack of appropriate insurance.
2. If the property floods, FEMA could subtract the unpaid premiums (by your estimate more than $3,800 per year) from the loss payment for the flood damage.If you require a policy with AE coverage now, and later it is determined that X was the correct zone, the borrower will receive a full refund of the excess premiums. There would be no consumer harm since the borrower will obtain a full refund for the excess premiums.
Under the current frequently asked questions it is your responsibility to resolve this dilemma. If the proposed FAQs are finalized as proposed, this problem goes away. You simply note the discrepancy in the file. We believe that the proposed FAQ will have to be revised since FEMA is no longer showing the flood zone on the policy.
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