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Would it be in compliance to charge a consumer or business customer for the cost to review a private flood insurance policy? We have a third party that can conduct reviews however there would of course be a few for a policy review.
If yes, then if the private policy was not acceptable and a different private policy was obtained, would we charge that fee a second time?
As an alternative, we are considering charging all customers a flat “flood insurance processing fee” across the board on all new loans. Does it comply to charge a flat fee for all loans secured by properties located in a SFHA?
Also, our force placed flood insurance policies are private. Are those force placed policies required to be reviewed and determined to either be comparable to an NFIP policy or be acceptable under the discretionary rule?
MGT is also considering what if we chose to not originate any loans located in a SFHA, would this policy be allowed, to not originate a loan secured by property located in a SFHA?
The final rule is silent on charging a fee. Since it is not specifically prohibited we believe you can charge a fee for the determination and any subsequent determination that would be necessary. You will need to consider whether this would be included in the finance charge; we believe the safe approach would be to include the charge in the finance charge.
As for the flat flood processing fee, how would that fee be labeled and what would it be for?
In regards to instituting a policy of not making loans that will be secured by property in a special flood hazard area, this isn’t prohibited, but you would need to consider possible fair lending implications (e.g. disparate treatment or impact, proxy for redlining, etc.).
I’d recommend discussing both the fee and the “no flood loans” policy with your regulator prior to implementation to get a better understanding of their interpretation and how they will view these practices before they come into your bank your next exam.
The flat fee would be called something like “flood processing fee” or “flood insurance processing fee” or something similar to that. The fee would cover the bank’s cost of a review of the flood insurance policy if a private policy lacking the compliance aid statement exactly, and general administrative costs for monitoring loans located in a SFHA for current insurance, etc… We have a 3rd party that tracks our insurance for us, and sends out the force place insurance letters for us. However there is still monitoring the bank has to do of the 3rd party’s reports, such as provide the amount of insurance required each year, charge the customer for force placed insurance in some instances. The fee would only be on loans located in a SFHA.
What you’ve described seems to be acceptable. You want to ensure you are disclosing it as a separate fee paid to the bank and include it in the finance charge.
The costs of a private insurance reviews are likely to be substantial. Out of curiosity, do you plan to charge a substantial fee (that could cover the cost of the review) to all borrowers with property located in a SFHA or do you plan to charge a modest fee to all in order to cover the significant cost on a few loans?
When I think about the fee from a banking standpoint it sounds modest, but from a consumer standpoint, I would consider it high. We have 2 different quotes from 3rd parties, one high, one low, with the primary difference being the low cost estimate only covers a mandatory acceptance review and no discretionary review should the policy not comply, whereas the more expensive quote covers the discretionary acceptance guidelines when the mandatory guidelines are not met. The fee though, would cover an initial review, with a little left over, as policies renew each year and can change. So is it reasonable, I believe it would be.
That brings me to the question, if we, or a 3rd party we contract with, conduct a review using the mandatory acceptance guidelines and the policy does not comply, the regulation says a bank may then accept the policy under the discretionary guidelines. Is a bank required to complete a discretionary guideline review to try to be able to accept the policy?
If a private policy does not meet the mandatory acceptance criteria then you are not required to accept the private policy. You are permitted (i.e. you may), accept the private policy IF it meets the discretionary criteria. You would need to determine if the policy meet the discretionary criteria, through a review of the policy compared to the criteria, before you could accept it.
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