Lapse in Flood Insurance Coverage? When to Respond with Force Placement

This time of year, we often receive questions about force-placing flood insurance when a credit union discovers a borrower’s policy has lapsed or provides insufficient coverage for the security property. Hurricane season begins on June 1, and given the recent severe weather and flooding in several states, it may be a good time to review the steps a credit union should take to address any potential lapses – both to satisfy an institution’s regulatory obligations and to protect its collateral.

Background

The Flood Disaster Protection Act (FDPA), as amended, prohibits lenders from making, increasing, extending, or renewing loans secured by improved real property or a mobile home located in a “special flood hazard area” (SFHA) where federal flood insurance is available unless the building or mobile home is covered by flood insurance. For such “designated loans,” a credit union must require the borrower to purchase flood insurance in an amount sufficient to cover the outstanding principal balance or the maximum limit of coverage for that property, whichever is less. This requirement is generally satisfied by purchasing a National Flood Insurance Program’s (NFIP’s) Standard Flood Insurance Policy (SFIP) or an appropriate private flood insurance policy that meets certain regulatory criteria. The National Credit Union Administration’s Part 760 implements FDPA for federally insured credit unions.

Beyond origination, if at any time during the term of the loan a credit union, or its servicer, determines that the collateral has less flood insurance coverage than is required by regulation, it must notify the borrower to obtain the required flood insurance. If the borrower fails to obtain the necessary flood insurance within 45 days after notification, the credit union must purchase (“force place”) insurance on the borrower’s behalf.

The credit union or its servicer may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance, beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount. The credit union must terminate any force-placed insurance within 30 days of receipt of confirmation of sufficient existing coverage and must refund to the borrower any premium and related fees charged during overlapping coverage. (Part 760.7)

Frequently Asked Questions (FAQs)

What follows are some useful FAQs that have been addressed in the Interagency Questions and Answers Regarding Flood Insurance (last updated in 2022):

Q: When must a credit union provide the force placement notice to the borrower?

A: A lender or servicer must provide notice to the borrower at the time the lender/servicer makes the determination of no coverage or insufficient coverage. If there is a brief delay in providing the notice, the lender/servicer must have a reasonable explanation for the delay. For example, there may be brief delays due to various lender processes, including but not limited to, batch processing and manual exception processing.

Q: Can a credit union satisfy the force placement notice requirement by sending it to the borrower prior to the expiration of the flood insurance policy?

A: No. Although a credit union may send notice prior to the expiration date of the flood insurance policy as a courtesy, the credit union (or its servicer) is still required to send notice upon determining that the flood insurance policy actually has lapsed or provides insufficient coverage. The credit union may purchase insurance on the borrower’s behalf beginning on the date of the lapse.

Q: When must the credit union have flood insurance in place if the borrower has not obtained adequate insurance within 45 days after notification?

A: The regulation provides that a lender or servicer shall purchase insurance on the borrower’s behalf if the borrower fails to obtain flood insurance within 45 days after notification. If the borrower fails to obtain flood insurance and the credit union does not force place flood insurance by the end of the force placement notification period, the credit union must have a reasonable explanation for the brief delay, e.g., the use of batch processing to purchase force placed flood insurance policies.

Q: When force placement occurs, what is the amount of insurance required to be placed?

A: The minimum amount of flood insurance required ‘‘must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act.” Therefore, if the outstanding principal balance is the basis for the minimum amount of required flood insurance, the credit union must ensure that the force-placed policy amount covers the outstanding principal balance plus any additional force-placed premium and fees capitalized into the outstanding principal balance.

Q: May a credit union commence a force-placed insurance policy on the day the previous policy expires, or must the new policy begin on the day after?

A: A credit union or its servicer may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance beginning on the date on which flood insurance lapsed or did not provide a sufficient coverage amount. A lender, however, may not require the borrower to pay for double coverage.

Q: If a credit union receives a confirmation of a borrower’s existing flood insurance coverage evidencing an overlap with a force-placed flood insurance policy, but does not receive a refund from the insurance provider of the force-placed flood insurance policy in a timely manner, is the credit union still required to refund any premiums for overlapping coverage to the borrower within 30 days?

A: Yes. The regulation specifically requires the refund of force-placed insurance premiums and any related fees charged to the borrower for any overlap period within 30 days of receipt of confirmation of a borrower’s existing flood insurance coverage without exception.

Q: What documentation is sufficient to demonstrate evidence of flood insurance in connection with a credit union’s refund of premiums paid by a borrower for force-placed insurance during any period of overlap with borrower-purchased insurance?

A: For purposes of confirming a borrower’s existing flood insurance coverage, the credit union must accept from the borrower an insurance policy declarations page that includes the existing flood insurance policy number and the identity of, and contact information for, the insurance company or its agent. (Part 760.7(b)(2)).

This blog post only hits the highlights. Additional FAQs are available here: Interagency Questions and Answers Regarding Flood Insurance - Section XVII. Force Placement of Flood Insurance.

Questions? Suggestions for future blog posts? Contact the Compliance Team at [email protected].