Reference:
FIL-42-2009 issued July 21, 2009, Revised Interagency Questions and Answers Regarding Flood Insurance

Question #62: “Does a lender or its servicer have the authority to charge a borrower for the cost of insurance coverage during the 45-day notice period?”

On page 35934 the proposed answer indicates the borrower cannot be charged for the force placed flood insurance coverage during the 45 day notice period regardless of the provider of the coverage. The provider we use issues a binder effective the day following the date of expiration of the previous coverage.
First question; has there been a finalized answer to the question and, if so, what is it or where can we find it.
Second question; the private provider we use sends out the three notification letters but issues a binder effective the day following the expiration of the previous coverage. Does this circumstance change the answer and allow a bank to charge for the force placed coverage from the effective date of the binder, which includes the 45 day notice period? It seems the customer is getting 45 days of “free” coverage on the bank’s ticket.

I don't know that the FAQ has been finalized yet, but regulation requires that the bank give the borrower 45 days to purchase flood insurance. If you charge for the 45 days, then you aren't giving them the time to purchase the insurance as required by law. If the bank chooses to place the insurance anytime during the 45 day period, then that is the bank's choice and is on their dime.

Is the borrower getting a free ride during that time? Yes, but that is because tha bank has decided the risk is too great fro them to wait for the 45 days to get insurance. Regardless of how your provider is setting it up or delivering the notices for you, you cannot charge the borrower for the 45 day notification period. If you do, you are denying the borrower the opportunity to purchase their own insurance at a cheaper rate.

The FAQ, which has not yet been finalized, merely clarifies the existing law. Borrower must be given 45 days to purchase insurance. That means they get 45 days. You cannot charge them for any insurance they bank decides to purchase in that time frame. The FAQ merely clarifies that they get 45 days.

It doesn't matter that there may be some coverage on the bank's dime. The bank could cover itself via another method during that time period and do a true force placement at the end of the 45 days.

This law is there to protect the government and limit disaster funds, not protect the bank or allocate costs.

Plus the gap for the bank is only 15 days as the old policy provides protection for "only the mortgagee" for 30 days after expiration.

from J Mire "The provider we use issues a binder effective the day following the date of expiration of the previous coverage." I thought there was no such thing as a binder with flood?

So until the FAQ is finalized; we are not required to follow ? We do not actually add the premium or charge the borrower for Flood Insurance coverage until after the 45 Days, But our force placed insurance is also effective the day we notify the company and any charges for the 45 day period is passed on to the borrower; is not correct procedure?

The FAQ is only a clarification of what has been required all along. IMHO you have been lucky that your procedure has not been caught by examiners.

What are other Banks doing; are they paying for coverage of the 45 Day waiting period? Or just letting the properties not be insured for that 45 Day period?

All NFIP policies have a 30 day grace leaving the property exposed for only 15 days.

We do not place until day 46 and we do not back date the policy or charge for premiums prior to the date the force placed insurance is placed.

We force on day 1 and eat the first 45 days worth of premium.

You are wasting 30-days of premium.

We have a third party who does not believe that we need to send out the 45 day letter immediately upon expiration of the policy, which by the way expiration is at 12:01 am the day of expiration. That means if we want to be diligent, the 45 day letter should be sent IMO @ 8am the day of expiration. We accept the policy force placement the day of expiration and charge the borrower the year's premium minus 45 days.

I have a question pertaining to this issue: May we charge administration fees of say $30 for the force placement?

"We have a third party who does not believe that we need to send out the 45 day letter immediately upon expiration of the policy,"

I would say you need a new third party service provider. Again, you are wasting 30 days worth of premiums.

I completely agree....but it wasn't my decision.

Well, I would think someone would like to know. Nothing like saving the Bank money. Why wouldn't they listen to you?

They decided the premium amount we eat is less than a possible flood loss we would take during the 45 day period. I told them about the 30 day grace period, but evidently the forceplacement vendor's doomsday speech is more convincing than me. So if they want to spend the cash, I'm ok with that as long as we don't charge the borrower.

Fortunately right now we only have a couple of loans where we have had to eat the premium, and they are small enough that it wasn't a huge amount. But I'm sure my argument will carry more weight if/when we have more loans we have to forceplace on...