We closed a loan on 12/29/10 that showed evidence of flood coverage, but a post closign review (more than amonth later) revealed that the amount is short.

We can force place, but only after we have notified the borrower and given them 45 days (from the date of our notice), correct?

Correct. And correct the process to eliminate future errors that can lead to CMPs.

Force placing insurance in an under-insured situation may not be possible. If you are force-placing NFIP policies and they already have one, it will not be valid. You can only have one NFIP policy at a time. See the MPFIG - you might have to call the loan due to default:

In an underinsured situation, when the borrower and/or agent of record refuse to cooperate with the new lender, the loan should not be made. If the loan has already been extended, the lender should exercise recourse as provided under the terms of the loan document.

I am a little confused...they just have a regular flood policy through an insurance company (not the NFIP) and we would force place with our hazard/flood FP insurance vendor.

"they just have a regular flood policy through an insurance company (not the NFIP)"

Most major insurance companies, i.e. Statefarm, Allstate, etc., all issue NFIP policies as they do not underwrite private flood insurance.

I called the insurance company and when I asked if it was an NFIP policy she said she wasn't sure. LOL

I always force placed privately because we had many many loans in flood zones due to our location and couldn't properly manage the process otherwise. Of course, we didn't let the loan close without adequate insurance - that is the key.

Even if you can't easily fix the insurance, you can fix the process. That is mandatory.

If at some point during the loan it is discovered the insurance amount is inadequate (for whatever reason - most likely error at origination) and we notify the borrower to increase coverage 45 day notice) and they do not, is it acceptable* for the lender to add the property to a blanket policy (with both the borrower and lender as named insureds)? Also, we are eating the cost of the blanket coverage (not charged to borrower). If not acceptable is then our only recourse to recall the loan since based on dicussion above two policies cannot exist on the same property?

*when I say acceptable I mean for compliance with the FDPA requirements and regulatory expectations

Thank you in advance for any insight.

Thanks.

I think what was said above was that you cannot have two NFIP policies on the property at one time. I do not believe that anyone was saying that you cannot have a private policy as forced placement of insurance. If you are not charging the customer, I believe that it can also be placed immediately, you just can't charge the customer for any coverage before the 45 day notice period runs from lapse.

Thanks LFTbanker for clarifying regarding the two policies.

In your opinion (or anyone else's), is just adding the property to the blanket policy (and not obtaining an individual force placed private policy) insuffcient from a compliance standpoint? Blanket policy does name borrower as the insured, and borrower is not charged any premium/fee.

I know of nothing that says your can't structure your forced placement as a blanket policy while specifically linking it to the specific loan and collateral for tracking and recordkeeping purposes, so long as the coverage is sufficient and you follow all the requirements the flood regulation for notice, etc. I have seen it done this way before, but was not aware that anyone was still writing blanket flood coverage for other than specific situations. I would, however, defer to others of broader scope of experience with regard to issues or complications that this could create. I am not personally aware of any.

As per this article from the Philadelphia Fed, it seems a blanket policy in the scenario noted above (insufficient covergage) would only be suitable when the lender is unable for force place for some reason. Actually in my opinion, this article contradicts itself (see two paragraphs below). What do you think?

http://www.philadelphiafed.org/bank-reso...arter/q2_03.cfm

Blanket Insurance Policies
Compliance examinations occasionally reveal instances of banks' relying on blanket insurance policies to satisfy the requirements of the flood insurance provisions of Regulation H. Typically, the lender obtains a blanket policy to protect its collateral in one or more locations. While these policies may protect the lender, they typically do not protect a borrower's interests and, therefore, in most instances, are not considered a suitable substitute for individual National Flood Insurance Program (NFIP) policies. However, in the limited circumstances discussed below, a blanket policy can be appropriate provided that its coverage is at least as broad as the coverage under the NFIP standard flood insurance policy, including deductibles, exclusions, and conditions.5

A blanket policy can be used when NFIP and private insurance are unavailable or when a policy has expired and the borrower has failed to renew coverage.6 For example, when a designated loan has a policy with insufficient coverage but the borrower refuses to increase coverage, a blanket policy may be appropriate when the lender is unable to force-place private insurance for some reason. When a policy has expired and the borrower has failed to renew coverage, a blanket policy can be adequate protection for the bank during the 15-day gap in coverage between the end of the 30-day grace period after the policy has expired and the end of the 45-day force-placement notice period. However, the lender must force-place insurance in a timely manner and may not rely on the blanket policy as a permanent solution.

With the exception of these limited circumstances, a blanket insurance policy obtained by the lender for its protection is not an acceptable substitute for flood insurance obtained by the borrower for his or her protection and does not comply with the requirements of section 208.25(c)(1) of the Board's Regulation H or §4012a(b) of the Reform Act.

I believe they are saying (The Fed can sometimes talk in circles) That a blanket policy would generally not be a sufficient replacement for requiring borrowers to obtain flood insurance for the reasons they give. They are also saying that it is appropriate in some instances, such as when you can't force place. They seem to wobble as to whether it is sufficient in lieu of an individual private force placed policy. I can see the point because you would have to ensure that the policy was sufficient to cover the greatest amount of coverage that could theoretically ever have to be force placed (theoretically 250k times the total number of residential biuldings taken as collateral in SFHA's plus 500k and contents,if taken, each for commercial). You would still have to comply with all other regulatory requirements. It may be that to have sufficient blanket coverage is impractical in terms of cost when compared to individual force placed policies. Before you mentioned yours, the only blanket policies I was aware of were written in connection with transition periods during vendor conversions to flood and hazard monitoring vendors, but I am not in the inurance business. I hope this helps.

A couple of observations:

1. Blanket insurance is OK for gap insurance protecting the bank in the 15 day or so window between 30 days after policy expiration and the expiration of the bank's 45 day letter.

2. Blanket insurance would only be adequate for force placement (as they indicate) if it meets all the FEMA requirements outlined in the MPFIG for private insurance policies. I have never seen any that does.

3. Blanket insurance is usually never designed to take the place of permanent insurance by the borrower, so have your lawyer read over your blanket insurance policy. If it will, the premiums must be horrendous. Most blanket insurance is only designed as gap insurance for the bank.

4. If the blanket insurance meets all of the above criteria and the premiums are so low that the bank is able to just absorb the cost, then please pass on the name of your insurance agent as I have multiple dozens of clients that I would like to introduce them to.

After posting this, I wondered if the use of "blanket" policy is throwing us all off? Do you actually mean a master policy under which individual policies are written?

Even then, I think are going to have a problem. Property insurance is not cummulative. If you have two policies for $100,000 and there is $120,000 in damage, you are only going to collect $100,000. You would have to write the second policy for $120,000 with a $100,000 deductible.

I agree with both of your posts. The only time I recall when cheap blanket coverage was available was pre-2005, when I believe that no one realized how expensive total flood claims could be. Even then I am not so sure anyone analyzed whether total coverage was sufficient, but that age is gone, so it doesn't much matter now.

Thank you rlcarey and LFTbanker - If I learned one thing, that is, I really have to scrutinize this!