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#2079003 - 05/17/16 06:16 PM Need help with Flood Ins coverage amount?
HRH Okie Banker Offline
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Joined: Jan 2003
Posts: 3,070
Oklahoma
Loan balance is $48,267
Old Hazard Insurance for $34,000
Current Flood insurance coverage for $34,000
(appraised in file for $22,000)
New Hazard replacement cost insurance now for $84,800

Insurance, from a brand new insurance company, just receives show customer changed insurance companies and increased hazard coverage from $34,000 to $84,800. Officer just did a drive by for us and notes no external changes have been made and this neighborhood consistently has property values under $30,000.

Am I asking a stupid question? Do we now require the customer to increase or force place insurance up to $48,267 (loan balance) now? Thanks
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Flood Compliance
#2079004 - 05/17/16 06:22 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
happyauditor Offline
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Regarding the old hazard insurance for $34,000...was this the replacement cost value as per the old hazard policy or merely the coverage amount the borrower purchased? Coverage amount can be less than the RCV or insurable value if the policy holder decides not to fully insure his property (assuming he is not required to fully insure it for other reasons).
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#2079010 - 05/17/16 06:34 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
HRH Okie Banker Offline
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Oklahoma
No - it was replacement cost too. We just don't have any justification for the increase in coverage.
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#2079023 - 05/17/16 06:47 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
happyauditor Offline
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happyauditor
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Interesting. Perhaps call the hazard insurance carrier to get more information.
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#2079025 - 05/17/16 06:58 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
Norman Paperman Offline
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I always rely on the appraisers determination of value. He is the one who put eyes on the structure and is in the best position to determine the value. From the get-go, pick one method and stick with it. The only time we deviate and use hazard insurance values is if the loan was originated prior to us instituting the policy of requiring cost approach values on all appraisals in a flood zone.

If you aren't requiring a cost approach on those loans, I would begin that policy immediately. It makes things so much easier.
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#2079053 - 05/17/16 08:08 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
HRH Okie Banker Offline
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Oklahoma
Thanks. We forced placed to loan balance + premium. We just couldn't afford to wait around any longer for someone to tell us what is going on. We are assuming that when the borrower increases coverage he, and the agent, knew what they were doing. Perhaps internal updates..
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#2079062 - 05/17/16 08:19 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
David Dickinson Offline
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Are you making, increase,renewing or extending this loan? If not, why increase the insurance mid-loan? The regulation does not require you to monitor the RCV and increase flood coverage mid-loan.

Concerning the increase in hazard insurance: Every year, the hazard insurance on my home increases because I have a RCV rider to keep up with inflation. Is it accurate? Who knows. I know that keeping the amount of insurance stagnant is not right, but I don't really know if the RCV rider amount is correct either.

Last, hazard insurance shouldn't be used as an absolute test for the proper amount of flood insurance. These are 2 different animals that have lots of differences in coverage. I encourage you to read the short article entitled "Flood Insurance Insurable Value" at our website. I think you'll find it helpful in understanding this often confused topic.
http://www.bankerscompliance.com/compliance-resources/free-downloads.htm
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#2079134 - 05/18/16 02:06 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
HRH Okie Banker Offline
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Oklahoma
David - Sorry, that info wasn't in my original post. This all occurred at renewal of the force placement of flood insurance. Research of the credit file shows the borrower had increased the replacement cost coverage of his insurance.
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#2080894 - 05/27/16 04:15 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
fretzer Offline
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Joined: Dec 2008
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Pennsylvania
Good Afternoon -

I'm following on the tails of the above string for a question regarding determining flood insurance when the first lien is with another lender. Our bank has a 2nd lien where the collateral is in a flood zone. The policy has been renewed and shows the coverage decreased. There is still a first mortgagee showing on the dec. page. How can the bank determine the balance of the first loan to ensure there's adequate coverage?

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#2080964 - 05/27/16 06:40 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
Jade'sFire Offline
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You could pull a credit report to determine the 1st lien current balance.
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#2081056 - 05/30/16 06:32 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
rlcarey Online
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Galveston, TX
How does your bank properly classify the loan for LTV purposes if you don't know how much is owed on the first lien??
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#2081400 - 06/01/16 08:43 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
fretzer Offline
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Pennsylvania
The initial LTV was determined at time of application, over a year ago. The flood policy renewed and it was noted that the insurance amount decreased, which triggered the question about the first lien at another institution.

The servicing area was asking if there was another way to determine the first lien balance at the other bank without pulling credit.

I advised them to pull credit in order to verify adequate flood insurance coverage for both liens on the property.

Thank you!
Last edited by fretzer; 06/01/16 08:49 PM.
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#2081433 - 06/01/16 10:57 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
rlcarey Online
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I advised them to pull credit in order to verify adequate flood insurance coverage for both liens on the property.

Where is your permissible purpose under the FCRA??

Ask the customer to prove it out.
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#2081458 - 06/02/16 01:02 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
fretzer Offline
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Pennsylvania
Let me go back...

A letter was sent to the borrower requesting proof of adequate coverage. Since there has been no response from the borrower the servicing area is asking if there's anything else they should or can do. The current coverage is above our bank's loan amount, but has decreased since the last renewal. This triggered the question of how does the bank prove that there is still adequate coverage?

Since there is no permissible purpose to pull credit (thanks RL Carey), is proof of the letter adequate in showing that the bank did their due diligence in verifying coverage?

Thank you!

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#2081517 - 06/02/16 03:58 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
Jade'sFire Offline
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Yaven IV
Why would you not have permissible purpose to pull credit. You have a legitimate business need to review the account to determine proper insurance coverage is obtained. 604(a)(3)(F)
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#2081747 - 06/03/16 05:33 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
rlcarey Online
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In a 1999 letter, the FTC staff opined on this issue in the context of closed-end credit transactions. Because the terms of closed-end credit transactions are generally predetermined and thus may not be changed unilaterally by the creditor, the staff opined that the creditor in that instance did not have a “review” permissible purpose. The Staff Summary adopts the essence of this opinion, but makes clear that the analysis does not turn on whether or not the account is open-end or closed-end. Staff believes that the “review” permissible purpose applies only where the creditor has an existing account relationship with the consumer and uses the report solely to decide whether to modify the terms of the account.
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#2084607 - 06/22/16 03:50 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
happyauditor Offline
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So why does the Interagency Q &A state a junior lienholder can use a credit report to determine first lien balance if the borrower and other lender does not provide you with that information?
Last edited by happyauditor; 06/22/16 03:50 PM.
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#2084638 - 06/22/16 05:06 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
rlcarey Online
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Galveston, TX
It states:

Junior lienholders also have the option of pulling a borrower’s credit report and using the information from that document to establish how much flood insurance is necessary upon increasing, extending or renewing a junior lien, thus protecting the interests of the junior lienholder, the senior lienholders, and the borrower.

You are not increasing, extending or renewing a junior lien in this situation.
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#2084690 - 06/22/16 07:42 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
happyauditor Offline
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So, if you are a junior lienholder who is now force placing (prior policy expired/not renewed, cancelled), how do you know how much to force place for (if the borrower is uncooperative and the superior lienholder is not sharing the information with you), if a junior lienholder is required to ensure adequate coverage?

Thanks.
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#2084696 - 06/22/16 07:53 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
Dan Persfull Offline
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Bloomington, IN
You base it on your current balance and the last known balance of the priority lien. By doing that you will pretty well be assured you are placing sufficient coverage to meet the minimum required coverage, unless you have reason to believe the priority lien balance has increased due to non payment by the borrower.
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#2084697 - 06/22/16 07:56 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
happyauditor Offline
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Thanks rlcarey and Dan...

If we assume last known balance of superior lien, we also assume the borrower has not made any payments on that loan? Don't we then run the risk of over-insuring the borrower, and billing them for more coverage than required?

There is a real need for clear guidance on these issues from the regulators. Instead, they go from bank to bank and impose fines without addressing the lack of clarity. (OK, rant over)

Thanks again.
Last edited by happyauditor; 06/22/16 08:00 PM.
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#2084704 - 06/22/16 08:04 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
happyauditor Offline
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In this thread it seems like the consensus was a credit report was permissible for force placement...

https://www.bankersonline.com/forum/ubbt...ent#Post2043096
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#2084706 - 06/22/16 08:06 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
happyauditor Offline
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and this one...

https://www.bankersonline.com/forum/ubbt...ent#Post2034223

As you can see I have been struggling with this for quite some time smile
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#2084711 - 06/22/16 08:22 PM Re: Need help with Flood Ins coverage amount? HRH Okie Banker
rlcarey Online
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Dan is correct. In the same paragraph as the guidance that suggested using a credit report, it says:

In the limited situation where a junior lienholder or its servicer is unable to obtain the necessary information about the amount of flood insurance in place on the outstanding balance of a senior lien (for example, in the context of a loan renewal), the lender may presume that the amount of insurance coverage relating to the senior lien in place at the time the junior lien was first established (provided that the amount of flood insurance relating to the senior lien was adequate at the time) continues to be sufficient.

You are making a mountain out of a mole hill. Who cares if you slightly over insure - the borrower needs to get off their butt.
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