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#2149919 - 10/16/17 12:30 PM New Loan with Force Place Flood Insurance
KRT Offline
Member

Registered: 11/09/06
Posts: 53
Loc: Southeast US
A borrower who currently has force placed flood insurance on his home has applied for a bridge loan to sell the current property, which is located in a flood zone, and to purchase a new residence, which is also in a flood zone.

Is the borrower required to purchase their own flood insurance policy before we can make this loan, or are we allowed to make a loan with a force place flood insurance policy?

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Flood Compliance
#2149937 - 10/16/17 01:15 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
Dan Persfull Offline
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Registered: 08/28/02
Posts: 45023
Loc: Bloomington, IN
For the existing property with forced placed insurance you can refinance that loan with the forced placed policy. You cannot however force place flood insurance on the new property in order to make the loan. They will have to get their own insurance or you cannot close the loan and I would make darn sure the premium was paid and the policy was in effect before closing the loan since you had to force place on the current property.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#2175255 - 04/25/18 04:31 PM Re: New Loan with Force Place Flood Insurance [Re: Dan Persfull]
bankincomply Offline
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Registered: 06/26/14
Posts: 11
Loc: Tennessee
Dan, Can you point me to where this guidance is in the regulations? We have posed a similar question to our regulators; however, we have not received an answer.
The guidance we were given many years ago was that we could not do a refinance (paying off existing loan and opening a new account) with a force placed hazard policy or flood insurance policy.
Thanks,

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#2175278 - 04/25/18 06:13 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
rlcarey Offline
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Registered: 07/16/01
Posts: 67324
Loc: Galveston, TX
Where you talking to the safety and soundness examiners or the compliance examiners? Why would compliance examiners care about a hazard policy. Safety and soundness will tell you that the borrower is in default and ask why are you renewing the loan?
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#2175279 - 04/25/18 06:18 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
Jay McGee Offline
Member

Registered: 04/26/16
Posts: 62
Dan,

If you close the loan for the existing property with forced placed insurance policy, what happens when the force-placed policy expires?

Also, if the term of the bridge loan is less than 12 months, I think it is excempt from the flood requirements.

§ 22.4 Exemptions.
The flood insurance requirement prescribed by § 22.3 does not apply with respect to:

(a) Any State-owned property covered under a policy of self-insurance satisfactory to the Administrator of FEMA, who publishes and periodically revises the list of States falling within this exemption;

(b) Property securing any loan with an original principal balance of $5,000 or less and a repayment term of one year or less; or

(c) Any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence. For purposes of this paragraph (c):

(1) “A structure that is a part of a residential property” is a structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes;

(2) A structure is “detached” from the primary residential structure if it is not joined by any structural connection to that structure; and

(3) “Serve as a residence” shall be based upon the good faith determination of the national bank or Federal savings association that the structure is intended for use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities.

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#2175284 - 04/25/18 07:41 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
rlcarey Offline
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Registered: 07/16/01
Posts: 67324
Loc: Galveston, TX
If you close the loan for the existing property with forced placed insurance policy, what happens when the force-placed policy expires?

You force place another policy.

Also, if the term of the bridge loan is less than 12 months, I think it is excempt from the flood requirements.

You are only exempt from the escrow requirements not the flood insurance requirements in total.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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#2175329 - 04/26/18 10:54 AM Re: New Loan with Force Place Flood Insurance [Re: KRT]
Dan Persfull Offline
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Registered: 08/28/02
Posts: 45023
Loc: Bloomington, IN
I received my verbal guidance from the FDIC Chicago Regional Office. Had to be at least 10 to 12 years ago now.

I was told if the flood insurance policy was already in place then there would be no violation because the insurance is not being forced placed in order to make the loan. However they were very specific that you could not force place a policy in order to have insurance in place to MIRE a loan.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#2175431 - 04/26/18 02:50 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
Moman Offline
Gold Star

Registered: 07/13/04
Posts: 477
Loc: WA
Our Peer Group of Auditors and Compliance Officers here in the North West invited FDIC (Seattle) compliance regulators as speakers. Part of that was a Q&A. At that meeting they also responded as Dan states above - this was in 2013 or 2014 - they said there was an "internal memo" at FDIC addressing the question - can't force-place to MIRE a loan, but if FP is in place, the loan can be MIREd.

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#2175438 - 04/26/18 03:16 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
rlcarey Offline
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Registered: 07/16/01
Posts: 67324
Loc: Galveston, TX
That has been my experience over the years (and that is a lot of them), but personally when I was actually still in the bank, I would just tell the customer that since you are currently in default of your current credit agreement and unless you cure that default by getting your own flood insurance, we are just going to call your loan at the current upcoming maturity. You would be surprised how responsive they suddenly become.

I would tell them that lending is a two way street - we give you money - you pay attention to the contract that you are signing. If you don't want to comply with your half the equation, then we have no further responsibility to babysit you.
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#2180501 - 06/01/18 04:44 PM Re: New Loan with Force Place Flood Insurance [Re: rlcarey]
LfBanker Offline
New Poster

Registered: 07/27/15
Posts: 12
Loc: Louisiana
Just to follow up on this. I know (I think) that this all came up out of the Oct. 2015 Interagency Flood Webinar. To anyone's knowledge has this ever been documented anywhere? I can't seem to find anywhere in writing about a MIRE event with a pre-existing force placed policy, though I have no doubt you all are entirely correct. I was just wondering. Thanks very much in advance for any information you may have.

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#2180510 - 06/01/18 05:15 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
Adam Witmer Offline
Diamond Poster

Registered: 09/21/10
Posts: 1033
If you are talking about using an existing forced place policy to renew a loan, I have not seen that in writing - just heard what Dan and Moman referenced. If you are talking about the prohibition on originating a new loan with a force placed policy, FEMA's (now rescinded) Mandatory Purchase Guidelines explained this pretty well. Here is part of an article I recently wrote on this topic:

Prior to the Biggert-Watters Flood Insurance Reform Act of 2012, FEMA had implemented guidance for financial institutions to follow called Mandatory Purchase of Flood Insurance Guidelines (last version September 2007). Though FEMA rescinded this guidance after Biggert-Waters, it is important to note that this guidance had specifically addressed situations where a lender wanted to originate a loan by using force-placed flood insurance:

“The force placement of coverage is designed for use at any time during the term of a loan in uninsured and underinsured situations; it is not intended for use at loan origination. If a borrower refuses to obtain flood insurance coverage as a condition of obtaining a loan, the loan is deficient and is not to be made.”

As FEMA’s flood insurance guidance was rescinded, interagency guidance has been issued over the last several years, much of which has reiterated the prior guidance by FEMA. Unfortunately, however, there is not currently any interagency guidance that clearly addresses whether a financial institution is prohibited from originating a loan with force placed flood insurance.
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Adam Witmer, CRCM

All statements are my opinion, not those of my employer, and should not be taken as legal advice.
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#2180553 - 06/04/18 09:23 AM Re: New Loan with Force Place Flood Insurance [Re: Adam Witmer]
LfBanker Offline
New Poster

Registered: 07/27/15
Posts: 12
Loc: Louisiana
Sorry. I should have been more clear, I am talking about renewing with existing force placed policy. I haven't been able to find anything either, just a couple of references to the interagency webinar. I was just hoping there was something out there somewhere. Thanks.

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#2180609 - 06/04/18 01:28 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
RR Joker Offline
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Registered: 11/15/02
Posts: 20016
Loc: The Swamp
I'm not aware of anything more than examiner's won't cite you for it, but nothing formal. I've seen this from FRB and FDIC.
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#2180649 - 06/04/18 02:38 PM Re: New Loan with Force Place Flood Insurance [Re: RR Joker]
LfBanker Offline
New Poster

Registered: 07/27/15
Posts: 12
Loc: Louisiana
Thanks, the agencies seem to have acknowledged this in the interagency webinar in October of 2015, but then any formal record of that seems to have vanished into the mists as well, although there are even some contemporary blog posts discussing it.

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#2180657 - 06/04/18 03:07 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
rlcarey Offline
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Registered: 07/16/01
Posts: 67324
Loc: Galveston, TX
The real issue is that you have a borrower that is in default for failure to properly insure your collateral per your existing loan agreement. Why would you choose to make another loan or renew a loan to a borrower that is currently in default and by doing so, absorb the additional risks, costs and compliance responsibilities. I was brought up as a banker and was taught that each party to a contract has specific responsibilities to the other party. The borrower has failed to honor their last contract, why do you believe that they will not do so in the future and possibly have it not related to just the insurance? Tell them to get insurance or you are done and they can pay you off. You would be surprised how well that actually works.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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#2180666 - 06/04/18 03:18 PM Re: New Loan with Force Place Flood Insurance [Re: rlcarey]
LfBanker Offline
New Poster

Registered: 07/27/15
Posts: 12
Loc: Louisiana
I agree with you on the general point. We are telling them to get insurance and I think there is some mistake or miscommunication as the borrower is telling the lender that the insurance quoted is significantly more expensive than the force placed policy, such that they'd rather just keep the force placed policy, which seems unbelievable to me. Mainly just trying to nail this down in case I ever need to use it. Thanks for your insights.

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#2180669 - 06/04/18 03:25 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
Adam Witmer Offline
Diamond Poster

Registered: 09/21/10
Posts: 1033
Originally Posted By LfBanker
the borrower is telling the lender that the insurance quoted is significantly more expensive than the force placed policy, such that they'd rather just keep the force placed policy

I've actually heard this many times in seminars over the last several years as the cost of force placed insurance hasn't always caught up to the cost of the increases some individual policies have had. I've even heard where banks agree with the customer after researching costs and have the customer get a new policy for the renewal with plans to cancel it and force place once the new loan is complete.

Just to be clear, I'm not saying I would recommend this approach, but I have heard that force placed policies can be much cheaper for the customer.
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Adam Witmer, CRCM

All statements are my opinion, not those of my employer, and should not be taken as legal advice.
www.compliancecohort.com

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#2180671 - 06/04/18 03:29 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
RR Joker Offline
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Registered: 11/15/02
Posts: 20016
Loc: The Swamp
Same here...It's often quite cheaper.
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My opinion only. Not legal advice.

Say you'll haunt me - Stone Sour

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#2180678 - 06/04/18 03:54 PM Re: New Loan with Force Place Flood Insurance [Re: RR Joker]
LfBanker Offline
New Poster

Registered: 07/27/15
Posts: 12
Loc: Louisiana
I just got the nfip quote. It confirms what you both said. Much more expensive!

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#2180680 - 06/04/18 03:57 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
Adam Witmer Offline
Diamond Poster

Registered: 09/21/10
Posts: 1033
I'm interested... how much more?
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Adam Witmer, CRCM

All statements are my opinion, not those of my employer, and should not be taken as legal advice.
www.compliancecohort.com

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#2180688 - 06/04/18 04:43 PM Re: New Loan with Force Place Flood Insurance [Re: Adam Witmer]
LfBanker Offline
New Poster

Registered: 07/27/15
Posts: 12
Loc: Louisiana
Force placed policy was about 1/3 the cost of the NFIP policy. Approximately $5k vs. $16k for $500k non-residential policy. Ouch!

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#2180693 - 06/04/18 05:15 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
rlcarey Offline
10K Club

Registered: 07/16/01
Posts: 67324
Loc: Galveston, TX
If these are private policies, then why don't they go direct to the insurance carrier you are using rather than the NFIP. They are not getting a premium break just because it is the bank force placing the policy or something is terribly amiss. Cheaper for the customer or not, you are assuming a lot of burden and potential liability.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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#2181315 - 06/11/18 04:12 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
John Burnett Offline

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Registered: 10/27/00
Posts: 37043
Loc: Cape Cod
The only other factor in the difference in costs might be who's covered. If the FP coverage only insures the bank, it could be a lot cheaper than coverage for the property owner. The bank's insured interest isn't greater than the loan amount.
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BankersOnline.com
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#2181316 - 06/11/18 04:16 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
Dan Persfull Offline
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Registered: 08/28/02
Posts: 45023
Loc: Bloomington, IN
If the FP coverage only insures the bank, it could be a lot cheaper than coverage for the property owner.

If that is the case then the policies would not be compliant.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

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#2181318 - 06/11/18 04:17 PM Re: New Loan with Force Place Flood Insurance [Re: KRT]
RR Joker Offline
10K Club

Registered: 11/15/02
Posts: 20016
Loc: The Swamp
Correct. Ours are typically MUCH cheaper, but they are purchased on the borrower's behalf. We are not MPPP and we don't obtain any type of 'portfolio' coverage.
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