Existing Flood Insurance Expired 03/31/2019, 45-day letter/notice was sent to customer April 2, 2019. Normal procedures are that we initiate the force place insurance on April 2nd, there is a 45-day binder, then on day 46 we pay the forced placed insurance effective the day it lapsed if customer has not got insurance on their own. Senior Management is questioning whether we are covered during that 45 days and why we didn’t pay the force placed insurance on day 1 (April 2, 2019). Just reaching out to see what any other opinions are.

A NFIP policy has a 30 day grace period so you are exposed for 15 days. Also if the policy is not renewed within the 30 day grace period the renewal policy will have a 30 day waiting period before going into effect. So you have an additional 30 days you are not covered.

We force place on day 1.

Rookie question - does anyone simply pay the premium due and tack that on the loan balance? Dan, is that what you mean when you say you force place on day 1? Or do you apply for/obtain an entirely new policy and let the lapsed one disappear?

Depends on the agreement you have with your insurer. Some may allow you to obtain a policy on day1 and then not bill you until day 46 or some will require you to pay the premium on day1. Either way you cannot charge the premium to the borrower until day 46. Also, be careful about adding the premium to the loan balance as most regulators have deemed that action as a flood trigger event (MIRE), which means create an escrow account (if applicable) and the policy amount would need to cover the increased loan amount (if that's the lowest of the 3 values).

This is good advice as this topic is a moving target. Just over two years ago, the agencies said they would be issuing formal guidance regarding this, but we have not yet seen it. At that time, the agencies had implied that if your contract (i.e. promissory note) specifically allowed you to add any premium and fees for force placed insurance to the outstanding principal amount of the loan, then this would NOT be a MIRE event. However, if your note did not specifically allow you to add the premium and fees to the loan balance, this would be a MIRE event triggering flood provisions, including a determination, escrow (if applicable) and the flood notice - as well as a need to have insurance in an amount sufficient to cover the new loan amount after the premium/fees are added to the loan balance.

A little color commentary on this point:
1) As I understand it, the "not a MIRE event" determination is connected to whether or not the loan documents allow for force-placed premium to be charged back to the borrower (not specifically connected to being allowed to add it to the loan balance);
2) Even though not considered a MIRE event, most lenders have been told that the force-placed premium amount to be added to the loan balance must be included in the minimum required calculation. If OLB (ex: $100M) is minimum required flood coverage amount, then premium (ex: $1M) must be included in coverage amount, meaning force-placed coverage amount must be $101M, using the examples given. Yes, a bit cyclical in practice (and a blazing red siren for insurance professionals...), but doable if you work with your force-placed vendor for a functional solution.

As I said, there really isn't any formal guidance on this, but the interagency letter to the ABA I referenced does relate it to being added to the loan balance - or rather, technically considers it an "advance" which means the payment of premium and fees would be considered part of the loan.

From the May 22, 2017 letter:
"If the institution's loan contract with the borrower includes a provision permitting the lender or servicer to advance funds to pay for flood insurance premiums and fees as additional debt to be secured by the building or mobile home, such an advance would be considered part of the loan. As such, the addition of the flood insurance premiums and fees to the loan balance is not considered an "increase" in the loan amount..."

I believe you can charge the premium to the borrower starting on day one of the lapse now?

Correct. Agency rules and commentary implementing BWA force-placed lapse date authorization officially cleared this up. In a nutshell, lenders may place coverage as of borrower's coverage lapse date; no need to worry about grace periods - if the borrower gets payment to the carrier inside of the allotted grace period, subsequent policy docs will reflect that this happened.

If the borrower responds with proof of overlapping coverage, refund of premium and related fees must be processed/applied within 30 days of receipt of that proof of coverage.

Does anyone have any language for your "45-day letter" that actually makes sense since this change? I feel like we contradict the letter by force placing on day one of the lapse.... I think we need to reword but struggle with how to word.

Depends on how your process works for issuing/billing the force-placed coverage.

Most lenders use force-placed master policies which cover the lapse from lapse date, but don't actual generate a certificate of insurance (and thus, a premium bill) until the end** of the 45-day notice cycle. For those lenders, no need to alter language.



If force-placing and billing immediately, then I agree you would not want to tell the customer they have 45-days to respond. Consider altering the language of the letter? Something to the effect of, "Federal law requires lenders to have coverage in place within 45-days of lapse, and to eliminate risk to bank and borrower of uninsured losses, the bank has ordered coverage as of lapse date."

**This is the famous "backdating" process that isn't really backdating, because the policy exists outside of the individual force-placed certificates... it's really more of a "delayed billing" process. Anyhow...

I'm certain your loan contact also tells the borrower they must maintain insurance without interruption. So the force placement letter isn't contracting the loan contact. Instead, it's informing the customer they must buy insurance or you will. Figuratively, layer the notification letter wording on top of the loan contact.

I agree - the letter isn't contradicting the loan contract but it's confusing b/c it gives the customer 45 days to get flood insurance when in reality we force placed it on day one of the lapse.