Forced Placed coverage short by premium amount

We have a forced placed flood policy that was put into place to cover the principal balance. When forcing flood insurance must you figure in the premium amount for which you are advancing on the loan for payment?

Hmmm -

Flood insurance policy $100,000

Current principal balance of the loan $102,000

Must have lesser of insurance available, principal balance of the loan, insurable value of the property.

You be the judge

Well carp. Thank you.

If I understand the OP's question, what they are saying is this:
Current principal balance of loan $100,000
Flood insurance premium $2,000
If we force place and add the premium to the loan amount, the principal balance will be $102,000.
So do we need $100,000 or $102,000 of flood insurance?

When you do the "lesser of 3 test", the current loan balance is $100,000, and if that's the lowest of the 3, some say go with $100,000 (I'm in the camp). Some say, if you'll add the premium to the balance, then you need to go with $102,000.

Just finished FDIC Compliance Exam. Examiners wrote up force-placed flood short by amount of force-placed premium added to loan.

They said you need to find out how much the premium would be, then add that to the current loan amount. Then validate that the premium quoted would cover the current loan amount plus the force-placed premium.

Just sayin'.

I agree with going with the principal plus the premium. The bank just loaned more money by financing the insurance premium

David - You are in the wrong camp when it comes to the regulators in my neck of the woods.

At a bank I previously worked at where we added force-placed flood insurance premiums to the loan balance, we were sited by the OCC because our flood coverage amount was short by the amount of the flood insurance premium.

Randy: I understand and don't push my "camp". The other side of the coin is AT THE TIME OF CALCULATION, what is the loan balance? If you go with "what WILL the loan balance be?" then when does it stop?

Let's say Flood premium on $100,000 = $2000, so you buy insurance for $102,000. BUT the premium on $102,000 is higher than $2,000 (let's say it's $2,100), so now your insurance is $100 shy of what's needed.

Personally, I think due diligence is needed by the bank to determine how much the insurance will cost to make a sufficient advance. If the cost is off by a small amount, charge the customer outside of the loan. If the customer cannot pay even a small amount, then you have a problem loan on your hands and a whole other set of issues.

I've heard both and see it as a catch-22, adding on and adding on. If this were not really for the benefit of FEMA I think the CFPB would cite it as a UDAAP issue unfair to the consumer.

I think adding the premium to the loan is a bad idea. The loan just keeps growing. In commercial lending, we issued a bill and chased them down for it. If not paid, we started collection action, etc.

For a consumer it is a bad idea, but if the bank is going to do this, they have to do it correctly and make sure that the required coverage is in place.

My two cents - I agree with David and Randy. Another point that was not raised from a UDAAP perspective is what happens if we tell the customer to get $102,000 in required coverage ($100,000 principal balance + $2,000 force placed premium) and the customer purchases their own coverage? Now we're in a situation where we're requiring more than the minimum requirement, which could be viewed as unfair and/or deceptive (IMO).

The easy solution: Require the insurable value of the structure.

The structure would not be over-insured. The borrower would have the maximum coverage available in the event of a flood loss. The bank would not have the dilemma of whether or not to include the premium in the policy amount.

The Act does not say you can only require the minimum. It just says you have to have at least the minimum of the 3 (insurable value, total balances of all liens, NFIP maximum).

And the bank would be covering the real risk, at the same time!

The Flood Matter Expert of the Dallas Region states that "the bank must obtain flood insurance in an amount required by 339.3(a).

The calculation is the lesser of:

a) The total outstanding loan balance (which will include any flood insurance premiums added to the loan)."


Can anyone show me where it states this in 339.3(a) please?

Here's what 339.3(a) states:

§339.3 Requirement to purchase flood insurance where available.
(a) In general. An FDIC-supervised institution shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the overall value of the property securing the designated loan minus the value of the land on which the property is located.

http://www.ecfr.gov/cgi-bin/text-idx?SID...13&rgn=div8

I guess I meant "can anyone show me where in 339.3(a) it states:

The total outstanding loan balance (which will include any flood insurance premiums added to the loan).

The flood insurance premium is only added to the loan AFTER it is purchased, so how can it be in the outstanding loan balance on which you figure the premium?

Seems incongruous to me.

That's why I quoted the reg in my last post. It DOESN'T say that.

Thanks so much! That's what I thought. I've been doing this for over 36 years and I thought maybe I missed something!

That's OK. I'm training my replacement and in 18 months "Good night Irene!". (or maybe sooner)

So the regulators come in and say give me a trail balance of all of your loans in a SFHA and the amount of insurance they have. What do you expect them to say when you have a loan with a principal loan balance of $51,000 and flood insurance coverage of $50,000? No, it doesn't say it directly. But I think "at least equal to the lesser of the outstanding principal balance" pretty much says it all. Banks have been cited by the regulators for this in my area.

Like a lot of things, it would require some documentation to demonstrate how the proper amount of flood insurance amount was calculated. I don't think it's that hard to explain.

If you purchased $51,000 of insurance and then the borrower was past due, had fees, etc. that led to a higher loan balance, would the amount of flood insurance be too low again?

Not unless you plan on capitalizing interest or fees. It references the principal balance. If you are holding the insurance in a separate no interest earning bucket, like other fees then it would not be an issue or if you established an escrow account. If you are going to be adding it to the principal balance, then I think it is. If they are adding it to the principal balance, they better be re-amortizing the loan otherwise after a number of years these people are going to have a huge balloon payment due at maturity and now you are looking at a UDAAP potential (or class action lawsuit like others of which I am aware). So you add money to the loan and re-amortize the payment, sounds like an increase to me which is actually a MIRE event. How far you want to take this is up to each bank, but I suggest they cover the entire new principal balance if they are adding the premiums to the principal balance.

Something I found in Federal Register /Vol. 76, No. 200 /Monday, October 17, 2011

Any policy that is obtained by a lender or its servicer, the premium of which is charged to the borrower pursuant to a contractual right, should be equivalent in coverage and exclusions to an NFIP policy and cover the interests of both the borrower and the lender.

Question #62 relates to when a borrower may be charged, but it also seems to address how much coverage should be in place. Can I request that the guru’s consider if this is something that might need to be considered when determining force placed insurance coverage amounts? It seems like if the Bank purchased coverage to “…cover the interests of both the borrower and the lender”, it would likely purchase coverage up to the full insurable amount – or maybe the maximum amount available for the property.

I have this same concern. As far as I know it is perfectly legal to purchase force placed coverage for the lesser of the RCV, loan amount, or max available, but if you have a 10k loan on a house worth 300k and you force place 10k....is that really a benefit to the customer. I know some banks allow this and some banks have a policy to always insure at the RCV of the building.
I just keep going back to UDAAP.

Is 10k a benefit to the customer? No. It covers the loan. But that's what the law requires. Fact is, that most borrowers don't want flood insurance. It's a horrible product because it doesn't pay when people think it should and it doesn't cover everything when it does pay out. Therefore, most lenders require the minimum amount they have to.

Flood insurance is a bad product that lenders are required to make borrowers purchase - not because most want it but because there's a law that requires them to be the "police".

Requiring RCV in all cases is a dangerous procedure. There are 2 class action lawsuits, that I am aware of, that basically state RCV shouldn't have been required. RCV is only appropriate when it's a 1) single family dwelling, 2) fully insured and 3) the borrower's principle dwelling. Other than that, the policy will only pay ACV. So the question is "why would you require insurance that will never pay?" If you are, that's a UDAAP issue!