Force Place Flood - Adding New Collateral

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Question:

We have an unusual scenario regarding flood insurance and I have not been able to find a straight answer in the FEMA guide or from our vendor or by calling FEMA directly. We are adding real estate property as collateral to an "existing loan" - no new funds are being disbursed. The new real estate collateral is located in a flood zone. The borrower is not providing proper flood insurance. Can we force place on the "new added property to an existing loan" at the inception of adding the collateral? The FEMA guide states: "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". The RM's argument is that this is not a new loan - just adding collateral to an existing loan. Is the act of adding new collateral considered origination? Can we force place on adding new collateral to an existing loan?

Answer:

Answer by David Dickinson:You are not making, renewing or increasing a loan, but you do have knowledge of an under-insured loan, which is one of the tripwires listed on page 54 of the FEMA Guidelines. I believe you must notify the borrower of the need for adequate insurance and force place if they don't purchase it within forty-five days after notification.

Answer:

Answer by Randy Carey:This is further supported by Q#57 in the recent Flood FAQ:

57. What is the requirement for the force placement of flood insurance under the Act and Regulation?

Answer: The Act and Regulation require a lender to force place flood insurance, if all of the following circumstances occur:

• The lender determines at any time during the life of the loan that the property securing the loan is located in an SFHA

First published on BankersOnline.com 2/15/10