The More You Know: 'Permissive Force-Placed' Flood Insurance
Hi, Compliance Friends! In DC, we are enjoying the warmer temperatures, but we are anxiously anticipating dryer weather. A recent question from a member prompted me to eyeball the 2015 Flood Rule a little more closely. Today's blog is going to detail what I've coined to be "Permissive Force-Placed Insurance".
The National Flood Insurance Act of 1968 (NFIA) created the National Flood Insurance Program (NFIP). The purpose of the NFIP is to provide affordable flood insurance coverage to some of America's most vulnerable properties. Pursuant to the mandatory purchase requirements, federally regulated or insured lenders must require flood insurance on properties that are located in areas that have a high risk of flood damage.
With respect to force-placed flood insurance, the 2015 Flood Rule clarifies that a credit union may charge a borrower for force-placed flood insurance beginning on the date on which the borrower's coverage lapsed or became insufficient. The 2015 Flood Rule also requires a credit union to cancel force-placed insurance and refund unearned premiums within 30 days of receipt of acceptable borrower-obtained flood insurance.
Permissive Force-Placed Flood Insurance
To review, pursuant to the Flood Insurance Act, if the member's home is located in an area with a high risk of flood damage, the credit union must require flood insurance. When a credit union learns that a borrower's flood insurance coverage has either lapsed or become insufficient, the lender must send to the borrower a letter, commonly referred to as the "45-day letter", informing the borrower that he or she has 45 days to purchase adequate flood insurance. The 45-day letter must be sent "upon making a determination" that the existing insurance coverage is inadequate or has expired, which includes, for example, receiving a notice of cancellation or expiration from the insurance provider, discovering a lapse as the result of an internal flood policy monitoring system, or learning that the property now requires flood insurance coverage because of a flood map change. If the borrower does not purchase adequate insurance in the required time frame, then the credit union must purchase insurance on the borrower's behalf, which is known as "force-placing" insurance.
From reviewing the 2015 amendment to the Flood Insurance Rule, the Agencies (OCC, Federal Reserve, NCUA) clarified that the borrower may be charged for force-placed insurance beginning as early as the date on which the borrower's policy lapsed or did not provide sufficient coverage. This means that a credit union need not wait until the end of the 45-day period to either begin force-placed coverage or charge the borrower for such coverage. However, if the borrower obtains a flood insurance policy that overlaps with the force-placed policy, then the credit union must refund any premiums paid by the borrower for this overlap period. The agencies also noted that the date of lapse of the borrower's policy is either the expiration date as provided by the policy or the date that the policy is cancelled.
Please see the relevant excerpt from the preamble to the most recent Flood Insurance amendment:
"If the borrower fails to obtain adequate flood insurance within 45 days after notification, then the regulated lending institution or its service must purchase flood insurance on behalf of the borrower. [. . .]As discussed above, the Agencies interpret this provision to mean that a regulated lending institution or its servicer can force place flood insurance beginning on the day the borrower's policy lapsed or did not provide sufficient coverage, and also, as of that day, the institution can charge the borrower for the force-placed insurance. However, if the borrower obtains a flood insurance policy that overlaps with the force-placed policy, the lender or servicer must refund any premiums paid by the borrower for the overlap period." 80 Fed. Reg. 43230-43232.
Here's an example to clarify the concept of "permissive force-placed" insurance. If a borrower does not renew a flood insurance policy that expires on September 30 and the credit union learns of the expiration, the credit union must provide the 45-day letter and may also obtain force-placed insurance as early as September 30. The credit union may then choose when to bill the borrower for the force-placed insurance, either (1) upon placement of the force-placed insurance, or (2) at a later date, such as, for example, when the 45-day period expires. If the borrower does not obtain a flood insurance policy and the credit union has not obtained force-placed insurance by November 14, which is the end of the 45-day period, then the credit union is required to obtain force-placed insurance on November 14 On the other hand, if the credit union obtains force-placed insurance on October 1 and if, on October 15, the borrower renews his or her flood insurance policy effective from October 1 and provides sufficient evidence to the lender, then the lender must refund any premiums paid by the borrower for the force-placed insurance coverage between October 1 and October 15.
This may not be mind-boggling to some, but the more you know, the more you grow. From reviewing the preamble, credit unions are not required to wait 45 days before force placing flood insurance. "Permissive force-placed" insurance allows credit unions to purchase the insurance as soon as the policy lapses or is cancelled. However, the Flood Rule requires credit unions to force-place insurance beginning the 45days after a policy is lapsed or cancelled.