We have a situation where a commercial borrower is purchasing two commercial properties that are in a flood zone. His insurance agent stated that he cannot purchase flood insurance on the properties in question until he owns the properties. We are doing the loan to purchase the properties. The borrower states that there is not a policy in place for the seller. I know we cannot close a loan without flood insurance in place. Can we force place in the borrower's name until he is able to get a policy?
Because this specific issue of whether a bank may originate a loan with force-placed insurance is not directly addressed within the guidance, there are two competing arguments. The first argument is that the requirement (§ 339.3(a)) to have flood insurance in place does not specifically prohibit a force-placed policy at origination. Further, the Interagency FAQs do not speak to nor, importantly, prohibit force-place insurance at origination. However, the more conservative practice would be to not force place for origination. This is because the force place provisions (§ 339.7) specifically mention, "during the term of the loan." It does not at all mention originating a loan with force place: "(a) Notice and purchase of coverage. If an FDIC-supervised institution, or a servicer acting on its behalf, determines at any time during the term of a designated loan ..." Further, the Interagency FAQs specifically mention being available only during the term of the loan (as opposed to at origination). Finally, the FAQs mention that a bank may, indeed, force place on behalf of the borrower, but only if certain prerequisites are met. One of these prerequisites being: "The lender determines at any time during the life of the loan that the property securing the loan is located in an SFHA;" Again, you will notice that "during the life of the loan" is mentioned. Many examiners have also reportedly taken a conservative approach in interpreting this. All this being said - it is up to the bank to make a policy decision in this instance, as - again - there is just a lack of guidance.
(a) Notice and purchase of coverage. If an FDIC-supervised institution, or a servicer acting on its behalf, determines at any time during the term of a designated loan, that the building or mobile home and any personal property securing the designated loan is not covered by flood insurance or is covered by flood insurance in an amount less than the amount required under §339.3, then the FDIC-supervised institution or its servicer shall notify the borrower that the borrower should obtain flood insurance, at the borrower's expense, in an amount at least equal to the amount required under §339.3, for the remaining term of the loan.
12 CFR 339.7(a): https://www.ecfr.gov/cgi-bin/text-idx?SID=8034fe349081bc75554cef97eb543a7f&mc=true&node=se12.5.339_17&rgn=div8
58. Can a servicer force place on behalf of a Lender? Answer: Yes. Assuming the statutory prerequisites for force placement are met, and subject to the servicing contract between the lender and the servicer, the Act clearly authorizes servicers to force place flood insurance on behalf of the lender, following the procedures set forth in the Regulation.
Fed. Reg., Interagency Questions and Answers Regarding Flood Insurance, #58: https://www.federalregister.gov/d/E9-17129/p-433
Is there a regulatory requirement to charge a 7-day early withdrawal penalty on a certificate of deposit (CD)?
In the first week after a CD is created, there must be an early withdrawal penalty of at least seven days' simple interest on amounts withdrawn within the first six days after deposit In Reg. D. And Reg. DD provides that if the bank will charge an early termination penalty, the bank must disclose that in the TISA disclosure. If a withdrawal is permitted without penalty, the account would no longer be classified as a certificate of deposit for Reg D purposes and could be classified as a savings or interest bearing transaction account.
The commentary for § 1030.4(b)(6)(ii) provides two examples of early withdrawals penalties: “$10.00” or “seven days' interest plus accrued but uncredited interest.”
Time deposit means:
(i) A deposit that the depositor does not have a right and is not permitted to make withdrawals from within six days after the date of deposit unless the deposit is subject to an early withdrawal penalty of at least seven days' simple interest on amounts withdrawn within the first six days after deposit.”
Early withdrawal penalties. A statement that a penalty will or may be imposed for early withdrawal, how it is calculated, and the conditions for its assessment.
Examples of early withdrawal penalties are:
i. Monetary penalties, such as “$10.00” or “seven days' interest plus accrued but uncredited interest.”
Comment 2 to 1030.4(b)(6)(ii): https://www.consumerfinance.gov/policy-compliance/rulemaking/regulations/1030/4/#4-b-6-ii-Interp-2-i
We have a property that is partially in a flood zone. The house on the property is not in a flood zone, but the barn on the property is in a flood zone. Do we have to require flood insurance for the barn? This is an agricultural loan, but the barn is not used for agricultural production or as a residence. The barn may be used to store a bush hog or a mower, but otherwise it is used primarily for household purposes.
No--as long as the property is residential, then it doesn’t appear that you would need to require flood insurance as the barn looks to fall under the detached structure exemption to the purchase requirement.
The flood insurance purchase requirement does not apply to the following…loan situations: 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. A structure that is 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. It is detached from the primary residential structure if it is not joined by any structural connection to that structure. Whether a structure serves as a residence is based on the institution’s good faith determination that the structure is intended for residential use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities, but not necessarily all three.
FDIC Flood Manual, "Exceptions to the Purchase Requirement" p. 6.3 https://www.fdic.gov/regulations/compliance/manual/5/v-6.1.pdf
Residential improved real estate means real estate upon which a home or other residential building is located or to be located.
12 CFR § 339.2 https://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=fdf70e757aacce7b4c813e5b2528621b&mc=true&n=pt12.5.339&r=PART&ty=HTML#se12.5.339_12
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