Compliance Alliance Question of the Week
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
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