Last year, in April, the American Bankers Association (ABA) submitted a letter to the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, Agencies) to question whether the Agencies would consider a creditor’s addition of force-placed insurance (FPI) premiums and fees to the outstanding principal balance of a designated loan to be an increase in the loan amount that triggers the applicability of specific flood insurance regulatory requirements under the Flood Disaster Protection Act. The Agencies recently issued a response and indicated a plan to issue official written guidance in the future.
The Agencies analyzed three methods of charging a borrower for FPI premiums and fees:
- Adding premium and fees to the mortgage loan balance
- Adding premiums and fees to an unsecured, separate account; or
- Billing the borrower directly
In summary, the Agencies determined that:
Premiums and Fees Added to Loan Balance: When a lender adds the expense of FPI premiums and fees to the loan balance (even if the addition is not considered a triggering event as discussed below), the Agencies will require FPI to be issued in an amount sufficient to cover the anticipated higher loan balance that includes the FPI policy premium and fees. The Agencies further explained that whether the addition of premiums and fees to the loan balance is a “triggering event” depends on the institution’s loan contract with the borrower.
- If the contract with the borrower permits the advancement of funds to pay for FPI premiums and fees as additional debt to be secured by the building or mobile home, it would be considered part of the loan, not a triggering event.
- If there is no such provision within the contract as described above, the addition would be considered a triggering event-related increase because no advancement of funds was anticipated as part of the loan and all requirements of a triggering event will apply. Including:
- Ensuring that the building or mobile home and any personal property securing the loan are covered by adequate flood insurance for the term of the loan.
- Mailing or delivering a written notice to the borrower that, among other things, the building or mobile home is in a special flood hazard area.
- Escrowing flood insurance premiums and fees (unless the lender or the loan qualifies for an exception) and providing notice to the borrower of the escrow requirement with the notice of special flood hazards.
Premiums and Fees Added to Unsecured Account or Billed to Borrower: On the other hand, adding premium and fees to an unsecured account or billing the borrower directly does not increase the loan balance, is not a triggering event, and does not require the lender to include FPI premium and fee amounts in the calculation of sufficient flood insurance coverage. If, however, the borrower fails to pay when direct billed and the institution later adds the associated costs to the mortgage loan balance, the institution should follow the guidance as described above.
As mentioned in the Agencies’ response letter to the ABA, the Agencies intend to issue further industry guidance on this matter.
Proctor will continue to monitor this topic and provide additional updates when available. If you have any questions, please contact your Proctor client relationship manager.