By Elva Coffey-Sears, CRCM, CRP
Early last year, the industry became aware that interagency guidance had been provided to examination staff regarding the impact on compliance with flood regulations when force placed flood insurance premiums are added to a loan balance. Specifically, this guidance indicated that the addition of the premiums to the loan balance meets the definition of “making, increasing, renewing, or extending” credit and thus triggers determination, notice and escrow requirements under the flood insurance requirements for lenders. Unfortunately, the agencies did not provide this guidance to the institutions they supervise. Lenders continued to operate under the interpretation that standard loan agreement language authorizes the addition of specified post-closing fees to the loan balance without triggering requirements associated with advancing new money. At that time, the American Bankers Association (ABA) submitted a request to the regulatory agencies to issue clarification to the industry.
An Update from the ABA
The ABA recently reported that the agencies have responded to that request for clarification and will be issuing guidance to the industry on the treatment of force placed flood insurance premiums. While the guidance has yet to be published, it is expected to clarify that flood determination, notice and escrow requirements are not triggered when the force placed premiums are billed directly to the borrower or added to a separate unsecured account. Similarly, if the loan agreement authorizes the lender to advance funds from the loan to cover these premiums, the advance is not considered an increase to the loan and thus is not a triggering event. However, if the loan agreement does not include the authorizing language, any advance to cover the premiums would be considered an increase and trigger the determination, notice and escrow requirements.
The guidance is also expected to include a reminder that regardless of whether the advance against a loan is a triggering event, lenders should reevaluate the adequacy of coverage when advancing funds to cover premiums. If the amount of coverage is based on the outstanding principal balance of the loan, as opposed to the maximum available coverage, the increase in the loan balance may require an increase in the amount of insurance coverage required.
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