Consumer Compliance Outlook: First Quarter 2015

Compliance Update

Lender Force-Placed Flood Insurance

On March 29, 2013, the Federal Emergency Management Agency (FEMA) issued Bulletin W-13017 External Link to announce a change in the waiting period requirements for lender force-placed insurance using the Mortgage Portfolio Protection Program (MPPP). Under the National Flood Insurance Program, when a standard flood insurance policy is purchased, it is subject to a 30-day waiting period unless an exception applies.1 This rule addresses the problem of adverse selection (i.e., that some property owners will not purchase insurance until they believe a flood is likely to occur). Prior to this bulletin, the exceptions to the waiting period included policies for the initial purchase of flood insurance coverage in connection with the making, increasing, extending, or renewing of a loan and lender force-placed insurance. With the issuance of this bulletin, MPPP policies became subject to the 30-day waiting period.

Lenders using the MPPP to purchase force-placed insurance should consider the effect of this change on their policies and procedures.2 Because MPPP policies now become effective 31 days after the date of purchase, lenders should factor that waiting period into the date on which they purchase the MPPP policy. It is important to note that FEMA Bulletin W-13017 applies only to policies purchased through the MPPP. Many lenders use private flood insurance policies that do not have waiting periods for force-placed insurance and, therefore, would be unaffected by this MPPP change.

As lenders evaluate the potential impact of this FEMA announcement on their policies, they should also consider another important change regarding force-placed insurance. On July 6, 2012, Congress enacted the Biggert-Waters Flood Insurance Reform Act of 2012 (BWA). Section 100244(a)(1) External Link of the BWA permits lenders to purchase force-placed insurance beginning on the date that a lender determines a property lacks coverage or the amount of coverage is insufficient, and it permits lenders to pass the cost of that force-placed insurance along to the borrower, including any associated fees. The federal banking agencies and the Farm Credit Administration discussed this in the Interagency Statement on the Impact of Biggert-Waters Act External Link, dated March 29, 2013.

Thus, if a lender determines that a loan in its portfolio is secured by real property in a special flood hazard area and does not have flood insurance or have a sufficient amount, the lender does not have to wait 45 days to purchase the MPPP policy and risk a gap in coverage.