We have an existing loan secured by property located in a SFHA where flood insurance is forced placed. We are going to refinance the loan into a new loan secured by the same property. The borrower wants to keep that same force placed flood insurance. However, our third party flood insurance company has said that force placed insurance is not transferrable and that they will need to cancel the existing flood insurance and then start the letter notification process for the new loan and force placed insurance. Would this be considered a violation of closing a new loan without adequate flood insurance? The policy would be effective back to the note date of the new loan.
Interesting question. The regulation is silent on this issue. An existing FAQ states that forced-placed insurance cannot be automatically renewed. A proposed FAQ will, if finalized, allow what you have proposed here. Technically, you are not allowed to close a loan with forced-placed insurance. If the borrower does not obtain insurance, then you can’t close the loan. With the proposed FAQ, it is clear that the agencies intend to change this position. So, the question is will an examiner cite a violation while we are on the cusp of the rule being changed. It sounds like the insurance agency will provide coverage that is effective on the date of closing, so little risk exists.