The Agencies are adopting two of the five questions and answers proposed in the 2009 Interagency Questions and Answers: one question and answer relating to insurable value (question and answer 9) and another question and answer relating to force placement of flood insurance (question and answer 61). The Agencies are also withdrawing one question and answer relating to insurable value and have reserved
this question and answer for later use (question and answer 10). The Agencies also propose to significantly and substantively change the answers to two of the questions and answers relating to the force placement of flood insurance, so the Agencies are proposing them for additional comment (questions and answers 60 and 62). In addition, the Agencies are proposing changes to a previously finalized question and answer
(question and answer 57) that also relates to the force placement of flood insurance to be consistent with the proposed changes to these two questions and answers.
The effective date of final questions and answers is October 17, 2011. Comments on the proposed questions and answers must be submitted on or before December 1, 2011.
Final 9. What is the “insurable value” of a building?
Answer: The insurable value of a building is the same as the overall value of a property minus the land on which the property is located. FEMA’s Mandatory Purchase of Flood Insurance Guidelines state that the insurable value of a building is the same as 100
percent replacement cost value (RCV) of the insured building, which is defined as “the cost to replace property with the same kind of material and construction without deduction for depreciation.”
In calculating the amount of insurance to require, the lender and borrower (either by themselves or in consultation with the flood insurance provider or other appropriate professional) may choose from a variety of approaches or methods to establish the insurable value. They may use an appraisal based on a cost-value (not market-
value) approach, a construction-cost calculation, the insurable value used in a hazard insurance policy (recognizing that the insurable value for flood insurance purposes may differ from the coverage provided by the hazard insurance and that adjustments may
be necessary; for example, most hazard policies do not cover foundations), or any other reasonable approach, so long as it can be supported.
Proposed 57. What is the requirement for the force placement of flood insurance under the Act and Regulation?
Answer: The Act and Regulation require a lender to force place flood insurance, if all of the following circumstances occur:
The lender determines at any time during the life of the loan that the property securing the loan is located in an SFHA;
Flood insurance under the Act is available for improved property securing the loan;
The lender determines that flood insurance coverage is inadequate or does not exist; and
After required notice, the borrower fails to purchase the appropriate amount of coverage within 45 days.
The Act and Regulation require the lender, or its servicer, to send notice to the borrower upon making a determination that the improved real estate collateral’s insurance coverage has expired or is less than the amount required for that particular property, such as upon receipt of the notice of cancellation or expiration from the insurance
provider. The Act and Regulation also require the lender, or its servicer, to give notice and force-place such insurance, if necessary, when a lender learns that a property requires flood insurance coverage because it is in an SFHA as a result of a flood map change (which is occurring in many communities as a result of FEMA’s map modernization program).
The notice to the borrower must clearly state that the borrower should obtain, at the borrower’s expense, flood insurance in an amount at least equal to the amount required under the NFIP, for the remainder of the loan’s term. The notice should also state that if the borrower does not obtain the insurance within 45 days, the lender will purchase
the insurance on behalf of the borrower and may charge the borrower for the cost of premiums and fees to obtain the coverage, which are likely to be more expensive than if the borrower purchases it. The Agencies encourage institutions to explain their force-placement policies to borrowers (including, where applicable, that they charge for force-
placement coverage for the 45-day period and the timing of that charge). In situations where a borrower has not previously been required to have flood insurance (such as a map change), it is a best practice to also provide the Notice of Special Flood Hazards and Availability of Federal Disaster Assistance, which give borrowers important information about the implications of being in an SFHA.
If adequate insurance is not obtained by the borrower within the 45-day notice period, then the lender must purchase insurance on the borrower’s behalf. Standard Fannie Mae/Freddie Mac documents permit the servicer or lender to add those charges to the principal amount of the loan.
FEMA developed the Mortgage Portfolio Protection Program (MPPP) to assist lenders in connection with force-placement procedures. FEMA published these procedures in the Federal Register on August 29, 1995 (60 FR 44881). Appendix A of FEMA’s September 2007 Mandatory Purchase of Flood Insurance Guidelines sets out the MPPP Guidelines and Requirements, including force-placement procedures and examples of notification letters to be used in connection with the MPPP.
Proposed 60. When should a lender send the force-placement notice to the borrower?
Answer: To ensure that adequate flood insurance coverage is maintained throughout the term of the loan, a lender or its servicer must notify a borrower whenever flood insurance on the collateral has expired or is less than the amount required for the property. The lender must send this notice upon making a determination that the flood
insurance coverage is inadequate or has expired, such as upon receipt of the notice of cancellation or expiration from the insurance provider or as a result of an internal flood policy monitoring system. Notice is also required when a lender learns that a property requires flood insurance coverage because it is in an SFHA as a result of a flood map
change (which is occurring in many communities as a result of FEMA’s map modernization program). To avoid the expiration of insurance, the Agencies recommend that the lender also advise the borrower when flood insurance on the collateral is about to expire.
Final 61. When must the lender have flood insurance in place if the borrower has not obtained adequate insurance within the 45-day notice period?
Answer: The Regulation provides that the lender or its servicer shall purchase insurance on the borrower’s behalf if the borrower fails to obtain flood insurance within 45 days after notification. However, where there is a brief delay in force placing required
insurance, the Agencies will expect the lender to provide a reasonable explanation for the delay, for example, where a lender uses batch processing to purchase force-placed flood insurance policies.
Proposed 62. When may a lender or its servicer charge a borrower for the cost of insurance that covers collateral during the 45-day notice period?
Answer: A lender or its servicer may charge a borrower for insurance coverage for any part of the 45-day notice period in which no adequate borrower-purchased flood insurance coverage is in effect, if the borrower has given the lender or its servicer the express authority to charge the borrower for such coverage as a contractual condition of
the loan being made. Any policy that is obtained by a lender or its servicer, the premium of which is charged to the borrower pursuant to a contractual right, should be equivalent in coverage and exclusions to an NFIP policy and cover the interests of both the borrower and the lender.
The Agencies encourage institutions to explain their force-placement policies to borrowers (including their policy on charging for force-placement coverage for the 45-day period and the timing of that charge) and encourage lenders and servicers to escrow flood insurance premiums. Following these recommendations could result in less force placement of flood insurance. Further, Regulation Z requires lenders to establish an escrow account for the payment of property taxes and mortgage-related insurance required by the lender, including flood insurance, for all “higher priced” first-lien mortgage loans. See 12 CFR 226.35(b)(3).