Can a Lender Close a Loan Then Notify You of Forced Placed Flood Insurance?
A lender must provide a borrower with a flood hazard determination notice at least 10 days before closing on the loan. If the property lies within a special flood hazard area (SFHA), the borrower has 45 days from the notice date to obtain flood insurance. If the borrower does not comply, federal law requires the lender to force flood insurance for the property. The lender retains the right to bill the borrower for the cost of the insurance policy.
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Flood Hazards
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Federal law requires lenders to conduct a flood hazard determination before closing on a loan secured by buildings or mobile homes and document it using the Federal Emergency Management Agency's (FEMA) Standard Flood Hazard Determination Form. If the borrower doesn't know the permanent location of a mobile home yet, the lender can make the loan without the determination but must complete it as soon as the borrower determines the permanent location. It is the lender's responsibility to obtain the permanent location from the borrower. When a lender finds a structure that lies within a special flood hazard area, it must notify the borrower, who must obtain adequate flood insurance through the National Flood Insurance Program (NFIP) or a private insurance company.
Borrower Notice
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If the lender determines the property lies within a special flood hazard area, it must provide a NFIP notice on the FEMA approved form to the borrower at least 10 days before closing on, increasing, extending or renewing the loan. This informs the borrower of the property's SFHA status, the need for insurance and its purchase deadline. It also discusses flood risks, mitigation measures, flood insurance availability and federal disaster relief for flood events. The lender must keep a record of the borrower's receipt of the notice.
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Federal Purchase Requirements
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When the property lies within a SFHA, federal law requires the borrower to obtain flood insurance to cover the value of the structure before closing the loan, and it requires the lender to enforce its purchase. If the borrower thinks the property does not belong in the SFHA because the ground itself meets the base flood elevation requirement, they can apply to FEMA for a Letter of Map Amendment or a Letter of Map Revision. If FEMA rejects the application, the lender must enforce the federal purchase requirement. If FEMA approves the application, it exempts the borrower from the federal purchase requirement, but the lender reserves the right to require flood insurance. Also, lenders can require flood insurance properties outside a SFHA.
Lender Review
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Federal law places the responsibility of ensuring the property carries flood insurance with the lender. It must verify that the borrower purchases the minimum policy required and that the policy was written for the correct risk zone. Policies issued for an incorrect zone result in payment of insufficient premiums. NFIP will not pay a claim against such a policy until the lender or borrower pays the premium difference. The lender must also ensure the borrower keeps the flood insurance current for the life of the loan.
Forced Place Flood Insurance
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Federal law requires the lender to force place insurance when the borrower fails to purchase flood insurance before closing a loan or lets their insurance policy lapse after the loan's closing. The lender has 45 days from the date of borrower notification to purchase the flood insurance and can charge the borrower for the premiums.
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References
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Comments
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"Policies issued for an incorrect zone result in payment of insufficient premiums." This statement is false. We have a policy issued for an incorrect zone, and FEMA and Allstate have refunded all five years of payments. The problem is Wells Fargo. They placed our house in foreclosure because we refused to pay for flood insurance, even though they made the flood zone determinations based on the wrong FIRM, not the one that was in effect during the dispute. We have a FEMA letter that says our house was never in the floodplain.
