We have a customer for whom we force place hazard insurance (monthly) and flood insurance (yearly). We are aware that force placing the flood insurance is a M.I.R.E. event and send the flood insurance notice yearly. Do we also need to provide the flood insurance notice on a monthly basis since we are increasing the loan each month through the force placement of hazard insurance? Also, if we do not receive a signed copy of the flood insurance notice from the borrower, should we document that the notice was sent with no response?

Whether the forced placement of hazard insurance on a property in a special flood hazard area triggers the requirement to send a flood insurance notice to the borrower depends on how the borrower is charged for the hazard insurance premiums and fees and whether your loan agreement permits advances to cover such costs.

The flood insurance regulations require a lender to deliver a written flood insurance notice to a borrower whenever a loan secured by a building or a mobile home in a special flood hazard area is made, increased, extended or renewed (a “M.I.R.E event”). Among other information, the notice must warn the borrower that the loan collateral is in a special flood hazard area and advise them of the flood insurance purchase requirements under the National Flood Insurance Act.

In an interagency letter to the American Bankers Association (ABA), the OCC, FDIC and Federal Reserve advised that if an “institution’s loan contract with the borrower includes a provision permitting the lender or servicer to advance funds to pay for flood insurance premiums and fees, such an advance would be considered part of the loan” and “the addition of the flood insurance premiums and fees to the loan balance [would not be] considered an ‘increase’ in the loan amount, and thus would not be considered a triggering event.” However, if there are no provisions in a loan agreement permitting such an advancement, “the addition of flood insurance premiums and fees to the borrower’s loan balance would be considered an ‘increase’ in the loan amount, and therefore” a triggering event requiring a flood insurance notice to be sent.

The letter to the ABA also advises that if an institution accounts for “the amount owed on force-placed flood insurance premiums and fees in a separate, unsecured account” or “[[i][/i]i]f the institution bills the borrower directly for the cost of the force-placed flood insurance,” these approaches are not considered triggering events since they do not increase the loan balance.

Although this guidance is specific to flood insurance, we believe that increasing the loan balance to cover hazard insurance premiums and fees also would be considered a M.I.R.E. event, triggering the requirement to send a flood insurance notice — unless your loan agreement permits the advancement of funds to cover hazard insurance costs.

Regarding the flood insurance notice, the FDIC Compliance Examination Manual requires examiners to verify that a bank that force-places flood insurance first provides written notice to a borrower that flood insurance is required. Consequently, we recommend documenting the date the notice was sent and the borrower’s failure to respond. Additionally, you may wish to consider sending the borrower a default letter if failing to return a signed copy of the flood insurance notice violates the terms of your loan agreement.

For resources related to our guidance, please see:

FDIC Flood Insurance Regulations, 12 CFR 339.9(a) (“Notice requirement. When an FDIC-supervised institution makes, increases, extends, or renews a loan secured by a building or a mobile home located or to be located in a special flood hazard area, the FDIC-supervised institution shall mail or deliver a written notice to the borrower and to the servicer in all cases whether or not flood insurance is available under the Act for the collateral securing the loan.”)

FDIC Flood Insurance Regulations, 12 CFR 339.9(b) (“Contents of notice. The written notice must include the following information: (1) A warning, in a form approved by the Administrator of FEMA, that the building or the mobile home is or will be located in a special flood hazard area; (2) A description of the flood insurance purchase requirements set forth in section 102(b) of the Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4012a(b)); . . .”)

FDIC Flood Insurance Regulations, 12 CFR 339.9(d) (“Record of receipt. The FDIC-supervised institution shall retain a record of the receipt of the notices by the borrower and the servicer for the period of time the FDIC-supervised institution owns the loan.”)

Interagency Letter to ABA (May 22, 2017) (ABA subscription required) (“The treatment of force-placed flood insurance premiums and fees depends on the method the institution chooses for charging the borrower. . . . If the institution’s loan contract with the borrower includes a provision permitting the lender or servicer to advance funds to pay for flood insurance premiums and fees as additional debt to be secured by the building or mobile home, such an advance would be considered part of the loan. As such, the addition of the flood insurance premiums and fees to the loan balance is not considered an ‘increase’ in the loan amount, and thus would not be considered a triggering event. Consequently, the notice and escrow requirements that may result from a triggering event would not apply.”)

Interagency Letter to ABA (May 22, 2017) (ABA subscription required) (“If, however, there is no provision permitting this type of advancement of funds in the loan contract, the addition of flood insurance premiums and fees to the borrower’s loan balance would be considered an ‘increase’ in the loan amount, and therefore, is considered a triggering event because no advancement of funds was contemplated as part of the loan. Regardless of whether or not a triggering event has occurred, if the loan balance has increased, flood insurance regulations issued by the Agencies state that the minimum amount of flood insurance required ‘must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the [National Flood Insurance Act of 1968, as amended].’”)

Interagency Letter to ABA (May 22, 2017) (“If the institution accounts for and tracks the amount owed on the force-placed flood insurance premiums and fees in a separate, unsecured account, this approach does not result in an increase in the loan balance and, therefore, is not considered a triggering event.”)

Interagency Letter to ABA (May 22, 2017) (“If the institution bills the borrower directly for the cost of the force-placed flood insurance, this approach does not increase the loan balance and is not considered a triggering event. If, however, the borrower fails to pay the bill, and the institution then adds the insurance premiums and fees to the mortgage loan balance or to an unsecured account, the institution should follow the guidance pertaining to those methods set forth above.”)

FDIC Compliance Examination Manual, Lending – Flood Disaster Protection, V-6.14 (September 2019) (“If the institution is required to force place insurance, verify: [1] That it provides written notice to the borrower that flood insurance is required, and [2] That if the required insurance is not purchased by the borrower within 45 days from the time that the institution provides the written notice, that the institution purchases the required insurance on the borrower’s behalf.”)