Agencies Clarify Interpretation on Lender-Placed Flood Insurance

In response to a query by American Bankers Association staff, the federal banking agencies recently provided clarifications on whether a lender charging a customer for premiums and fees for force-placed flood insurance to a borrower’s loan balance constitutes a loan balance increase that would be a “triggering event” under the Flood Disaster Protection Act. ABA sent the letter after hearing regulatory agency staff and examiners take the position that it would constitute a triggering event, which is “an interpretation new the industry and inconsistent with industry practice,” ABA noted.

The agencies said in a letter to ABA that the requirement to add the premiums and fees associated with the lender-placed flood insurance policy applies only when the lender intends to add the premiums and fees to the loan balance. If the premiums and fees are held in an unsecured account or are billed directly to the borrower, the amount of lender-placed flood insurance does not need to include the cost of the premiums and fees — although, if such amounts are subsequently rolled into the unpaid loan balance, the lender will need to then follow the guidance for premiums and fees added to the loan balance.

The letter also said that the agencies will issue additional guidance on this issue in the future. For more information, contact ABA’s Anjali Phillips.