There are two issues that still remain unresolved in my mind:

1) The FDIC FIL 14-2013 states that this amendment was made to the FDPA as it relates to FP insurance:

• “Provide that the premiums and fees that a lender or servicer may charge the borrower include premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide sufficient coverage amount”

A policy lapse occurs when the policy has expired and you do not renew it within 30 days of the expiration date.

Question: So, did they mean to use the word “lapse” to mean that the Bank can only charge premiums from the date of lapse (which essentially means that the Bank will still have to eat 30 days’ worth of premium since they can only charge from the lapse date, instead of the EXPIRATION date)? They used the word “lapsed” instead of “expired”. Was this on purpose or an oversight?

2) The FDPA provides that “a lender or its servicer must notify a borrower if it determines that the flood insurance coverage on the improved real estate or mobile home serving as collateral for the borrower’s loan has expired or is less than the amount required for that particular property (42 USC 4012a(e)). The notice must inform the borrower of the need to purchase flood insurance. If the borrower fails to purchase flood insurance within 45 days after notification, the lender or servicer must purchase flood insurance on behalf of the borrower”.

Question: So, taking this language to mean If the borrower fails to purchase insurance within 45 days, THEN the Bank must FP, must the Bank send the notice after expiration – give them 45 days to purchase, THEN purchase it on the 46th day if they did not (which is how I understand it)? Or, can the Bank FP at any time?

1. http://www.bankersonline.com/forum/ubbthreads.php?ubb=showflat&Number=1799818&page=3

2. must the Bank send the notice after expiration, assuming you mean the expiration date of the flood insurance policy, yes. can the Bank FP at any time? Yes, but why would you when you have coverage for 30 days from the policy's expiration and you cannot charge the borrower any premiums for or during that 30 days?

Regarding #1 - Again, because they used the word "lapsed" in the FIL, I am going to assume (until otherwise clarified via another FIL) that they meant lapsed, so this means that the Bank can charge premiums incurred during the 15 day period after a policy has lapsed and the 46th day when the FP policy was obtained by the Bank. So, if it is a Bank's practice to FP on the 46th day and make the effective date of the FP policy the day after a borrower's policy has EXPIRED, they cannot charge the premium for 30 days worth of coverage - only 15 days. Correct?

Regarding #2 - There are three parts to your answer I want to address.

First, it is your opinion then that a Bank can FP at any time (and I am not talking about when the effective date is per se - I am saying the actual day in which the Bank can obtain or request a FP policy from their vendor) - they do not have to wait until 45 days after the notice was sent to the borrower?

Second, if the borrower does not pay within 30 days of expiration to renew the policy - it lapses (which is the scenario I am talking about - a borrower that simply does not pay to renew at all). If the Bank orders a FP policy and requests an effective date which is 31 days after the policy expired, then the property will not have had coverage for 30 days. The Bank is not going to be covered. Let's say a borrower's policy expired on 1/1 and the policy lapsed on 1/31 because they didn't pay the premium to renew - they went on vacation on 1/15 for two weeks and unbeknownst to them, Hurricane Dan comes through and the house it engulfed in flood waters while they were sipping Mai Tai's on the beach in Malibu. When they return home, they and the Bank are not going to be covered. UNLESS, when the Bank obtained their FP policy, they requested an effective date which was the day after the borrowers policy expired (which all the vendors I know of allow the Bank to do - it was just that prior to the BW amendment, the Bank could not charge the borrower for premiums incurred during the 45 day waiting period after the notce was sent).

Finally, I agree that the Bank can only charge permiums for the 15 days between when the policy lapses and the 46th day (since they used the word "lapsed" in the FIL). So the Bank is still stuck with 30 days of premiums if they obtain FP policies with effective dates back to the day after the borrower policy expires.

As discussed numerous times in the past the bank can force place any time after the policy expires, they just can't collect premiums for the first 30 days (used to be 45 days).

There was coverage in place for those 30 days. The coverage lapsed at midnight on the 30th day for non-payment of premium. As for Hurricane Dan hitting during those 30 days and the premium not getting paid is a risk the bank has always had to take. If you feel the bank will save money by absorbing those premiums in anticipation of fighting of a potential loss from Hurricane Dan then go for it. Just be sure you follow the required refund requirements if the borrower produces you a policy that has concurrent coverage with your force placed policy.

Okay, so to summarize the options available to the banks:

Option 1:
-Policy expires 1/1
-Bank force places on 1/2 with effective date of 1/2 and sends the borrower a notice giving them 45 days to get insurance
-Borrower does not pay to renew within 30 days of the expiration (so the policy lapses) on 1/31
-Bill arrives from vendor and bank pays it, but only charges the borrower for the pro rated amount of premium that was incurred from day 31 to day 46, thus saving the bank 15 days of the cost of premiums but they are on the hook for the other 30 days.

*** OR ***

Option 2:
-Policy expires 1/1
-Bank sends the borrower a notice giving them 45 days to get insurance on 1/2
-Borrower does not pay to renew within 30 days of the expiration (so the policy lapses) on 1/31
-Bank force places on 2/1 with an effective date of 2/1
-Bill arrives from vendor and bank pays it, but only charges the borrower for the amount of premium that was incurred from day 31 to day 46, thus costing the bank nothing since they can charge the borrower now; HOWEVER, this option is only good if the bank is willing to take the risk that Hurricane Dan will not cause the house to float away during the 30 days after the expiration of the policy or if the bank has a "gap insurance" policy specifically to cover them in the event of losses during that 30 day window.

Where you say "There was coverage in place for those 30 days. The coverage lapsed at midnight on the 30th day for non-payment of premium", I am confused because it was my understanding that if a borrower did not pay to renew the policy and therefore allowed it to lapse, the coverage ceased on the date of the expiration of the policy. If a claim is made on day 25 after a policy expired for example, the insurance company is not going to pay the claim UNLESS the borrower sent in the premium to renew the policy, so it would not lapse; therefore, making the policy effective the day after the original expiration.

Until they officially define "lapsed", I think anybody's guess on this issue is as good as the next persons.

I agree with you rlcarey...makes me wonder if they understood how it would affect those of us in the industry. With penalties being so high, no one wants to take any chances.

Do you agree with the two options I listed above?

And, I realized that there really is a 3rd option also...waiting until the 46th day after sending the borrower the notice to force place insurance and making the effective date whatever you want I suppose, with the understanding that the borrower can only be charged for premiums incurred since the lapse date (not the expiration date) and the Bank has to consider the risks involved in the property being potentially uninsured for a period of time if you don't make the effective date the day after a borrower's policy expires.

Naturally, everyone's procedures need to be modified to account for properly calculating what the borrower should be charged when the bill from the vendor arrives.

I am going to be doing a flood scrub soon and want to make sure I have my ducks in a row.

Please tell me if I don't.

Many banks didn't change their procedures at all due to the confusion. They force place on day 46th and don't worry about it.