Int Q&A – Force Placement 10 – Does capitalizing the flood insurance premium into the outstanding principal balance constitute a triggering event…?

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Q:  Force Placement 10 – Does capitalizing the flood insurance premium into the outstanding principal balance constitute a triggering event - an “increase” that would trigger the applicability of flood insurance regulatory requirements?
 
A:   The Act and the Regulation require a lender to notify the borrower that the borrower should obtain adequate flood insurance when the lender determines that a building or a mobile home located or to be located in an SFHA is not covered by any or adequate flood insurance. If the borrower fails to obtain adequate flood insurance within 45 days, then the lender must purchase insurance on the borrower’s behalf. The lender may charge the borrower for the premiums and fees incurred by the lender in purchasing the force-placed flood insurance.

Among the various methods that a lender might use to charge a borrower for force-placed flood insurance are: (1) capitalizing the premium and fees into the outstanding principal balance; (2) adding the premium and fees to a separate account; (3) advancing funds from the escrow account to pay for the premiums and fees of the force-placed flood insurance; or (4) billing the borrower directly for the premiums and fees of the force-placed flood insurance policy. The treatment of force-placed flood insurance premiums and fees depends on the method the lender chooses for charging the borrower.

Premium and fees capitalized into outstanding principal balance
If the lender’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 advancement would be considered part of the loan. As such, the capitalization of the flood insurance premiums and fees into the outstanding principal balance is not considered an “increase” in the loan amount, and thus would not be considered a triggering event. If, however, there is no explicit provision permitting this type of advancement of funds in the loan contract, the capitalization of flood insurance premiums and fees into the borrower’s outstanding principal 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. See also Q&A Force Placement 8.

Premium and fees added to an account
If the lender accounts for and tracks the amount owed on the force-placed flood insurance premium and fees in a separate account, this approach does not result in an increase in the loan balance and, therefore, is not considered a triggering event.

Premium and fees advanced from the borrower’s escrow account
If the lender’s loan contract with the borrower permits the lender to advance the premiums and fees for the force-placed flood insurance from the borrower’s escrow account, this approach does not increase the outstanding principal balance and is not considered a triggering event.

Premium and fees billed directly to borrower
If the lender bills the borrower directly for the cost of the force-placed flood insurance, this approach does not increase the outstanding principal balance and is not considered a triggering event.
 
 
ADDITIONAL INFORMATION:
This Q&A was included in the Interagency Questions and Answers Regarding Flood Insurance, which were issued on 05/11/2022.  They were published in the Federal Register on 05/31/2022 and may be found here:  https://www.federalregister.gov/documents/2022/05/31/2022-10414/loans-in-areas-having-special-flood-hazards-interagency-questions-and-answers-regarding-flood
 

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