Claire-ification

IA&B Vice President - Advocacy Claire Pantaloni, CIC, CISR Are you a member with a question? Contact Claire to find the answer at 800-998-9644, ext. 604 or ClaireP@IABforME.com.

QUESTION:

Can a mortgage lender require my insured to cover the home for the full loan value rather than the replacement cost?

ANSWER:

No, but it’s not always that simple, especially based on recent developments. In all cases, the answer depends on the state where the practice occurs and the type of financial institution and/or loan.

First of all, our three states now all have language prohibiting the practice of requiring more than the replacement value of the buildings. It is important to remember that this prohibition applies to statechartered banks.

DELAWARE

The Delaware Code specifically addresses the amount of property insurance in connection with the loan at Title 25, section 2119 Insurance requirements for mortgages, and at Title 5, section 2418 Prohibited acts and practices (for mortgage loan originators). Under §2119, the lender may not require more than “the value placed on the improvements,” which by definition excludes the value of the land. §2418 states that “it is a violation to (13) Cause or require a borrower to obtain property insurance coverage in an amount that exceeds the replacement cost of the improvements as established by the property insurer.”

MARYLAND

The Maryland Code is replete with protection for consumers, prohibiting state-chartered lenders from requiring a borrower to obtain coverage beyond the replacement cost of the real property. Members who are confronted with this situation can refer the lender to Commercial Law/ Credit regulations, section 12124. It states: “(2) A lender may not require a borrower, as a condition to receiving or maintaining a loan secured by a first mortgage or first deed of trust, to provide or purchase property insurance coverage against risks to any improvements on any real property in an amount exceeding the replacement cost of the improvements on the real property.” Note that subparagraph (3) provides the same language for flood insurance. In addition, substantially similar language is also available at § 12-410 for secondary mortgages, § 12-312 (e) for consumer loans, § 12-909 (e) for revolving-credit transactions, and at § 12-1007 (f) for closed-end-credit transactions.

PENNSYLVANIA

IA&B spearheaded the Mortgage Property Insurance Coverage Act (Act 51 of 2008), which applies to owneroccupied residential property. The law prohibits lenders from requiring a borrower to obtain property insurance coverage which exceeds the replacement value of buildings and structures situated on the land. The borrower may not be required to insure the value of the land.

FANNIE MAE / FREDDIE MAC

Fannie Mae and Freddie Mac purchase mortgages and convert them for resale to investors. Both institutions have specific guidelines that also prohibit the practice of asking more than the replacement cost. If you run into an issue with these institutions, refer the letter to the Fannie Mae Selling Guide - Single Family (Part B, Chapter B7-3, Hazard and Flood Insurance) or the Freddie Mac Single Family Seller/Servicer Guide (Series 4000, Chapter 4703).

FLOOD POLICIES

If the situation involves a flood policy, the Fannie Mae and Freddie Mac guides also include information on the amount of flood insurance that can be mandated.

The main stumbling block remains national banks (it will have the word “national” in its name or “N.A.” after its name). National banks are regulated by the Office of the Comptroller of the Currency (OCC). We are not aware of any specific guidance given by the OCC to lenders on this issue. Producers can still encourage individuals to file a complaint with the OCC, but there is no legal or regulatory leverage to speak of.

This document is not a legal opinion and should not be relied upon as such. The intent of this document is to provide a general background regarding the topic or topics discussed, not to provide legal advice. Producers and agencies should consult an attorney regarding specific situations and specific questions with respect to the topic or topics covered in this document. Neither the Insurance Agents & Brokers nor any of its employees shall be responsible for any errors or omissions regarding any statements made in this document, nor any errors or omissions regarding any statutes, regulations, court rules, and/or any other government documents cited in this document.