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Showing posts with label flood insurance mortgage requirements. Show all posts
Showing posts with label flood insurance mortgage requirements. Show all posts
Sunday, November 22, 2015
U.S. District Court holds that mortgagee can require flood insurance higher than the amount of the mortgage
In 1994 Susan Lass took out a mortgage on her house, which is an area that is designated under the National Flood Insurance Act as a special flood hazard area. (For older posts on flood insurance legislation, see here and then scroll down.)
As a named plaintiff in a class action lawsuit Lass alleged that Bank of America, the mortgagee, breached her mortgage contract by requiring her to have more flood insurance than was required under the terms of her mortgage and more than BOA's financial interest in the property.
In Lass v. Bank of America, N.A., 2011 WL 3567280 (D. Mass. 2011), the United States District Court for the District of Massachusetts noted that the NFIA prohibits federally-regulated lenders from giving loans secured by real estate in a special flood hazard area in which flood insurance is available unless the property is covered by flood insurance "in an amount at least equal to the outstanding principal balance of the loan or the maximum limit of coverage made available . . . , whichever is less."
Lass's original lender, RMC, required her to maintain insurance in the amount of her loan balance. In 2007 she chose to increase her coverage to $100,000.
RMC transferred the loan to BOA, which required her to increase her flood insurance to $145,086, the replacement value of the improvements to her property. When she did not purchase the additional insurance, BOA purchased it for her and paid for it out of her escrow account.
The court held that BOA did not breach the mortgage contract, because the contract requires Lass to maintain flood insurance "in the amounts and for the periods that Lender requires."
The real question is: Why would a homeowner with property in a flood zone not insure the property to replacement value? Weather patterns are getting more extreme. Insurance protects your investment. We quibble over exclusions and exceptions, but overall: Insurance is good. Make sure you have enough of it.
Thursday, October 8, 2015
First Circuit overturns itself on flood insurance requirement
I posted here about Kolbe v. BAC Home Loans Servicing, LP, 695 F.3d 111 (1st Cir. 2012), a case in which the First Circuit Court of Appeals overturned the dismissal of the complaint of a homeowner alleging that a mortgage lender did not have authority under the loan documents to demand that the homeowner purchase flood insurance in excess of the outstanding loan amount. The court held that the loan documents were ambiguous and that therefore the court could not determine the issue as a question of law.
The First Circuit has now revisited the case in Kolbe v. BAC Home Loans Service, LP, __ F.3d __, 2013 WL 5394192 (1st Cir.) and overruled its prior decision.
Kolbe, the homeowner, contended that the mortgage lender cannot require more than the federally mandated minimum flood insurance, which is the lesser of the balance of the loan or $250,000 in flood zones and $0 in non-flood zones.
Kolbe's mortgage loan was guaranteed by the Federal Housing Administration. The mortgage agreement contained uniform covenants that are required by HUD regulations to be in every FHA-insured mortgage. One of those covenants provided:
4. Fire, Flood and Other Hazard Insurance. Borrower shall insure all improvements on the property, whether now in existence of subsequently erected, against any hazards, casualties, and contingencies, including fire, for which Lender requires insurance. This insurance shall be maintained in the amounts and for the periods that Lender requires. Borrower shall also insure all improvements on the Property, whether now in existence or subsequently erected, against loss by floods to the extent required by the Secretary [of HUD].
Kolbe filed a class action suit contending that under the contract the bank could not require him to purchase insurance in excess of the balance of the loan. The District Court granted the lender's motion to dismiss. Kolbe appealed, and in the panel decision discussed in my previous post the First Circuit vacated the dismissal. The First Circuit then granted rehearing en banc.
In its en banc decision the court held, first, that the contract provision was a uniform provision used in many contracts, and therefore it must be interpreted uniformly regardless of what an individual contracting party may have understood the clause to mean.
It held, second, that because the uniform contract language was imposed by the government of the United States, the government's meaning with respect to the language controls. That meaning is determined in light of the purposes for which the government imposed the language and the context of the relevant regulatory scheme.
The court held that the bank's interpretation was the correct one. The language of the clause by itself and in combination with other clauses in the contract makes clear that the bank can impose a requirement of additional flood insurance.
The court also held that under a broader context the bank's interpretation must prevail. As one example given by the court, if the borrower defaulted on an FHA-guaranteed loan, HUD ultimately would take possession of and sell the property, reimbursing the mortgage insurance fund with the proceeds of the sale. But if the house had been destroyed by flood then "there is nothing" (a slight exaggeration, but still) for HUD to sell.
Finally, the United States submitted an amicus brief supporting the bank's interpretation. The court held that it was required to defer to the interpretation offered by the United States unless that interpretation was clearly erroneous.
Friday, October 2, 2015
Another First Circuit case on whether mortgage lender can increase flood insurance requirement
Last week I posted about Lass v. Bank of America, __ F.3d __, 2012 WL 4240504 (1st Cir.), in which the United States Court of Appeals for the First Circuit held that, taken as a whole, mortgage documents were ambiguous as to whether the lender could demand that the borrower increase her flood insurance coverage.
The First Circuit issued a companion opinion in the case of Kolbe v. BAC Home Loans Servicing, LP, __ F.3d __, 2012 WL 4240298 (1st Cir.).
As in Lass, Kolbe, a mortgage borrower, asserted that Bank of America's demand that he increase his flood coverage breached the terms of his mortgage contract.
The mortgage contract required that Kolbe "insure all improvements on the Property, whether now in existence or subsequently erected, against any hazards . . . for which the Lender requires insurance. This insurance shall be maintained in the amounts and for the periods that Lender requires. Borrower shall also insure all improvements on the Property, whether now in existence or subsequently erected against loss by floods to the extent required by the Secretary [of HUD]."
Kolbe was required by federal law to obtain flood insurance because his property is located in a special flood hazard zone under the National Flood Insurance Act. The minimum amount mandated by the law is coverage at least equal to the outstanding principal balance of the loan, or $250,000, whichever is less.
An aside: I find this provision shocking. I believe everyone should have adequate insurance, and I support the government regulating flood insurance to the extent that such flood insurance might not be affordable, or available at all, in flood hazard zones without such regulation. But I can see no reason why the government should mandate that homeowners are required to have insurance to protect the interests of the lenders but not of the homeowners. The lenders can protect their interests by including a flood insurance requirement in the loan contract.
Moreover, as the court noted in Kolbe, the National Flood Insurance Act was passed because major floods had required "unforeseen disaster relief measures and placed an increasing burden on the Nation's resources." By requiring insurance only to the extent of the lender's interests, the law demonstrates that the government is interested in protecting financial institutions but not homeowners.
Getting back to the decision, Kolbe purchased more than the minimum required amount of flood insurance. Bank of America subsequently sent notice to Kolbe that he was required to increase his flood insurance coverage to the total replacement cost of his property as identified in his homeowner's policy. (Everyone: if you are in a flood plain you should have flood insurance to the replacement cost of your property, regardless of what your mortgage lender says.)
The court held that the insurance provision in the contract was ambiguous, and therefore turned to extrinsic evidence to interpret it. It noted that HUD treats hazard insurance and flood insurance separately, but also that FEMA recommends replacement value flood insurance.
The court concluded that the extrinsic evidence was also, therefore, ambiguous. It held that the District Court erred when it dismissed Kolbe's complaint on the ground that the mortgage unambiguously permitted the lender to demand additional coverage.
Sunday, September 27, 2015
First Circuit vacates District Court ruling that mortgagee can require flood insurance in excess of amount of mortgage
I posted here about the decision of the United States District Court for the District of Massachusetts in Lass v. Bank of America, in which the court held that under the terms of the mortgage agreement that mortgagee bank could require the homeowner to have more flood insurance than the bank's interest in the property (in other words, more than the mortgage amount).
The United States Court of Appeals for the First Circuit has now vacated that decision and remanded the case. In Lass v. Bank of America, __ F.3d __, 2012 WL 4240504 (1st Cir.), the court held that although the pertinent mortgage provision gives the lender discretion over the amount of flood insurance, a supplemental document given to the borrower at her real estate closing may be read to state that the mandatory amount of flood insurance imposed at that time would remain unchanged for the duration of the mortgage.
The mortgage agreement required the borrower to have flood insurance to "be maintained in the amounts and for the periods that Lender requires."
A separate document, entitled "Flood Insurance Notification," stated, "At the closing the property you are financing must be covered by flood insurance in the amount of the principle [sic] amount financed, or the maximum amount available, whichever is less. This insurance will be mandatory until the loan is paid in full."
Lass obtained flood insurance equal to $40,000, the full amount of her loan. She subsequently voluntarily increased the coverage to $100,000.
The lender later told her that she needed an additional $145,086 in flood insurance, to reflect the replacement value of the improvements on the property.
Lass refused to purchase the additional insurance. After notice to her, the bank purchased it for her and charged her escrow account for the premium.
Applying contract interpretation principles, the court held that the mortgage and notification, taken together, are ambiguous as to the lender's authority to demand increased flood coverage on Lass's property.