By David Thompson, CPCU
Q. Please see the lengthy email exchange below between a lender and me involving a private flood policy (it is the RCBAP) that we supplied to them. The lender sent me their form to sign, a “Certification of Adequacy of Private Flood Insurance by Agent.” It lists six criteria that they say must exist in the private policy, and there is a spot for the agent to sign certifying this policy meets the requirements. The lender called me and I told them I would not sign the form. We sent them the entire policy for review, and now they are emailing me telling me that if I do not sign the form the loan will not close. Have you run across this before? —Lauren K, Herbie Wiles Insurance (name and question used with permission.)
A. This request/demand by lenders is becoming more common, and I expect the trend to continue.
We need to start with the most important point here: Never, ever, sign any lender-supplied form, this one included. Your E&O insurer (Westport in your case) has stated many times, “Agencies are unable to sign these lender specific forms.” Our vice president and general counsel at FAIA has stated the same thing repeatedly. You did the perfect thing by sending the lender the entire policy; nothing else is required. If the lender contacts the customer (common) saying, “Your agent is not cooperating,” turn the tables on the lender. Contact the customer and advise that it is the lender, not the agency, that is holding up the closing. Be professional, but do not bow to lender pressure.
The background here is that under the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) lenders are required to accept a private flood policy (private as compared to NFIP) if coverage is at least as broad as the NFIP policy. That requirement is found in section 100239 of BW-12. That requirement is also in 42 U.S. Code 4012a.
Lenders “have a dog in the race,” as the saying goes, in that they face fines of up to $2,000 per loan if they are found not to be compliant with the regulations imposed on them by their regulators. Lenders are concerned that if they accept a private flood policy that does meet the requirements of their regulator, they will be fined. Thus, they want someone (that would be you!) to certify that the policy is compliant. My thought is that if their regulator fines them, they will go back against the agency who “certified” the policy. Therefore, you see your exposure here; every form you sign (of course you will not) could be a potential $2,000 cost to you if the lender is fined. Thus, the reason that no agency should ever sign this form.
Remember lenders who refuse to accept a private flood policy that meets the federal guidelines can face penalties by their regulators. It certainly cannot hurt to remind lenders of that!
The lender in your case, as is typical, tried to force you to sign the form and he gave you incorrect information.
First, you were supplied with the NFIP “Mandatory Purchase of Flood Insurance Guidelines” by the lender. That was very kind of the lender to send those; the problem is the guidelines were withdrawn several years ago; so, in effect, they no longer exist. Nice try!
Next, the lender told you, “This is a mandatory FEMA form that must be signed by the agency.” Nice try again, but that is simply not true. There is no such FEMA requirement. I have heard that line used by lenders several times in the past.
Next, the lender told you, “Not every bank has an expert to review policies, thus the reason the agency has to do it.” Well, the fact that the lender does not have an expert is not our problem; let him hire one. Many lenders do have “experts” who review policies. Hey, maybe I will become a consultant for lenders and review policies for them…for a hefty fee! That would give me some good money to spend on BBQ!
Then the lender told you, “These forms are signed by other agents, and we have never had someone refuse to sign it.” You remember Dad asking you, “If everyone else jumped off the cliff, would you do it too?” The fact that other agencies foolishly sign the form is certainly not a reason that you should do it.
It is ironic that the policy you sent the lender clearly stated that it met the standards of BW-12. My grandson cannot even walk yet, and I bet he could read the policy and see that it is compliant.
You get an A+ for standing firm with the lender. This calls for BBQ! I would suggest you head a few miles down the road to Smokin D’s BBQ near St. Augustine for lunch or dinner. Remember, it is cash only! Have a pork sandwich for me, please. Good job! Continue to “stand firm.”
How do you handle lender issues such as this? Visit the Community to weigh in.
Copyright FAIA, March 2017