Office of the Commissioner of Financial Regulation

 

Lender Required Property and Flood Insurance Advisory 06-01 - Advisory Notices

 

Download this advisory in Word format (Word document, 75KB, download Word viewer for free)

 

March 9, 2006

Some lenders and credit grantors may be requiring borrowers to pay excessive property or flood insurance in connection with loans secured by their residences. The practice may also include the requirement that borrowers purchase insurance coverage in an amount exceeding the replacement value of any improvements on real property as a condition to receiving or maintaining a loan. The following should serve as guidance to lenders who wish to be in compliance with the law:

  • A lender or credit grantor may not require a borrower, as a condition to receiving or maintaining a loan secured by a first mortgage or first deed of trust, or a secondary mortgage loan to provide or purchase property insurance coverage against risks to any improvements on any real property in an amount exceeding the replacement value of the improvements on the real property;
     
  • A lender or credit grantor 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 flood insurance coverage in an amount exceeding the replacement value of the improvements on the real property;
     
  • The land is excluded from the overall valuation of the replacement value;.
     
  • In determining the replacement value of the improvements on any real property, the lender may:
    • Accept the value placed on the improvements by the insurer; or
    • Use the value placed on the improvements that is determined by the lender's appraisal of the real property:

A lender or credit grantor may not require that the insurance be purchased through a particular insurance producer or insurance company. Additionally, any property insurance coverage required by a lender must bear a reasonable relation to the existing risk of loss.

NOTE: This office strongly recommends that lenders and credit grantors review all statutory requirements with their counsel in order to ensure compliance.