For the last few years, the folks at the Federal Emergency Management Agency have been issuing more accurate flood plain maps at the same time as the government has made a renewed push for mortgage lenders to help make sure homeowners who need flood insurance are actually purchasing it. But even though these new maps should be making it more clear to everyone whether or not one’s home is in a flood plain, the banks appear to be playing fast and loose with the rules in order to force customers into more expensive insurance policies.
See, while part of your property might be in a Special Flood Hazard Area, that doesn’t necessarily mean you need to purchase flood insurance. The insurance is only required if your actual house falls within that zone.
So if your house is far from that lake, creek or river or is high up above the area that could flood, you should not have to purchase the insurance. Problem is, as these new maps get around, banks are taking only cursory glances at them and not always checking to see where a house might be before deciding that flood insurance is needed.
Usually, banks give homeowners 45 days to provide proof of insurance. After that, the bank will just put you into a policy of its choosing — one that is often significantly higher in price than what you’d pay if you bought it yourself.
Homeowners can appeal to FEMA, though that process will likely require 60 days. By that time, they will have either needed to find their own insurance or be placed into one by their lender.
Additionally, many homeowners are just as unaware of the specifics of flood insurance requirements as the banks appear to be. Thus, when the letter comes from their lender, they just assume it is accurate.
While three of the nation’s largest banks — Bank of America, Wells Fargo, and JPMorgan Chase — say they don’t accept commissions on forced-place insurance, many lenders do get a large chunk (upward of 20%) as incentive for getting homeowners into the required insurance. It should be noted that Chase only stopped the practice in 2010 after it was sued for allegedly enriching itself via forced-place insurance.
Reps for the banking industry claim lenders are not out to line their pockets with these commissions.
Whether or not the banks’ mistakes on forced-place flood insurance is a money grab or a genuine misunderstanding, the number of appeals to FEMA has skyrocketed in recent years. Last year, the agency received nearly 36,000 such appeals, a 55% increase from only three years before.
We’ve written before about the danger to homeowners and the housing market of banks pushing borrowers into pricy forced-place homeowners insurance policies. At least in those cases, the banks were purchasing insurance policies that actually needed to be bought.
Lenders’ mistakes cost homeowners on flood insurance [StarTribune.com]