Can a Lender Require You to Obtain Flood Insurance Above the Amount Required by Federal Law?
Faez v. Wells Fargo Bank, N.A., et al., 745 F.3d 1098 (11th Cir. 2014)
According to a recent decision by the United States Court of Appeals for the Eleventh Circuit, lenders can require borrowers with a federally-insured mortgage to obtain flood insurance above and beyond the amount required by the Federal Housing Administration (FHA).
In the case of Faez v. Wells Fargo Bank, N.A., et al., 745 F.3d 1098 (11th Cir. 2014), the borrower, Farie Faez, obtained a $61,928.00 FHA-insured mortgage. Ms. Faez then secured $63,000.00 in flood insurance, an amount greater than the loan’s principal balance, but less than the home’s replacement value. Wells Fargo, after having acquired Ms. Faez’s mortgage, demanded that she increase her flood insurance to cover the replacement value of her home. Ms. Faez declined to do so; at which point, Wells Fargo force-placed the increased insurance, passing the premium cost along to Ms. Faez. Thereafter, Ms. Faez filed suit against Wells Fargo claiming that the lender breached the mortgage contract by forcing her to obtain more insurance than federal law requires.
Because the Secretary of HUD requires flood insurance coverage in the lesser of $250,000.00 or the loan’s principal balance, Ms. Faez argued that Wells Fargo could not require her to obtain more flood insurance than her loan’s principal balance, which is less than $250,000.00. Wells Fargo countered by asserting that the regulation sets a floor, rather than a ceiling, on the amount of flood insurance that a borrower must obtain.
After examining the subject regulation and the mortgage contract, the Eleventh Circuit ultimately agreed with Wells Fargo, holding that “the only reasonable interpretation…is that a mortgage lender may require the borrower to have more flood insurance than the HUD-determined minimum.” In reaching this conclusion, the Court noted that the mortgage contract between Ms. Faez and Wells Fargo allows the lender to “do and pay whatever is necessary” to “protect the value of the property,” which extends to the replacement value of the home. The Court additionally cited FHA’s goal of encouraging affordable home ownership and cited concern that a ruling in favor of Ms. Faez could result in lenders declining to offer FHA-insured mortgages in high risk flood areas, or passing the expense of their increased risk of loss along to the borrower. Consequently, it is now clear that lenders can require borrowers with FHA-insured loans to obtain flood insurance in an amount equal to the home’s replacement value.
Why This is Important to Your Clients
“Flood Damage” is not covered by your homeowners or business policy and is the leading cause of property loss from natural disasters. In recent years Arizona wildfires have made more Arizona residents vulnerable to flooding.
Important features of the National Flood Insurance Program (NFIP) are:
- Everyone can and should have flood insurance. Even if you do not live in a designated flood zone you can purchase flood insurance if your community participates in the NFIP. Anyone can get flooded. More than 90 percent of all Presidentially declared disasters involve flooding.
- You can insure your home for up to $250,000. Contents coverage, up to $100,000 is separate. Renters can insure their belongings, too.
- Flood insurance pays even when no disaster is declared. Statistically, federal disaster declarations are issued in less than 50 percent of flooding incidents. An NFIP policy will pay for flood damage whether or not there is a federal disaster declaration.