Certain Flood Insurance purchasing requirements are imposed on both mortgagors (borrowers) and mortgagees (lenders) of residential real property.
If the mortgage covers improvements such as dwellings which are located on land subject to the National Flood Insurance Program, then both the borrower and the lender are obligated by Federal Regulations to obtain and maintain "NFIP flood insurance coverage on the property improvements" during the term of the mortgage. 24 C.F.R. § 203.16a(a)(promulgated by the Federal Department of Housing and Urban Development).
This means that if the borrower does not purchase the flood insurance, or if the borrower purchases it but for whatever reason does not keep the required flood insurance in place, then the lender is legally obligated to place the required flood insurance that will cover the improvements which are located on the land in question, land which as noted, is subject to the National Flood Insurance Program.
The amount or policy limit of the required flood insurance is:
an amount at least equal to either the outstanding balance of the mortgage, less estimated land costs, or the maximum amount of the NFIP insurance available with respect to the property improvements, whichever is less.
24 C.F.R. § 203.16a(c). [Emphasis added.] "Whichever is less." The amount is the lesser of the outstanding loan balance (less estimated land costs) or the maximum amount of NFIP insurance available, whichever amount is less.
This means that even if NFIP insurance is available with greater policy limits than the outstanding loan balance, that the outstanding loan balance is the default amount for the policy limits of the required flood insurance because in that case the amount of the outstanding loan balance is less than the maximum amount of available NFIP insurance.
Parenthetically, the title of this Regulation is also clear:
Mortgagor and mortgagee requirement for maintaining flood insurance coverage.
[Boldface in original.]
In an Order on March 14, 2013, a U.S. Magistrate Judge confronted a third amended complaint which contained claims of force-placed flood insurance. The plaintiffs alleged in their third amended complaint in that case that they, the mortgagors-borrowers, were being charged with premiums for flood insurance limits in excess of what the law allows and that their lenders and mortgage servicers were pocketing the difference.
However, the gist of these particular claims was repeated from the second amended complaint and the same Magistrate Judge had already dismissed the earlier, similar claims with prejudice. He gave leave to amend previously, but only as to the plaintiffs' factual allegations on their "kickback theory."
As the Magistrate Judge pointed out in his March, 2013 Order, that reason alone was sufficient to grant Wells Fargo's motion to dismiss the third amended complaint. McKenzie v. Wells Fargo Bank, N.A., 2013 WL 1087844 *12 (N.D. Cal. March 14, 2013).
However, the Magistrate Judge went on to examine "the causes of action alleged in the TAC on the basis of the excessive insurance theory." In his view, the third amended complaint failed to state a claim upon which relief could be granted in that case. McKenzie v. Wells Fargo Bank, N.A., 2013 WL 1087844 *12 (N.D. Cal. March 14, 2013).
The major addition in factual allegations in the third amended complaint, in the eyes of the Magistrate Judge, is that the plaintiffs in that case alleged that their claims against the mortgage servicers were based in part on Fannie Mae and Freddie Mac guidelines for mortgage servicers.
The Magistrate Judge quoted from a Federal case in Texas to the effect that the Fannie Mae guidelines, and by inference the Freddie Mac guidelines to the extent they might be different, operated between the lenders and their agents the servicers, and as a matter of law the servicing guidelines did not provide the plaintiffs with a claim upon which relief could be granted:
The allegations in the TAC demonstrate that Lender hires the Loan Servicer as an agent to, among other things, maintain flood insurance on the subject property. The GSE servicing guidelines have been described as “a set of instructions from a lender-principal to a servicer-agent.” See Hinton v. Federal Nat'l Mort. Ass'n, 945 F. Supp. 1052, 1057 (S.D.Tex.1996) (interpreting the Fannie Mae guide).
McKenzie v. Wells Fargo Bank, N.A., 2013 WL 1087844 *13 (N.D. Cal. March 14, 2013).
The language quoted from the Hinton decision was not complete, however. Here is the complete quotation from the Federal District Judge's opinion in the Hinton case:
The guide is a set of instructions from a lender-principal to a servicer-agent; it is not a contract between borrower and lender.
Hinton v. Federal Nat'l Mort. Ass'n, 945 F. Supp. 1052, 1057 (S.D. Tex. 1996), aff'd per curiam, 137 F.3d 1350, 1998 WL 92439 (5th Cir. Feb. 11, 1998). [Emphasis added.]
Wells Fargo argued in the McKenzie case that the servicing guidelines relied on by the plaintiffs "mimic" the Federal Regulation requiring a certain amount of flood insurance coverage, quoted above, yet Wells Fargo contended that as the U.S. Magistrate Judge in the McKenzie case had previously ruled, that the servicing guidelines nonetheless established a "floor, not a ceiling." McKenzie v. Wells Fargo Bank, N.A., 2013 WL 1087844 *7 (N.D. Cal. March 14, 2013).
The Magistrate Judge in McKenzie agreed, finding no limitation in the guidelines to whatever amount of flood insurance is less:
There is no limitation on the Loan Servicer's discretion to maintain one of the other enumerated alternative coverage levels where that minimum is met.
McKenzie v. Wells Fargo Bank, N.A., 2013 WL 1087844 *13 (N.D. Cal. March 14, 2013).
As we have seen, the determinative Regulation concerning the amount of flood insurance coverage to place is the lesser of the two enumerated alternative coverage levels, i.e., the remaining loan balance or the maximum amount available of NFIP insurance coverage. 24 C.F.R. § 203.16a(c), quoted in full above.
Whether that limitation is found in the servicing guidelines or not, it will not in either case change the fact that that limitation is found in the governing Regulation. Unlike the Federal Regulation, the servicing guideline "is not law." Hinton v. Federal Nat'l Mort. Ass'n, 945 F. Supp. 1052, 1056 (S.D. Tex. 1996), aff'd per curiam, 137 F.3d 1350, 1998 WL 92439 (5th Cir. Feb. 11, 1998).
Under the applicable law, then, the servicing guidelines issued by Fannie Mae and Freddie Mac cannot be invoked by the borrower; therefore, they cannot bind the borrower either. Further, even if the guidelines could bind parties other than the servicers and their principals, the lenders, even then the servicing guidelines are not law. The applicable law is set out in the Federal Regulation quoted above, 24 C.F.R. § 203.16a(c), and the required policy limits of flood insurance are either the remaining loan balance or the maximum amount of NFIP insurance available, "whichever is less."
That is not ambiguous language. Whatever else those words may be, they seem to be clear.
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