Iowa Supreme Court Opens Door to Potential Servicer Liability for Flood Hazard Disclosure Failures

Mortgage Servicing Flood Insurance

On November 16, the Iowa Supreme Court held that a mortgage servicer may be liable to borrowers for failing to disclose information it acquired about the borrowers’ flood hazard risks. Bagelmann v. First Nat’l Bank, No. 11-1484, 2012 WL 5642039 (Iowa Nov. 16, 2012). After their home flooded, the borrowers sued their mortgage lender and servicer and alleged that at the time of origination and two years later during a refinance transaction, the lender incorrectly informed them that the property was not in a special flood hazard area and that no flood insurance was required. According to the borrowers, several years later the servicer was advised that the property was in a special flood hazard area and failed to inform the borrowers prior to their property flooding. The Iowa Supreme Court affirmed the district court’s holdings that (i) the borrowers cannot use the requirements of the National Flood Insurance Act as a basis for a state-law claim, (ii) the lender and servicer did not breach a contract with the borrowers, and (iii) the borrowers do not have a viable negligent misrepresentation claim. However, the Supreme Court determined that the borrowers provided evidence from which a fact finder could infer that the servicer knew prior to the flood that the property was in a flood zone and that prior representations to the contrary were incorrect. Therefore, the court reversed the grant of summary judgment to the servicer and remanded the case for further consideration of a possible claim based on Restatement (Second) of Torts section 551(2) against their servicer.  The court also affirmed the lower court’s grant of summary judgment to the lender on the grounds that the lender no longer had a banking relationship with the borrowers.