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Financial Services Law Insights and Observations

First Circuit Holds Lender Can Require Increased Flood Insurance Coverage

Mortgage Origination Mortgage Servicing Class Action Force-placed Insurance Flood Insurance


Recently, the U.S. Court of Appeals for the First Circuit affirmed a district court’s dismissal of a putative class action alleging that a lender improperly required borrowers of FHA-insured mortgages to buy and maintain higher flood insurance coverage than that indicated in their mortgage contracts. Kolbe v. BAC Home Loans Servicing, LP, No. 11-2030, 2013 WL 5394192 (1st Cir. Sept. 27, 2013). The ruling, from an equally divided en banc court, allows mortgage lenders to require borrowers to maintain flood insurance equal to the replacement value of their homes. The named borrower claimed that he was forced to increase his flood insurance coverage in breach of his mortgage contract with his original lender that set the required flood amount coverage. In an amicus brief filed by DOJ on behalf of HUD, the government argued that the FHA’s model mortgage form gives lenders discretion to require coverage for the replacement cost of the property in the event of a flood. The Court of Appeals agreed with the government’s interpretation of the language in the model mortgage contract and reasoned that to interpret the form otherwise would hinder federal housing policy by discouraging banks from offering FHA-insured mortgages or forcing banks to charge higher rates. Dissenting judges argued that the ruling allowed a federal agency to intervene and rewrite a contract to serve its own purposes, and that the ruling’s prediction that banks would not offer FHA mortgages or charge higher rates was speculative.