With an expansion of the flood plain in several California counties taking effect next month, lenders are wrestling with the question of when to notify borrowers.
On July 6 the Federal Emergency Management Agency will remap its flood zones in California, adding 250,000 properties. That same day, flood insurance rates are scheduled to double. The owners will be required by law to buy flood insurance, but mortgage lenders are the ones ultimately on the hook.
In 1994 the federal government passed a law requiring servicers to make sure borrowers in flood plains are insured. If the homeowners have failed to buy flood insurance, the law authorizes the lenders to "force-place" policies by adding the premiums to loan balances. Flood insurance is underwritten by the National Flood Insurance Program.
The lenders are not, however, required to inform homeowners that they have an opportunity to lock in low premiums before FEMA releases the final remapping.
"It's worth their while to mention to the consumer that, come July 6, they're going to have to buy it anyway," said Albert LeQuang, manager of mortgage policy, insurance, and disaster response at Freddie Mac, which has encouraged lenders to be proactive. "Why not buy today and pay 50% of the cost?"
But "some people think this is a risky thing to do, to prenotify," said Darcy Patch, director of sales and marketing at Cigna Flood Services.
These lenders are afraid of lawsuits. Insurance provided by the National Flood Insurance Program is nonrefundable, and though preliminary maps of the new flood zones are available, nothing is final until next month. "The downside is that if FEMA doesn't put these new maps into effect and the customer buys flood insurance, they can't get their money back," said Carl Formato, president of Washington Mutual Insurance Services.
Even those who have seen fit to alert borrowers are still being cautious. Two weeks ago Countrywide Insurance Services Inc., an affiliate of Countrywide Home Loans, sent personalized letters to 9,000 customers in the areas affected by the FEMA remapping.
Countrywide chose to notify only after FEMA had revised its preliminary maps several times. "We pulled the trigger when we thought things were close enough to where they were going to end up," said John Ingersoll, senior vice president for business development.
In its letters, Countrywide advised its customers-in bold typeface-that they were not required to buy the insurance until July 6, Mr. Ingersoll said.
Also this month Washington Mutual sent out letters to its customers who could potentially find themselves in a flood zone come July 6. "The way our letter is worded, we alerted the customer that 'it's your decision,'" said Mr. Formato. "It's strictly a customer service issue at this point."