Fix a flood insurance shortfall

Must borrower boost coverage after lender's mistake?

Mortgages are complicated instruments subject to a myriad of rules and regulations from the many private parties and government entities that are involved. With so much complexity, mistakes are inevitable.

Q: Last December I did a refinance, which required a flood insurance policy on my home. Everything was fine when, out of the blue, I receive a letter from the bank that purchased the loan stating that I needed to increase the coverage on my flood insurance policy within 30 days or the bank would buy the additional coverage for me. Can the bank do this when the policy I bought met the requirements of the lender I dealt with?

A: This letter is typical of many that I receive about mistakes committed by lenders. First, the mistake arose out of the complexity of a process involving multiple players. The lender was required, as a condition of granting a mortgage, that the borrower purchase flood insurance, because the property was located in an area designated a Special Flood Hazard Area by the Federal Emergency Management Agency (FEMA).

The required coverage, which the originating lender did not get right, is set forth in the Flood Disaster Protection Act.

Another common feature of the letters I receive from borrowers about mistakes is a presumption on their part that because the mistake was not theirs, they should not be required to bear any of the cost of fixing it. That is not the case.