A California District Court Rejected A HELOC Lender’s Demand That Mortgagors Must Obtain Flood Insurance For The Full Amount Of Their Line Of Credit Even Though The Lender Had Suspended Future Draws Due To A Decline In The Property’s Value

In Hofstetter v. Chase Home Finance, LLC, C 10-01313 (N.D. Cal., Aug. 16, 2010) the mortgagors had a home equity line of credit that had no opening balance. The lender suspended future draws because the mortgagors’ properties had declined in value. After the credit was suspended the lender advised the mortgagors by federal law they must purchase flood insurance for the property in the amount of $175,000.00. The lender further advised the mortgagors that if they don’t purchase the flood insurance, the lender would force place it and charge them the premium, which is what ultimately happened. The plaintiff, a mortgagor, brought a class action against the lender under California’s UDAP statutes and TILA. The lender answered that it was required under the National Flood Insurance Act of 1968 (NFIA) to purchase the flood insurance. According to the plaintiff, the statutory language of 42 U.S.C. §4012a(b)(1) unambiguously set the minimum required amount of flood insurance coverage for plaintiff’s home equity line of credit at zero dollars, since the outstanding principal balance of [her] loan was zero dollars. As such, plaintiff asserts that the lender was not required-and had no authority-under the NFIA to purchase flood insurance for her property. The lender, in rebuttal, pointed to decades’ worth of regulatory materials showing that the total amount of credit at origination is the proper measuring stick for the minimum required flood insurance under the NFIA. The court said neither party was right. The agencies implementing NFIA recognized that it would be onerous to require banks to continually monitor the ebb and flow of funds actually being drawn on a home-equity line of credit for purposes of compliance with the mandatory flood insurance provisions of the NFIA. As such, the agencies allowed lenders to simply require the purchase of flood insurance equal to the maximum amount of funds the borrower could theoretically draw on the line. The court further found that the lender’s proposed construction also missed the mark. According to the lender, the minimum amount of flood insurance required for a home equity line of credit under the NFIA is the total amount of the line at origination, regardless of whether circumstances surrounding the line have changed. However, the OCC made clear that a request made for an increase in an approved line of credit may require a new determination of minimum flood insurance requirements. This demonstrates that the minimum amount of flood insurance required for home-equity lines of credit is tied not to the total amount of the line at origination but to the total amount of credit actually being extended at the time. Thus, to be consistent with the purposes of the NFIA and in accord with the regulations and agency materials governing these requirements, the minimum requirements for flood insurance for a home-equity line of credit requires the lender to take into account: (1) the maximum amount of funds the borrower may draw on the line at the time a flood determination is made, and (2) the outstanding principal balance of the loan, whichever is greater.

Download Related Document