Lender May Require Borrower To Obtain More Flood Insurance Than The Amount Required By Hud Without Breaching The Loan Agreement

Feaz v. Wells Fargo Bank, N.A., 13-10230 (11th Cir. Feb. 2014) involves contract interpretation arising from the interplay of two federal statutes. One is the National Housing Act (NHA), 12 U.S.C. § 1701, which is intended to promote home ownership; the other is the National Flood Insurance Act (NFIA), 42 U.S.C. §§ 4001-4129, which promotes affordable flood insurance. The NFIA requires a minimum amount of flood insurance before a federal agency can provide financial assistance for home purchases in areas that present special flood hazards. For homes in these areas, the NFIA prohibits regulated lenders from making any mortgage unless the home is covered by flood insurance in an amount at least equal to the outstanding principal balance of the loan or the maximum limit of coverage made available under [the NFIA], whichever is less[.] All FHA insured loans contain a covenant that requires borrowers to insure their homes against any hazards for which Lender requires insurance and to also insure … against loss by floods to the extent required by HUD, the FHA’s parent agency. When the FHA guarantees a mortgage loan for a home located in a designated special flood hazard area, HUD requires that the home be covered by flood insurance in an amount at least equal to either the outstanding balance of the mortgage, less estimated land cost, or the maximum amount of the NFIP insurance available with respect to the property improvements, whichever is less. The issue in the case is whether the words directing the borrower to have flood insurance to the extent required by the Secretary make the amount the HUD Secretary requires a minimum that the lender can exceed or a maximum that limits what the lender can require. The 11th Circuit joined those courts holding that the covenant unambiguously makes the federally required flood-insurance amount the minimum, not the maximum, the borrower must have. Although contract interpretation is a question of law, when a contract contains a uniform provision required by a federal agency, two additional considerations are relevant: the interpretation of the contract cannot vary from place to place and the United States drafted the language to implement congressional directives. Applying these principles, the 11th Circuit held that the uniform covenant on flood insurance is not ambiguous and that the only reasonable interpretation is that a mortgage lender may require the borrower to have more flood insurance than the HUD-determined minimum. Because the contract allows a lender to set the required insurance amount for any hazards, and hazards clearly includes floods, if the lender requires more than the HUD minimum, the borrower satisfies both by meeting the lender’s required amount. If the lender requires less, the borrower must obtain the amount set by HUD. This interpretation is supported by other contract language, including the language allowing the lender to do and pay whatever is necessary to protect the value of the Property and Lender’s rights. The value of the Property is not limited to the loan’s principal balance; it is the full replacement value of the home that secures payment of the debt. The NFIA and FHA regulations support this reading as well. The statutory and regulatory context of FHA guarantees for home-mortgage loans makes it implausible to read the covenant as imposing a ceiling on the amount of flood insurance a lender may require. If the insurance amount is limited to only the unpaid principal balance, the lender would not be able to insure against the risk the regulatory scheme imposes because the cost of repairing the damage may exceed the unpaid balance of the loan, which would result in the lender having to pay more for repair than it could collect in insurance benefits.

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