Letter to Richard Cordray, Director of Consumer Financial Protection Bureau

Letter

Today, U.S. Senator Charles E. Schumer called on the Consumer Financial Protection Bureau (CFPB) to investigate whether lenders are pressuring homeowners to purchase higher levels of flood insurance coverage than is required by law, which can cost residents in the region thousands of dollars per year in extra premiums. In particular, recent reports in Central New York allege that insurers are requiring homeowners to purchase insurance coverage in the amount of the "replacement cost" of their home, rather than the outstanding principal amount of their mortgage. Schumer noted that federal law requires property owners to purchase flood insurance for buildings within a designated Special Flood Hazard Area, but does not mandate the level of insurance coverage. The U.S. Department of Housing and Urban Development (HUD) has issued guidelines, however, providing that the legally required coverage amount is that of the "outstanding principal balance" on the mortgage, which is nearly always much lower than the replacement cost. Schumer is calling on CFPB Director Richard Cordray to investigate this practice, and ensure that New York homeowners are not on the hook to purchase higher levels of flood insurance than is required by law.

"Why are banks requiring more flood insurance coverage than is required to recover the cost of their loan to the homeowner? When a home is worth say, $80,000 on the open market and it has a $40,000 mortgage, why is the bank requiring up to $250,000 of insurance? On the one hand, it doesn't add up -- who is scratching whose back? And on the other hand, it slams homeowners with hundreds, or even thousands, of dollars a year in extra insurance premiums that they can ill afford to pay," said Schumer.

"When it comes to thousands of dollars a year tacked on to residents' flood insurance costs, there should be absolutely no ambiguity as to what is required of homeowners' flood insurance responsibilities," added Schumer. "With reports that residents are being required by lenders to purchase insurance coverage in the amount of the replacement cost of their homes, rather than the outstanding cost of their mortgage, it is clear that something must be done. That is why I'm calling on the Consumer Financial Protection Bureau to swiftly investigate whether lenders are pressuring homeowners to require higher level insurance coverage than is required by federal law, and to provide clear and coordinated rules for lenders. Upstate New York homeowners who want to cover the cost of replacing their home should be free to purchase that coverage, but their feet shouldn't be held to the fire in order to do so."

The Flood Disaster Protection Act of 1973 requires property owners to purchase flood insurance for buildings located within a designated Special Flood Hazard Area when owners utilized Federal financial assistance to acquire the property. However, the level of insurance coverage homeowners must acquire to protect properties in flood zones is not specified in the law. In his letter to the CFPB, Schumer highlighted that HUD provides flood insurance coverage guidance that demonstrates clearly that flood insurance coverage does not need to exceed the balance of one's mortgage. In contrast, some New York residents have been told by their lenders that flood insurance must be purchased not just to cover the outstanding principal balance of the mortgage, but coverage must also be high enough to cover the cost to completely replace a home.

Schumer highlighted recent reports of a Syracuse resident with a $25,000 mortgage, that was forced to purchase coverage for the amount it would cost to rebuild his home from scratch in the event of a flood, rather than the cost for the balance of his mortgage. The cost for this coverage is over $200,000, which is nearly 3.5 times the value of the Syracuse resident's home. Schumer stated that this disturbing trend must be investigated, and called on the CFPB to ensure that homeowners in Syracuse or any other region are not being pressured to pay for higher level insurance coverage than is required by law.

A copy of Schumer's letter appears below:

Richard Cordray

Director

Consumer Financial Protection Bureau

1700 G Street, NW

Washington, DC 20552

Dear Mr. Cordray:

I write to express grave concern over recent reports that lenders are pressuring homeowners into purchasing far greater levels of flood insurance coverage than is required by law, costing them hundreds and even thousands of dollars per year in extra premiums, without informing the homeowners that they are not, in fact, required by law to purchase such large policies. In particular, insurers are requiring homeowners to purchase insurance coverage in the amount of the replacement cost of their home, rather than the outstanding principal amount of their mortgage.

As you know, the Flood Disaster Protection Act of 1973 requires property owners to purchase flood insurance for buildings located within a designated Special Flood Hazard Area when owners utilized Federal financial assistance to acquire the property. While this statute makes clear the requirement to purchase flood insurance, the level of insurance coverage mortgage holders must possess to protect properties in flood zones is not. For example, the U.S. Department of Housing and Urban Development (HUD) provides flood insurance coverage guidance and technical assistance to property owners. This guidance states, "For loans, loan insurance or guarantees, the amount of flood insurance coverage need not exceed the outstanding principal balance of the loan." HUD is very clear that flood insurance coverage does not need to exceed the balance of one's mortgage. However, New Yorkers from Syracuse to Long Island have been told by their lenders that flood insurance must be purchased not just to cover the outstanding principal balance of the mortgage, but coverage must also be high enough to cover the cost to completely replace a home.

The lender's interests are fully protected by ensuring that they are repaid on the mortgage -- their interest does not extend to replacing the home in the event it is damaged. Homeowners who want coverage sufficient to cover the cost of replacing their home are, of course, free to purchase such coverage. But they should not be forced to do so.

The discrepancy between flood insurance coverage levels as outlined by HUD's flood insurance coverage guidance and those coverage levels required by federal lenders is confusing and can be very costly. I respectfully request that you investigate these practices and take action to ensure that consumers are not forced to purchase more flood insurance than is required by law.

Thank you for your attention to this very important request. Please do not hesitate to contact me or my staff at 202-224-6542 should you have any questions.

Sincerely,

Charles E. Schumer

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