B7-3-05, Additional Insurance Requirements (12/14/2022)

If a lender or servicer becomes aware of a subject property's exposure to perils that are not covered as required in Coverage Requirements in  B7-3-02, Property Insurance Requirements for One-to Four-Unit PropertiesB7-3-02, Property Insurance Requirements for One-to Four-Unit Properties, or Coverage Requirements in  B7-3-03, Master Property Insurance Requirements for Project DevelopmentsB7-3-03, Master Property Insurance Requirements for Project Developments, such as toxic waste; it should contact Fannie Mae to determine whether additional coverage is necessary. Servicers should contact their Fannie Mae Servicing Representative (see Servicing Guide, F-4-02, List of Contacts) and lenders should contact their Fannie Mae Account Team (see  E-1-02, List of ContactsE-1-02, List of Contacts).

When the loan provides funds to cover the costs of repairs, remodeling, renovations, or energy-related improvements, there must not be any coverage exclusions or limitations related to the renovation work during the time that work is being performed on the property.

Once repairs, renovation, or construction is complete, the lender or servicer must review the property insurance policy (and flood insurance policy when required) to ensure the appropriate coverage is in place based on the completed replacement cost value of the subject property.

Fannie Mae allows insurance policies that include optional coverage such as those outlined below. However, Fannie Mae does not pay costs arising from disputes with insurers in settling claims that relate only to this optional coverage.

Acceptable Types of Optional Credit Life or Mortgage Loan Insurance

Permissible coverage includes:

• single-premium credit insurance policies and debt cancellation agreements that are free in all respects to the borrower, 
• single-premium mortgage insurance policies with a credit insurance feature where such credit insurance feature is free in all respects to the borrower, and
• credit insurance policies that require borrowers to pay a separately identified premium on a monthly or annual basis or debt cancellation agreements that require borrowers to pay a separately identified fee on a monthly basis.

These credit insurance policies or debt cancellation agreements must be disclosed to the borrower in clear and simple terms in advance of purchase of the applicable policy or agreement.

Notwithstanding the lender's or servicer's compliance with the above requirements, Fannie Mae purchases loans with debt cancellation agreements only with Fannie Mae's express written approval of the overall debt cancellation feature. This includes the debt cancellation agreement, and execution by the lender or servicer and Fannie Mae of a separately negotiated agreement.

The lender or servicer may act as a broker or agent in the sale of this type of credit insurance to the borrower.

The lender or servicer must reimburse Fannie Mae for attorney's fees or any costs that it incurs if Fannie Mae brings an action on a defaulted loan and the borrower defends against Fannie Mae's foreclosure or acts to enjoin Fannie Mae from liquidating the loan and one of the defenses or actions for injunction is based on:

• an obligation of the lender or servicer (including as the broker or agent that obtained the credit insurance for the borrower and/or as a party that has agreed to collect premiums and remit them to the credit insurer on the borrower's behalf),
• an obligation of the credit insurer, or
• the obligation of the mortgage insurer to maintain credit insurance and apply benefits thereof to the borrower's loan.

Unacceptable Types of Optional Credit Life or Mortgage Loan Insurance

Although certain property insurance policies that include optional coverage are allowed, Fannie Mae does not purchase loans in the following situations:

• The premium/fee for single-premium credit life insurance policies or debt cancellation agreements is paid directly by the borrower or paid indirectly by financing the premium/fee into the loan amount.
• The premium/fee for single-premium mortgage insurance policies with a credit insurance feature is paid directly by the borrower or paid indirectly by rolling the credit insurance single premium into the cost of the mortgage insurance (whether or not it is identified as including a credit insurance premium).