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May 07
Lenders Can't Require Limits Greater Than Home Replacement Cost

pexels-kindel-media-7578916.jpgThe question comes into the Geek CaveTM often enough that I thought it would be worth posting a reminder here. In New York and Connecticut, the law prohibits lenders from requiring home mortgage borrowers to buy dwelling insurance limits that are greater than the home's replacement cost. Your Resident Insurance GeekTM has not had to answer this question since ... yesterday.

​Here is chapter and verse. First, New York Banking Regulations  Section 38.9 states:

No mortgage banker or exempt organization shall require any mortgagor, in connection with the granting of a mortgage loan, to obtain a hazard insurance policy in excess of the replacement cost of the improvements on the property as a condition for the granting of such mortgage loan.

In this context, the term "mortgage loan" means "a loan made to one or more individuals primarily for personal, family or household use​ ..." This prohibition does not apply to commercial property insurance. 

The regulation also requires the lender to disclose this prohibition to the borrower. ​

Similarly, Connecticut General Statutes Section 36a-757 states:

No mortgage lender shall, in connection with any application for a mortgage loan in this state which is secured by mortgage on residential real estate located in this state, require any prospective mortgagor to obtain by purchase or otherwise a fire insurance policy, flood insurance policy, other extended coverage policy, or any combination thereof, in excess of the replacement value of the covered premises as a condition for the granting of such mortgage.

Again, this applies only to personal insurance, not to commercial property insurance. 

The next time a mortgage lender tries to force one of your clients to buy $1.3 million in coverage on a house that would cost $500,000 to rebuild, do not hesitate to inform them of these laws and regulations. If a lender wants to play in the New York and Connecticut sandboxes, these are the rules they have to follow.

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