Agreeing with the First Circuit’s recent en banc ruling in Kolbe v. BAC Home Loans Servicing LP, — F.3d —, 2013 WL 5394192 (1st Cir. Sept. 27, 2013), the United States Court of Appeals for the Eleventh Circuit ruled that the form language in mortgages requiring borrowers to purchase the FHA’s minimum required amount of flood insurance does not prevent lenders from demanding more insurance than the FHA requires. The Court affirmed dismissal of the claim for breach of contract, and also of the related claims for breach of the duty of good faith and fair dealing, and breach of fiduciary duty.
Noting a split of authority among district courts, in which many others have found the contract language to be ambiguous, the First Circuit recognized that interpretation of contract language required by federal law is subject to additional considerations than when interpreting the text of a standard private contract. First, courts must strive to interpret these contracts uniformly whenever they appear to promote the standardization that the federal law intended to achieve. The FHA required standardization of the flood insurance provision “with only such adaptation as may be necessary to conform to state or local requirements,” which weighed against finding any ambiguity in the provision. The Eleventh Circuit noted that it should adopt an approach that “ensures effective functioning of our financial markets, and begets stability.” Second, when contract language is required by law, it is legislative intent, not the parties’ intent, that guides a court’s interpretation. And here, the applicable FHA regulations made clear that lenders are allowed to require more than the FHA’s minimum, up to the value of the property, because “the lender’s exposure to the risk of loss can, and often does, extend to the replacement value of the home.” Further, the FHA only regulates flood insurance in certain areas, and for loans up to $250,000; viewing the FHA requirement as an absolute maximum would, irrationally, prevent lenders from requiring any flood insurance for other loans.
Of note, the United States filed an amicus brief supporting the lender’s position, on which the Court also relied. The Government argued that preventing lenders from requiring more than the FHA minimum would contravene federal housing policy in that it would lead to lenders not making loans in areas with “any significant flood risk.” For that reason, the United States has consistently interpreted the FHA mortgage insurance program as allowing lenders to require more coverage. The Court agreed with this interpretation, though it did not specify the level of deference granted to the government’s interpretation.