Presented by Jay Friedland, CEO M&M Consulting LLC

Transcription

1 Presented by Jay Friedland, CEO M&M Consulting LLC The Florida Bankers Association 30th Annual Consumer Compliance Seminar

2 The Florida Bankers Association 30th annual Consumer Compliance Seminar 1 Jay Friedland jaybanker@mmconsulting.info 2 Biggert-Waters Flood Insurance Reform Act Commercial treatment for multiunit dwellings Mandatory escrow and exemption to requirements Increased deductibles Private insurance requirements Forced place coverage Provisions under Biggert-Waters Flood that are self-implementing and those that require rules to become effective Status of rules The Homeowners Flood Insurance Affordability Act of 2014 Impact on Biggert-Waters Most recent interagency FAQs Status of mandatory flood guidelines Ongoing flood insurance requirements - Detailed review of flood requirements presently applicable to lenders taking into account all of the above changes 3 1

3 Before 1968 flood insurance was virtually unavailable in the private sector as insurance companies were often unwilling to underwrite and bear the risk of flood due to its catastrophic nature. However. 1968: National Flood Insurance Protection Act 1973: Flood Disaster Protection Act 1994: National Flood Insurance Reform Act 2012 Biggert Waters Flood Insurance Reform Act 2014 Homeowners Flood Insurance Affordability Act 4 Flood insurance violations continue to be a major regulatory concern Exceptions continue to be identified on exam Regulator concern re write your own policies Civil Money penalties The flood maps have been changing big time! Plenty of issues for commercial lending And there s been major flooding occurring with increasing frequency over last 10 years 5 The storm of the century is no longer waiting a century to occur! 6 2

4 Just in case you somehow missed it, this is what I am talking about

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8 As a result of all of this major flooding There s been increased regulatory enforcement as properties that should have been covered by flood insurance were found not to be covered, or inadequately covered. Huge payouts by National Flood Insurance Fund had caused Fund to move toward being under water..and Congress enacted the Biggert-Waters Flood Insurance Reform Act! 19 The Biggert-Waters Flood Insurance Reform Act of 2012 Technically called the Flood Insurance Reform and Modernization Act the Act s short title is Biggert-Waters Flood Insurance Reform Act of Signed into law July 6, 2012 Many provisions 53 separate sections - but effective dates not always clear. 21 7

9 Some provisions directly impact lenders such as increased potential for civil money penalties. Others, such as for sharp flood insurance premium increases, indirectly impact lenders in that they may get greater pushback from borrowers and over time more borrowers may allow policies to lapse, requiring more forced placement actions. We won t go over all 53 sections, but will address those that I think may most significant impact lenders, directly or indirectly. 22 The authority of the National Flood Insurance Program was extended 5 years until September 30, Many do not realize that the NFIP is not a permanent program, but is authorized for only a period of time. This in the past has resulted in lapses in coverage. 23 Eliminated subsidized rates for following classes of structures and allows rates to increase by 25% per year until actuarial rates are achieved: Any residential property not used as primary residence Any severe repetitive loss property Any property that has incurred flood related damages that cumulatively exceed the fair market value of the property Any business property 24 8

10 Any property that after the date of the Bill has incurred substantial damage or has experienced substantial improvement exceeding 30 percent of the fair market value of the property. Any new policy or lapsed policy, or any policy for a newly purchased property. Any policy where owner refused FEMA mitigation offer, or for a repetitive loss property or severe repetitive loss property. Severe Repetitive Loss property for single family residence means 4 or more claims, each >$5,000 & cumulatively >$20,000. For multi-family residences, FEMA Director to provide a definition. 25 Provided for Increase in Average Annual Limit on Premium Growth - annual limitation on premium increase went from 10% to 20%. Authorized FEMA to accept the payment of flood insurance premium in installments. (If no surcharge for installments, would lenders if escrowing be forced to go to instalment payments as consumer friendly???) 26 Would require lender to accept private flood insurance as satisfaction of the flood insurance coverage requirement if the flood insurance coverage meets the requirements for coverage. Caution should be exercised in ensuring policy meets FEMA requirements more on this later. 27 9

11 Not only is lender required to accept qualifying private insurance, notice to borrower must state this fact. Act requires lender disclose to borrower that (i) flood insurance is available from private insurance companies that issue standard flood insurance policies on behalf of NFIP or directly from NFIP; 28 (ii) flood insurance providing same level of coverage as NFIP standard flood insurance policy may be available from private insurance company that issues policies on behalf of NFIP; & (iii) borrower is encouraged to compare insurance coverage, deductibles, exclusions, conditions and premiums associated with flood insurance policies issued on behalf of NFIP & policies issued by private insurance companies and to direct inquiries regarding availability, cost, and comparisons of flood insurance coverage to an insurance agent. 29 is issued by an insurance company that is (i) licensed, to engage in the business of insurance in the State where insured building is located provides coverage at least as broad as standard NFIP policy considering deductibles, exclusions, & conditions; includes 45 days insured/lender cancellation notice provision; information re: availability of insurance under NFIP; mortgage interest clause similar NFIP policy; provision requiring insured to sue within 1 year after denial of all or part of a claim under the policy; & cancellation provisions as restrictive as NFIP

12 Penalties for Non-Compliance would increase from $350 to $2000 per violation (& limit on annual penalties eliminated) for failure to: require flood insurance provide special flood hazard notice force place required flood insurance escrow flood insurance (required escrow accounts) provide notice to servicer upon transfer accept a comparable private policy 31 Maximum amount flood insurance coverage for residential properties of 5 or more residences (not condos) is equal to commercial property coverage (maximum now $500,000). Previously, whether one owned a single family house, a duplex, or a five family apartment complex, the coverage was limited to the dwelling policy at $250,000 NFIP coverage. 32 FDIC, OCC, Federal Reserve & NCUA interagency statement of May 30, Key point is that a review of current outstanding loans is needed. If, as result of increase in maximum limit of building coverage for these multifamily buildings, a lender determines on or after June 1, 2014, that building securing a loan is now covered by flood insurance in an amount less than required by federal flood insurance regulation, it should take steps to ensure that borrower obtains sufficient coverage, including force placing insurance pursuant to federal law

13 Biggert Waters changes to minimum deductibles apply only to new & renewal policies effective on or after 6/1/14. According to NFIP for 1-4 family residences: Full-Risk Rated Policies depending on the zone will move to $1,000 (<$ coverage) or $1,250 minimum deductibles. Policies rated with Pre-FIRM subsidized rates will have a minimum deductible of $1,500 for building or contents coverage if building coverage does not exceed $100,000, and $2,000 if exceeds $100, In NFIP Manual effective in October 2014: Deductible tables for residential range from $1,000 to $5,000 Deductible tables for other residential and nonresidential range from $1,000 all the way to $50,000 Optional residential max now $10,000 (had been $5000) NFIP manual contains detailed deductible tables. 35 Would require FEMA Administrator to establish meaningful standards for updating maps. Authorizes $400 million annually for mapping. Expect maps to be updated more frequently and if you have experienced map updating, it rarely results in flood zone properties being determined not to be in a SFHA. Rather, properties not previously in SFHAs are now included. Expect some unhappy borrowers and increased need to force place flood insurance

14 Would require FEMA to accumulate a reserve fund to help cover losses in higher than average years. FEMA will be required to put at least 7.5% of into the fund each year until the reserve ratio is met. The need to build up reserves puts further pressure on FEMA to increase rates. 37 Would require each policy to state all conditions, exclusions & other limitations in plain English, in boldface type, & in a font size that s twice the size of text of policy body. 38 Requires lenders to establish escrows for flood premiums unless institution: (i) has total assets of less than $1 billion; & (ii) on or before 7/6/12, didn t have policy consistently & uniformly requiring escrow of taxes, insurance premiums, fees, or any other charges; and (iii) was not required under federal or state law to deposit taxes, insurance premiums, fees, or any other charges into an escrow account. Exemption appears to apply only to institutions have not maintained any escrow accounts at all. Effective date has been postponed to Jan

15 Force Placed Coverage Act clarified that when force placing, coverage to be purchased should be retroactive to when coverage lapsed and that borrower to pay for this. Lenders must terminate force placed coverage within 30 days of confirming that coverage has been obtained, & refund any premiums charged from coverage date (i.e., ensuring no overlap in coverage). 40 Required FEMA, upon the effective date of a new or updated Flood Insurance Rate Map, to phase in premium increases over five years by 20 percent a year to reflect the current risk of flood to a property, effectively eliminating FEMA s ability to grandfather properties into lower risk classes. 41 FDIC, OCC, Fed and NCUA on March 29, 2013 interagency Biggert-Waters guidance: Intended to reduce confusion (which was considerable) as to which parts of Act were self-implementing, and therefore already effective, and which parts require implementing regulations to have effect. Following is described as Agencies position 42 14

16 The following became effective upon enactment: Amendments to the force placement provisions. The increase of the maximum civil money penalty for an FDPA violation to $2,000 and Elimination of the annual penalty cap. 43 Following not effective until regulations are issued: That lenders accept private flood insurance policies if coverage satisfies standards specified in the Act. That lenders disclose to borrowers certain information regarding the National Flood Insurance Program. That certain lenders and servicers establish escrow accounts for flood insurance premiums and fees for any loan outstanding or entered into after July 6, 2014, that is secured by residential improved real estate or a mobile home. (There is an exemption for certain institutions with less than $1 billion in assets). 44 The interagency statement went on to provide more detail in key areas

17 Force Placement FDPA provides that a lender must notify borrower if it determines that flood insurance coverage on property serving as collateral has expired or the amount is insufficient. Must also notify borrower if map change now requires flood insurance. Notice must inform borrower of need to purchase flood insurance. If borrower fails to do so within 45 days, lender must purchase flood insurance and may charge borrower for premiums. The Act amends the FDPA to: 46 Provide that premiums lender may charge goes back to when flood insurance coverage lapsed or did not provide sufficient coverage amount; Require lender within 30 days of confirmation of borrower s existing flood insurance coverage, to terminate force-placed insurance and refund forceplaced insurance premiums paid by borrower during overlap; and Require lender to accept as confirmation of coverage declarations page that includes existing flood policy number and identity and contact information for insurance company or agent. 47 Private Flood Insurance: - Lenders will have to accept private flood insurance policies if coverage provided satisfies standards specified in the Act. In addition, lenders are required to disclose NFIP Flood insurance is available from private insurance companies or from NFIP directly; Flood insurance that provides the same level of coverage as an NFIP policy may be available from private insurance companies; and Borrowers are encouraged to compare policies. The above provision will be implemented by the Agencies through notice and comment rulemaking. It is the Agencies position that this provision of the Act is not effective until regulations are issued

18 Even with delayed implementation of a number of key provisions, there were many impacts of Biggert Waters, most of which were not noticed much outside of the insurance industry. However, as a result of Biggert Waters, many property owners were hit with huge increases in insurance premiums, sometimes staggering increases, particularly in areas that had experienced major flooding. For example 49 From 8/19/14 Huffington Post Before the relief law was signed, a homeowner in Hawaii was shocked to find out his insurance rate, which had been $1,200 a year, would rise to as much as $47,000 a year. Once told the new rate by the insurance agent, the homeowner was not heard from again. Another homeowner in Kailua was faced with a potential increase from $700 to $30,000 per year. 50 Similar articles and television news stories appeared in Many other areas of the country identifying staggering increased insurance premiums impacting both individual homeowners and owner s of small commercial buildings

19 The media attention caught the attention of many, including members of Congress who had enacted Biggert-Waters to begin with. Many legislators viewed the Reform Act as having unbearable financial consequences on their constituents. As a result, Congress enacted the Homeowners Flood Insurance Affordability Act which can be viewed as reforming the flood reform Act 52 President Obama signed Homeowner Flood Insurance Affordability Act of 2014 into law on March 21, Law repeals or modifies certain provisions of the Biggert-Waters Flood Insurance Reform Act. However, many provisions of Biggert-Waters remain and are still being implemented. 53 While this Act requires some changes to be made retroactively, applying to certain policies written after July 6, 2012, other changes require new programs, processes and procedures

20 Requires gradual rate increases to properties now receiving subsidized rates instead of immediate increases required by Biggert Waters in some instances. However, FEMA generally required to increase premiums for subsidized properties by at least 5 %annually until rate is no longer subsidized. 55 With limited exceptions flood insurance premiums cannot increase more than 18 percent annually. There are some exceptions to these limitations, and policies for the following properties will continue to see up to a 25 percent annually until they reach their non subsidized rate: 56 Older business properties with subsidized rates; Older non-primary residences with subsidized rates; Severe Repetitive Loss Properties with subsidized rates; and Buildings that have been substantially damaged or improved built before the local adoption of a Flood Insurance Rate Map (i.e. Pre-FIRM properties )

21 In order to enable new purchasers of property to retain Pre-FIRM rates while FEMA is developing its guidelines, a new purchaser will be allowed to assume prior owner s flood insurance policy & retain same rates until the guidance is finalized. Also, lapsed policies receiving Pre-FIRM subsidized rates may be reinstated with Pre-FIRM subsidized rates pending FEMA s implementation of the rate increases required by the Act. 58 New surcharge for all policies to offset cost of subsidized policies and achieve the financial sustainability goals Biggert Waters. A policy for a primary residence will include a $25 surcharge. All other policies will include a $250 surcharge. The fee will be included on all policies, including full-risk rated policies, until subsidies are eliminated. 59 Requires that residential basement floodproofing be considered when developing full-risk rates after map changes increasing the Base Flood Elevation in area where residential basement floodproofing is permitted. Mandates FEMA develop installment plan for non-escrowed flood insurance premiums, which will require changes to regulations & Standard Flood Insurance Policy contract. Increases maximum deductibles

22 Requires the Technical Mapping Advisory Council (TMAC) to review the new national flood mapping program authorized under the 2012 and 2014 flood insurance reform laws. The law requires the Administrator to certify in writing to Congress that FEMA is utilizing technically credible data and mapping approaches. The law also requires FEMA to submit the TMAC review report to Congress. 61 Back to Basics --- The fundamentals of flood insurance requirements 62 Flood Hazard insurance requirements apply to all loans secured by structures in flood hazard areas, regardless of loan type or purpose or priority of security interest (some very limited exceptions such as piers & boat houses). Requirements also apply to vacant land if structure is to be built using loan proceeds

23 Lender Responsibilities: Prior to making, increasing, renewing or extending a loan secured by improved real estate or mobile home, must determine (using FEMA form) whether property is in a SFHA and area is eligible for flood hazard insurance. If multiple properties with structures secure loan, determination must be obtained for each. If multiple structures are located on a single property, a listing of structures on parcel should be attached to single determination form. 64 Note: Technically, mobile homes not secured by land are covered only if: home is anchored to a permanent and home is connected to utilities However, examiners seem to view the fact that any weight taken off the wheels (i.e., cinder blocks) constitutes a foundation and that either a single light wire or hose running to unit constitutes utilities. Assume that all mobile homes are covered!!! 65 Includes commercial as well as consumer, although both commercial and consumer properties have unique flood considerations Construction loans covered even though initially land is unimproved & no buildings on property. Only exception: loans <$5000 to be repaid <1 year. How many of these are secured by real estate? 66 22

24 Regulations don t specify when determination must be made. However, as will be discussed shortly, if notification is required, it must be provided at least 10 days prior to closing so that the determination must be performed taking into account this time frame. Determination can be made by third party if party guarantees accuracy. However, Lender ultimately responsible regardless of who performs determination. It is important to: Assure appropriate contract provisions regarding liability Ascertain third party s financial strength React if indications of quality issues with determinations 67 Review flood determination very carefully Is address correct It must be address of property securing the loan which may not be the same as borrower s primary residence Does it reflect the correct number? A determination on 1902 Main St. does not serve as a determination for 9102 Main St. Is the town correct? Is all required information completed Is the lender ID correct? Is form current version. 68 If property in SFHA in participating community, lender may not make, renew, extend or increase loan w/o flood insurance If property in SFHA not in participating community, lender may legally make loan, but From a safety and soundness perspective, may not want to incur risk. Secondary Market may require insurance. Private insurance is often available, but at much higher cost

25 Insurance is not available for: Buildings built completely over water if newly constructed after October, 1982 Boat Houses Buildings erected/substantially improved after area designated as an undeveloped Coastal Barrier Area Buildings in violation of State or local laws Buildings in communities not participating in the national program 70 Flood zone indicated on determination form governs actions that lender must take. If form indicates that property is in SFHA, Lender must treat it as such. Alternative determinations showing a different flood zone, such as those prepared by appraiser or insurance agency, can not be substituted for that received from service provider. 71 When borrower first learns that property is in a special flood hazard area and that flood insurance is required, you are likely to hear: But, but, but but. But it was never in a flood zone before. But our neighbors aren t required to have flood insurance. But our prior lender never required this. But the property is as high as Mount Everest. But the property is really a shack and need not be insured. But there is no water nearby. But there has never been a flood. But my insurance agent said that it s not in a flood zone. But your own appraiser said that it s not in a flood zone

26 If customer (or insurance agent) disagrees with determination, Lender s options for accommodating customer are very limited: If customer asserts, in circumstances where land is partially in a SFHA, structure is outside of SFHA, lender cannot rely on assertion. To address concern, a survey may be obtained and sent to lender s service provider for consideration. If service provider issues a new determination, lender can rely on it (retain both determinations in file). If not, lender must rely on original determination. If a survey cannot be obtained prior to closing, lender must require insurance at closing. 73 If customer argues that only a small portion of the structure is in the SFHA, the old adage if your toe is in the water, you are in the water comes to mind. In other words, even if the bottom step off the back porch is the only portion of the structure within the SFHA, then the structure is deemed to be in the SFHA. 74 If customer asserts elevation is such that structure couldn t possibly flood or map is incorrectly drawn, only customer option is to seek a letter of map amendment or revision from FEMA. If loan closes prior to FEMA changing map, insurance must be in place at closing. If customer asserts that determination company made a mistake, you can ask company to confirm providing whatever additional information customer provides. However, decision is up to determination company

27 Borrower and lender may jointly submit a review request to the Director of FEMA during the 45 day period after the borrower is notified that flood insurance is required. The FEMA review will also check for LOMAs, LOMR-Fs, and LOMRs in existence that should affect the determination. Requests submitted more than 45 days after borrower notification will not be reviewed, will be returned by FEMA with the fee and should not be resubmitted. FEMA must respond within 45 days. 76 Flood Insurance requirements absolutely positively cannot be waived under any circumstances. For example, the abundance of caution concept applicable to appraisal requirements has absolutely no application to flood requirements. Only alternative if lender doesn t want to have customer problem is for lender to pay premium, not something many lenders will want to do. 77 If SFHA property is in participating community, lender must provide notice at least 10 days before closing that: property is in a special flood hazard zone flood insurance will be required to close the loan flood insurance coverage is available from national program and from private insurers as well; and federal disaster relief may be available in the event of a federally declared disaster. A notice must also be sent if property is in nonparticipating community, but language is different

28 Please note that the regulation actually states that the notification must be provided a reasonable time prior to closing. However, examiners typical view of a reasonable time prior to closing is at least 10 days prior to closing, which was the requirement of an earlier version of the regulation that had been replaced. 79 Two key points about the notification: Must be sent a reasonable time prior to closing(10 days) & Lender must document that it was sent 10 days prior; and Lender must also be able to document receipt of notification (although this can be done at closing). 80 To document that notice was sent 10 days prior to closing, lender may: 1. Send notice certified mail; 2. Retain a copy of the notification with the system generated print date; or 3. Retain a copy of a notification cover letter

29 To document receipt of notification by the borrower, Lender may 1. Send notice certified mail; 2. Have the borrower sign a copy of the notification -- this can be done at closing. Lender need not document that borrower received notice 10 days prior (as opposed to lender sending notice ten days prior), but only that borrower received notice by time loan closed. 82 Change in examination practice? We have learned of instances where FDIC & OCC examiners indicated that a dated cover letter is to be used to document notification was sent in timely manner. It would appear that print date on notification may no longer be viewed as adequate evidence, at least for some examiners. 83 M&M has for years advocated cover letter use, not for this purpose, but to communicate up front: Proper flood zone Amount of flood insurance required That a specific amount of flood insurance is what lender requires, i.e., a minimum, and that it is up to applicant to decide if more is wanted. See Sample Cover letter to flood notification(participating community) 84 28

30 Dear (Date) The attached Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance is an important notice that should be read carefully. The notice informs you that the property that is to serve as collateral for our loan is in a special flood hazard area, that the community in which the property is located participates in the National Flood Insurance Program (NFIP) and how to determine the minimum amount of flood insurance that by regulation must be in place for the lender to make the loan. We calculate that minimum amount as $. Again, that amount is the minimum required by flood regulations applicable to the lender and is the only amount required by the lender. That amount may or may not be sufficient to protect your interests. You may or may not wish to purchase more insurance, but that is a decision in which the lender provides no guidance. That decision should take into account the value of the structures. We will require proof of insurance in an amount equal to no less than the above stated amount. Moreover, the proof must also identify that coverage is being provided for property in flood zone and must identify the lender as a loss payee. 85 Coverage must be in place at closing. A copy of the Flood Insurance Application and premium payment, or a copy of the declarations page, is sufficient evidence of proof of purchase for new policies. The NFIP does not recognize binders. 86 However, NFIP does recognize Certificate of Property Insurance, Evidence of Insurance, and similar forms provided for renewal policies if following is included: Policy Form/Type (GP, DP, RCBAP*, PRP) Policy Term Policy Number Insured s Name and Mailing Address Property Location Current Flood Risk Zone Rated Flood Risk Grandfathered: Y/N Mortgagee Name and Address Coverage Limits; Deductibles Annual Premium 87 29

31 The required minimum amount of insurance is lesser of three numbers: loan amount Insurable value of structure or maximum amount of available coverage. 88 The Loan amount means: The full amount of the loan; plus The full amount of committed lines even if there is no amount outstanding; plus The full amount of any other loans and committed lines secured by the same property even if loans are to other lenders. 89 Second lien holders must be covered. Following FAQ is from 7/21/09 interagency guidance: Question: When lender makes, increases, extends or renews second mortgage secured by building located in SFHA, how much flood insurance is required? Answer: Lender must ensure that adequate insurance is in place equal to lesser of either combined total outstanding principal balance of first and second loan or maximum amount available under the Act

32 Let s run through some examples, Lender has $100,000 HELOC with $20,000 outstanding & no other loans are secured by property, what should be used as loan amount? Lender has $100,000 HELOC with $20,000 outstanding & also 1 st mortgage secured by property, originally for $200,000, but only $120,000 is now outstanding, what should be used as loan amount? Lender has new $100,000 HELOC with $0 outstanding, but other lender has residential mortgage with $30,000, what should be used as loan amount? 91 The second factor determining the amount of insurance required is the insurable value of property securing the loan. There has been some confusion as to what this value is, but a recent FAQ (from Oct 2011 final FAQs) addressed this issue. 92 Q. What is the insurable value of a building? A. Insurable value is same as overall value of property minus land. FEMA s Flood Insurance Guidelines state that building insurable value is same as 100 percent replacement cost value (RCV), which is defined as cost to replace property with same kind of material and construction without deduction for depreciation. 31

33 However, payment in case of loss differs: Insurance on commercial buildings will pay the actual cash value Insurance on primary residence will pay the Replacement Value Insurance on other dwellings will pay the actual cash value 94 The 10/1/11 FAQs state: FEMA s guidelines provide lenders should avoid creating a situation in which insured pays for more coverage than NFIP would pay in event of loss. Strictly linking insurable value to RCV is not practical in all cases. In cases involving certain residential or condominium properties, policies should be written to, and insurance loss payout usually would be equivalent of, RCV. However, in cases involving nonresidential properties, & even some residential properties, where insurance loss payout would normally be based on actual cash value, which is RCV less physical depreciation, insurance policies written at RCV may require an insured to pay for coverage that exceeds amount NFIP would pay in event of loss. Therefore, it s reasonable for lenders, in determining amount of flood insurance required, to consider extent of recovery allowed. 95 As previously noted, required minimum amount of insurance is lesser of three numbers: loan amount value of structures or maximum amount of available coverage. Maximum amount of available coverage depends on whether property is residential or commercial: The Commercial limit is $500,000 The residential limit is $250,000. However, please remember that a residential property of five or more units is now subject to the commercial limit

34 *Some communities have only limited coverage. Note multifamily now non-residential but contents stays at $100, To avoid risk of postponing closing, evidence of flood insurance should be reviewed prior to closing. In reviewing documents, confirm that: Lender is named on policy (this helps ensure Lender receives cancellation notice & receives proceeds in event of flood disaster) The address is correct The dollar amount of the coverage is correct The flood zone is correct Policy is for flood insurance (not hazard insurance) 98 Having sent the form of cover letter previously discussed should prove very helpful at this point. First, if properly completed, the letter conveys key information (required insurance amount and the proper flood zone designation) to reduce the risk that the policy is insufficient. If the amount or flood zone is incorrect, it helps underscore that it is not the lender s fault

35 As discussed, flood requirements apply to residential and commercial properties, but there are some significant differences: Residential coverage maximum is $250,000, while commercial maximum is $500,000. per structure. For residential (but not commercial), if Lender establishes an escrow account for anything else, it must escrow for flood insurance premium. 100 Include the premium on the RESPA HUD Settlement statement provided at closing, and on the Initial Escrow Statement 1000 Reserves Deposited with Lender 1001 Hazard Insurance per month 1002 Mortgage Insurance per month 1003 Property Taxes per month 1004 Flood Insurance per month 101 Additional difference contents coverage: If lender takes security interest in contents, flood insurance must also be obtained on contents. However, Regulation AA generally prohibits lenders from taking contents of a residence in a residential mortgage transaction. With respect to commercial loans, commercial documents typically provide for a security interest in contents. Even if interest in contents is not perfected with UCC filing, contents coverage must be obtained if mortgage document grants lender a security interest. If no other source of valuing contents, examiners will look to hazard insurance policy valuation

36 Although possible to have multiple properties securing a consumer transaction it is rare - less unusual for commercial transaction. If multiple properties, must have flood determination on each and if necessary notification and coverage on each. If bumping up against loan amount in determining coverage amount, don t put all coverage on single property allocate. If multiple structures on same property and both are in SFHA, need separate policies covering each and allocate coverage amount. 103 Life of Loan Monitoring Requirement If flood hazard insurance required, lender must monitor loan to ensure that insurance does not lapse: If policy lapses, immediately inform borrower in writing that if proof of insurance not obtained in 45 days, Lender will force place insurance. Force place insurance on 46 th day if no response. To avoid a potentially antagonizing communication to borrower and to minimize the risk of flood policy actually lapsing, make initial contact with borrower at least days prior to expiration date. Force placed insurance is typically more expensive. 104 Construction loans - When structure is to be built in SFHA, insurance must be purchased to cover during construction period. Two approaches allowable as per 9/21/09 FAQs: require borrowers to have policy at origination; allow borrower to defer purchase of insurance until either a foundation slab has been poured and/or an elevation certificate has been issued

37 Condo loans Condo developments are covered by Master Policy for condominiums the Residential Condominium Building Association Policy (RCBAP). To meet requirements, RCBAP should be purchased in amount of at least 80% of building replacement value or NFIP maximum ($250,000) multiplied by number of units), whichever is less. 106 For instance, maximum coverage amount on 50 unit condo building could be $12,500,000 ($250,000 x 50). However, if replacement value was only $10MM, condominium association could purchase $8,000,000 policy & not be required to have a co-insurance payment in event of flood. The $8,000,000 coverage would meet requirements for all units within condominium. 107 Examiners position has generally been that individual dwelling policy can be obtained regardless of RCBAP coverage, & MUST be obtained if institution wishes to make loan in instances where RCBAP is < 80%. The problem is, where RCBAP is less than 80%, consumer may never get paid on individual policy or may only receive a portion because of coinsurance penalty that will be imposed

38 Most recent FAQs states same approach Question: What if RCBAP coverage insufficient? Answer: Have borrower ask association to get additional coverage. If association doesn t, lender must require borrower to purchase dwelling policy in amount sufficient to meet flood insurance requirements, i.e., difference between RCBAP s coverage allocated to unit & flood insurance requirements. 109 Same requirements apply whether 50 unit condo is one 25 story building with 2 units on each floor or it consists of all ground level units. This make not make sense, but it is what it is. In this regard, the OCC posted the following consumer FAQ My condominium is on the 5th floor of a multi-story building located in a Special Flood Hazard Area (SFHA). Is my loan subject to the regulatory requirement for flood insurance? Yes. The mandatory flood insurance purchase requirements apply to loans secured by individual residential condominium units. This includes those units located in multi-story condominium complexes, located in an SFHA for which flood insurance is available under the Flood Disaster Protection Act). 110 Zones: Flood zones vary--the higher the likelihood of flooding, the higher the coverage cost Property Type: The National Flood Insurance Program has various policies and limits. Private insurance may also be an option

39 If the covered loan servicing is sold or transferred, the Bank must notify the insurer within 60 days The notice may be by whatever electronic or hard copy format the parties generally use. The RESPA Notice of Transfer of Servicing form is sufficient if it gives: Borrower s name Flood insurance policy number Property address (including city and state) Name of lender or servicer making notification Name and address of new servicer Name and telephone number of contact person at new servicer. 112 Flood Insurance Risk Maps (FIRM) Older maps used Zones B and C for areas where coverage is not required. Newer maps use Zone X (shaded) and Zone X (unshaded) for those areas. All Zones starting with A and V are highly susceptible to flooding; V-lettered zones are also subject to wave action and wind. Determination zone and policy zone must match at the very least in the A or V designation 113 Question: May lender rely on private insurance policy to meet its flood insurance obligations? Answer: It depends. Private policy may be adequate substitute for NFIP insurance if it meets Mandatory Purchase Guidelines criteria. FEMA states if a private policy differs from NFIP Standard Flood Insurance Policy, differences should be carefully examined before policy is accepted as sufficient protection

40 M&M Comment- Do you really want to take the risk of being wrong or second guessed on exam? Some examiner have raised write your own policies as an area of concern. Private insurance must conform to FEMA criteria. To the extent that private policy differs from the NFIP Standard Flood Insurance Policy (available at ), differences to be carefully examined before policy is accepted. 115 The criteria: Licensure -insurer must be licensed, admitted, or approved to do business in jurisdiction where building located, by jurisdiction insurance regulator. 45-Day Cancellation/Non-Renewal Notice Breadth of Policy Coverage -policy must guarantee that coverage is at least as broad as SFIP coverage. Strength of Mortgage Interest Clause must be a mortgagee interest clause similar to that in SFIP. Legal Recourse - must require insured to file suit within 1 year after date of written claim denial. 116 As mentioned, although we will be required to accept private insurance, there s risk that policy would not be viewed as meeting standards. To address concern, regulators in 10/30/13 Federal Register proposed a safe harbor that a policy will be deemed to satisfy private flood insurance requirements if a state insurance regulator makes a determination in writing that policy meets Biggert Waters requirements

41 In commenting on proposal, ABA suggested additional safe harbor - that insurer certifies that the policy conforms to the private flood insurance minimum requirements. What remains unclear, and a possible risk, is responsibility of lender to accept policy not within safe harbor. However, the Agencies indicated that they are considering whether to include a provision in final rules that expressly permits regulated lending institutions to accept, as satisfaction of the FDPA s mandatory purchase requirement, a flood insurance policy issued by a private insurer that does not meet the Act s definition of private flood insurance. 118 Can one rely on prior determination for refinancing, assumption or multiple loans to same borrower? Answer: It depends. Lender may rely on previous determination when increasing, extending, renewing, or purchasing loan. Making a loan not an event that permits lender to rely on prior determination. When loan involves refinancing or assumption by same lender who obtained original flood determination on same property, lender may rely on prior determination only if original determination not more than 7 years old, & no map revisions since prior determination. 119 Can lender be found in violation if, despite diligence in making determination, notifying borrower, & requiring insurance, there is a discrepancy between flood zone designation on determination & insurance policy? Lenders should have process in place to identify & resolve, discrepancies. If lender can substantiate bona fide effort to resolve discrepancy, no violation will be cited. If pattern of unresolved discrepancies is found due to a lack of effort to resolve such discrepancies, lender may be cited for violations

42 Question: When should lender send force placement notice? Answer: A lender must notify a borrower whenever flood insurance has expired or is less than the amount required for property. The lender must send notice upon making determination coverage is inadequate or has expired, such as a result of an internal flood policy monitoring system. Notice is also required when a lender learns that insurance is required because of a flood map change. To avoid expiration of insurance, Agencies recommend lender also advise borrower when insurance is about to expire 121 Question: When must lender have insurance in place if borrower has not obtained insurance within 45- day period? Answer: Regulation states lender shall purchase insurance if borrower fails to obtain flood insurance within 45 days after notification. However, where there s a brief delay in force placing insurance, Agencies will expect lender to provide reasonable explanation for delay, for example, where lender uses batch processing to purchase force-placed insurance. 122 One of the many things Biggert Waters did was renew FEMA s authority to write flood insurance policies for a stated of period time. However, there have been occurrences, most recently June 1, 2010, when FEMA s authority lapsed before Congress issued new authority

43 Question: Does a lapse in FEMA flood insurance authority mean that loans secured by improved real property located in special flood hazard areas may not be made by lenders? Answer: No, it does not. Lenders are not precluded during a lapse in flood insurance authority from making loans due to a lack of NFIP flood insurance. During a lapse, a lender may legally make a loan to a borrower secured by improved real property in a SFHA without requiring the borrower to obtain flood insurance coverage. Nevertheless, a lender is not relieved of other obligations under federal flood insurance law and safety and soundness considerations cannot be disregarded. 124 Question: Does a lender still have to make flood hazard determinations during a lapse? Answer: Yes, during a lapse, lenders must continue to make standard flood hazard determinations and lenders must also give borrowers the notice of special flood hazards and availability of federal disaster relief, if applicable, as required. 125 Question: What are a lender s options regarding new loans that will be affected by a lapse? Answer: lenders may consider following options: Lenders may have borrower complete application & pay premium, which insurance company will hold pending reauthorization. These applications will be processed as soon as program is reauthorized & will be made effective to the fullest extent of that authority. If authorization is not granted, premiums will be refunded and the new and renewal policies, which had been on hold, will not be issued. Lenders should advise borrowers that remittance of application & payment will not result in immediate NFIP coverage and cannot legally be required until reauthorization, as well as advising borrowers about consequences of non-retroactive reauthorization. Lenders should ensure borrowers with property in flood hazard areas are informed of implications of closing a mortgage loan during lapse

44 Lenders may determine that risk of loss is sufficient to justify postponing closing a loan until the NFIP has been reauthorized. Lenders may still require borrower to obtain private flood insurance where available; however, the cost of such insurance may influence borrower to postpone closing rather than incur a long-term obligation to address a possible short-term lapse. Lenders may make the loan without requiring the borrower to apply for flood insurance and pay the premium pending reauthorization, but this poses a number of risks that lenders should carefully evaluate. Moreover, if Congress reauthorizes the NFIP, flood insurance must be obtained for these loans after the lapse, including, if necessary, by forced placement. Before making such loans, lenders should ensure borrowers are aware of the flood insurance requirements and that force-placed insurance is typically more costly than borrower-obtained insurance. Lenders need to have a system to keep track of and identify these loans so they can ensure insurance is purchased if the NFIP is made available subsequent to closing. 127 Question: What happens to renewals during a lapse? Answer: For applications received once lapse begins, FEMA generally processes all renewals as soon as program is reauthorized. Lenders may continue to accept payments during the period of lapsed authority. Alternatively, depending on the terms of mortgage, lenders may be able to require borrowers to obtain coverage outside NFIP. 128 To help manage flood insurance compliance risk, lenders should have a formal process to ensure compliance. In writing procedures, recognize that: Flood is a high risk area, often cited on exam It is not a simple area for all staff to understand and a lot of guidance is needed It may be better to err on side of too much detail Objective is not only to provide guidance but to affix responsibilities Doing procedures vs. monitoring procedures

45 Initial determination is whether to have one set of procedures or two, consumer/residential and commercial? Answer may be dictated by how Lender s operations are organized and if same staff will be handling both areas. 130 For additional information, we usually point clients in the direction of the Mandatory Purchase of Flood Insurance Guidelines (or everything you ever wanted to know about flood insurance but were afraid to ask). However, on February 5, 2013, FEMA rescinded the Guidelines with the following message: 131 In accordance with FEMA Directive , any policy document older than three years from date of issuance must be reviewed for accuracy & updated or rescinded if information is found to be out of date. Current version of the Guidelines contains outdated information and guidance that has been made obsolete by the new legislation, "The Biggert-Waters Flood Insurance Reform Act of Therefore, FEMA has decided best course of action, to prevent confusion on the part of our stakeholders, is to rescind the Guidelines. Lenders should consult their respective regulatory agency for information regarding compliance with the mandatory purchase requirements

46 Was this really the best course of action? I strongly doubt it! Most of the booklet would not have been changed by the Reform Act and I would have thought FEMA could just have rescinded those sections. It was suggested that lenders should consult their respective regulatory agency for information regarding compliance with the mandatory purchase requirements, but I have not heard anything official on this 133 M&M s advice: Since examiners have tended to follow guidelines (even though it s clear that they were not formally binding), except where the Reform Act or implementing regulations specifically impact sections of the mandatory guidelines, we recommend that clients continue to follow them unless and until: Regulators suggest otherwise; or They are replaced. 134 On 10/30/13 FDIC, OCC, Federal Reserve & NCUA published proposed rulemaking to amend their regulations regarding loans in SFHAs. The proposal covers: acceptance of private flood insurance, escrowing flood insurance payments, and force-placement of flood insurance. The proposal contains model language for notices including the borrower notification, the availability of private flood insurance, and escrow requirements for residential loans (both for new loans and existing loans). The comment period has been closed for months. Given the mood in Congress as expressed by the new 2014 revisions, this entire proposal may be back on the drawing board. 45