NCUA Final Rule. Loans in Areas Having Special Flood Hazards

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1 NCUA Final Rule Loans in Areas Having Special Flood Hazards November 13, 2015

2 NCUA Final Rule Loans in Areas Having Special Flood Hazards TABLE OF CONTENTS Summary Analysis of the Final Rule 1 Detailed Analysis of the Final Rule 4 Compliance Implementation Checklist 11 Sample Policy 14 Model Forms 18 DISCLAIMER THE INFORMATION PROVIDED IS GENERAL INFORMATION AND IS NOT TO BE CONSIDERED LEGAL ADVICE ABOUT THE SUBJECT MATTERS COVERED OR ANY SPECIFIC LEGAL ISSUE. THE ADVICE OF AN ATTORNEY SHOULD BE OBTAINED AS APPROPRIATE TO SPECIFIC ISSUES AND FACTUAL SITUATIONS

3 NCUA Final Rule Effective Date: October 1, 2015 and January 1, C.F.R et seq. 80 FR 43216, July 21, 2015 Loans in Areas Having Special Flood Hazards The NCUA and other banking agencies jointly issued a final rule amending existing rules for loans in flood hazard areas. Certain revisions became effective October 1, 2015 while other revisions do not become effective until January 1, Coverage The rule generally applies to loans secured by buildings or mobile homes located or to be located in areas determined by the Federal Emergency Management Agency ( FEMA ) to have special flood hazards. NCUA s rule applies to all federally-insured credit unions. Purchase of Flood Insurance The credit union may not make, increase, extend, or renew a loan secured by a building or mobile home that is located or to be located in a special flood hazard area in which flood insurance is available ( Designated Loan ) unless flood insurance is purchased for the term of the loan. The requirement to purchase flood insurance applies to table funded loans. Exemptions From Purchase Requirement The requirement to purchase flood insurance does not apply to State-owned property covered under a policy of self-insurance, loans with an original principal balance of $5, or less with a term of one-year or less, and detached structures that do not serve as a residence. Escrow of Premiums and Fees Effective October 1, 2015, the credit union must require the escrow of flood insurance premiums and fees for a Designated Loan IF it requires the escrow of taxes, insurance premiums, fees, or any other charges for a loan secured by residential improved real estate or a mobile home that is made, extended or renewed after October 31, Effective January 1, 2016, the credit union or servicer acting on behalf of the credit union must require the escrow of flood insurance premiums and fees for any Designated Loan secured by residential improved real estate or a mobile home that is made, increased, extended or renewed on or after January 1, Exceptions to the Escrow Requirement There are a number of exceptions to the escrow requirement effective January 1, The requirement to escrow flood insurance premiums and fees does not apply to a credit union that had assets of less than $1 billion as of December 31 st of either of the two prior calendar years and was not required by law to escrow for other fees or charges for the entire term of any loan secured by residential improved real estate or a mobile home and did not have a policy of consistently and uniformly requiring escrow for taxes, insurance and other charges on such loans. The requirement to escrow also does not apply to loans primarily for business, commercial or agricultural purposes, loans secured by a subordinate lien if the borrower has obtained flood insurance, HELOCs, non-performing loans, and loans where flood insurance is purchased by a NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 1

4 condominium, cooperative or homeowners association or similar group for which the premium is a common expense of the group. If an exception ceases to apply, the credit union must require the escrow of flood insurance premiums and charges. Escrow accounts must be administered according to the requirements of section 10 of the Real Estate Settlement Procedures Act ( RESPA ). Notice of Escrow Requirement If the credit union is required to escrow for flood insurance premiums and charges, the credit union must give the borrower notice of this requirement using language substantially similar to model clauses contained in the appendix to the rule. Use of Standard Determination Form The credit union must use the standard flood hazard determination form from FEMA. Force Placement of Flood Insurance If the credit union or servicer determines that a designated loan is not covered by flood insurance, or covered in an insufficient amount, the credit union must notify the borrower that flood insurance should be obtained for the term of the loan. If the borrower does not obtain flood insurance within 45 days after notification, the credit union must purchase flood insurance on the borrower s behalf. After the credit union receives confirmation that the borrower has purchased flood insurance, the credit union must terminate force-placed insurance and refund any premiums or charges for insurance during any period for which the borrower s coverage was in effect. Determination Fees Under certain conditions, the credit union may charge the borrower a reasonable fee (including life-of-loan monitoring) for determining whether a building or mobile home securing a loan is or will be located in a special flood hazard area. Notice of Special Flood Hazards and Availability of Assistance When the credit union makes, increases, extends or renews a loan secured by a building or mobile home located or to be located in a special flood hazard area it must mail or deliver a notice to the borrower and servicer stating whether or not flood insurance is available for the collateral securing the loan. Contents of Notice Effective October 1, The notice must include a warning that the building or mobile home is or will be located in a special flood hazard area, a description of the flood insurance purchase requirements, a statement (if applicable) that flood insurance coverage is available under the NFIP and may be available from private insurers, and a statement whether Federal disaster relief assistance may be available in the event of damage to the building or mobile home caused by flooding in a Federally-declared disaster. Contents of Notice Effective January 1, The notice must include a warning that the building or mobile home is or will be located in a special flood hazard area, a description of the flood insurance purchase requirements, a statement (if applicable) that flood insurance coverage is available from private insurance companies that issue standard flood insurance policies on behalf of the National Flood Insurance Program ( NFIP ) or directly from the NFIP, a statement that flood insurance that provides the same level of coverage as a standard flood insurance policy under the NFIP may also be available from a private insurance company, a statement that the borrower is encouraged to compare the flood insurance coverage, deductibles, exclusions, conditions, and premiums associated with flood insurance policies NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 2

5 issued on behalf of the NFIP and policies issued on behalf of private insurance companies and that the borrower should direct inquiries regarding the availability, cost, and comparisons of flood insurance coverage to an insurance agent, and a statement whether Federal disaster relief assistance may be available in the event of damage to the building or mobile home caused by flooding in a Federally declared disaster. The credit union must provide the notice to the borrower within a reasonable time before the completion of the transaction, and to the servicer as promptly as practicable after the credit union provides notice to the borrower but no later than the time the credit union provides other similar notices to the servicer concerning hazard insurance and taxes. Notice to the servicer may be made electronically or may take the form of a copy of the notice to the borrower. The credit union must retain a record of the receipt of the notices by the borrower and the servicer for the period of time the credit union owns the loan. Instead of providing the notice to the borrower, the credit union may obtain satisfactory written assurance from a seller or lessor that, within a reasonable time before the completion of the sale or lease transaction, the seller or lessor has provided such notice to the purchaser or lessee. The credit union must retain a record of the written assurance from the seller or lessor for the period of time the credit union owns the loan. The credit union will be in compliance with the notice requirements if it uses the sample language provide in the rule s appendix. NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 3

6 NCUA Final Rule Loans in Areas Having Special Flood Hazards Effective Date: October 1, 2015 and January 1, C.F.R et seq. 80 FR 43216, July 21, 2015 I. Introduction. Part 760 of NCUA s rules generally requires federally-insured credit unions to determine whether loans secured by a building or mobile home are located in a special flood hazard area. A special flood hazard area means the land in the flood plain within a community having at least a one percent chance of flooding in any given year, as designated by the Administrator of FEMA. II. Definitions a. Designated Loan means a loan secured by a building or mobile home that is located or to be located in a special flood hazard area in which flood insurance is available under the Act b. Building means a walled and roofed structure, other than a gas or liquid storage tank, that is principally above ground and affixed to a permanent site, and a walled and roofed structure while in the course of construction, alteration, or repair c. Mobile home means a structure, transportable in one or more sections, that is built on a permanent chassis and designed for use with or without a permanent foundation when attached to the required utilities. The term mobile home does not include a recreational vehicle. Under the rule, the term mobile home means a mobile home on a permanent foundation. The term mobile home includes a manufactured home as that term is used in the NFIP d. Residential improved real estate means real estate upon which a home or other residential building is located or to be located e. Servicer means the person responsible for: i. receiving any scheduled, periodic payments from a borrower under the terms of a loan, including amounts for taxes, insurance premiums, and other charges with respect to the property securing the loan; AND ii. making payments of principal and interest and any other payments from the amounts received from the borrower as may be required under the terms of the loan f. Special flood hazard area means the land in the flood plain within a community having at least a one percent chance of flooding in any given year, as designated by the Administrator of FEMA g. Table funding means a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 4

7 III. Requirement to Purchase Flood Insurance a. General Rule. i. A credit union may not make, increase, extend, or renew any Designated Loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan ii. The amount of insurance must be at least equal to the lesser of 1. the outstanding principal balance of the Designated Loan, OR 2. the maximum limit of coverage available for the particular type of property under the Act iii. Flood insurance coverage under the Act is limited to the building or mobile home and any personal property that secures a loan and not the land itself b. Table Funded Loans. A credit union that acquires a loan from a mortgage broker or other entity through table funding shall be considered to be making a loan for the purposes of the rule IV. Exemption From the Requirement to Purchase Flood Insurance a. The credit union is not required to purchase flood insurance in connection with a loan secured by i. any State-owned property covered under a policy of self-insurance satisfactory to the Administrator of FEMA (who publishes and periodically revises the list of States falling within this exemption) ii. property securing any loan with an original principal balance of $5,000 or less and a repayment term of one year or less, OR iii. any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence. For purposes of this exemption 1. a structure that is a part of a residential property is a structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes 2. a structure is detached from the primary residential structure if it is not joined by any structural connection to that structure 3. serve as a residence is based upon the good faith determination of the credit union that the structure is intended for use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities V. Escrow Requirement-Effective January 1, 2016 a. General Rule i. The credit union, or a servicer acting on behalf of the credit union, must require the escrow of all premiums and fees for any flood insurance required by the rule to be purchased for any Designated Loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after January 1, 2016, payable with the same frequency as payments on the Designated Loan are required to be made for the duration of the loan. A credit union is not required to escrow for flood insurance premiums if the loan is not NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 5

8 secured by residential improved real estate or a mobile home, even if a credit union must require the purchase of flood insurance b. Exceptions to the General Rule i. The credit union is not required to escrow for flood insurance premiums and fees IF 1. The loan is an extension of credit primarily for business, commercial, or agricultural purposes 2. The loan is in a subordinate position to a senior lien secured by the same residential improved real estate or mobile home for which the borrower has obtained flood insurance coverage that meets the requirements of the rule 3. Flood insurance coverage for the residential improved real estate or mobile home is provided by a policy that a. Meets the requirements of the rule, b. Is provided by a condominium association, cooperative, homeowners association, or other applicable group, AND c. The premium is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense 4. The loan is a home equity line of credit (HELOC) 5. The loan is a nonperforming loan, which is a loan that is 90 or more days past due and remains nonperforming until it is permanently modified or until the entire amount past due, including principal, accrued interest, and penalty interest incurred as the result of past due status, is collected or otherwise discharged in full; OR 6. The loan has a term of not longer than 12 months ii. Duration of Exception. If the credit union, or a servicer acting on behalf of a credit union, determines at any time during the term of a Designated Loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after January 1, 2016, that an exception no longer applies, then the credit union or its servicer must require the escrow of all premiums and fees for any flood insurance required as soon as reasonably practicable and, if applicable, must provide any disclosure required under section 10 of the Real Estate Settlement Procedures Act (RESPA) iii. Escrow Account. The credit union, or a servicer acting on behalf of a credit union, must deposit the flood insurance premiums and fees on behalf of the borrower in an escrow account. The escrow account is subject to the escrow requirements under section 10 of RESPA, which generally limits the amount that may be maintained in escrow accounts for certain types of loans and requires escrow account statements for those accounts, only if the loan is otherwise subject to RESPA. Following receipt of a notice from the Administrator of FEMA or other provider of flood insurance that premiums are due, the credit union, or a servicer acting on behalf of the credit union, must pay the amount owed to the insurance provider from the escrow account by the date when such premiums are due c. Notice. For any loan for which the credit union is required to escrow, or may be required to escrow during the term of the loan, the credit union, or a servicer acting on behalf of the credit union, must mail or deliver a written notice together NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 6

9 with the notice of special flood hazards and availability of Federal disaster relief assistance (see below) informing the borrower that the credit union is required to escrow all premiums and fees for required flood insurance, using language that is substantially similar to model clauses on the escrow requirement in appendix A d. Small Lender Exception i. Except as may be required under applicable state law, the requirement to escrow for flood insurance premiums and fees and provide notice of this requirement, and the requirement to offer the option to escrow, do not apply to a credit union: 1. That has total assets of less than $1 billion as of December 31 of either of the two prior calendar years, AND 2. On or before July 6, 2012, BOTH a. Was not required under Federal or state law to deposit taxes, insurance premiums, fees, or any other charges in an escrow account for the entire term of any loan secured by residential improved real estate or a mobile home; AND b. Did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or any other charges in an escrow account for any loans secured by residential improved real estate or a mobile home ii. Loss of Small Lender Exception. If a credit union no longer qualifies for the small lender exception, the credit union must escrow premiums and fees for flood insurance for any designated loan made, increased, extended, or renewed on or after July 1 of the first calendar year after loss of the exception e. Option to Escrow i. General Rule. A credit union, or a servicer acting on behalf of the credit union, must offer and make available to the borrower the option to escrow all premiums and fees for flood insurance for any loan secured by residential improved real estate or a mobile home that is outstanding on January 1, 2016, or July 1 of the first calendar year in which the credit union has lost a small lender exception, unless: 1. The credit union or the loan qualifies for an exception from the escrow requirement 2. The borrower is already escrowing all premiums and fees for flood insurance for the loan, OR 3. The credit union is required to escrow flood insurance premiums and fees under the rule ii. Notice. For any loan the credit union must offer the option to escrow, the credit union, or a servicer acting on behalf of a credit union, must mail or deliver to the borrower no later than June 30, 2016, or September 30 of the first calendar year in which the credit union has lost its small lender exception, a notice in writing informing the borrower of the option to escrow all premiums and fees for any required flood insurance and the method(s) by which the borrower may request the escrow, using language similar to the model clause in Appendix B of the rule. The notice may be provided electronically if the borrower agrees iii. Timing. A credit union or servicer must begin escrowing premiums and fees for flood insurance as soon as reasonably practicable after the credit union or servicer receives the borrower s request to escrow NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 7

10 VI. Required Use of Standard Flood Hazard Determination Form a. Use of form. A credit union must use the standard flood hazard determination form developed by the Administrator of FEMA when determining whether the building or mobile home offered as collateral security for a loan is or will be located in a special flood hazard area in which flood insurance is available under the Act. The standard flood hazard determination form may be used in a printed, computerized, or electronic manner. A credit union can obtain the standard flood hazard determination form from FEMA s Web site here b. Retention of form. A credit union must retain a copy of the completed standard flood hazard determination form, in either hard copy or electronic form, for the period of time the credit union owns the loan VII. Force Placement of Flood Insurance a. Notice and purchase of coverage. If the credit union, or a servicer acting on behalf of the credit union, determines at any time during the term of a Designated Loan, that the building or mobile home and any personal property securing the designated loan is not covered by flood insurance or is covered by flood insurance in an amount less than the amount required under the rule, then the credit union or its servicer must notify the borrower that the borrower should obtain flood insurance, at the borrower s expense, in an amount at least equal to the amount required under the rule, for the remaining term of the loan. If the borrower fails to obtain flood insurance within 45 days after notification, then the credit union or its servicer must purchase insurance on the borrower s behalf. The credit union or its servicer may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance, including premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount b. Termination of force-placed insurance i. Termination and refund. Within 30 days of receipt by a credit union, or a servicer acting on behalf of the credit union, of a confirmation of a borrower s existing flood insurance coverage, the credit union or its servicer must 1. Notify the insurance provider to terminate any insurance purchased by the credit union or its servicer, AND 2. Refund to the borrower all premiums paid by the borrower for any insurance purchased by the credit union or its servicer during any period during which the borrower s flood insurance coverage and the insurance coverage purchased by the credit union or its servicer were each in effect, and any related fees charged to the borrower with respect to the insurance purchased by the credit union or its servicer during such period ii. Proof of Coverage. For purposes of confirming a borrower s existing flood insurance coverage, the credit union or its servicer must accept from the borrower an insurance policy declarations page that includes the existing flood insurance policy number and the identity of, and contact information for, the insurance company or agent NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 8

11 VIII. Determination Fees a. General Rule. Regardless of any Federal or state law to the contrary (other than the Flood Disaster Protection Act of 1973), the credit union, or a servicer acting on behalf of the credit union, may charge a reasonable fee for determining whether the building or mobile home securing the loan is located or will be located in a special flood hazard area. A determination fee may also include, but is not limited to, a fee for life-of-loan monitoring b. Borrower fee. The determination fee may be charged to the borrower if the determination either i. is made in connection with making, increasing, extending, or renewing of the loan that is initiated by the borrower ii. reflects the Administrator of FEMA s revision or updating of floodplain areas or flood-risk zones iii. reflects the Administrator of FEMA s publication of a notice or compendium that 1. Affects the area in which the building or mobile home securing the loan is located, OR 2. By determination of the Administrator of FEMA, may reasonably require a determination whether the building or mobile home securing the loan is located in a special flood hazard area, OR iv. results in the purchase of force-placed flood insurance coverage by the credit union or its servicer on behalf of the borrower under the rule IX. Notice to Borrowers of Special Flood Hazards and Availability of Disaster Relief Assistance a. Notice requirement. When the credit union makes, increases, extends, or renews a loan secured by a building or a mobile home located or to be located in a special flood hazard area, the credit union must mail or deliver a written notice to the borrower and to the servicer informing each of them whether or not flood insurance is available under the Act for the collateral securing the loan b. Contents of Notice. The written notice must contain the following information: i. A warning, in a form approved by the Administrator of FEMA, that the building or the mobile home is or will be located in a special flood hazard area, ii. A description of the flood insurance purchase requirements set forth in section 102(b) of the Flood Disaster Protection Act of 1973, iii. A statement, where applicable, that flood insurance coverage is available from private insurance companies that issue standard flood insurance policies on behalf of the NFIP or directly from the NFIP, iv. A statement that flood insurance that provides the same level of coverage as a standard flood insurance policy under the NFIP may also be available from a private insurance company that issues policies on behalf of the company, v. A statement that the borrower is encouraged to compare the flood insurance coverage, deductibles, exclusions, conditions, and premiums associated with flood insurance policies issued on behalf of the NFIP and policies issued on behalf of private insurance companies and that the NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 9

12 borrower should direct inquiries regarding the availability, cost, and comparisons of flood insurance coverage to an insurance agent, AND vi. A statement of whether Federal disaster relief assistance may be available in the event of damage to the building or mobile home caused by flooding in a Federally declared disaster X. Notice of Servicer s Identity a. Notice requirement. When the credit union makes, increases, extends, renews, sells, or transfers a loan secured by a building or mobile home located or to be located in a special flood hazard area, the credit union must notify the Administrator of FEMA (or the Administrator of FEMA s designee) in writing of the identity of the servicer of the loan. The Administrator of FEMA has designated the insurance provider to receive the credit union s notice of the servicer s identity. This notice may be provided electronically if electronic transmission is satisfactory to the Administrator of FEMA s designee b. Transfer of servicing rights. The credit union must notify the Administrator of FEMA (or the Administrator of FEMA s designee) of any change in the servicer of a loan described above within 60 days after the effective date of the change. This notice may be provided electronically if electronic transmission is satisfactory to the Administrator or his or her designee. Upon any change in the servicing of a loan, the duty to provide notice shall transfer to the transferee servicer NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 10

13 NCUA Final Rule Loans in Areas Having Special Flood Hazards Effective Date: October 1, 2015 and January 1, C.F.R et seq. 80 FR 43216, July 21, 2015 Adopt policies in conformity with the rule (see sample policy below) Implement procedures to comply with the rule, including For each loan made, increased, extended or renewed that is secured by a building or mobile home Ensure that a flood hazard determination is made Using appropriate form Determine whether the loan is exempt from the requirement to purchase flood insurance Ensure that flood hazard insurance is purchased for loans secured by a building or mobile home determined to be in a special flood hazard area not subject to an exception Provide notice to the borrower and servicer as applicable stating whether or not flood insurance is available for collateral securing the loan For loans secured by real estate upon which is located, or which is to be located, a home or other residential building or a mobile home Determine if the credit union must escrow flood insurance premiums and fees or if escrow is not required because The loan is primarily for business, commercial or agricultural purpose The loan is a subordinate lien, and flood insurance has been purchase by the borrower Appropriate flood insurance coverage Is provided by a condominium, cooperative, homeowners association or similar group as a common expense, AND The premiums are paid by the condominium, cooperative, homeowners association or similar group as a common expense The loan is a HELOC The loan is 90 days or more past due The term of the loan is not greater than 12 months Ensure that if an exception to the requirement to escrow for flood insurance premiums and fees ceases to apply, the credit union requires such escrows as soon as practicable after loss of the exception and, if applicable, provides any disclosures required by RESPA For loans subject to the escrow requirement, ensure that flood insurance premiums and fees are deposited into the escrow account on behalf of the borrower; and, that premiums and fees are timely paid to the insurer For loans subject to the escrow requirement, ensure the credit union mails or delivers written notice, together with the notice of special flood hazards and availability of federal disaster assistance, informing the borrower that the credit union is required to escrow all premiums and fees for flood insurance, using language substantially similar to model clauses in Appendix A of the rule NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 11

14 Determine if the credit union is exempt from 1) the requirement to escrow, 2) the requirement to provide notice of the escrow requirement, and 3) the requirement to provide the option to escrow because the credit union meets the small lender exception For loans secured by real estate upon which is located, or which is to be located, a home or other residential building or a mobile home that are outstanding on January 1, 2016, or that are outstanding on July 1 of the first calendar year in which the credit union has lost a small lender exception, offer and make available to the borrower the option to escrow required flood insurance premiums and fees, unless The loan or the credit union is subject to an exception The borrower is already escrowing for flood insurance premiums and fees The credit union must escrow according to the rule For loans that the credit union must give the borrower the option to escrow, mail or deliver (electronically if agreed) a written notice informing the borrower of the option to escrow and the method(s) by which the borrower may request the escrow using language substantially similar to the model clause in Appendix B of the rule By June 30, 2016 for loans outstanding on January 1, 2016, and By September 30 th of the first calendar in which the credit union has lost a small lender exception For loans that the credit union must give the borrower the option to escrow, ensure escrows begin as soon as reasonably practicable after receiving the borrower s request to escrow For loans to be secured by a building or mobile home, ensure the credit union uses the standard flood hazard determination form developed by FEMA and retain a copy of the form during the time the credit union owns the loan For loans secured by a building or mobile home located in a special flood hazard area, if the credit union determines that the building, mobile home or any personal property securing the loan are not covered by flood insurance or are covered in an insufficient amount Notify the borrower that the borrower must obtain flood insurance at the borrowers expense, in an amount required by the rule Force place flood insurance if the borrower fails to obtain flood insurance within 45 days of notification to the borrower For loans which the credit union has force placed insurance and has received confirmation that the borrower has obtained flood insurance Notify the provider of the force-placed insurance to terminate any forceplaced insurance, and Refund to the borrower all premiums paid by the borrower for any insurance purchased by the credit union during any period the borrower s flood insurance coverage and the insurance purchased by the credit union were each in effect and any related fees charged to the borrower with respect to the insurance purchased by the credit union When a credit union makes, increases, extends, or renews a loan secured by a building or a mobile home located or to be located in a special flood hazard area, mailing or delivering a written notice of special flood hazards and availability of federal disaster relief assistance to the borrower and to the servicer informing each of them whether or not flood insurance is available under the Act for the collateral securing the loan NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 12

15 When a credit union makes, increases, extends, renews, sells or transfers a loan secured by a building or a mobile home located or to be located in a special flood hazard area, ensure the credit union notifies FEMA in writing of the identity of the servicer of the loan When the credit union changes servicers of a loan, ensure the credit union notifies FEMA of the change within 60 days after the effective date of the change Ensure and document that mortgage loan servicing agreements and servicers understand and comply with the requirements of the rule Ensure all records are properly maintained NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 13

16 Sample Policy for the NCUA Final Rule Loans in Areas Having Special Flood Hazards Effective Date: October 1, 2015 and January 1, C.F.R et seq. 80 FR 43216, July 21, 2015 ABC Credit Union Policy for Loans in Areas Having Special Flood Hazards NOTICE: This sample policy assumes that the credit union does NOT qualify for the small lender exception pursuant to the rule s escrow requirements and, therefore, does not address the requirements for a small lender who loses such exception under the rule. ABC Credit Union will comply with all applicable federal and state regulations. More particularly, the Credit Union will comply with the requirements of NCUA Regulation 760 (12 C.F.R et seq. the Rule ) when making, increasing, extending, renewing or transferring any loan secured by a building or mobile home that is located or to be located in a special flood hazard area. The Rule makes a distinction between a loan that is secured by a building or mobile home that is located or to be located in a special flood hazard area in which flood insurance is available under the National Flood Insurance Act of 1968 ( the Act ) (a Designated Loan ), and a Designated Loan that is secured by residential improved real estate. The Rule has different requirements for a Designated Loan and a Designated Loan secured by residential real estate, and lending staff must take care to distinguish between the two categories in order to ensure compliance with the requirements of the Rule and this policy. Determination of Status Prior to making, increasing, extending or renewing any loan that is to be secured by a building or mobile home, the Credit Union will determine whether such building or mobile home is or will be located in a special flood hazard area in which flood insurance is available under the Act. The Credit Union will make such determination using the most recent standard flood hazard determination form developed by the Administrator of FEMA. Requirement to Purchase Flood Insurance Except as otherwise provided in this policy, the Credit Union will not make, increase, extend or renew any Designated Loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The Credit Union will ensure that the amount of flood insurance coverage is at least equal to the outstanding principal balance of the loan or the maximum limit of coverage available for the particular type of property under the Act, whichever is less. Where the Credit Union acquires a Designated Loan through a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the the loan to the Credit Union ( Table Funding ), the Credit Union will ensure the requirements of the Rule and this policy are met. NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 14

17 The Credit Union [will not] / [may, but need not] require the borrower to purchase flood insurance: 1) If the property securing the loan is state-owned property covered under a policy of self-insurance satisfactory to the Administrator of FEMA (who publishes and periodically revises the list of states falling within this exception) 2) If the loan has an original principal balance of $5, or less and a maturity of one year or less 3) For any structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes but that is not joined by any structural connection to that structure and does not serve as a residence Escrow of Flood Insurance Premiums and Fees For any Designated Loan made, increased, extended or renewed by the Credit Union that is secured by real estate upon which a home or other residential building is located or to be located ( Residential Improved Real Estate ) or a mobile home, the Credit Union will require the escrow of all premiums and fees for any required flood insurance. Escrows for such flood insurance must be payable with at least the same frequency as payments for the Designated Loan. The Credit Union [will not] / [may, but need not,] require the escrow of flood insurance premiums and fees if 1) The loan is an extension of credit primarily for business, commercial, or agricultural purposes 2) The loan is in a subordinate position to a senior lien secured by the same Residential Improved Real Estate or mobile home for which the borrower has obtained flood insurance coverage that meets the requirements of the Rule and this policy 3) Flood insurance coverage for the Residential Improved Real Estate or mobile home is provided by a policy that a. meets the requirements of the Rule and this policy b. provided by a condominium association, cooperative, homeowners association, or other similar group, AND c. the premium for which is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense 4) The loan is a home equity line of credit (HELOC) 5) The loan is a nonperforming loan, which is a loan that is 90 or more days past due and remains nonperforming until it is permanently modified or until the entire amount past due, including principal, accrued interest, and penalty interest incurred as the result of past due status, is collected or otherwise discharged in full, OR 6) The loan has a term of not longer than 12 months If the Credit Union determines at any time during the term of a Designated Loan secured by Residential Improved Real Estate or mobile home that any of the above exceptions to requiring the escrow of flood insurance premiums and fees no longer apply, the Credit Union will require the escrow of all insurance premiums and fees for any required flood insurance as soon as reasonably practicable and, if applicable, the Credit Union will provide the borrower with any disclosure(s) required under the Real Estate Settlement Procedures Act ( RESPA ). The credit union will deposit the flood insurance premiums and fees on behalf of the borrower in an escrow account. This escrow account will be subject to escrow requirements adopted pursuant to section 10 of RESPA only if the loan is otherwise subject to RESPA. Following receipt of a notice from the Administrator of FEMA or other provider of flood insurance that NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 15

18 premiums are due, the credit union will pay the amount owed to the insurance provider from the escrow account by the date when such premiums are due. If the Credit Union is required to escrow for flood insurance premiums and fees during the term of the loan, the Credit Union shall mail or deliver a written notice, together with the notice of special flood hazards and availability of Federal disaster relief assistance required by the Rule and this policy, informing the borrower that the Credit Union is required to escrow all premiums and fees for required flood insurance, using language that is substantially similar to model clauses on the escrow requirement in appendix A of the Rule. For any loan outstanding on January 1, 2016 that is secured by Residential Improved Real Estate or a mobile home, the Credit Union will offer and make available to the borrower the option to escrow all premiums and fees for flood insurance unless the loan qualifies for an exception under this section, or the borrower is already escrowing all premiums and fees for flood insurance. The Credit Union will mail or deliver to the borrower no later than June 30, 2016 a notice in writing, or if the borrower agrees, electronically, informing the borrower of the option to escrow all premiums and fees for any required flood insurance and the method(s) by which the borrower may request the escrow, using language similar to the model clause in appendix B of the Rule. Force Placement of Flood Insurance If the Credit Union determines at any time during the term of a Designated Loan, that the building or mobile home and any personal property securing the Designated Loan is not covered by flood insurance, or is covered by flood insurance in an amount less than the amount required by the Rule or under this policy, then the Credit Union will notify the borrower that the borrower should obtain flood insurance, at the borrower s expense, in an amount at least equal to the amount required under by the Rule and by this policy, for the remaining term of the loan. If the borrower fails to obtain flood insurance within 45 days after notification, then the Credit Union will purchase insurance on the borrower s behalf. The Credit Union will charge the borrower for the cost of premiums and fees incurred in purchasing the insurance, including premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or the borrower did not provide a sufficient coverage amount. Upon receiving an insurance policy declarations page that includes the existing flood insurance policy number and the identity of, and contact information for, the insurance company or agent [, or other evidence of coverage satisfactory to the Credit Union] that the borrower has in place flood insurance coverage in an amount required by the Rule and this policy, the Credit Union will notify the provider of force-placed insurance to terminate flood insurance coverage purchased by the Credit Union. The Credit Union will refund to the borrower all premiums paid by the borrower for any insurance purchased by the Credit Union or its servicer during any period which the borrower s flood insurance coverage and the insurance coverage purchased by the Credit Union were each in effect, and any related fees charged to the borrower with respect to the insurance purchased by the credit union during such period. Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance When the Credit Union makes, increases, extends, or renews a loan secured by a building or a mobile home located or to be located in a special flood hazard area, the Credit Union will mail a written notice to the borrower and to the servicer in all cases where applicable whether or not flood insurance is available under the Act for the collateral securing the loan. The Credit Union will include in the notice: NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 16

19 1) a warning, in a form approved by the Administrator of FEMA, that the building or the mobile home is or will be located in a special flood hazard area 2) a description of the flood insurance purchase requirements set forth in section 102(b) of the Flood Disaster Protection Act of 1973, as amended 3) a statement, where applicable, that flood insurance coverage is available from private insurance companies that issue standard flood insurance policies on behalf of the NFIP or directly from the NFIP 4) a statement that flood insurance that provides the same level of coverage as a standard flood insurance policy under the NFIP may also be available from a private insurance company that issues policies on behalf of the company 5) a statement that the borrower is encouraged to compare the flood insurance coverage, deductibles, exclusions, conditions, and premiums associated with flood insurance policies issued on behalf of the NFIP and policies issued on behalf of private insurance companies and that the borrower should direct inquiries regarding the availability, cost, and comparisons of flood insurance coverage to an insurance agent, AND 6) a statement whether Federal disaster relief assistance may be available in the event of damage to the building or mobile home caused by flooding in a Federally declared disaster Notice of Servicer s Identity When the Credit Union makes, increases, extends, renews, sells, or transfers a loan secured by a building or mobile home located or to be located in a special flood hazard area, the Credit Unionwill notify the Administrator of FEMA (or the Administrator of FEMA s designee) in writing of the identity of the servicer of the loan. The Administrator of FEMA has designated the insurance provider to receive the credit union s notice of the servicer s identity. The Credit Union [may] / [will] provide the notice electronically if electronic transmission is approved by FEMA. The Credit Union will notify the Administrator of FEMA (or the Administrator of FEMA s designee) of any change in the servicer within 60 days after the effective date of the change. This notice [may] / [will] be provided electronically if electronic transmission is approved by FEMA. Upon any change in the servicing of a loan, the duty to provide notice shall transfer to the transferee servicer. NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 17

20 Model Forms for the NCUA Final Rule Loans in Areas Having Special Flood Hazards Effective Date: October 1, 2015 and January 1, C.F.R et seq. 80 FR 43216, July 21, 2015 Sample Form Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance ABC Credit Union is giving you this notice to inform you that: The building or mobile home securing the loan for which you have applied is or will be located in an area with special flood hazards. The area has been identified by the Administrator of the Federal Emergency Management Agency (FEMA) as a special flood hazard area using FEMA s Flood Insurance Rate Map or the Flood Hazard Boundary Map for the following community: 5F5F5F. This area has a one percent (1%) chance of a flood equal to or exceeding the base flood elevation (a 100-year flood) in any given year. During the life of a 30-year mortgage loan, the risk of a 100-year flood in a special flood hazard area is 26 percent (26%). Federal law allows a lender and borrower jointly to request the Administrator of FEMA to review the determination of whether the property securing the loan is located in a special flood hazard area. If you would like to make such a request, please contact us for further information. The community in which the property securing the loan is located participates in the National Flood Insurance Program (NFIP). Federal law will not allow us to make you the loan that you have applied for if you do not purchase flood insurance. The flood insurance must be maintained for the life of the loan. If you fail to purchase or renew *43263 flood insurance on the property, Federal law authorizes and requires us to purchase the flood insurance for you at your expense. At a minimum, flood insurance purchased must cover the lesser of: (1) The outstanding principal balance of the loan; or (2) the maximum amount of coverage allowed for the type of property under the NFIP. Flood insurance coverage under the NFIP is limited to the building or mobile home and any personal property that secures your loan and not the land itself. Federal disaster relief assistance (usually in the form of a low-interest loan) may be available for damages incurred in excess of your flood insurance if your community s participation in the NFIP is in accordance with NFIP requirements. NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 18

21 Although you may not be required to maintain flood insurance on all structures, you may still wish to do so, and your mortgage lender may still require you to do so to protect the collateral securing the mortgage. If you choose not to maintain flood insurance on a structure and it floods, you are responsible for all flood losses relating to that structure. Availability of Private Flood Insurance Coverage Flood insurance coverage under the NFIP may be purchased through an insurance agent who will obtain the policy either directly through the NFIP or through an insurance company that participates in the NFIP. Flood insurance that provides the same level of coverage as a standard flood insurance policy under the NFIP may be available from private insurers that do not participate in the NFIP. You should compare the flood insurance coverage, deductibles, exclusions, conditions, and premiums associated with flood insurance policies issued on behalf of the NFIP and policies issued on behalf of private insurance companies and contact an insurance agent as to the availability, cost, and comparisons of flood insurance coverage. [Escrow Requirement for Residential Loans] Federal law may require a lender or its servicer to escrow all premiums and fees for flood insurance that covers any residential building or mobile home securing a loan that is located in an area with special flood hazards. If your lender notifies you that an escrow account is required for your loan, then you must pay your flood insurance premiums and fees to the lender or its servicer with the same frequency as you make loan payments for the duration of your loan. These premiums and fees will be deposited in the escrow account, which will be used to pay the flood insurance provider.] Flood insurance coverage under the NFIP is not available for the property securing the loan because the community in which the property is located does not participate in the NFIP. In addition, if the non-participating community has been identified for at least one year as containing a special flood hazard area, properties located in the community will not be eligible for Federal disaster relief assistance in the event of a Federally declared flood disaster. NCUA Final Rule Loans in Areas Having Special Flood Hazards Page 19

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