How To Get Flood Insurance In N.C.A.S.A

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1 Above The Water Line: Keys To Effective Flood Compliance Presented by and An ICBA Audio Conference June 22, 2010 / 10:00 AM-11:30 AM Central

2 Before We Begin These Audio Conference and Participant Guide are brought to you by the Education and Products Division of the Independent Community Bankers of America, the flood compliance and insurance experts of WNC Insurance Services, Inc., and its flood zone determination service partner, LPS National Flood. This presentation is for informational purposes only and does not constitute legal advice or a recommendation on any particular insurance matter by any of the speakers, the ICBA, LPS National Flood or WNC. If you need legal guidance or insurance advice, please consult your legal counsel or a licensed insurance professional. 2

3 Agenda Provider Credentials WNC Insurance Services, Inc. LPS National Flood First Step In Flood Compliance: Flood Zone Determination (FZD) Flood Regulations, Compliance, Flood Q&A And NFIP Reauthorization Insurance: The Be-All And End-All Of Flood Compliance A Banker s Notes 3

4 Provider Credentials WNC Insurance Services, Inc. ICBA s Preferred Service Provider For Flood Compliance And Insurance 48 Years Of Insurance Industry Experience Pioneered Lender Placed Flood In 1981 And Lender Placed Wind In 1998 To Protect Lenders Against Uninsured Losses Largest Lloyd s Of London Lender Placed Flood, Wind And Excess Flood Coverholder In The U.S. More Than 1,000 Financial Institution Clients Nationwide Member Of MBA, NAPSLO, NLIC, AAMGA Publishes Compliance Matters To Benefit Banks And Lenders 4

5 Provider Credentials LPS National Flood 21+ Years As A Leading Provider Of Flood Zone Determinations To Lenders And Insurance Companies Servicing Lenders Nationwide And Tracking Over 32 Million Loans For Map Revisions (Life Of Loan) Over 200 Employees With All Production In Arlington, Texas Maintains $15 Million E&O Coverage Combined With The Financial Strength Of LPS Full Liability Coverage On Determination & Tracking Products One Of Few Select Companies To Be An NFDA Certified Company Of The National Flood Determination Association 5

6 Speaking To You Today Jordan N. Gray, Esq. SVP, Compliance and Legal Affairs WNC Insurance Services, Inc. So. Pasadena, CA John Tullius Chief Underwriting Officer WNC Insurance Services, Inc. So. Pasadena, CA Michael Russo Business Development Director LPS National Flood (FZD Provider) Arlington, TX Barbara Peiffer Vice President, Loan Services United Central Bank Garland, TX Marlee Melville Vice President, ICBA Moderator 6

7 First Step In Flood Compliance: Flood Zone Determination (FZD) Michael Russo 7

8 First Step in Flood Compliance: FZD A regulated lender must determine whether the building or manufactured (mobile) home offered as security for a loan is, or will be, located in an SFHA and document the determination of flood hazard status on the Standard Flood Hazard Determination Form (SFHDF). Source: NFIP s Mandatory Purchase of Flood Insurance Guidelines (Sept. 2007) 8

9 FZD Types And Related Processes Flood Zone Determination (FZD) Basic Flood Zone Determination Life Of Loan Flood Zone Determination Grandfathered Flood Zone Determination Related Steps And Processes Portfolio Review And Analysis Portfolio Conversion Servicing Transfers CertMap 9

10 FZD Technology Indicators % Of FEMA s Flood Insurance Rate Map Data That Is Incorporated Into FZD System Sources And Frequency Of Updates For Latest FEMA Community And Map Information Geocoding And Specialized Tools That Increase Accuracy, Address Standardization And Improve Automated Hit Rates Available Tools For Efficient And Accurate Manual Determinations 10

11 Resolving FZD Disputes Lender s Compliance Responsibility To Resolve Flood Zone Discrepancies Resources To Resolve Disputes Availability Of Exhibits To Help Resolve Disputes Level Of Assistance In Obtaining Letters of Map Amendment (LOMAs) Access To eloma Tool For Expedited Turnaround 11

12 Why Life of Loan? To Stay In Compliance As FEMA Flood Maps Change By: Tracking Determinations For The Life Of The Loans Notifying Borrowers Of Insurance Requirement Changes Within 60 Days Of A Map Revision Helping Ensure Required Flood Coverage Is In Place Or Force Placed When Necessary 12

13 Flood Regulations, Compliance, Flood Q&A And NFIP Reauthorization Jordan N. Gray, Esq. 13

14 What Is The Scope Of The Regulation? Regulated Lenders Federally Regulated And Federally Insured Lenders Designated Loans Buildings Or Mobile Homes Located In A Special Flood Hazard Area (SFHA) And Any Personal Property In Building If Also Security 14

15 What Is The General Requirement? A member bank shall 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. 12 CFR (c) 15

16 How Can You Auditor-Proof Your Flood Compliance? 16

17 10 Auditor-Proof Compliance Actions 1. Determine the property s flood zone at loan closing, notify the applicant if flood insurance is required, and provide reasonable time (usually 10 days) to obtain a flood policy. 2. Document the loan file with the flood zone determination and ALL flood compliance activity, and use the required language for borrower notices found in the Regulations. 17

18 10 Auditor-Proof Compliance Actions 3. Require sufficient flood insurance coverage on each building located in an SFHA to satisfy the minimum requirements of the Regulation. 4. Escrow flood insurance premiums if you escrow other items, such as hazard insurance, fees and taxes. 18

19 10 Auditor-Proof Compliance Actions 5. Monitor flood zone changes for the life of the loan and require flood insurance when property becomes part of an SFHA. 6. For newly required or expiring flood insurance, notify the borrower in writing and provide at least 45 days to obtain or renew a flood policy. 19

20 10 Auditor-Proof Compliance Actions 7. Force place flood insurance if borrower does not (a) provide proof of coverage within 45 days from notice date, (b) allows the policy to lapse, or (c) provides an inadequate amount of insurance. 8. In addition to residential dwellings and mobile homes, require flood insurance on commercial buildings, condominium units, and buildings in the course of construction if the improvement is or will be located in an SFHA. 20

21 10 Auditor-Proof Compliance Actions 9. For subordinate liens, if the property is located in an SFHA, verify that sufficient flood insurance is in place to cover all liens; require additional flood insurance if necessary. 10. If borrower disputes the flood zone determination, do not waive the flood insurance requirement unless you have a Letter of Map Amendment (LOMA) or Letter of Map Revision (LOMR) from FEMA. 21

22 What Will An Auditor Not Find In Your Loan Files? 22

23 6 Common Flood Compliance Violations 1) Not Having The Proper Documentation Standard Flood Hazard Determination Form Is Required For Each Loan Covered Not Necessary To Give To Customer May Be Stored Electronically 23

24 6 Common Flood Compliance Violations 2) Allowing Waivers Of Insurance Without Proper Justification If Borrower Disputes Flood Zone Determination, Only Flood Map Changes (LOMA/LOMR) Can Justify Waiver 24

25 6 Common Flood Compliance Violations 3) Not Sending Flood Notice To Borrower Required If Borrower Must Obtain Insurance Must Provide Reasonable Time Before Loan Closes (Usually 10 Days) Must Be Signed Or Acknowledged By Borrower 25

26 6 Common Flood Compliance Violations 4) Not Requiring Sufficient Insurance Must Require at Least the Lowest of: Outstanding Loan Balance (Remember To Consider Other Liens) Replacement Cost Value Of Structure Less Value Of The Land Maximum NFIP Limits Available (Currently $250K For A Residential And $500K For A Commercial Structure) 26

27 6 Common Flood Compliance Violations 5) No Proof Of Insurance In Loan File Part Of Documentation Requirements Must Document All Compliance Actions 27

28 6 Common Flood Compliance Violations 6) Not Requiring Insurance On Condo Unit, Commercial Property, Building Under Construction, Second Mortgage & HELOC Required For Condo Unit Even If Only Part Of Association Property Is In An SFHA Lender Must Consider All Liens Requirements Also Apply To Commercial Property And Building Under Construction 28

29 If An Auditor Can t Find It, You May Get Fined Civil Money Penalties For Flood Violations Agency As of # Banks Assessed Total Penalties # Banks Assessed Total Penalties FDIC 26 $185, $767,390 OCC 1 $125,000 7 $332,010 FRB 0 $0 8 $225,195 OTS 5 $23,100 2 $2,370 Totals 32 $333, $1,326,965 Source: wwww.bankersonline.com 29

30 The 45-Day Issue: Unresolved #s 60, 61 & 62 Download the Flood Q&A and WNC s Comments at: 30

31 Question: Can the 45-day notice period be accelerated by sending notice to the borrower prior to the actual date of expiration of flood insurance coverage? Proposed Answer: No. No

32 No. 60 Proposed Answer (Agencies Reasoning): Although a lender or servicer may send a notice warning a borrower that flood insurance on the collateral is about to expire, the Act and Regulation do not allow a lender or its servicer to shorten the 45-day force-placement notice period by sending notice to the borrower prior to the actual expiration date of the flood insurance policy. The Act provides that a lender or its servicer must notify a borrower if it determines that the improved real estate collateral s insurance coverage has expired or is less than the amount required for that particular property. 42 U.S.C. 4012a(e). A lender must send the notice upon making a determination that the flood insurance coverage is inadequate or has expired, such as upon receipt of the notice of cancellation or expiration from the insurance provider or as a result of an internal flood policy monitoring system. This notice must allow the borrower 45 days in which to obtain flood insurance. 32

33 No. 60 WNC Position: Law expressly permits borrowers to be given 45 days notice immediately prior to expiration Reasons: FEMA s MPPP renewal process begins 45 days prior to expiration (Is this now unlawful?) Defeats goal of continuous flood insurance 33

34 No. 61 Question: When must the lender have flood insurance in place if the borrower has not obtained adequate insurance within the 45-day notice period? Proposed Answer: The Regulation provides that the lender or its servicer shall purchase insurance on the borrower s behalf if the borrower fails to obtain flood insurance within 45 days after notification. However, where there is a brief delay in force placing required insurance, the Agencies will expect the lender to provide a reasonable explanation for the delay. 34

35 Question: Does a lender or its servicer have the authority to charge a borrower for the cost of insurance coverage during the 45-day notice period? Proposed Answer: No. No

36 No. 62 Proposed Answer (Agencies Reasoning): There is no authority under the Act and Regulation to charge a borrower for a force-placed flood insurance policy until the 45-day notice period has expired. The ability to impose the costs of force placed flood insurance on a borrower commences 45 days after notification to the borrower of a lack of insurance or of inadequate insurance coverage. Therefore, lenders may not charge borrowers for coverage during the 45-day notice period. This holds true regardless of whether the force placed flood insurance is obtained through the NFIP or a private provider. 36

37 No. 62 WNC Position: Law permits charging borrower for insurance purchased by the lender including coverage during the 45-day notice period Goal is to compel borrowers to maintain continuous flood coverage for life of loan at borrower s expense Reasons: Borrower notified at loan origination of duty to maintain insurance for term of loan at own expense Force-placed coverage continues borrower s contractual duty to maintain insurance No express prohibition against charging borrower for retroactive coverage during 45-day notice period 37

38 What s The Latest On NFIP Reauthorization? 38

39 Pending NFIP Reauthorization Bills H.R Stable Flood Insurance Authorization Act of 2010 Introduced by Barney Frank [MA] and co-sponsored by Maxine Waters [CA], this bill extends the National Flood Insurance Program, four months, to September 30, H.R To extend the National Flood Insurance Program to December 31, 2010 Introduced by Earl Pomeroy [ND], as the title says, this bill extends the National Flood Insurance Program to December 31,

40 Pending NFIP Reauthorization Bills S A bill to extend the National Flood Insurance Program through December 31, Introduced by David Vetter [LA], this bill also extends the National Flood Insurance Program to December 31, H.R Flood Insurance Reform Priorities Act of 2010 Introduced by Maxine Waters and co-sponsored by Barney Frank, this bill extends the National Flood Insurance Program for an additional five years, to September 30, (Please see WNC s Compliance Matters issue of May 25, 2010 for further information on these bills and WNC s position on delaying enforcement of the flood mandatory purchase requirements as proposed in H.R and H.R ) 40

41 Insurance: The Be-All And End-All Of Flood Compliance 41

42 Insurance: The Be-All And End-All Of Flood Compliance John Tullius 42

43 Questions Every Banker Must Ask Do I have a reliable system of force-placing flood insurance if it becomes necessary? Can my program tell me the insurance compliance status of my loan portfolio when I need to know? Can I use the program to send borrower notices? Can I order, edit or cancel coverage through the Internet without generating more paper? Does my program provide updates on flood compliance issues? 43

44 Questions Every Banker Must Ask Is my lender-placed flood program reliable, i.e. will it be there when a flood loss occurs or losses mount in a catastrophe? How closely does my lender-placed flood program follow the NFIP s terms, coverages and limits? Can I place immediate, same-day coverage or is there a waiting period like the NFIP? Does my lender-placed flood program provide additional coverages that better protect the bank s interest or benefit the property owner? 44

45 Questions Every Banker Must Ask Can I use the program to place additional insurance because a borrower s flood policy has insufficient limits? If a borrower wants additional flood insurance, can my program provide it? Does my program offer deductible options and deductible buy-back coverage? Does my program offer contents coverage when personal property is part of loan security? What are the available limits? 45

46 A Banker s Notes 46

47 A Banker s Notes Barbara Peiffer 47

48 A Banker s Notes: Flood Insurance Process Order Flood Determination At Time Of Loan Approval If property is in a flood zone, obtain borrower signature(s) and date on acknowledgement. Obtain Evidence Of Flood Insurance Prior To Funding Ensure your bank is listed as mortgagee and policy covers lesser of loan amount, value of improvements, or maximum amount available with the NFIP. If taking lien on building and contents, ensure policy covers both. On Date Of Funding, Verify 10 Days Have Expired Since Determination Date Or Borrower s Acknowledgement Enter Tickler Information With Policy Expiration Date 48

49 A Banker s Notes: Flood Insurance Process If Renewal Is Not Received By Expiration Or Upon Cancellation, Send Letter #1 30 Days After Letter #1, Send Letter #2 If No Policy Received 15 Days After Letter #2, Send Letter #3 And Force Place Insurance Coverage Ensure Sufficient Coverage Is Maintained For Full Term Of Loan Flood insurance is a federal requirement and can never be waived unless loan amount is $5,000 or less with a term of one year or less. 49

50 A Banker s Notes: Successful Audit Tips If You Take A Lien On Contents, Ensure Flood Policy Covers Both Building And Contents Ensure 10 Days Have Lapsed From The Later Of: 1) Date Of Flood Zone Determination; Or 2) Date Of Borrower s Acknowledgement Of Flood Hazard Status Ensure Coverage Is In Place (Force Place If Needed) During Any Flood Zone Dispute; Do Not Wait Until Dispute Is Resolved 50

51 A Banker s Notes: Successful Audit Tips If Using A Flood Determination Service, Ensure Timely Change Notifications And Immediate Notification Of Borrowers Perform Annual Self-Audit Of Your Flood Insurance Ask your flood determination vendor for a list of properties in a required flood zone and compare to your loans tracked for flood coverage. 51

52 FEMA Resource: 52

53 FEMA Resource: Homeowners Flood FAQ 53

54 FEMA Resource: Top Ten Facts for Lenders 54

55 FEMA Resource: Top Ten Facts for Lenders 55

56 FEMA Resource: Flood Guidelines Download the Flood Book at: 56

57 57

58 58 We look forward to continuing our conversation on flood compliance and insurance solutions soon. For more information, please contact your ICBA Representative or WNC s Jack Everdale, SVP at (817) / jeverdale@wncfirst.com, or visit today.