Finally! Flood Insurance Interagency Regulations
Finally! Flood Insurance Interagency Regulations!
First there was the Biggert-Waters Flood Reform Act of 2012 (BWA)! At the 11th hour for implementation, there came the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) that modified some of the elements of BWA. Bankers were caught in a quandary – what was effective by statute and what would become effective by regulation? FEMA initially issued Memorandum W-13070 to sort it out. On June 22, 2015 an Interagency Statement was issued announcing a joint final rule covering force placement of flood insurance and escrowing of flood insurance payments. The one thing not yet addressed is “private flood insurance” which will be addressed in separate rulemaking. This final rule includes the revised flood insurance regulation for each agency.
So what does it mean for my institution?
Most changes become effective October 1, 2015. The escrow rules and the revisions to the Notice of Special Flood Hazards becomes effective January 1, 2016. So you’ll want a crash course on the revisions. Here’s a partial listing!
- Coverage definition has changed from “limited to overall value of the property securing the loan minus the value of the land on which the property is located” to “limited to building or mobile home and any personal property securing the loan and not the land itself”.
- “Director of FEMA” has changed to “Administrator of FEMA” for all reference purposes.
- “Residential Improved Real Estate” means real estate upon which a home or other residential building is located or to be located.
- Exemption for Detached Structures applies to any structure that is part of residential property but is detached from the primary residential structure and does not serve as a residence.
- Detached if it is not joined by any structural connection.
- Part of residential property if the structure is used primarily for personal, family, or household purposes and not used primarily for agricultural, commercial, industrial, or other business purposes.
- “Does not serve as a residence” is based on a good faith determination that it does not include sleeping, bathroom, or kitchen facilities.
- Exemption condition must be re-examined each time there is a triggering event – Make, Increase, Renew, Extend (MIRE) a loan.
- Lenders may still require flood insurance on detached structures with high value or in the borrower’s best interest.
- Escrow Requirement
- Must escrow for residential real estate or mobile home unless the loan or lender qualifies for exemption.
- Small Lender Exemption – Assets less than $1 Billion as of December 31 of the two prior calendar year (same as the CRA rule) and on or before July 6, 2012:
- Was not required to escrow and
- Did not have a policy of “consistently and uniformly” requiring escrow.
- Loan exceptions – Subordinate lien loans; Condos; HELOCs; Non-performing Loans; Loans with terms less than 12 months; business purpose loans.
- Option to Escrow
- NOT APPLICABLE TO LENDERS WHO ARE NOT REQURIED TO ESCROW.
- Lenders must make the option to escrow available for existing loans secured by residential improved real estate or mobile home, even those for which borrowers previously waived escrow when offered to them.
- Notice must be provided by June 30, 2016. Can be a separate notice or added to another disclosure, such as a periodic statement.
- Force-Placed Flood Insurance
- The date on which flood insurance lapses (not 30 days later) is the expiration date.
- FDPA still requires borrower notification 45 days following the date of lapse or insufficient coverage.
- Lender may send one or more additional notices prior to expiration as a courtesy but will still be required to send the mandated 45-day notice.
- May force-place flood insurance anytime during the 45 day notice period (do not have to wait for 45 days to expire).
- Private force-placed insurance policies generally do not have a 30-day waiting period so the lender could force-place effective immediately.
- May charge the borrower for the cost of premiums and fees incurred for coverage on the date on which flood insurance coverage lapsed or did not provide sufficient coverage.
- Must terminate and refund “overlap” premiums if the borrower later provides evidence of insurance coverage.
- Have 30 days after receipt of a borrower policy to review for adequacy before being required to cancel force-placed insurance.
- CFPB RESPA servicing rules require lenders to pay a borrower’s hazard insurance premiums from an escrow account in the event of policy lapse. FDPA statutes do not. However, lenders may do so if it benefits the consumer.
- Notice of Special Flood Hazards – Revised Appendix A; Required use is effective January 1, 2016.
- Adds language about required escrow.
- Adds availability of private insurance language.
The announcement is located at: http://www.federalreserve.gov/newsevents/press/bcreg/20150622a.htm with the final rule at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20150622a1.pdf .