(from LendersNews,
November 2011) Federal Flood Insurance
Compliance - Update
Federal agencies that
regulate financial institutions have once again
clarified their guidelines regarding flood
insurance. The agencies are:
- The Office of the Comptroller of the
Currency
- The Federal Reserve System
- The Federal Deposit Insurance
Corporation
- The Office of Thrift Supervision
- The Farm Credit Administration
- The National Credit Union Administration
The agencies have been updating their flood
insurance guidelines, by way of "Questions and
Answers" (Q&A) published in the Federal
Register. Two years ago, the six Federal
agencies issued five supplemental "Questions and
Answers", (July 21, 2009 - 74 FR 35914-947
("Flood Q&A")).
Although not actual law, individual field
regulators use the latest guidelines in their bank
examinations. Unfortunately, some aspects
of the 2009 guidelines seemingly were in conflict
with existing Federal Law ((The National
Flood Insurance Act of 1968, and the
Flood Disaster Protection Act of 1973, as
revised by the Reform Act (codified at 42
U.S.C. 4001 et seq.).) The comment period
that followed was put to good use by commenters
(primarily lenders and insurance providers),
whose actions lead to a new revised "Questions
and Answers", published October 17, 2011.
Link to
Federal Register
(Click Here)
At issue are:
- When the (federally required) 45-day
notice period should begin.
- When
a borrower can be charged by the lender
for the cost of flood insurance coverage,
with respect to the 45-day notice period.
- How
soon after the end of the notice period a
lender should obtain flood insurance
coverage when the borrower has failed to
purchase an appropriate policy.
Of the five Supplemental "Questions and
Answers" from 2009, three have been revised,
and are significant for lenders.
Significance |
Revised Questions
and Answers
October 17, 2011 |
Previously, Q&A 62
directed that, "lenders may not
charge borrowers for coverage during the
45-day notice period."
That Answer seemed to be
in direct conflict with a lender’s need
to maintain insurance coverage at all
times.
The revised "Q&A" now
permits lenders to obtain insurance when
it lapses.
But in language that
lenders might find troubling, the
revised Answer further directs that the
coverage, "should be equivalent in
coverage and exclusions to an NFIP
policy and cover the interests of both
the borrower and the lender."
Also, it "encourages"
lenders to
"explain
their force-placement policies to
borrowers...",
which is subjective, and therefore open
to interpretation by each individual
regulator.
Previously, Q&A 60
directed that,
"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."
Clearly, this language
prevented the lender from obtaining
force placed coverage for 45 days
following its initial notice to the
borrower. The problematic implications
of this time lime cannot be
underestimated, and the commenters were
successful in getting the "Q&A" revised.
The Revised Q&A 57
expands the previous Q&A by adding, "The
Agencies encourage institutions to
explain their force placement policies
to borrowers (including, where
applicable, that they charge for
force-placement coverage for the 45-day
period and the timing of that charge)". |
Question 62:
When may a lender or its servicer
charge a borrower for the cost of
insurance that covers collateral
during the 45-day notice period?
Answer:
A lender or its servicer may
charge a Borrower for insurance
coverage for any part of the 45-day
notice period in which no adequate
Borrower-purchased flood insurance
coverage is in effect, if the
borrower has given the lender or its
servicer the express authority to
charge the borrower for such
coverage as a contractual condition
of the loan being made. Any policy
that is obtained by a lender or its
servicer, the premium of which is
charged to the borrower pursuant to
a contractual right, should be
equivalent in coverage and
exclusions to an NFIP policy and
cover the interests of both the
borrower and the lender.
The Agencies encourage
institutions to explain their
force-placement policies to
borrowers (including their policy on
charging for force-placement
coverage for the 45-day period and
the timing of that charge) and
encourage lenders and Servicers to
escrow flood insurance premiums.
Following these recommendations
could result in less force placement
of flood insurance. Further,
Regulation Z requires lenders to
establish an Escrow account for the
payment of property taxes and
mortgage-related insurance required
by the lender, including flood
insurance, for all ‘‘Higher Priced’’
first-lien mortgage loans. See 12
CFR 226.35(b)(3).
_______________________________
Question 60
When should a lender send the force
placement notice to the borrower?
Answer:
To ensure that adequate flood
insurance coverage is maintained
throughout the term of the loan, a
lender or its servicer must notify a
borrower whenever flood insurance on
the collateral has expired or is
less than the amount required for
the property.
The lender must send this 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.
Notice is also required when a
lender learns that a property
requires flood insurance coverage
because it is in an SFHA as a result
of a flood map change (which is
occurring in many communities as a
result of FEMA’s map modernization
program). To avoid the expiration of
insurance, the Agencies recommend
that the lender also advise the
borrower when flood insurance on the
collateral is about to expire.
____________________________________
Question 57
What is the requirement for the
force placement of flood insurance
under the Act and Regulation?
Answer
The Act and Regulation require
the lender, or its servicer, to send
notice to the borrower upon making a
determination that the improved real
estate collateral’s insurance
coverage has expired or is less than
the amount required for that
particular property, such as upon
receipt of the notice of
cancellation or expiration from the
insurance provider.
The Act and Regulation also
require the lender, or its servicer,
to give notice and force-place such
insurance, if necessary, when a
lender learns that a property
requires flood insurance coverage
because it is in an SFHA as a result
of a flood map change (which is
occurring in many communities as a
result of FEMA’s map modernization program).
The notice to the borrower must
clearly state that the borrower
should obtain, at the borrower’s
expense, flood insurance in an
amount at least equal to the amount
required under the NFIP, for the
remainder of the loan’s term.
The notice should also state that
if the borrower does not obtain the
insurance within 45 days, the lender
will purchase the insurance on
behalf of the borrower and may
charge the borrower for the cost of
premiums and fees to obtain the
coverage, which are likely to be
more expensive than if the borrower
purchases it.
The Agencies encourage
institutions to explain their
force-placement policies to
borrowers (including, where
applicable, that they charge for
force-placement coverage for the
45-day period and the timing of
that charge). In situations
where a borrower has not
previously been required to have
flood insurance (such as a map
change), it is a best practice
to also provide the Notice of
Special Flood Hazards and
Availability of Federal Disaster
Assistance, which give borrowers
important information about the
implications of being in an SFHA.
If adequate insurance is not
obtained by the borrower within
the 45-day notice period, then
the lender must purchase
insurance on the borrower's
behalf. Standard Fannie
Mae/Freddie Mac documents permit
the servicer or lender to add
those charges to the principal
amount of the loan.
FEMA developed the Mortgage
Portfolio Protection Program (MPPP)
to assist lenders in connection
with force-placement procedures.
FEMA published these procedures
in the Federal Register on
August 29, 1995 (60 FR 44881).
Appendix A of FEMA's September
2007 Mandatory Purchase of Flood
Insurance Guidelines sets out
the MPPP Guidelines and
Requirements, including
force-placement procedures and
examples of notification letters
to be used in connection with
the MPPP.
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