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Newsletter Archive

(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:

  1. When the (federally required) 45-day notice period should begin.
  2. When a borrower can be charged by the lender for the cost of flood insurance coverage, with respect to the 45-day notice period.
  3. 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).

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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.

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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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