For the second time in less than five months, a U.S. Court of Appeals ruled that the FHA Model Mortgage sets a floor, not a ceiling, on the amount of flood insurance coverage a borrower must maintain. Feaz v. Wells Fargo Bank, N.A., No. 13-10230, 2014 WL 503149 (11th Cir. Feb. 10, 2014); see also Kolbe v. BAC Home Loans Servicing, LP, 738 F.3d 432 (1st Cir. Sept. 2013). On February 10, the U.S. Court of Appeals for the Eleventh Circuit upheld a district court’s dismissal of a borrower’s claim for breach of contract and violations of various other state laws, concluding that the FHA Model Mortgage “unambiguously makes the federally required flood-insurance amount the minimum, not the maximum, the borrower must have.” Thus, the court concluded that the lender did not violate the mortgage when it required the borrower to increase her flood insurance coverage from the minimum amount required by federal law to the replacement cost value of her home or the maximum available under the National Flood Insurance Program, whichever was less. In reaching its decision, the court sided with the United States, which filed an amicus brief in this case and in a First Circuit case decided in September 2013, reasoning, in part, that any other interpretation would undermine federal housing policy.
On March 21, President Obama signed the Homeowner Flood Insurance Affordability Act of 2013, which includes several provisions impacting previously enacted mandatory flood insurance purchase requirements. The bill, among other things, delays from July 6, 2014 to January 1, 2016, a prior mandate that all flood insurance premiums be escrowed, and excludes from the mandatory escrow requirements (i) home equity lines of credit; (ii) junior or subordinate lien loans when flood insurance is provided for in connection with a superior lien loan secured by the same property; (iii) nonperforming loans; (iv) loans with a term of 12 months or less; (v) business purpose loans; and (vi) loans secured by property that is part of a condominium, cooperative, or other project development, if the property is covered by flood insurance provided by and paid for, as a common expense, by the condominium association, cooperative, homeowners association, or other applicable group. The bill also mandates that FEMA make available a high-deductible policy for residential properties that increases the maximum loss deductible for damages to covered properties from $5,000 to $10,000. Further, the bill excludes from the mandatory flood insurance purchase requirements detached structures not used as a residence but, in doing so, allows lenders flexibility to require that flood insurance be maintained on such structures.
On October 11, the FDIC, the OCC, the Federal Reserve Board, and other federal agencies (collectively the agencies) proposed a rule to implement changes to certain flood insurance regulations required by the Biggert-Waters Flood Insurance Reform Act of 2012. The proposal generally would, among other things, require premiums and fees for flood insurance to be escrowed for any loans secured by residential improved real estate or a mobile home. The proposal incorporates a statutory exception for any institution with total assets of less than $1 billion that, as of July 6, 2012, was not required by federal or state law to escrow taxes or insurance for the term of the loan and did not have a policy to require escrow of taxes and insurance. The agencies also propose requiring lenders to accept private flood insurance that meets the statutory definition to satisfy the mandatory purchase requirement, but seek comment on whether the final rule should include a provision that expressly permits lenders to accept a flood insurance policy issued by a private insurer that does not meet the definition of “private flood insurance.” The proposed rule also would amend lender-placement provisions to clarify that a lender or its servicer has the authority to charge a borrower for the cost of coverage commencing on the date on which the borrower’s coverage lapsed or became insufficient. The proposal also stipulates the circumstances under which a lender or its servicer must terminate lender-placed insurance and refund payments to a borrower, and establishes documentary evidence a lender must accept to confirm that a borrower has obtained an appropriate amount of flood insurance coverage. Comments on the proposal are due by December 9, 2013.
Recently, the U.S. Court of Appeals for the First Circuit affirmed a district court’s dismissal of a putative class action alleging that a lender improperly required borrowers of FHA-insured mortgages to buy and maintain higher flood insurance coverage than that indicated in their mortgage contracts. Kolbe v. BAC Home Loans Servicing, LP, No. 11-2030, 2013 WL 5394192 (1st Cir. Sept. 27, 2013). The ruling, from an equally divided en banc court, allows mortgage lenders to require borrowers to maintain flood insurance equal to the replacement value of their homes. The named borrower claimed that he was forced to increase his flood insurance coverage in breach of his mortgage contract with his original lender that set the required flood amount coverage. In an amicus brief filed by DOJ on behalf of HUD, the government argued that the FHA’s model mortgage form gives lenders discretion to require coverage for the replacement cost of the property in the event of a flood. The Court of Appeals agreed with the government’s interpretation of the language in the model mortgage contract and reasoned that to interpret the form otherwise would hinder federal housing policy by discouraging banks from offering FHA-insured mortgages or forcing banks to charge higher rates. Dissenting judges argued that the ruling allowed a federal agency to intervene and rewrite a contract to serve its own purposes, and that the ruling’s prediction that banks would not offer FHA mortgages or charge higher rates was speculative.
On April 11, HUD issued Mortgagee Letter 2013-11, which amends prior guidance related to the origination and servicing of FHA-insured loans in declared disaster areas. The letter stresses that prior guidance requiring a moratorium on foreclosures of properties in disaster areas for 90 days applies to the initiation of foreclosures and foreclosures already in process. The letter outlines steps servicers should take to determine the appropriate course of action for each borrower, including a review of individual facts and circumstances to determine whether to offer forbearance and other loss mitigation alternatives. The letter details such loss mitigation options and servicer requirements. The policy changes took effect immediately.
On April 9, HUD issued Mortgagee Letter 2013-10 to explain enhancements to the Lender Insurance program that allows high-performing mortgagees to conduct pre-endorsement reviews and insure loans. Those enhancements were implemented by a January 2012 HUD rule. The letter summarizes changes made by that rule, reviews mortgagee eligibility requirements for participation in the Lender Insurance program, and outlines the initial application process. Among other things, the letter also discusses the conditions under which a mortgagee’s lender insurance authority can be terminated or suspended and explains how mortgages with such authority are subject to a revised indemnification policy.
On March 29, the Federal Reserve Board, the FDIC, the OCC, the NCUA, and the Farm Credit Administration issued an interagency statement to clarify the effective dates for changes to the Flood Disaster Protection Act enacted last year in the Biggert-Water Flood Insurance Reform Act (the Act). The statement informs financial institutions that the force-placed aspects of the Act became effective upon enactment, which was July, 6, 2012, while provisions related to private flood insurance and escrow of flood insurance payments do not take effect until the agencies issue regulations. The statement reiterates the OCC’s prior statement that the new flood insurance penalty provisions in the Act took effect immediately and apply to violations that occurred on or after July 6, 2012.
On February 22, Fannie Mae issued Servicing Guide Announcement SVC-2013-02, reminding servicers that when they deposit undisbursed insurance loss draft funds into an interest-bearing account, the account must be for the borrower’s benefit and, regardless of the mortgage loan’s delinquency status, the servicer must comply with applicable laws regarding the disbursement of interest earned to the borrower. The announcement also introduced a new form for use when referring a borrower to Fannie Mae for the exit option that allows a three-month transition with no rent payment required, and updated the form to be used when referring a borrower for the exit option that allows up to a twelve-month lease with a market rent payment. On February 27, Fannie Mae issued Servicing Guide Announcement SVC-2013-03, describing servicing policy changes and updates to (i) private flood insurance, (ii) termination of applicable force-placed insurance, and (iii) special remittance type codes. The private flood insurance change follows a related announcement, SEL-2013-02, which, among other things, informed sellers that Fannie Mae must accept flood insurance from private providers as an alternative to National Flood Insurance Program policies. The insurance-related policies are effective immediately, and servicers must report using the new codes for applicable special remittances on or after April 1, 2013.
On November 20, the OCC issued Bulletin 2012-38 to advise national banks and federal savings associations about a recent OCC rule that adjusted the maximum civil money penalties (CMPs) for inflation and implemented higher flood insurance CMPs. The OCC rule revises the penalty tables that identify the statutes that provide the OCC with CMP authority, describe the different tiers of penalties provided in each statute, and set out the maximum penalty the OCC may impose pursuant to each statutory provision. The rule also implements the Biggert-Waters Flood Insurance Reform Act, which was signed into law on July 6, 2012 as part of a broad transportation bill. That Act increased the maximum CMP per flood insurance violation and removed the annual cap on flood insurance penalties assessed against a single lender in a calendar year. Effective December 6, 2012, any regulated lending institution that is found to have a pattern or practice of committing flood insurance violations will be assessed a civil penalty not to exceed $2,000 per violation, with no calendar year limit on such penalties.
On November 16, the Iowa Supreme Court held that a mortgage servicer may be liable to borrowers for failing to disclose information it acquired about the borrowers’ flood hazard risks. Bagelmann v. First Nat’l Bank, No. 11-1484, 2012 WL 5642039 (Iowa Nov. 16, 2012). After their home flooded, the borrowers sued their mortgage lender and servicer and alleged that at the time of origination and two years later during a refinance transaction, the lender incorrectly informed them that the property was not in a special flood hazard area and that no flood insurance was required. According to the borrowers, several years later the servicer was advised that the property was in a special flood hazard area and failed to inform the borrowers prior to their property flooding. The Iowa Supreme Court affirmed the district court’s holdings that (i) the borrowers cannot use the requirements of the National Flood Insurance Act as a basis for a state-law claim, (ii) the lender and servicer did not breach a contract with the borrowers, and (iii) the borrowers do not have a viable negligent misrepresentation claim. However, the Supreme Court determined that the borrowers provided evidence from which a fact finder could infer that the servicer knew prior to the flood that the property was in a flood zone and that prior representations to the contrary were incorrect. Therefore, the court reversed the grant of summary judgment to the servicer and remanded the case for further consideration of a possible claim based on Restatement (Second) of Torts section 551(2) against their servicer. The court also affirmed the lower court’s grant of summary judgment to the lender on the grounds that the lender no longer had a banking relationship with the borrowers.