On April 22, the American Bankers Association (ABA) sent a letter to the OCC, the Federal Reserve, and the FDIC regarding force-place flood insurance (also known as lender-placed insurance). The ABA probed the question of whether or not the advancement of a lender-placed flood insurance premium constitutes an “increase” to the designated loan – a statutory “tripwire” under the Flood Disaster Protection Act (FDPA). According to the letter, “increasing reports” from ABA members suggest that examiners are taking the position that “advancing a flood insurance premium in order to force-place flood insurance increases a loan balance and therefore constitutes a MIRE event [(making, increasing, renewing, or extending a designated loan)].” The letter summarizes FDPA requirements, noting that, if examiners are in fact considering the advancement of a premium to force-place flood insurance as an increase to a designated loan, such an “interpretation is new to the industry and is inconsistent with industry practice and contractual obligations under standard mortgage loan agreements.” According to the ABA, this new approach would result in increased borrower confusion and expense: “[i]ndeed, if adding the flood insurance premium to the loan is considered to increase the loan amount, following that logic through, the payment of a force-placed hazard insurance premium, taxes, or even a late fee would also ‘increase’ the loan—and result in a MIRE event as it is wholly inconsistent to treat these protective advances differently. Accordingly, a delinquent borrower could experience a ‘MIRE event’ as frequently as monthly with each late payment. Clearly, this was not Congress’s intent.” The ABA urged the banking agencies to release interagency guidance to address concerns related to the advancement of flood insurance premiums as a potential MIRE event.
On April 28, the U.S. House of Representatives passed the Flood Insurance Market Parity and Modernization Act (H.R. 2901) by a unanimous vote of 419-0. The bill, which was introduced in June 2015 by Rep. Dennis Ross, R-Lakeland, and co-sponsor Patrick Murphy, D-Jupiter, is intended to encourage the use of private flood insurance. The bill, among other changes:
(i) Amends the definition of “private flood insurance” to, among other changes, remove the requirements that a private flood insurance policy include deductibles, exclusions, conditions, cancellation provisions, and mortgage interest (i.e., loss payee) clauses comparable to National Flood Insurance Program (“NFIP”) policies. The amended definition of “private flood insurance” would only require that the policy (1) be issued by an insurance company that is approved to provide insurance in the state where the building is located, and (2) provide flood insurance in compliance with that state’s laws. Read more…
On March 10, the FDIC issued FIL-18-2016 announcing updates to technical assistance videos on flood insurance. The FDIC’s videos “reflect changes in federal flood insurance laws, including changes regarding escrowing of flood insurance premiums and fees, insuring detached structures, and force-placed insurance.” The updated flood insurance series includes five separate videos: (i) Overview and Key Requirements; (ii) Building an Effective Compliance Management System; (iii) Common Violations and Consequences for Noncompliance; (iv) Frequently Asked Questions; and (v) Review and Resources. As highlighted in the letter, “the FDIC continues to emphasize to institutions the importance of managing compliance risk associated with making loans in areas having special flood hazards.”
On June 22, the federal banking agencies issued a joint final rule that modifies the mandatory purchase of flood insurance regulations to implement some provisions of the Biggert-Waters and Homeowner Flood Insurance Affordability Acts. Notable highlights include that the final rule, among other things: (i) expands escrow requirements for lenders who do not qualify for a small lender exception, (ii) clarifies the detached structure exemption, (iii) introduces new and revised sample notice forms and clauses relating to the escrow requirement and the availability of private flood insurance, and (iv) clarifies the circumstances under which lenders and servicers may charge borrowers for lender-placed flood insurance coverage. The escrow provisions and sample notice forms will become effective on January 1, 2016, and all other provisions will become effective October 1, 2015. The agencies reminded that the escrow provisions in effect on July 5, 2012, the day before Biggert-Waters was enacted, will remain in effect and be enforced through December 31, 2015.
The agencies also indicated that they plan to address Biggert-Waters’ private flood insurance provisions through a separate rulemaking.
On October 30, five federal agencies – the FCA, FDIC, NCUA, OCC and the Fed – issued a proposed rule regarding flood insurance. The proposed rule will amend regulations relating to loans secured by property located in special flood hazard areas. Specifically, the proposed rule would (i) establish requirements in connection with the escrow of flood insurance payments; (ii) provide certain borrowers with the option to escrow flood insurance premiums and fees; and (iii) eliminate the HFIAA requirement “to purchase flood insurance for a structure that is part of a residential property located in a special flood hazard area if that structure is detached from the primary residential structure and does not also serve as a residence.” Comments on the proposed rule are due by December 29, 2014.