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On June 5, Fannie Mae issued a Selling Notice to address new regulations on private flood insurance taking effect July 1. (See previous InfoBytes coverage here.) While the joint final rule issued by the federal banking agencies in February applies the private flood insurance provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) to supervised financial institutions, Fannie Mae stated that it is not subject to the final rule and will continue to apply its current Selling Guide eligibility standards and procedures to all loans in FEMA-designated special flood hazard areas (SFHA), or to loans secured by residences that are in a SFHA at the time of origination. Under the Selling Guide, “private flood insurance policies may be delivered as an alternative to National Flood Insurance Program (NFIP) policies” provided the terms and amount of coverage meet the specified qualifications and the property insurer meets the rating requirements.
On June 6, Freddie Mac released Guide Bulletin 2019-11, which, among other things, also emphasizes that it is not subject to the final rule, and is separately authorized by the Biggert-Waters Act to accept private flood insurance policies and establish requirements for issuers of these policies on premises securing Freddie Mac Mortgages. Specifically, Freddie Mac stated that it will continue to apply its current criteria when accepting private flood insurance policies, and that its requirements will “apply to all Seller/Servicers, including an institution subject to the federal banking agencies’ rule regardless of the rule provision (mandatory or discretionary) used to accept a private flood insurance policy.”
OCC Updates Comptroller’s Licensing Manual to Provide Revised Guidance on Flood Insurance Requirements
On September 7, the OCC released OCC Bulletin 2017-35 announcing a replacement of its handbook titled “Flood Disaster Protection Act” (FDPA)—last issued in 1999—to reflect recent amendments to the FDPA and implement regulations that resulted from the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) and the Homeowner Flood Insurance Affordability Act of 2014. The booklet, which is part of the Comptroller’s Licensing Manual, clarifies the following changes, among other things:
- flood insurance requirement exemptions for certain detached nonresidential structures;
- a requirement that banks—or servicers acting on behalf of a bank—escrow flood insurance premiums and fees for “any loan secured by a residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after January 1, 2016,” and also lists exemptions to the requirement;
- a requirement that banks and servicers “subject to the escrow requirement” must provide borrowers the option to escrow flood insurance premiums and fees and are required to implement the escrow “as soon as reasonably practicable” after the request has been received;
- FDPA provisions on force-placed insurance, including termination and refund requirements; and
- “examination procedures for determining compliance with the detached structure, escrow, and force placement provisions.”
Notably, the OCC stated that the Biggert-Waters Act provision, which requires the acceptance of private flood insurance policies that meets specified criteria to satisfy the mandatory purchase requirement, has not yet been adopted and will be addressed separately.
On October 20, the FDIC, OCC, Federal Reserve, Farm Credit Administration, and National Credit Union Administration issued a proposed rule intended to develop further the private flood insurance marketplace by implementing certain provisions of the 2012 Biggert-Waters Flood Insurance Reform Act (Biggert-Waters Act). Notably, the proposed rule would “require regulated lending institutions to accept policies that meet the statutory definition of private flood insurance in the Biggert-Waters Act and permit regulated lending institutions to accept flood insurance provided by private insurers that does not meet the statutory definition of ‘private flood insurance’ on a discretionary basis, subject to certain restrictions.” Comments on the proposal are due 60 days after it is published in the Federal Register.
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.
(ii) Removes amendments made by the Biggert-Waters Flood Insurance Reform Act that required the federal banking agencies to adopt regulations requiring lenders to accept private flood insurance policies if they met the definition of “private flood insurance,” and replaces such provisions with a definition of the minimum amount of private flood insurance necessary to satisfy the mandatory purchase requirements (which is the same as the minimum amount of NFIP insurance necessary to satisfy the mandatory purchase requirements--i.e., coverage that is at least equal to the insurable value of the building, the outstanding principal balance of the loan, or the maximum coverage available under the NFIP);
(iii) Requires federal agency lenders (i.e., federal agencies that make direct loans secured by improved real estate or a mobile home) to accept private flood insurance policies meeting the scaled-back definition of “private flood insurance” as long as such policies provide the minimum amount of required insurance;
(iv) Requires Fannie Mae and Freddie Mac to accept private flood insurance policies meeting the scaled-back definition of “private flood insurance” as long as (a) such policies meet Fannie Mae and Freddie Mac’s requirements relating to the financial strength of the private insurance company, and (b) the financial strength requirements do not affect or conflict with state laws, regulations, or procedures regulating the business of insurance; and
(v) Ensures that borrowers who purchase private flood insurance policies will not lose eligibility for subsidies under the NFIP as long as coverage remains continuous.
Although the bill has received support from a broad range of industry and consumer groups, some believe that it may undermine the ability to ensure that the terms of private flood insurance policies provide sufficient protection.
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 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.
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 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.
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