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Proposed Rule Issued to Stimulate Robust Marketplace for Private Flood Insurance
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.
House Passes Private Flood Insurance Bill by Unanimous Vote
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.
ABA Seeks Interagency Guidance Related to Force-Place Flood Insurance Premiums
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.
FDIC Updates Flood Insurance Videos
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.”
Federal Banking Agencies Issue Final Flood Insurance Rule
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.
Agencies Propose Flood Insurance Rule
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.
Massachusetts Enacts Flood Insurance Bill
On July 23, Massachusetts Governor Deval Patrick signed HB 3783, which prohibits creditors from requiring borrowers or owners to purchase flood insurance on the property: (i) at a coverage amount that exceeds the outstanding mortgage thereon; (ii) that includes coverage for contents; or (iii) that includes a deductible less than $5,000. Borrowers and owners will still have the option of purchasing a greater amount of insurance. The law provides that, in each instance flood insurance is required, the creditor must provide notice explaining that insurance coverage will only protect the creditor or lender’s interest in the property, and may not be sufficient to pay for repairs or property loss after a flood. The changes took effect immediately.
Prudential Regulators Issue Statement On Increased Maximum Flood Insurance Coverage
On May 30, the OCC, the FDIC, the Federal Reserve Board, the NCUA, and the Farm Credit Administration issued an interagency statement regarding the increased maximum amount of flood insurance available for “Other Residential Buildings” (i.e., non-condominium residential buildings designed for use for five or more families) beginning June 1, 2014. The statement explains that the maximum amount of flood insurance available under the NFIP for Other Residential Buildings increased from $250,000 to $500,000 per building, which may affect the minimum amount of flood insurance required for both existing and future loans secured by Other Residential Buildings. The statement also informs institutions that FEMA instructed insurers to notify Other Residential Building policyholders—which potentially could include notice to lenders on those policies—of the new limits before June 1, 2014. The agencies state that “[i]f a financial institution or its servicer receives notification of the increased flood insurance limits available for an Other Residential Building securing a designated loan, the agencies expect supervised institutions to take any steps necessary to determine whether the property will require increased flood insurance coverage.” According to the statement, lenders are not required to perform an immediate full file search, but, for safety and soundness purposes, lenders may wish to review their portfolios in light of the availability of increased coverage to determine whether additional flood insurance coverage is required for the affected buildings. If, as a result of this increase, a lender or its servicer determines on or after June 1 that an Other Residential Building is covered by flood insurance in an amount less than required by law, then it should take steps to ensure the borrower obtains sufficient coverage, including lender-placing insurance.
President Signs Flood Insurance Bill
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.
Eleventh Circuit Holds Lender Can Require Increased Flood Insurance Coverage
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.