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Agencies Request Comment on Proposed Amendments to Regulations on Loans Secured by Property in High-risk Flood Zones
Practical Law Legal Update 3-545-6385 (Approx. 4 pages)
Agencies Request Comment on Proposed Amendments to Regulations on Loans Secured by Property in High-risk Flood Zones
by Practical Law Finance
| Published on 17 Oct 2013 • USA (National/Federal) |
Five federal regulators released and are seeking comment on proposed amended regulations imposing requirements on loans secured by real property located in high-risk flood zones.
On October 11, 2013, five federal regulators released and are seeking comments on proposed amended regulations that would impose additional requirements on loans secured by real property located in high-risk flood zones. Existing regulations require loans secured by property in high-risk flood zones to be insured up to the lesser of the current principle balance outstanding on the loan or the maximum amount of insurance available for the type of property securing the loan. The proposed amendments would implement certain provisions of the Biggert-Waters Flood Insurance Reform Act of 2012, which reformed the National Flood Insurance Program (NFIP). The agencies' proposal addresses, among other things:
- Private flood insurance. The proposal requires regulated lending institutions and their loan servicers to accept statutorily defined private flood insurance to satisfy the mandatory purchase requirement. An insurance policy that meets the statutory definition is one that:
- is issued by an insurance company that is approved to engage in the business of insurance (or recognized as a surplus lines insurer for specific types of policies) by the jurisdiction in which it operates;
- provides coverage at least as broad as the standard NFIP Policy;
- provides cancellation provisions at least as restrictive as the NFIP Policy;
- requires the insurer to give 45 days notice to the insured and the institution before cancellation of the policy;
- informs the insured of the availability of flood insurance under the NFIP; and
- includes a mortgage interest clause similar to the one contained in the standard NFIP Policy.
Additionally, the proposal requests comment on whether the agencies should use their authority under the Flood Disaster Protection Act (FDPA) to expressly permit regulated lending institutions and their servicers to accept a policy issued by a private insurer that does not meet the statutory definition of private flood insurance above and, if so, what criteria should be required for the policy to qualify. - Escrow of flood insurance payments. The proposal requires regulated lending institutions and their servicers to place into escrow payments and fees for flood insurance on loans secured by residential improved real estate or a mobile home. This requirement would not apply to business, agricultural and commercial loans, or loans that are covered by an insurance policy taken out by the borrower and paid for through an escrow account established by another lender. Additionally, certain institutions may qualify for a statutory exception from the escrow requirement if the institution:
- has less than $1 billion in total assets; and
- was not required under state or federal law, or its own internal policies, to place into escrow taxes, insurance premiums or other types of fees on or before July 6, 2012.
Institutions would be required to comply with the proposed escrow requirement beginning July 6, 2014. - Forced-placed flood insurance. The proposal clarifies that an insurance policy declarations page (that includes the name of the insurer and the policy number) is sufficient documentary evidence to confirm that the borrower has obtained the necessary flood insurance coverage. The proposal further clarifies that regulated lending institutions and servicers have the authority to charge a borrower for the cost of force-placed flood insurance coverage, beginning on the date that the borrower's coverage becomes insufficient. The proposal requires a lender to terminate force-placed flood insurance and refund premium payments and fees to the borrower within 30 days, for any period of time that both the flood insurance purchased by the borrower and the institution were in effect.
The proposal also provides new and revised sample notice forms and clauses. If an institution implements these forms, it is deemed to have complied with the requirement to inform customers of the above changes to the flood insurance requirements. While the regulations issued by each of the five regulators vary slightly to conform to each agency's existing regulations, the substance of the proposals is consistent across all five regulators. The five regulators include:
- The Farm Credit Administration.
- The National Credit Union Administration.
The public will have until December 10, 2013 to comment on the proposal.
Practical Implications
If the proposed amended regulations become effective, lenders will need to alter how they maintain insurance for homes in high-risk flooding areas on behalf of borrowers. At a minimum, lenders will need to consider implementing new documentation to notify customers of their rights and to comply with the new escrow requirements. However, while the proposed regulations impose additional obligations on lenders to ensure that borrowers have flood insurance in high-risk areas, the ultimate payment obligation rests with the borrower. To that end, if the borrower lives in a high-risk area requiring flood insurance, the lender must factor in the amount of the premium as a mortgage-related obligation for purposes of the ability-to-repay determination. For a discussion of the ability-to-repay determination, see Practice Note, The Ability-to-Repay and Qualified Mortgage Rule.
In addition to imposing additional obligations on lenders, the proposed regulations may offer industry-wide benefits. In particular, the proposed regulations would open the residential flood insurance market to private insurers. This increase in competition may result in lower premiums for borrowers and greater options for lenders for force-placed insurance.