New US Federal Flood Insurance Regulations

Background

On 21 July 2015, several federal agencies* promulgated a joint rule entitled “Loans in Areas Having Special Flood Hazards” which implements provisions of the Homeowner Flood Insurance Affordability Act (HFIAA) and the Biggert–Waters Flood Insurance Reform Act (BWA).  The agencies have not addressed private flood insurance in the current rule except to state that it will be the subject of a separate rulemaking in the future. The new rules discussing Force Placed insurance and the Detached Property Exemption may be of particular interest to the market. Each is discussed in more depth below.  The rule is effective from 1 October 2015 and addresses:

• Force Placed Insurance
  

  The regulations clarify rules regarding:

  1. charging a borrower for force placed flood insurance may begin;
  2. terms for mandatory termination of force placed flood insurance and refund of payments; and
  3. evidence sufficient to demonstrate the borrower has purchased coverage.
• Detached Property Exemption
  Introduction of a new exemption to the mandatory purchase requirement for any structure that is located on a residential property, but is detached from the primary residential structure and does not serve as a residence.
• Escrow Requirements
  A new requirement, with various exemptions, for regulated lenders or servicers to escrow premiums and fees in respect of flood insurance for any loan secured by residential improved real estate or a mobile home from 1 January 2016.
• Notice Forms
  New and revised sample notice forms and clauses that lenders or servicers are required to provide.

Introduction of a new exemption to the mandatory purchase requirement for any structure that is located on a residential property, but is detached from the primary residential structure and does not serve as a residence.

Force Placed Insurance

CHARGING FOR FORCE PLACED FLOOD INSURANCE

The BWA permits lenders, or their servicers, to charge the borrower for the cost of providing flood coverage beginning on the date on which the borrower’s flood insurance coverage “lapsed” or failed to provide sufficient cover. The new rule clarifies that a borrower’s flood insurance policy has “lapsed” on the policy’s expiration date or the date on which the policy was cancelled.

NOTICE OF LAPSE

The rule clarifies that the statutory notice from lenders or loan servicers to borrowers advising them of their responsibility to maintain flood insurance must be sent following the date on which the policy lapsed (see previous) or was determined to provide inadequate coverage.

Notice provided before the date the policy “lapses” does not constitute effective notice for force placing flood insurance but may be provided as a courtesy to the borrower.

Finally, it should be noted that although the lender or servicer are required to purchase flood insurance to satisfy the mandatory purchase requirement 45 days after the statutory notice, lenders are not prevented from force placing (or charging the borrower for) flood coverage as of the date on which the coverage “lapsed” or was determined to be insufficient.

TERMINATING FORCE PLACED COVERAGE

The new rule clarifies that an insurance policy declarations page that includes the existing flood insurance policy number and the identity of and contact information for the insurance company or its agent is sufficient evidence of a borrower’s flood insurance coverage.

The agencies’ analysis accompanying the rule stresses that while insurers must accept a policy declarations page as proof of cover, lenders may at their discretion accept alternative evidence of cover in order to cancel force placed business.  Once confirmation of the borrower’s flood coverage has been received, lenders or their servicers have 30 days in which to:

• make necessary inquiries into the sufficiency of the borrower’s flood coverage;
• notify the lender’s or servicer’s insurance provider to terminate the forced place coverage; and
• refund to the borrower all premiums and fees for any period in which the borrower’s and lender’s flood insurance coverage overlapped.

Detached Structure Exemption

Federal law requires the mandatory purchase of flood insurance for all properties with federally backed mortgages located in Special Flood Hazard Areas (SFHA). Upon a triggering event (i.e. making, increasing, renewing, or extending a loan), lenders are required to assess whether a property is located in a SFHA.

The new rule creates an exemption from the mandatory purchase requirement for structures that are detached from the primary residential structure and do not serve as a residence.

• “detached” is defined as not joined by any structural connection (i.e. it is freestanding);
• “residence” status may be determined by the lender, but consideration of the structure’s intended use and of the presence of sleeping, bathroom, or kitchen facilities is encouraged. 

Finally, the agencies have made clear that lenders may require flood insurance for detached structures, even where exempt from the mandatory purchase requirement, in order to protect the lender’s interest in the borrower’s collateral securing the loan.

*the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration (FCA) and the National Credit Union Administration (NCUA).