United States

Regulatory agencies issue proposed regulation on Biggert-Waters provisions

COMPLIANCE NEWS  | 

The Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Federal Reserve (Board), Farm Credit Administration (FCA) and National Credit Union Administration (NCUA) issued a proposed rulemaking implementing some of the provisions of the 2012 Biggert-Waters flood insurance reform law to revise their regulations accordingly. 

The proposed rule significantly revises the federal flood insurance statutes and addresses the following provisions from the Biggert-Waters Act (the Act) that are under the agencies’ jurisdiction:

  • Section 100209 of the Act, relating to the escrow of flood insurance payments
  • Section 100239 of the Act, relating to the acceptance of private flood insurance
  • Section 100244 of the Act, relating to force-placed insurance

The proposal states that lenders should consult the Act for further information about revisions to the flood insurance statutes that will not be implemented through this rulemaking.

The proposal includes a recap of the flood insurance statutes which is included here as background information:

  1. The National Flood Insurance Act of 1968 (1968 Act) and the Flood Disaster Protection Act (FDPA) govern the National Flood Insurance Program (NFIP). The 1968 Act made federally subsidized flood insurance available to owners of improved real estate or mobile homes located in special flood hazard areas if the community where the improved real estate or mobile home is located participates in the NFIP.
  2. Until the adoption of the FDPA in 1973, the purchase of flood insurance was voluntary. The FDPA required the mandatory purchase of flood insurance and directed the OCC, Board, FDIC, NCUA and the former Office of Thrift Supervision to issue regulations governing the lending institutions they supervised. The resulting regulations directed the lending institutions to require flood insurance on improved real estate or mobile homes serving as collateral for a loan (secured property) if the secured property was located in a Special Flood Hazard Area (SFHA) in a participating community.
  3. Title V of the Riegle Community Development and Regulatory Improvement Act of 1994, also known as the National Flood Insurance Reform Act of 1994 (Reform Act), comprehensively amended the federal flood insurance statutes. The Reform Act established new requirements on federally regulated lending institutions, such as the escrow for flood insurance premiums under certain conditions and mandatory force- placement of flood insurance coverage. In addition, the Reform Act broadened the definition of “federal entity for lending regulation” to include the FCA.
  4. The Biggert-Waters Act of 2012 significantly amends the NFIP requirements, over which the agencies have jurisdiction. Specifically, the Act:
    • Increases the maximum civil money penalty (CMP) the agencies may impose per violation when there is a pattern or practice of flood violations and eliminates the limit on the total amount of penalties the agencies may assess against a regulated lending institution during any calendar year  
    • Requires regulated lending institutions to escrow premiums and fees for flood insurance on residential improved real estate, unless the regulated lending institution meets the statutory small institution exception  
    • Directs regulated lending institutions to accept private flood insurance, as defined by the Act, and to notify borrowers of the availability of private flood insurance  
    • Amends the force-placement requirement to clarify that regulated lending institutions may charge a borrower for the cost of premiums and fees incurred for coverage beginning on the date on which the flood insurance coverage lapsed or did not provide sufficient coverage and to prescribe the procedures for terminating force-placed insurance

The recently issued proposal discusses items “b” through “d” above. Item “a” regarding the increase in maximum CMPs and the elimination of limits on the amount of penalties was addressed by some of the agencies in separate notices earlier; however, as a reminder, the agencies note in the proposal that the civil money penalty provisions and the force-placement requirements were effective upon enactment. Both the escrow and private flood insurance provisions will become effective when the agencies finalize these implementing regulations. The agencies previously published guidance regarding the effective dates of the amendments which can be found here: http://www.fdic.gov/news/news/financial/2013/fil13014.html#cont

The proposal includes, but is not limited to the following proposed changes:

  • Definitions: The agencies are proposing to add a new definition for private flood insurance consistent with section 100239 of the Act, which added a new section 102(b)(7) to the FDPA.
  • Requirement to purchase flood insurance where available: The current regulation provides that a regulated lending institution cannot make, increase, extend or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. This provision further provides that flood insurance coverage is limited to the overall value of the property securing the designated loan minus the value of the land on which the property is located. The agencies also are proposing to amend this section to implement section102(b)(1)(B) of the FDPA, as added by section 100239(a)(1) of the Act, which requires that all regulated lending institutions accept private flood insurance if certain conditions are met.
  • Escrow requirement: The agencies are proposing to revise their regulations to require regulated lending institutions, or servicers acting on behalf of a regulated lending institution, to escrow all premiums and fees for flood insurance required for any loans secured by residential improved real estate or a mobile home unless the lending institutions qualify for the statutory exception. In addition, the premiums and fees must be payable with the same frequency as payments on the loan are made for the duration of the loan. The proposed provision applies to any loan secured by residential improved real estate or a mobile home that is made or is outstanding on or after July 6, 2014.  The proposed rule would mandate that a regulated lending institution, or a servicer acting on its behalf, mail or deliver a written notice informing a borrower that it is required to escrow all premiums and fees for required flood insurance on residential improved real estate.
  • Exception to escrow requirement: The statute states that, except as provided by state law, regulated lending institutions that have total assets of less than $1 billion are exempt from this escrow requirement if, on or before July 6, 2012, the institution: (i) in the case of a loan secured by residential improved real estate or a mobile home, was not required under federal or state law to deposit taxes, insurance premiums, fees or any other charges in an escrow account for the entire term of the loan; and (ii) did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees or any other charges in an escrow account for loans secured by residential improved real estate or a mobile home. A regulated lending institution would only be subject to the escrow requirement if it has assets of $1 billion or more as of Dec. 31 for at least two consecutive years.
  • Force placement of flood insurance: The proposal implements section 100244 of the Act by setting forth when a regulated lending institution or its servicer may begin to charge the borrower for force-placed insurance, the circumstances under which a regulated lending institution or its servicer must terminate force-placed insurance and refund payments, and what documentary evidence is sufficient to demonstrate a borrower has flood insurance coverage. The agencies propose to amend their regulations to provide that the regulated lending institution or its servicer may charge the borrower for the cost of premiums and fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount. The Agencies interpret the Act to permit a regulated lending institution to force-place a flood insurance policy purchased on behalf of a borrower that is effective the day after expiration of a borrower’s original insurance policy to ensure that it is continuous. 
  • Termination of force placement of flood insurance: The agencies propose that within 30 days of receipt by a regulated lending institution, or a servicer acting on its behalf, of a confirmation of a borrower’s existing flood insurance coverage, a regulated lending institution is required to: (i) notify the insurer to terminate any force-placed insurance purchased by the regulated lending institution or its servicer; and (ii) refund to the borrower all premiums paid by the borrower for any insurance purchased by the regulated lending institution or its servicer under this section for any period during which the borrower’s flood insurance coverage and the insurance coverage purchased by the regulated lending institution or its servicer were each in effect (overlap period), and any related fees charged to the borrower with respect to the insurance purchased by the regulated lending institution or its servicer during such overlap period.
  • Notice of special flood hazards and availability of federal disaster relief assistance:  Section 100239 of the Act adds a new section 102(b)(6) to the FDPA (42 U.S.C. 4012a(b)(6)) requiring regulated lending institutions to disclose to a borrower that: (i) flood insurance is available from private insurance companies that issue Standard Flood Insurance Policies (SFIP) on behalf of the NFIP or directly from the NFIP; (ii) flood insurance that provides the same level of coverage as an SFIP under the NFIP may be available from a private insurance company that issues policies on behalf of the company; and (iii) the borrower is encouraged to compare the flood insurance coverage, deductibles, exclusions, conditions and premiums associated with flood insurance policies issued on behalf of the NFIP and policies issued on behalf of private insurance companies and to direct inquiries regarding the availability, cost and comparisons of flood insurance coverage to an insurance agent. The proposal requires the disclosures set forth in section 102(b)(6) of the FDPA to be included in the Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance, and the agencies have proposed model language to include in the sample form of notice contained in Appendix A.

As previously mentioned, there are other provisions of the Biggert-Waters Act to consider. Some provisions require the NFIP to make the program more financially stable by raising rates to reflect flood risk appropriately. In addition, the provisions change how Flood Insurance Rate Map (FIRM) updates impact policyholders. Guidance issued regarding the Biggert-Waters Act in the form of a Q&A can be found on the Federal Emergency Management Agency’s (FEMA) website here: http://www.fema.gov/media-library-data/20130726-1912-25045-9380/bw12_qa_04_2013.pdf.  FEMA also provides a quick reference guide for Subsidized Pre-FIRM Buildings in the Special Flood Hazard Area which can be found here: http://www.fema.gov/media-library-data/41ecfedd3b889396440c30d34b9b91ea/Agent_Quick_RefGuide_September_2013.pdf

 Comments for this proposal were to be received by Dec.10. The proposal can be found here: http://www.fdic.gov/news/board/2013/2013-10-08_notice_dis_a_fr.pdf.