Flood Compliance: Implementation of the Final Rulecontent.aba.com/briefings/3012956.pdf · American...

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Flood Compliance: Implementation of the Final Rule

Thursday, October 8, 2015 Eastern Time

2:00 p.m.–3:30 p.m. Central Time

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American Bankers Association Flood Compliance: Implementation of the Final Rule Thursday, October 8, 2015 ▪ 2:00 – 3:30 p.m. ET

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II

Table of Contents

TABLE OF CONTENTS ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II

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SPEAKER BIOGRAPHY ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV

PROGRAM OUTLINE ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V

CONTINUING EDUCATION CREDITS INFORMATION ... . . . . . . . . . . . . . . . . . . . . . . . . VI

CPA SIGN-IN/SIGN-OUT SHEET ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII

INSTRUCTIONS FOR RECEIVING CERTIFICATES OF ATTENDANCE .. VIII

PROGRAM INFORMATION ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ENCLOSED

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III

Speaker and ABA Staff Listing

Moderator Anjali Phillips Senior Counsel Center for Regulatory Compliance American Bankers Association 1120 Connecticut Avenue, NW Washington, DC 20036 (202) 663-5338 [email protected] Speakers Donald J. Brown Vice President, CRP, CCS Senior Compliance Risk Manager and FDPA Officer Corporate Compliance Webster Bank, NA 100 Broad Street Milford, CT 06460 (203) 882-4413 [email protected] Rich Slevin H2O Partners, Inc. Flood Compliance & Education Division 260 Addie Roy Road., Ste 150 Austin, TX 78746 (708) 910-8458 [email protected]

ABA Briefing/Webcast Staff Cari Hearn Senior Manager (202) 663-5393 [email protected] Linda M. Shepard Senior Manager (202) 663-5499 [email protected] American Bankers Association 1120 Connecticut Avenue, NW Washington, DC 20036 www.aba.com

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Speaker Biographies

ANJALI PHILLIPS Anjali Phillips is a Senior Counsel in the Center for Regulatory Compliance at the American Bankers Association. She joined ABA in March 2015 and focuses on flood insurance compliance issues, UDAAP, and debt collection. Before joining ABA, Anjali worked as a lawyer at Allen & Overy LLP and O’Melveny & Myers, LLP, focusing on regulatory matters. She clerked for Judge Surrick on the Eastern District of Pennsylvania. Anjali has an B.A., cum laude, in Communications from the University of Pennsylvania. She has a J.D. from the University of Pennsylvania Law School. She is a member in good standing of the bars of Maryland and the District of Columbia. DONALD J. BROWN Don Brown is a Vice President of Webster Bank, N.A., and serves in a dual capacity within the bank’s Corporate Compliance Department as the Senior Compliance Risk Manager of the Commercial Regulatory Oversight Team and as the Flood Disaster Protection Act Officer of the Bank. Don is actively involved in several national FDPA regulatory forums and provides formal FDPA training to bankers. Don has also delivered outreach regulatory training upon request to professionals within the appraisal and realtor industries. Don maintains a Certified Risk Professional (CRP) and Certified Controls Specialist (CCS) designation and has over thirty [30] years of banking experience including over twenty [20] years of consumer and commercial lending regulatory compliance experience in a large bank environment. RICH SLEVIN Rich Slevin is a Senior Territory Training Manager for H2O Partners, Inc. He is widely recognized as a flood insurance subject matter expert by key insurance, banking, lending and state government entities. State departments of insurance, industry trade organizations, insurance agents and leading financial institutions regularly look to him for his expertise on flood insurance. He has delivered more than a thousand seminars, webinars, workshops and speeches on the topic of flood insurance throughout the United States to diverse target audiences that have included insurance agents, insurance companies, banking and lending institutions as well as federal, state and local government officials. Rich joined H2O Partners in December 2008. Prior to that, he spent 17 years with Computer Sciences Corporation where he worked on the National Flood Insurance Program Bureau and Statistical Agent project. He also worked for 15 years with CIGNA Corporation in its property and casualty insurance division in various operations and marketing management positions. Rich is a graduate of Indiana University – Bloomington. He resides in Chicago.


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PROGRAM OUTLINE TIMES SESSION AND SPEAKERS

1:45 – 2:00 p.m. ET

Pre-Seminar Countdown

2:00 – 2:02 p.m.

Welcome and Speaker Introduction 1Source International.

2:02- 2:05 p.m.

Introductions and Overview Anjali Phillips, American Bankers Association

2:05 – 2:25 p.m.

The Detached Structures Exemption Donald J. Brown, Webster Bank NA Rich Slevin, H2O Partners, Inc. Anjali Phillips, American Bankers Association

2:25 – 2:55 p.m.

The Mandatory Escrow Requirement and the Option to Escrow

Donald J. Brown, Webster Bank NA Rich Slevin, H2O Partners, Inc. Anjali Phillips, American Bankers Association

2:55 – 3:15 p.m.

Force-placed Insurance Donald J. Brown, Webster Bank NA Rich Slevin, H2O Partners, Inc. Anjali Phillips, American Bankers Association

3:15 – 3:30 p.m.

Questions and Answers, Wrap-up


VI

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VIII

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10/7/2015

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aba.com 1-800-BANKERS

Flood Disaster Protection Act Compliance: Implementation of the Final Rule

ABA Briefing/WebcastThursday, October 8, 20152:00 – 3:30 p.m. ET


Disclaimer

This Briefing will be recorded with permission and isfurnished for informational use only. Neither the speakers,contributors nor ABA is engaged in rendering legal norother expert professional services, for which outsidecompetent professionals should be sought. All statementsand opinions contained herein are the sole opinion of thespeakers and subject to change without notice. Receipt ofthis information constitutes your acceptance of these termsand conditions.

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Presenters

Donald J. Brown, CRP, CCS, Vice President, Senior Compliance Risk Manager and FDPA Officer –Corporate Compliance, Webster Bank, NA

Rich Slevin, Senior Territory Training Manager, H2O Partners, Inc.

Anjali Phillips, Senior Counsel, Center for Regulatory Compliance, American Bankers Association (Moderator)

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Agenda

• Introductions and Overview

• The detached structures exemption

• The mandatory escrow requirement and the option to escrow

• Force-placed insurance

• Questions and Answers

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Introduction

• June 22, 2015 - the Agencies (OCC, Fed, FDIC, FCA, and NCUA) issued Final Rule modifying regulations applicable to loans secured by properties located in a Special Flood Hazard Area (SFHA)

• Final Rule implements Homeowner Flood Insurance Affordability Act (HFIAA) amendments relating to:– escrowing of flood insurance payments– exemption of certain detached structures from the mandatory flood

insurance purchase requirement

• Final Rule also implements Biggert-Waters Act of 2012 (BW-12) amendments relating to:– the force placement of flood insurance

• Final Rule does not address the private flood insurance provisions in BW-12

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Implementation Dates

• Escrow requirement and option to escrow provisions are effective for all loans outstanding on January 1, 2016:– Begin mandatory escrow for premiums and fees when “Making,

Increasing, Renewing, or Extending” (MIRE events) any non-exempt designated loan on or after January 1, 2016

– Distribute notice of option to escrow by June 30, 2016 on any non-exempt non-escrowing designated loan

• Prior to January 1, 2016 - current provisions remain in place

• Compliance with any clarifications to the force-placement and detached structures provisions provided by the Final Rule became effective on October 1, 2015– Forced-placement provisions themselves were effective upon enactment of

the BW-12– Detached structures provisions themselves were effective upon enactment

of HFIAA

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Mandatory Purchase Requirement

• “A national bank or Federal savings association shall not 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.”

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Detached Structures: Overview

• Flood insurance is not mandated on “any structure that is a part of any residential property but is detached from the primary residential structure of such property anddoes not serve as a residence.”

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Detached Structures: Purpose

• Previous requirement was that any building – even a low value detached structure – securing a designated loan must be insured

• HFIAA recognized that insurance on some such structures adds considerable costs for the borrower but only minimal value

• Exemption is focused on low-value structures

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Detached Structures: Loan Purpose

• The exemption applies regardless of the purpose of the loan – consumer, business, commercial, or agricultural purpose

• Loan must be secured by a residence

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Detached Structures: Key Definitions

• “Structure that is a part of a residential property’’ - a structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes

• Both the main structure and the detached structure must be used primarily for personal, family or household purposes

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• “Detached” - not joined to the primary residential structure by any structural connection

• Detached structures stand alone– Two structures joined by a breezeway or roof would

not be considered detached.

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• May not “serve as a residence” – based upon a good faith determination of the lender of the structure’s intended use

• No bright line test here – lender’s good faith discretion– No ongoing duty to monitor the use of the structure

until a MIRE event

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Detached Structures

Q: If the residential structure is not in a SFHA but a detached structure is in a SFHA, is flood insurance

required for the detached structure?

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Detached Structures: Factors to Consider

1. Is the structure a part of the residential property?

2. Is the structure detached?

3. Is the structure intended for or actually used as a residence?

4. Has the structure been given as collateral, or does it otherwise add significant value to the property?

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Detached Structures

Q: If a designated loan secures a residence with a detached garage, what investigation should the lender

conduct and what documentation should the lender retain in order to determine whether to apply the

detached structure exemption?

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Escrow: Overview of Escrow

• Required escrow of premiums and fees for flood insurance for any non-exempt consumer purpose designated loan secured by residential improved real estate or a mobile home at a MIRE event on or after January 1, 2016

• Required option to escrow for all designated loans outstanding on January 1, 2016 not subject to mandatory escrow, otherwise escrowing, or exempt

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Escrow: Overview of Mandatory Escrow

• Unless an exception applies, mandatory escrow must be imposed at:– First MIRE event that occurs on or after January 1, 2016 – July 1st of the first calendar year a lender loses its small

lender status and is required to escrow

• Two categories of exceptions:– Small lender exception– Loan exceptions

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Escrow: Small Lender Exception

• Exception applies to lenders or servicers:– With total assets of less than $1 billion, – Who, on the date of enactment of BW-12, July 6, 2012,

• Were not required by Federal or State law to escrow taxes or insurance for the term of the loan, and

• Did not have a policy of uniformly and consistently escrowing taxes and insurance

– Asset size is calculated as of December 31st of either of the preceding two calendar years

• Assets of less than $1 billion in either of the immediately preceding two years may qualify a bank for the exception

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Escrow

Q: If a lender has less than $1 billion in assets on December 31, 2014 and more than $1 billion on

December 31, 2015, when would the lender be required to implement the escrow requirement?

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Escrow: Small Lender Exception

• Lenders or servicers who subsequently exceed the threshold: – Must escrow for any eligible loan that has a MIRE event after

July 1st of the first calendar year of changed status– Must provide the option to escrow notice to other eligible

borrowers by September 30th of the first calendar year after the change in status

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Escrow

Q: If a loan type requires escrow for a period of time, will a lender who otherwise qualifies for the small lender exception be disqualified because they offer that loan

type?

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Escrow: Loan Exceptions

• Loan primarily for business, commercial or agricultural purposes

• Subordinate liens when flood insurance coverage for first position lien was provided at time of subordinate loan origination and maintained

• Flood insurance for condominium associations, cooperatives, and homeowner associations, etc., where flood insurance is provided with premiums paid for as a common expense

• Home equity lines of credit

• Non-performing loans (90 or more days past due) which remain non-performing

• Short-term loans

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• Loan primarily for business, commercial or agricultural purposes

– Escrow requirement applies only to consumer purpose loans

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• Subordinate liens when flood insurance coverage for first position lien was provided at time of subordinate loan origination and maintained

– Lenders and servicers must inquire as to the amount of flood insurance coverage currently in place with the first lienholder at a MIRE event in order to ensure sufficient coverage

– No requirement to monitor lien position prospectively

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• Flood insurance for condominium associations, cooperatives, and homeowner associations, etc., where flood insurance is provided with premiums paid for as a common expense

– Flood insurance meets mandatory purchase requirements

– Escrow required if borrower purchases own coverage (Dwelling Form policy)

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• Home equity lines of credit

– Home equity term loans are not exempt, unless they fall under another exception

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• Non-performing loans

– A loan is deemed nonperforming if it is 90 or more days past due and

– Once deemed nonperforming, a loan remains nonperforming until either:

• permanently modified or • entire amount past due, including principal, accrued interest,

and penalty interest incurred as the result of past due status, is collected or discharged

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• Short-term loans

– Must be no longer than 12 months to qualify

– Extensions of 12 month or less • Exception applies

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Escrow: Monitoring of an Exception

• Lenders and servicers have no ongoing obligation to substantiate the continuing existence of an exception, except at a triggering MIRE event

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Escrow: Map Changes

• Flood Insurance Rate Map (FIRM) changes are not a MIRE event– Lenders are not required to escrow based solely on a map

change– Lenders may offer the option to escrow

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Escrow: Overview of Option to Escrow

• The option to escrow must be offered and made available to borrowers with outstanding designated loans as of January 1, 2016 or July 1st of the calendar year in which a lender loses its small lender status

– Offer must be made by:• June 30, 2016• September 30st of the first calendar year during which the lender

or servicer loses its small lender status

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Escrow: Option to Escrow Considerations

• Option does not apply to:– Loans already escrowing – Loans, lenders or servicers who qualify for any of the

exceptions

• If a borrower submits an escrow request, the lender or servicer must begin escrowing “as soon as reasonably practicable”

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Forced Placement: Overview

• If a lender or servicer determines at any time that a designated loan is not covered by adequate flood insurance, the lender or servicer must notify the borrower that the borrower should obtain adequate flood insurance

• If adequate insurance is not obtained within 45 days of notice, a lender or servicer must force place insurance

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Forced Placement: Notices

• Lenders or servicers, at their discretion, may send one or more additional notices prior to the policy expiration date as a convenience to the borrower

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Forced Placement

Q. How should a lender or servicer communicate when insurance is needed due to a map change?

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Forced Placement: Charges

• Borrower may be charged for the cost of premiums and fees for coverage beginning on the date on which flood insurance coverage lapsed or did not provide sufficient coverage

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Forced Placement: Timing

• Lenders or servicers may force-place coverage anytime during the 45-day notice period

• Lenders or servicers must force-place coverage by the end of the 45-day notice period

– Policies may be backdated to day of lapse

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Forced Placement

Q. When should lenders force-place flood insurance and when they should charge borrowers?

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Forced Placement: Termination

• Termination of a force-placed insurance policy is required within 30 days of receipt of confirmation of a borrower’s existing flood insurance coverage

• Lender or servicer must:

– Notify the insurer to terminate any force-placed insurance purchased by the lender or servicer and

– Refund to the borrower all overlapping premiums and fees

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Forced Placement: Proof of Own Coverage

• Final Rule states the lender may only ask for:– an existing insurance policy declarations page that includes the

flood insurance policy number and – the identity of and contact information for the insurance company or

its agent

• Lenders and servicers have 30 days from the receipt of the confirmation to:– conduct all necessary inquiries – terminate the force-placed policy– refund any premiums for the overlap period

• Cannot require additional information but if submitted by the borrower, the lender or servicer may review it

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Private Insurance

• Acceptance of private flood insurance remains a challenging issue for lenders and servicers

• The agencies have said they plan to address these provisions in a separate rulemaking

• Pending legislative actions

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Appendices

• Appendix A: sample Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance

– new language regarding the escrow requirements

– disclosure regarding the availability of both NFIP and private flood insurance policies from private companies

• Appendix B: Sample Clause for Option to Escrow for Outstanding Loans

• Revisions to Appendix A and new Appendix B are effective on January 1, 2016

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Key Takeaways

• What does this mean for implementation?– Ensure policies and procedures are up-to-date– Ensure notices are up-to-date– Ensure regulatory compliance checklists reflect any

changes from these rules

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How to Submit Questions

If you are participating on the Web:Enter your Question in the “Questions” Box

and Press ENTER / SUBMIT

If you are participating by Phone:Email your question to: [email protected]

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Reference and Resources

Additional Resources:• Loans in Areas Having Special Flood Hazards Final Rule (July 21, 2015):

http://www.gpo.gov/fdsys/pkg/FR‐2015‐07‐21/pdf/2015‐15956.pdf (This link includes Appendix A and B)

• Interagency Q & As Regarding Flood Insurance (July 2009): http://edocket.access.gpo.gov/2009/pdf/E9‐17129.pdf

• Interagency Q & As Regarding Flood Insurance (October 2011): http://www.gpo.gov/fdsys/pkg/FR‐2011‐10‐17/pdf/2011‐26749.pdf

• ABA Flood Staff Analysis: http://www.aba.com/Compliance/Mem/Documents/SA‐Flood‐Final2015July.pdf

Detached Structures:• Flood insurance is not required on “any structure that is a part of any residential property but is detached from the

primary residential structure of such property and does not serve as a residence.”• A structure is “detached” from the primary residential structure if it is not joined by any structural connection

to the residential structure.• A detached structure may not “serve as a residence” based upon a good faith determination of the lender of

the structure’s intended use.• A “structure that is a part of a residential property’’ is a structure used primarily for personal, family, or

household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes.

• Lenders have significant discretion in determining which structures must be covered and which ones may be exempt.

• The exemption applies regardless of the purpose of the designated loan – consumer, business, commercial, or agricultural purpose – provided the loan is secured by a residence.

Force‐Placement:• If a lender or servicer determines at any time that a designated loan is

not covered by sufficient flood insurance, the lender or servicer must provide notice to the borrower, and if adequate insurance is not obtained within 45 days, must obtain flood insurance coverage and may charge a borrower for the cost of insurance commencing on the date on which the borrower’s coverage lapsed or became insufficient.

• Lenders or servicers may force place coverage anytime during the 45‐day notice period, although they must place it by the end of the period.• Policies may be backdated to the day the policy lapsed.

• Overlapping force‐placed flood insurance premiums must be refunded to the borrower.

• Termination of force‐placed insurance is required within 30 days of receipt of confirmation of existing flood insurance coverage.

Escrow:• Lenders and servicers not otherwise exempt must implement the mandatory escrow

requirement at any MIRE event after January 1, 2016 and offer the option to escrow by June 30, 2016 to all designated loans not otherwise exempt or already escrowing.

• Exceptions:• The small lender exemption: lenders or servicers:

• With total assets of less than $1 billion, calculated as of December 31 of either of the previous two years,

• Who, on the date of enactment of Biggert‐Waters, July 6, 2012, • Were not required by Federal or State law to escrow taxes or insurance for

the term of the loan, and• Did not have a policy of uniformly and consistently escrowing taxes and

insurance.• Loan‐related exceptions:

• Subordinate loans.• Loans secured by a condominium, cooperative, or other such development. • Business, commercial, or agricultural purpose loans.• Home equity lines of credit.• Nonperforming loans.• Loans with terms not longer than 12 months.

Implementation Dates:• Mandatory Escrow – Must be imposed by any non‐exempt lender for any non‐exempt designated

loan which has a MIRE event after January 1, 2016 or June 30 of the first year an applicable exemption does not apply.

• Option to Escrow ‐Must be offered by any non‐exempt lender for any non‐exempt designated oanoutstanding as of January 1, 2016. Notices of option to escrow must be distributed by June 30,2016 or September 30 of the first year an applicable exemption does not apply.

• Detached Structures – Currently effective. Clarifications must be implemented by October 1, 2015.• Force‐placement – Currently effective. Clarifications must be implemented by October 1, 2015.

Mandatory Purchase of Flood Insurance Requirement: “A national bank or Federal savings association shall not 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.”

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July 2015

ABA staff analysis does not provide, nor is it intended to substitute for, professional legal advice.

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ABA Staff Analysis: Final Rule to Implement Certain Requirements of the Biggert-Waters Flood

Insurance Reform Act and the Homeowner Flood Insurance Affordability Act1 Updated August 21, 2015

Introduction and Summary: On June 22, 2015, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration (FCA) and the National Credit Union Administration (NCUA) (collectively, the Agencies) issued a joint Final Rule modifying regulations applicable to loans secured by properties located in special flood hazard areas.

The Final Rule implements the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) amendments to the Flood Disaster Protection Act (FDPA), relating to the escrowing of flood insurance payments and the exemption of certain detached structures from the mandatory flood insurance purchase requirement.

The Final Rule also implements the Biggert-Waters Flood Insurance Reform Act of 2012 (BWA) amendments to the FDPA relating to the force placement of flood insurance.

The Final Rule does not address the private flood insurance provisions in the BWA. These provisions are urgently required to help lenders and servicers determine whether private flood policies meet required standards under the BWA. The agencies plan to address these provisions in a separate rulemaking.

The Final Rule follows the Agencies proposed regulations from the 2013 Proposal – covering rules to implement the escrow, private insurance, and force-placed insurance provisions in the BWA – and the 2014 Proposal – covering updated rules for the escrow regulations and rules regarding detached structures. ABA commented on both proposed rules (see 2013 Comment Letter and 2014 Comment Letter). Implementation Dates:

The escrow requirement and option to escrow provisions are mandated by statute and are effective on January 1, 2016.

o As of January 1, 2016, lenders and servicers must escrow premiums and fees for

flood insurance for any designated loan secured by residential improved real estate or a mobile home when “making, increasing, renewing, or extending” (MIRE events) a designated loan.

o As of June 30, 2016, lenders and servicers must have distributed notices providing the option to escrow to all loans outstanding on January 1, 2016.

1 80 Fed. Reg. 43216, available at: http://www.gpo.gov/fdsys/pkg/FR-2015-07-21/pdf/2015-15956.pdf.

http://www.aba.com/Advocacy/commentletters/Documents/clABACommentBWA2013Dec.pdf

http://www.aba.com/Advocacy/commentletters/Documents/clABACommentBWA2013Dec.pdf

http://www.aba.com/Advocacy/commentletters/Documents/clFlood2014.pdf

http://www.gpo.gov/fdsys/pkg/FR-2015-07-21/pdf/2015-15956.pdf

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Revisions to Appendix A and new Appendix B are effective on January 1, 2016.

The forced-placement provisions were effective upon enactment of the BWA, and the detached structures provisions were effective upon enactment of HFIAA. However, lenders and servicers must adjust their systems to reflect compliance with any clarifications to those provisions provided by the rule by no later than October 1, 2015.

Key Elements of the Final Rule: The Final Rule reaffirms the mandatory purchase requirement, that a lender or servicer may not make, increase, renew, or extend a 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. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property.

Designated loans are loans secured by a building or mobile home located in a special flood hazard area in which flood insurance is available.

Detached Structures: The Final Rule provides that flood insurance is not required on any structure on a residential property if it is detached from the primary residential structure and does not serve as a residence.

The original FDPA contained a requirement that any building – even a low value detached structure – securing a designated loan must be insured. The HFIAA amendments recognized that insurance on these structures – such as a storage shed or a garage – can add considerable costs for the borrower while adding minimal value, and permitted that these structures may be exempt, subject to the provisions outlined above.

The exemption applies to loans made for business, commercial, or agricultural purposes, in addition to consumer loans, if they are secured by a residence, as ABA recommended in our 2014 Comment Letter. o The purpose of the loan does not change the value of the detached structure, or the

lack thereof.

The exemption gives banks significant discretion to determine which structures require coverage. o The exemption applies only to structures that the lender or servicer deems part of the

residential property. o When detached structures are given as collateral, lenders and servicers may require

the structure be covered regardless. In this instance, the structures themselves – such as detached greenhouses – have value to the bank and the borrower, and accordingly do not meet the purpose of the exception.

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The Final Rule provides some clarification of the terms “residential property,” “detached,” and “serve as a residence.”

o “Residential property” applies only to structures for which there is a residential use

(personal, family, or household purpose) and not to structures for which there is a commercial, agricultural, or other business use.

o A structure is “detached” from the primary residential structure if it is not joined by any structural connection to the residential structure –i.e., it stands alone.

o A detached structure “serves as a residence” based upon a good faith determination

of the lender of the structure’s intended use. The Agencies have declined to provide a bright line test for this good faith determination, and accordingly, the lender or servicer has significant discretion, but is called upon to do a case-by-case analysis. Although no single question is dispositive, lenders and servicers might consider

and document some of the following considerations in their good-faith determinations of whether a detached structure serves as a residence:

Has the borrower indicated the structure will be used as a residence?

Does the structure have bathroom facilities?

Does the structure have kitchen facilities?

Does the structure have sleeping facilities?

Is the structure traditionally used as a residence? (a guest house)

Is the structure traditionally used for some purpose other than a residence? (a green house, a horse barn, a tool shed)

Although active monitoring of whether a detached structure qualifies for the exemption is not required, detached structures should be re-examined upon a MIRE event to determine if the coverage determination remains reasonable. If a lender or servicer subsequently becomes aware that a detached structure is no longer exempt, the borrower must be notified that insurance is required, and if insurance is not placed within 45 days of that notification, the lender must force-place it.

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Escrow: The Final Rule requires lenders or servicers to escrow premiums and fees for flood insurance for any designated loan secured by residential improved real estate or a mobile home at a MIRE event on or after January 1, 2016. The option to escrow must be offered to most other borrowers with outstanding loans after that date. The Escrow Requirement: There are several exceptions to the escrow requirement:

The small lender exemption:

o Except as may be required under applicable State law, the exception applies to lenders or servicers:

With total assets of less than $1 billion, Who, on the date of enactment of Biggert-Waters, July 6, 2012, were not

required by Federal or State law to escrow taxes or insurance for the term of the loan, and

Who, as of July 6, 2012, did not have a policy of uniformly and consistently escrowing taxes and insurance.

o Asset size is calculated as of December 31 of either of the previous two years.

Assets of less than $1 billion in either of the immediately preceding two years would qualify a bank for the exception, if the other two criteria also apply.

o Lenders or servicers who were at one time exempt, but become covered by the

escrow rule:

Will need to begin escrowing for any loan that has a MIRE event on July 1 of the first calendar year of changed status.

Must provide the option to escrow notice to other eligible borrowers by September 30 of the first calendar year after the change in status.

o Theoretically, a lender or servicer may regain the small lender exemption if its assets

fall below the threshold. However, the Agencies discourage lenders and servicers from switching back and forth.

o Lenders and servicers may be eligible for the small lender exemption even if they make HPML loans under Regulation Z, which requires escrow, if they otherwise meet the exemption requirements. HPMLs allow the borrower the ability to stop escrowing after 5 years, and therefore, these escrows do meet the “for the term of the loan” requirement. The FDIC has verbally advised ABA that the Agencies agree with this interpretation.

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Loan-related exceptions:

o Loans in a subordinate position to a senior lien secured by the same property for which flood insurance meeting the mandatory purchase requirement is being provided.

Lenders and servicers must inquire as to the amount of flood insurance coverage in place at a MIRE event in order to ensure it is sufficient.

Lenders and servicers should ensure their loan documents permit requiring escrow on subordinate lien loans in the event the first loan is paid off and the subordinate lien loan becomes a first lien.

o Loans secured by residential improved real estate or a mobile home that is part of a

condominium, cooperative, or other project development.

The policy must meet the mandatory purchase requirement, as described above.

If the amount of the condominium association, cooperative, homeowners association, or other applicable group purchased policy does not satisfy the mandatory flood insurance purchase requirement, then the borrower would be required to obtain a supplemental policy to cover the deficiency and it would be subject to escrow.

o Loans secured by residential improved real estate or a mobile home made primarily

for a business, commercial, or agricultural purpose.

o Home equity lines of credit.

Although home equity lines of credit are exempt, regardless of their position, if a home equity term loan is a senior lien, it would not be exempt.

o Nonperforming loans.

A loan is deemed nonperforming if it is 90 or more days past due. Once the

loan is deemed nonperforming, it remains nonperforming until either:

The loan is permanently modified;

The entire amount past due, including principal, accrued interest, and penalty interest incurred as the result of past due status, is collected; or

The entire amount past due, including principal, accrued interest, and penalty interest incurred as the result of past due status, otherwise discharged in full, through charge-off, foreclosure, short sale, or some other method.

Whether a loan is nonperforming was a previously complicated question - as a borrower may fall past due, make a few payments, and then fall past due again – which the Agencies have attempted to address with this guidance.

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o Loans with terms not longer than 12 months.

If a loan of 12 months or less is extended or renewed for an additional term of

12 months or less, the extension or renewal will qualify as a new MIRE event. Accordingly, the exception would apply to the extended or renewed loan.

Lenders and servicers not exempt from the escrow requirement must implement the requirement at any MIRE event that occurs after January 1, 2016, or by July 1 of the first calendar year during which the lender or servicer has a change in status requiring it to escrow.

The previous escrow rules, as they were in effect on July 5, 2012, remain in effect through December 31, 2015.

Flood map changes are not a MIRE event, and therefore, lenders or servicers are not required to escrow based solely on a map change.

Lenders and servicers have no ongoing obligation to substantiate the continuing existence of the exception, except at a triggering MIRE event. However, if a lender or servicer becomes aware the status of a loan has changed, even outside a MIRE event, the lender or servicer will need to take action to begin escrowing “as soon as reasonably practicable.”

The Option to Escrow: By June 30, 2016, lenders and servicers must also offer and make available the option to escrow flood insurance premiums and fees for non-exempt loans that are outstanding as of January 1, 2016.

The requirement does not apply to lenders, servicers, or loans that are exempt from the general escrow requirements.

o If a previously exempt lender loses the exemption, then that lender must provide the

option to escrow notice by September 30, of the first calendar year during which the lender or servicer has a change in status requiring it to escrow.

o The status of a loan as of the January 1, 2016 or July 1 (for banks or servicers experiencing a change in status) determines whether a lender or servicer has to send the option to escrow notice. If the loan on that date is subject to one of the exemptions, the lender or servicer would not need to send the borrower the notice.

Notice to borrowers who are already escrowing or whose loans are already subject to the requirement is not required.

If a borrower submits an escrow request, the lender or servicer must begin escrowing “as soon as reasonably practicable.”

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Force-Placed Insurance: If a lender or servicer determines at any time that a designated loan is not covered by sufficient flood insurance, the lender or servicer must provide notice to the borrower, and if adequate insurance is not obtained within 45 days, may charge a borrower for the cost of flood insurance coverage commencing on the date on which the borrower’s coverage lapsed or became insufficient.

The Agencies consider the date of lapse to be the expiration date provided by the policy, or the date the flood insurance is cancelled. NFIP policies often provide a 30-day “grace period,” following the policy expiration date. However, the Agencies recognize this grace period typically covers only the lender’s interest, and there may be lack of continuous coverage protecting the borrower’s interest, and therefore use the expiration or cancellation date.

45-day notice is also required when the lender or servicer learns insurance is needed due to a map change.

Lenders or servicers, at their discretion, may send one or more additional notices prior to the policy expiration date as a convenience to the borrower. However, the lenders or servicers are still required to send the mandated 45-day notice following the lapse of the borrower’s policy.

Lenders or servicers may force place coverage anytime during the 45-day notice period, although they must place it by the end of the period. Policies may be backdated to the day the policy lapsed.

o In the example provided in the Final Rule, if a policy expires on June 30th, the policy

can be placed as early as July 1, but must be placed no later than on August 15th.

o As a practical matter, the Agencies suggest that lenders or servicers may choose to force-placing a policy as of the date of lapse of the previous policy but wait until the 45-day notice period has expired to collect premiums for coverage beginning at the date of lapse may help lenders and servicers avoid the administrative burden of refunding premiums for any overlapping coverage.

The borrower may be charged for the cost of premiums and fees for coverage beginning on the date on which flood insurance coverage lapsed or did not provide sufficient coverage.

o If the borrower obtains a flood insurance policy that overlaps with the force-placed

policy, the lender or servicer must refund any premiums paid by the borrower for any overlap period.

Force-placed flood insurance premiums paid by a borrower must be refunded for any period of overlap with the borrower’s flood insurance coverage, even if evidence of the borrower’s flood insurance is not provided to the bank on a timely basis.

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Termination of a force-placed insurance policy is required within 30 days of receipt of confirmation of a borrower’s existing flood insurance coverage. The lender or servicer must:

o Notify the insurer to terminate any force-placed insurance purchased by the lender or

servicer and

o Refund to the borrower all premiums and related fees the borrower paid for any insurance purchased by the lender or servicer for any period during which the borrower’s flood insurance coverage overlaps with the force-placed policy.

Lenders or servicers may receive insurance confirmation from either the borrower or an insurance agent or insurer with whom the institution has direct contact.

The Final Rules provide that it is sufficient for a borrower to show 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 as proof of insurance. o This creates significant difficulty for lenders and servicers who may well need more

information to determine whether the scope or amount of the policy is sufficient to meet the mandatory purchase requirement, as described above. This is particularly true if the policy is a private policy for reasons discussed further below.

o Lenders and servicers have 30 days from the receipt of the confirmation to conduct all necessary inquiries regarding whether the borrower’s flood insurance policy satisfies the minimum mandatory purchase requirement, and if so terminate the force-placed policy, and refund any premiums for the overlap period within 30-days. This may be very difficult if the information provided does not show the necessary details and significant investigation is required.

If additional information is submitted by the borrower, the lender or servicer may review it.

The Final Rule does not require, as the CFPB does in its mortgage servicing rule, a lender or servicer to advance funds to a borrower’s escrow account for the purpose of paying for a borrower’s hazard insurance (unless the lender or servicer has a reasonable basis to believe that a borrower’s hazard insurance has been canceled or not renewed for reasons other than nonpayment). However, nothing prohibits a lender or servicer from doing so to benefit the consumer.

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Private Insurance: The BWA sought to encourage private sector participation by requiring lenders to accept private flood policies that meet certain very specific standards. However, the rigidity of the standards in the statute makes it very difficult for lenders to make reasonable determinations of whether they can accept a policy.

The 2103 Proposal included a few solutions to this problem.

o The first is a safe harbor provision, allowing a lender to accept a private policy when a state insurance regulator determines a policy meets the mandatory purchase requirement.

o In the alternative, the 2013 Proposal suggests giving lenders discretion to accept private policies that do not meet the required standards.

The delay in providing regulatory guidance continues to make it difficult for lenders to accept private policies. Further guidance on this issue is urgently needed.

Additional Information:

The Final Rule includes two sample notices:

o Appendix A provides a sample Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance.

This includes new language regarding the escrow requirements. This also includes a disclosure regarding the availability of both NFIP and

private flood insurance policies from private companies.

o Appendix B provides a Sample Clause for Option to Escrow for Outstanding Loans.

The lender or servicer is not precluded from adding additional information to provide clarity.

What’s Next:

There are still a number of open questions regarding implementation. It is our hope the Agencies together with the Federal Emergency Management Agency (FEMA) will publish additional guidance, either through updated Q&As or reissuing the National Flood Insurance Program (NFIP) NFIP Mandatory Purchase of Flood Insurance Guidelines (the Bluebook).

Questions? Contact Anjali Phillips for more information.


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