Flood Disaster Flood Disaster Protection ActProtection Act

Regulatory Compliance School: IntroductionRegulatory Compliance School: IntroductionCUNA Center for Professional DevelopmentCUNA Center for Professional Development

February 4 and 11, 2003February 4 and 11, 2003

Presented byPresented byRaAnn WoodRaAnn Wood

raannw@ccul.orgraannw@ccul.org

The Fine PrintThe Fine Print

These materials are designed to supplement the lecture discussion. This information is designed to provide general information on various compliance issues that affect credit unions and their operations. It is provided with the understanding that neither CUNA & Affiliates, nor any of their employees, including the presenter, is herein rendering specific legal or professional advice as it applies to a particular credit union.

Such advice should be obtained directly from the most current regulations or sought from an attorney, CPA, or other professional person familiar with the differences between state & federal credit union charters, taking into account both state and federal law, before using any of the material for any specific application.

What is the National Flood What is the National Flood Insurance Program?Insurance Program?

• Provides federal flood insurance to owners of improved real estate or mobile homes (properties) located in a floodplain, if their community participates in the program

• Provides an incentive for communities to adopt floodplain management ordinances designed to mitigate the effects of flooding on both new and existing construction

GSE Guidelines GSE Guidelines (Fannie Mae & Freddie Mac)(Fannie Mae & Freddie Mac)

• Fannie Mae, Freddie Mac and Ginnie Mae guidelines require that the loans they buy that are secured by improved property and that are located in Special Flood Hazard Areas (SFHA) have flood insurance for the life of the loan

• Credit unions selling loans to the secondary market must also abide by the appropriate GSE flood insurance guidelines

Audit Checklist

Coverage AvailabilityCoverage Availability• Mandatory flood insurance purchase

requirements only apply to structures located in communities participating in the NFIP

• If the community does not participate, the purchase of flood insurance becomes the credit union’s business decision, not a federal mandate.

Emergency and Regular Emergency and Regular ProgramsPrograms

• Emergency Program• Typically the first phase under which a

community participates in NFIP• Only the minimum amounts of insurance

coverage are available at subsidized rates• Regular Program

• More comprehensive floodplain management requirements are imposed

• Higher amounts of federal flood insurance are available based on risk zones and elevations

Write Your Own (WYO) Write Your Own (WYO) ProgramProgram

• Allows participating property and casualty insurance companies to write and service the NFIP’s Standard Flood Insurance Policy in their own names

• Insurance companies receive an expense allowance for policies written and claims processed

• The federal government retains responsibility for underwriting any losses

Flood Insurance MapsFlood Insurance Maps• More than 19,000 communities have been

identified as susceptible to flooding through the publication of flood maps – over 95% of them participate in NFIP

• FEMA notifies each community of the determination and issues Flood Hazard Boundary Maps or Flood Insurance Rate Maps showing the location of the SFHAs

Requirement to Purchase Flood Requirement to Purchase Flood Insurance Where AvailableInsurance Where Available

• Mandatory Purchase Requirement• A credit union may not make, increase,

extend, or renew any loan on property located in a specific flood hazard area unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. Audit

Checklist

Requirement to Purchase Flood Requirement to Purchase Flood Insurance Where AvailableInsurance Where Available

Audit Checklist

• Mandatory Purchase Requirement

• Applies to all loans, including both consumer and commercial properties.

Acquired LoansAcquired Loans• Loans acquired from a mortgage broker or other

entity through table funding are considered to be made by the credit union and are required to meet the flood hazard insurance requirements as well.

30-Day Waiting Period30-Day Waiting Period• Normally there is a 30-day waiting period

before flood insurance goes into effect unless:• Initial purchase of insurance is made in

conjunction with the loan• The application and presentment of premiums

are made at or prior to loan closing• The initial purchase of insurance is made

within a one-year period following the revision or update of a flood insurance rate map

Refinancing, Equity Loans Refinancing, Equity Loans and Modificationsand Modifications

• The exception to the 30-day waiting period also applies to refinancing, placing of 2nd mortgages, and modifying existing mortgages. The exception also applies to:• Force placement of flood insurance• Increased limits at renewal• Map revisions

Required Amount of Required Amount of InsuranceInsurance

• The outstanding principal balance of the loan or the maximum limit of coverage available for the particular type of property ($250,000 for residential), whichever is lower

• Limited to the overall value of the property minus the value of the land on which the property is located

Credit Union’s Credit Union’s ResponsibilityResponsibility

• The credit union’s responsibilities cease upon the sale of the loan.

• However, the credit union will still be responsible for compliance with these provisions if it retains servicing rights to the loan.

ExemptionsExemptions• The flood insurance requirement does not apply

to property securing a loan with an original principal balance of $5,000 or less and a repayment term of one year or less

What About Insuring Land?What About Insuring Land?

• This regulation only applies to improved real estate, meaning land with a building or mobile home that is attached to a foundation on the land

Escrow RequirementEscrow Requirement• The credit union is required to escrow flood

insurance premiums if it requires the escrow of taxes, insurance premiums, fees, or other charges for real estate secured loans

• The escrow amount will besubject to escrow requirements in Section 10 of RESPA

Audit Checklist

The Flood Determination The Flood Determination Process Process

• Required use of the Standard Flood Hazard Determination Form (SFHDF)• Credit Unions must use FEMA’s SFHDF

when determining whether the building or mobile home offered as collateral security for the loan is or will be located in a special flood hazard area where flood insurance is available

• It is the responsibility of the lender to make the individual flood hazard determination. It can be made by a person other than the lender if that person guarantees the accuracy of the information.

Uses of a Previous Uses of a Previous DeterminationDetermination

• The credit union may not use a previous determination for a new loan

• However, if the loan involves an increase, extension, renewal or purchase of an existing loan the determination may be reused if:• It is less than 7 years old• No new or revised FIRM or FHBM has been issued

in the interim• It was initially recorded on an SFHDF that became

effective or was revised on or after 01/02/96

What if member disputes the credit What if member disputes the credit union’s determination that flood union’s determination that flood insurance is required?insurance is required?

• It may be contested if it was conducted in order to comply with the mandatory federal flood insurance provision requirements

• It may not be challenged if it is part of the credit union’s standard lending practices, i.e.: if private flood insurance is required as a condition for all mortgage loans

What if the member disputes the What if the member disputes the accuracy of the flood maps?accuracy of the flood maps?

• There are procedures available for changing or correcting a FIRM which are beyond the scope of the credit union’s responsibilities in complying with flood insurance requirements.

• Members should be advised, however, that they are still required to purchase and maintain flood insurance until the matter is resolved in their favor.

Forced Placement of Forced Placement of Flood InsuranceFlood Insurance

• If during the life of a loan that requires flood insurance it is determined that the amount of the insurance is less than required:• The credit union must notify the member that more

insurance is required at the member’s expense• If the member does not obtain the insurance within

45 days of notification, the credit union may “force place” the insurance on the member’s behalf and charge the member for the cost of the premiums and any fees incurred in purchasing the insurance.

Determination FeesDetermination Fees• The credit union may charge a

“reasonable fee” for determining whether the property securing the loan is located or will be located in special flood hazard area. • The NFIRA does not define the term

“reasonable”

Truth-in-Lending Act Truth-in-Lending Act ImplicationsImplications

Audit Checklist

• When an extension of credit is secured by an interest in real property, TILA and Reg Z specifically state that the cost to do the determination does need to be disclosed, but does not need to be included in the calculation of the finance charge

• A flood zone search that includes a charge for life-of-loan monitoring must include the portion of the cost for the monitoring in the APR calculation

Notice Notice RequirementsRequirements

Audit Checklist

• When a credit union makes a loan for a property located in a SFHA, the credit union must mail a written notice to the member

• The notice must include:• An approved FEMA warning that the building is located

in a SFHA• A description of the flood insurance purchase

requirements in the FDPA• A statement, if applicable, that flood insurance is

available under the NFIP and also from private insurers• As statement whether federal disaster relief assistance

is available in the case of flooding in a federally-declared disaster

Record of ReceiptRecord of Receipt• The credit union must retain a record of the

receipt of the notices by the member and the servicer for the period of time the credit union owns the loan

Record Retention

Alternative Method of Alternative Method of NoticeNotice

Record Retention

•A credit union will be in compliance with the notice requirement if it uses the language in Appendix 5-B of RegTraC Module 4: Mortgage Lending Regulations.

•The notice must be delivered within a reasonable time before the completion of the transaction.

Use of Prescribed Form Use of Prescribed Form of Noticeof Notice

• A credit union will be in compliance with the notice requirement if it uses the language in Appendix 5-B of RegTraC Module 4: Mortgage Lending Regulations.

• The notice must be delivered within a reasonable time before the completion of the transaction.

Notice of Servicer’s Notice of Servicer’s IdentityIdentity

• When a credit union makes a loan secured by a property located in a SFHA, the credit union must notify FEMA in writing of the identity of the servicer of the loan.•The notice requirement is met by informing the insurance provider of the servicer’s identity.

Transfer of Servicing Transfer of Servicing RightsRights

• The credit union must notify FEMA of any change in the servicer of a loan within 60 days after the effective date of the change.

• The notice requirement is met by notifying the insurance provider.

• Appendix 5-C of RegTraC Module 4: Mortgage Lending Regulations contains a sample Notification of Change of Servicer form

For More InformationFor More Information• This presentation includes a summary of

the information contained in the Flood Disaster Protection Act.

• For additional information or clarification, please refer to RegTraC Module 4: Mortgage Lending Regulations, Section 5: Flood Disaster Protection Act.