Flood Insurance 2002 - Total Training...
Transcript of Flood Insurance 2002 - Total Training...
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0 of 72 Flood Insurance
Carl Pry
April 23, 2015
A TTS Production
Flood Insurance Compliance Issues and
Enforcement Topics that
Continue to Plague Lenders
Carl Pry
April 23, 2015
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Carl Pry
April 23, 2015 Biggert-Waters
Biggert-Waters Flood Insurance Reform Act of 2012
Part of Transportation Bill, H.R. 4348; July 6, 2012 (Pub. L. 112-141)
When was/is it effective?
• Interagency Statement 3/29/13: force placement and civil money penalty provisions became
effective upon enactment
Reauthorized NFIP through September 2017
Increased CMPs to $2,000 per violation for failure to:
1. Require flood insurance
2. Provide notice of special flood hazards
3. Force place required flood insurance
4. Escrow flood insurance (required escrow accounts)
5. Provide notice to applicable servicer upon transfer
6. Accept comparable private policy in lieu of NFIP policy
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Carl Pry
April 23, 2015 Affordability Act
Homeowner Flood Insurance Affordability Act of
2014
H.R. 3370
Addressed negative consequences resulting from
Biggert-Waters, including dramatic increases in
premiums and requirements for escrows
Mandates FEMA make available a high-deductible
policy for residential properties
• Increases maximum loss deductible for damages to covered
properties from $5,000 to $10,000
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Carl Pry
April 23, 2015 Affordability Act
Guidance? Regulations?
“The Administrator [meaning FEMA] shall issue final
guidance and rate tables necessary to implement the
provisions of and the amendments made by this Act not
later than eight months following the date of the
enactment of this Act”
• No such guidance yet; regulators waiting as well
GAO Report (14-297R)
• FEMA still must address provisions in Biggert-Waters and
Affordability Act that affect many aspects of NFIP, including
its finances, rate setting, and participation
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April 23, 2015 Affordability Act
Flood insurance premium issues
addressed by FEMA in Bulletin
W-1401
http://www.nfipiservice.com/Stakeholder/pd
f/bulletin/w-14011.pdf
Overview found beginning on
page 3
Refunds
Premium rates
New surcharges on all policies
Grandfathering
Mapping
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Carl Pry
April 23, 2015 Escrow Requirements
Most escrow requirements were scheduled to take effect July 6, 2014
(Biggert-Waters) – delayed to January 1, 2016
Would have applied on that date
Timing requirements have changed
Exemptions from escrow requirement (not flood insurance
requirement)
Junior liens (subordinate to senior lien secured by same residential real
property where flood insurance is already being provided)
Business purpose loans secured by residential real estate
HELOCs
Nonperforming loans
Loans with terms 12 months or less
Condos/co-ops if the property is covered by flood insurance paid for by the
condo association, co-op, homeowners association, or similar group
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April 23, 2015 Escrow Requirements
Interagency proposal issued October 24, 2014:
Applies to any loan originated, refinanced, increased, extended, or renewed on
or after January 1, 2016
• Residential real estate as collateral
Institutions with assets < $1 billion do not have to escrow if they do not have a
policy of escrowing for such items
• Unless the loan is an HPML under Reg. Z
• However: each Agency shall create regulations requiring all institutions to make
available the option to escrow for flood insurance premiums in accordance with
escrow requirements of RESPA for:
– Exempt institutions (asset thresholds)
– Any loan made prior to January 1, 2016 where flood insurance is required
Institutions with assets < $1 billion and have a consistent escrow policy; and
those with assets $1 billion and over
• Required to escrow for flood insurance
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Carl Pry
April 23, 2015 NFIA and Regulations
Why do we have these rules?
Who are we protecting here?
• Protecting the Federal Government from disaster relief payments
• Not protecting your borrowers, although there is an obvious benefit to them
National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of
1973 introduced the requirements (42 USC 4001 et. seq.)
Regulations
Mandated by the National Flood Reform Act (Part V of the Riegle Community
Development and Regulatory Improvement Act) of 1994
Regulations: 61 FR 45684 (August 29, 1996) – NOT transferred to CFPB
• 12 CFR 22 (OCC); 208 (FRB – in Reg. H); 339 (FDIC); 760 (NCUA)
Each version is virtually identical – all following the same requirements
Regulatory expectations beyond statutory and regulatory requirements
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April 23, 2015 Flood Handbook Withdrawn
FEMA’s Mandatory Purchase of Flood Insurance Guidelines
booklet was removed from its website Feb. 5, 2013
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April 23, 2015 Coverage
What loans are covered?
Any loan secured by improved real estate or insurable mobile
home
• Collateral-dependent, not purpose-dependent
– Includes “abundance of caution” or personal guarantees
• You can “carve out” a building from your security interest, but you should
“fully analyze the risks of this option”
What is improved real estate?
“Improved” means an insurable building (most any type)
What makes it insurable?
• 2 load-bearing walls and a roof
• More than 50% of the building’s value is above ground
Certain buildings are not insurable
• Buildings built completely over water, such as boathouses
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April 23, 2015 Manufactured Homes
Manufactured Housing is also known as “factory-built housing”
One-family dwelling unit
Having characteristics of site-built housing
Legally classified as real property
Built on a permanent chassis
Built and installed under the Federal Manufactured Home Construction and Safety
Standards (HUD Code) – 24 CFR 3280.2
• The “housing must be essentially ready for occupancy upon leaving the factory and being
transported to a building site”
• A red HUD tag with a stamped serial number may be attached to the home guaranteeing that the
home was built to conform to HUD’s code
Also may be called “factory-built housing,” which is:
Modular, panelized, or prefabricated
Factory Built homes may display a blue Building Officials and Code Administrators
(BOCA) tag, which means the home was built to local zoning requirements
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April 23, 2015 Manufactured Home Insurability
What manufactured homes are covered?
The home must fulfill 3 conditions to be insurable:
1. Sits on a permanent foundation – can you tow it away?
2. Complies with any applicable community tie-down regulations,
AND
3. Connected to utilities – electric, gas, sewer, etc.
If any of these 3 are not met, no insurance needed (even if in a
flood zone)
• No determination necessary, either
Tied
Down?
Connected
to Utilities? Insurable
Permanent
Foundation?
Manufactured
Home Test:
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April 23, 2015 Manufactured Home Insurability
Doesn’t matter whether the land is owned or rented
Flood insurance protects structures, not land
Also doesn’t matter whether the land secures the loan or
not
• Note this is the opposite of the RESPA applicability standard
What if you don’t know where it will be located
before the loan closes? When should we do the
determination and send a notice?
“as soon as practicable…and, if possible, before
completion of the loan transaction”
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April 23, 2015
Each unit is separately insurable
Doesn’t matter what floor the unit is on – all
are considered equally
• Common interest in the entirety
• Losses are shared equally
RCBAP
If the building is 75% of more residential,
condo association may purchase a RCBAP
• If not eligible (nonresidential), General
Property Form policy is used
• Dwelling policy available for individual units
Each unit is insurable to $250,000 in a
residential condo; $500,000 for each
commercial condo building
Declarations page of a RCBAP must show
the building’s RCV and number of units in
each building (as of 10/1/07)
Condominiums
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April 23, 2015 Construction Loans
The statute does not directly address this situation
But is a covered loan (Q20) and insurance is available (Q21)
Insurability of the structure begins once construction rises
above the ground above the BFE (in an ‘A’ or ‘V’ zone)
Materials to be used in the construction, but yet to be walled and
roofed, are eligible for coverage (not required, though)
“While an NFIP policy may be purchased prior to the start of
construction, as a practical matter, coverage under an NFIP policy
is not effective until actual construction commences or when
materials or supplies intended for use in such construction,
alteration, or repair are contained in an enclosed building on the
premises or adjacent to the premises” (Q21)
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April 23, 2015 Construction Loans: What to Do
1. Get determination before construction begins
Don’t avoid getting a determination until later; i.e. after the loan closes
If the finished building will be in a SFHA, provide the notice before the loan
closes
2. Options: secure the policy before closing the loan (if possible) or
“allow a borrower to defer the purchase of flood insurance until either
a foundation slab has been poured and/or an elevation certificate has
been issued” (Q22)
“However, the lender must require the borrower to have flood insurance in
place before the lender disburses funds to pay for building construction” (Q22)
• Have internal controls to ensure this
• Gap or blanket policies are generally not acceptable here
Require purchase at the time of a specified drawdown of the loan for actual
construction
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April 23, 2015 When is a Determination Required?
In certain instances, you must determine the flood zone where the
structure is located What loans? Again, when you have a loan secured by improved real estate or
an insurable mobile home
When must a determination be done? Events (MIRE):
Doesn’t matter what you call it – is it effectively one of these events,
i.e. refis, workouts, restructures, etc.?
Make (originate) a loan
Increase an existing loan
Renew an existing loan
Extend an existing loan
Flood determination required – triggering
events Adding to a loan you made previously (more time or $)
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April 23, 2015 Determinations: Knowledge is King
The flood insurance rules revolve around knowledge that
structure lies in a flood zone
Making, increasing, renewing, or extending a covered loan are
the only 4 events where you must obtain knowledge of a
structure’s flood status
• Note that a loan purchase is NOT one of the four
– You don’t have to do a new determination upon purchasing a loan (due
diligence, though)
You are always free to determine the flood zone status of a
property at any other time, but you must then live with the results
• If you know you have a building securing a loan in a SFHA, you must
obtain insurance
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April 23, 2015 Determinations
Who can perform the determination?
Determining flood zone status means locating the property’s
location on a FIRM (Flood Insurance Rate Map) or FHBM
(Flood Hazard Boundary Map) issued by FEMA
• A FHBM is preliminary, with limited flood risk information; is replaced by
a FIRM
You may always do the determination yourself
If it is done by a third party, that third party must guarantee its
accuracy
• This is commonly done by insurance companies or flood insurance
specialists, but be careful about having appraisers do them
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April 23, 2015 Exceptions
Exception from the rules means no determination is necessary
State-owned property that is self-insured
Original loan amount is $5,000 or less AND term of 1 year or less
• This is not a home-stretch exemption/cancellation
If a manufactured home does not meet conditions for insurability, no company
would issue a policy
Exceptions from insurability – do the determination, provide a
notice (if in SFHA), but insurance is not required
The community does not participate in the NFIP
Structures located in Coastal Barrier Resources Act of 1982 (CBRA) areas
• NFIP insurance is unavailable on new buildings built in these areas – as of the later
of 1982 or when the area was designated as a CBRA3
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April 23, 2015 Flood Insurance Maps and Zones
Examples of flood insurance rate maps (FIRMs)
Available from vendors or from FEMA’s Map Service Center directly: 800-358-9616, online at http://msc.fema.gov
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Carl Pry
April 23, 2015 Flood Insurance Maps and Zones
Flood zones are marked on the map
There are over 100 different zone designations
“A” or “V” ( for wave velocity risk) are high risk
“X”: shaded for moderate risk, or unshaded for low risk
• “B” (moderate risk) and “C” (low risk) appear on older maps
“D” means not evaluated for flood yet, but flooding risk is
possible; “M” indicates mudflow risk; “E” indicates erosion risk
(not listed on maps, though)
• Even though insurance is not required in these areas, take the risk into
account (25 % of NFIP claims are for buildings located in low-risk areas)
Changes (compendiums) periodically published in the
Federal Register
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April 23, 2015 Other Zones
CBRS and OPAs
CBRS: Coastal Barrier Resources System
• From the Coastal Barrier Resources Act of 1982 (CBRA), which was passed
to discourage development on undeveloped coastal barrier areas
• CBRS areas (also known as CBRAs) are mainly along East and Gulf Coasts
and along Great Lakes
OPA: Other Protected Area
• Environmentally protected, for example
Both are identified on FIRMs (diagonal lines)
Coverage for buildings in OPAs and CBRAs is only available
upon certain conditions (permits, building built before certain date
depending on the program)
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April 23, 2015 Biggert-Waters
Mapping
Coordinate with Technical Mapping Advisory Council,
establish ongoing program where Administrator will
review, update, and maintain NFIP rate maps
Biggert-Waters and amendments mandated certain
improvements in this area
Communities making progress on improvements
Will be eligible for flood insurance; premiums will be
same as if improvements were complete
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April 23, 2015 Community Status Book
FEMA publication lists cities and counties within a
specific state
Identifies the community panel number, latest map
available for the community, and whether the
community is participating in the NFIP.
May be obtained from FEMA at 800-358-9616 or on
FEMA’s website
Use these to see if maps have changed at all
If the map date has changed, you can’t use it
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April 23, 2015 Required Insurance
If the determination shows the structure is located
in a Special Flood Hazard Area (SFHA), insurance
is required
Zones beginning with “A” (flood risk) or “V” (wave
velocity risk) are SFHAs
• A1-30 and V1-30 on older maps; AE and VE on newer maps
• This means in any one year, there is a 1% (or better) chance of
flooding
• Over a 30-year period, the area has a 26% chance of flooding
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April 23, 2015 Biggert-Waters
RESPA notice
Notification of flood insurance and availability of flood insurance
under NFIP or private insurance company
• Whether or not RE is located in SFHA
• CFPB has not issued any change to RESPA to implement this requirement
yet
Policy disclosure
Each policy must state all conditions, exclusions and other
limitations on flood insurance coverage in plain English,
boldface type and in font size twice that of
policy body
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April 23, 2015 Determination Challenges
“You read the map wrong – it really is not in a
SFHA”
The maps are hard to read, especially online
You can get a final determination from FEMA: Letter of
Determination Review (LODR)
• Must be done within 45 days of the borrower being
notified that insurance is required
• Costs $80; results returned within 45 days
• In the meantime, require insurance
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April 23, 2015 Determination Challenges
What about documentation
suggesting the property is not likely
to flood?
Such as an engineer’s certification,
elevation certificate, or others
Answer: FEMA’s maps are the final
word
• FEMA guidelines of 7/13/89,
reprinted in 1999 and 2007
Guidelines (pg. 17)
• Yes, the booklet was revoked but
this is still the final word
Nevertheless, until the map is physically amended or revised, lenders are bound by the information shown on FEMA maps unless a LOMA has been issued by FEMA for the building. Lenders may not close a loan on the basis of a guarantee or indemnification from a flood vendor or other third party as a substitute for a LOMA.
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April 23, 2015 Determination Challenges
What if the property really is not likely to flood?
FEMA must change the map through a LOMC: Letter of Map Change
Letter of Map Amendment (LOMA) reflects natural elevations above the BFE
• Could also be from inadvertent errors
• Nationwide remapping effort to eliminate these errors (Map Mod Project)
Letter of Map Revision (LOMR) reflects man-made changes that raise the site
above the BFE (Base Flood Elevation)
• Also may see LOMR-F (Letter of Map Amendment Based on Fill)
• Must be approved by the community
• If the building’s bottom floor has merely been raised above the BFE, insurance is still
required, although at a lower rate
FEMA’s “Scientific Resolution Panel” (SRL) provides independent technical
experts to resolve flood hazard data
“A lender may never waive the flood insurance requirement…”
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Carl Pry
April 23, 2015 Relying on a Previous Determination
Must we do a new determination every time we make a covered loan?
“A previous determination may not be reused when making a new loan”
However, when it is a junior lien loan from the first mortgagee and the purchase
requirements had been met for the first mortgage (i.e. adequate insurance, if required) and
there has been no remapping:
• “Assuming the requirements…are met and the same lender made the first mortgage, then a new
determination may not be necessary, when the existing determination is not more than seven
years old, there have been no map changes, and the determination was recorded on an SFHDF”
• “If, however, a lender other than the one that made the first mortgage loan is making the junior
lien loan, a new determination would be required because this lender would be deemed to be
‘‘making’’ a new loan” (Q37)
Make (originate) a loan
Increase an existing loan
Renew an existing loan
Extend an existing loan
Adding to a loan you made previously (more time or $)
For a second mortgage or home equity loan, you may rely on a
previous determination ONLY if you performed the original
determination; otherwise perform a new determination
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Carl Pry
April 23, 2015 Relying on a Previous Determination
Must we do a new determination every time we change an
existing loan?
Life of loan coverage is not a substitute for a new determination (or
proper reliance)
If relying on previous determination that showed property is
in a SFHA, must provide a new notice – cannot rely on
previous notice
Make (originate) a loan
Increase an existing loan
Renew an existing loan
Extend an existing loan
Adding to a loan you made previously (more time or $)
You MAY rely on a previous determination that you procured
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Carl Pry
April 23, 2015 Relying on a Previous Determination
If you add to an existing loan, you can rely upon a previous
determination (that you procured – cannot rely on someone else’s
determination) if 3 conditions are met (Q68):
1.The previous determination is less than 7 years old
• This does not mean you have to re-determine every 7 years (is not a shelf-life issue)
2.The determination you are relying upon must be recorded on the SFHDF (1/2/96)
3.The flood zone hasn’t changed since the time of the original determination
• If a change results in the property now being in either an A or V zone, insurance is
required
• If the map has changed and the property is now in some other zone (other than “A” or
“V”), insurance is not required, but you can’t rely on the old determination – get a new
one
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Carl Pry
April 23, 2015 Flood Zone Discrepancies
If policy is written for a different zone than shown on the
determination, is it a violation?
As long as proper coverage is in place, shouldn’t it be a
risk/review issue?
What exactly is a discrepancy?
• “A lender should only be concerned about a discrepancy on the Standard
Flood Hazard Determination Form (the SFHDF) and the one on the flood
insurance policy if the discrepancy is between a high-risk zone (A or V) and
a low- or moderate-risk zone (B, C, D, or X). In other words, a lender need
not be concerned about subcategory differences between flood zones on
these two documents” (Q71)
• However, should “systematically compare” the designations
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Carl Pry
April 23, 2015 Flood Zone Discrepancies
Duty to check for discrepancies
FDIC-FIL-114-2007:
• “It is important for institutions…to have internal
controls in place to verify that borrowers are
maintaining adequate flood insurance coverage for the
life of the loan. Such controls include: Checking flood
insurance policies to confirm that they were written for
the risk zone noted in the flood determination and, if
not, resolving the difference”
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April 23, 2015 Flood Zone Discrepancies
Dealing with differences
Is it from a mistake? Re-check the determination
NFIP’s “Grandfather Rule” allows reliance on determination
originally issued before changes were made to the FIRM
• “Continued use of a rating on an insured property when the initial flood
insurance policy was issued prior to changes in the hazard rating for the
particular flood zone where the property is located” (Q71)
– Substantiate (document) the findings
Preferred Risk Policy (PRP)
• Available at reduced rate, allowed to continue paying at lower
premium
• Make sure the policy has continued – no lapses or gaps in coverage
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Carl Pry
April 23, 2015 Flood Zone Discrepancies
If can’t resolve with the insurance
company: (Q71)
“Lender should notify the insurance
agent about the insurer’s duty
pursuant to FEMA’s letter of April
16, 2008 (W–08021), to write a flood
insurance policy that covers the most
hazardous flood zone. When
providing this notification, the lender
should include its zone information
and it should also notify the insurance
company itself.”
“The lender should substantiate these
communications in its loan file”
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Carl Pry
April 23, 2015 Participation in the NFIP
For flood insurance to be required, the community must
participate in the National Flood Insurance Program (NFIP)
20,000+ communities identified; over 95% participate in the program
• NFIP Community Status Book (CSB) lists status of participating and non-
participating, Emergency Program, and suspended communities (available online)
• OCC Bulletin 2008-4: CSB not being used by some determination providers, relying
on FEMA’s Flood Map Status Information Service (FMSIS), which may not always
be current
Participation means the community enters into an agreement with FEMA to
take steps to reduce flooding risks
• In return, NFIP (federal) flood insurance policies are available
If there are no maps, you know the community does not participate
• Some non-participating communities have maps, though
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April 23, 2015 Participation in the NFIP
What if the community does not participate?
No flood insurance is required by regulation (regardless of what
flood zone the property is in), though you are always free to
require it of your borrower
• This is a risk decision
You must still do the determination, complete the SFHDF, and
give notice if the building is in a SFHA
No Federal government-guaranteed loans (FHA, VA, or SBA)
loans can be made (if the building is in a SFHA)
• Fannie and Freddie follow this requirement, as well
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Carl Pry
April 23, 2015 SFHDF
Must be completed for every loan
No need for any signature, initials, etc.
Don’t need to provide a copy
Retain copy in loan file for as long as
you own the loan
New FEMA flood form; not “officially
issued”
There is a 3-year transition period for the
new form, so you don’t have to use new
form until May 2015 (??)
Changed B3 (LOMA/LOMR Number)
Didn’t change instructions
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April 23, 2015
A notice be given to the borrower if
the structure is located in a SFHA
Don’t need to provide a notice if property
is not located in a SFHA
You must provide the notice even if the
community does not participate in the
NFIP (if the structure is in a SFHA)
Need be provided only to one borrower
This must be provided in writing a
reasonable time before closing
Loosely defined as 10 days
A shorter time is OK if the borrower
understands the responsibilities
It must be acknowledged (signed,
initialed, etc.) by the borrower
Retain for as long as you own the loan
Notice of Special Flood Hazards
Recommended language of the notice is found in Appendix A of each version of the regulation
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April 23, 2015
What must be kept in the loan file?
1. SFHDF (Determination form) – in all cases
2. Notice of Special Flood Hazards – only if in a SFHA
3. Evidence of insurance (if required)
• This may be a copy of application and premium payment, or copy of the
declarations page of the policy (not binder or certificate of insurance)
• Acord forms? Depends on regulator
30-day wait requirement for policies?
Policies generally are effective beginning 30 days after issuance
However, they are effective immediately if issued due to a legal
requirement to have flood insurance
Evidence of Compliance
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Carl Pry
April 23, 2015
Standard Flood Insurance Policies
(SFIP)
General Property Form, Dwelling Form,
RCBAP
May be underwritten by private insurance
carriers to NFIP standards (Write-Your-
Own, or WYO, companies)
Older “Preferred Risk Policies” (PRPs)
may still be out there (eligibility extended
through 2012)
• Low-cost coverage in NFIP regular
communities
Flood Insurance Policies
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Carl Pry
April 23, 2015 Biggert-Waters
Private flood insurance
Purchase of private flood insurance instead of NFIP policy will meet
mandatory purchase requirement (Biggert-Waters)
Lenders must provide a notice to borrowers about private flood insurance
Force-placed insurance termination and refund
Lender or servicer must accept borrower’s insurance policy declarations page
that includes flood policy number and insurance company or agent and contact
number
Within 30 days of receipt by lender or servicer of confirmation of borrower’s
existing coverage, lender or servicer must:
• Terminate any force-placed insurance
• Refund all force-placed insurance premiums and fees charged to the borrower
during any overlap
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Carl Pry
April 23, 2015
Private flood insurance policies and FEMA requirements – obsolete?
Mandatory Purchase of Flood Insurance Guidelines (p. 58) required 6 elements
of compliance for all private flood insurance policies:
1. Licensure
2. Surplus Lines Recognition (Non-Residential Commercial)
3. Required 45-Day Notice of Cancellation/Non-Renewal Notice
4. Breadth of Policy Coverage
5. Strength of Mortgage Interest Clause
6. Legal Recourse
Mandatory Purchase Guidelines have been revoked – Biggert-Waters rendered
moot?
Most “gap” or “blanket” policies that cover multiple risks don’t cover
all 6 elements for flood
NFIP vs. Private Policies
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Carl Pry
April 23, 2015 Biggert-Waters and Premiums
Note some of these delayed by Affordability Act
Actuarial rates to be phased in over a 4-year period for following
properties built prior to 1975 (rates will increase 25% per year until
premiums reaches actuarial rate)
Second Homes
Severe repetitive loss properties
Damage exceeds 50% of FMV
Commercial buildings
For all other properties, 20% increase per year (5 years) until full
actuarial rate is reached
Subsidies are prohibited for properties not previously insured by
NFIP or lapsed policies
Increases annual cap on premium rate increases from 10% to 20%
Except for properties covered under the subsidy phase out
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Carl Pry
April 23, 2015 Amount of Coverage
All-or-nothing: if any part of a building is located in a SFHA, it’s all in
“Partial coverage” only for part in the SFHA is not permitted
Minimum amount required is the least of the following 3 values:
1. The “insurable value” of the structure (improvements) – generally 100% RCV,
including foundation and supporting structures
• This equals the overall value of property minus the value of land
– Low value buildings on high-value land? Doesn’t matter – insure the building(s)
– What if the value of the land is more than the loan amount? Doesn’t matter
2. The outstanding principal balance of the loan(s)
3. The maximum available under the NFIP (per structure, NOT per loan)
• $250,000 PER residential structure*, $500,000 PER commercial structure*
– Be careful of multiple buildings securing a loan
You may always require more, at your option (up to loan amount)
• Risk management decision
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Carl Pry
April 23, 2015 Amount of Coverage
Minimum amount required is the least of the following:
1. Insurable value of improvements
2. Outstanding principal balance of the loan(s)
3. Maximum available under the NFIP per structure
Check to ensure senior liens are also covered – may have to “cure this
deficiency”
“additional flood insurance coverage be added … in the amount of … the
combined total outstanding principal balance of the first and second loan” (Q36)
“The lender on the second mortgage cannot comply … by requiring flood
insurance only in the amount of the outstanding principal balance of the second
mortgage without regard to the amount of flood insurance coverage on a first
mortgage” (Q36)
Examples:
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48 of 72 Flood Insurance
Carl Pry
April 23, 2015 Biggert-Waters
* Multi-family structures
5 or more units eligible for flood insurance under
NFIP
Coverage limited to $500,000 per structure
• New coverage limits available for new policies,
policy renewals, or existing policies with change
endorsements that are effective on or after June 1,
2014
49 of 72 Flood Insurance
Carl Pry
April 23, 2015 What is “Insurable Value”?
“Insurable value”: Q9 (76 FR 64175,
10/17/11)
“Lenders should avoid creating a
situation in which the insured pays
for more coverage than the NFIP
would pay in the event of a loss.”
Problem: “nonresidential properties,
and even some residential properties,
where the insurance loss payout
would normally be based on actual
cash value, which is RCV less
physical depreciation”
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50 of 72 Flood Insurance
Carl Pry
April 23, 2015 Insurable Value
Replacement Cost Value (RCV)
Cost to replace property with the same kind of material and
construction without deduction for depreciation
Again, lenders should avoid creating a situation in which the
insured pays for more coverage than NFIP would pay in the event
of a loss
• For nonresidential properties (and some residential properties) where loss
payout would normally be based on ACV (RCV less physical depreciation),
insurance policies written at RCV may require an insured to pay for
coverage that exceeds the amount NFIP would pay
• “it is reasonable for lenders, in determining the amount of flood insurance
required, to consider the extent of recovery allowed under the NFIP policy
for the type of property being insured”
51 of 72 Flood Insurance
Carl Pry
April 23, 2015 Insurable Value
For ranching, farming, and industrial buildings, insurable
value may be determined by functional building cost value
or demolition/ removal cost value
Functional Building Cost Value:
• Cost to repair or replace a building with commonly used, less costly
construction materials and methods that are functionally equivalent
Demolition/Removal Cost Value:
• Lender may calculate insurable value as the demolition/removal cost value,
which is cost to demolish the remaining structure and remove the debris
• May be used when a building is not important to the ongoing nature of the
business and as such would not be replaced if damaged or destroyed by a
flood
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52 of 72 Flood Insurance
Carl Pry
April 23, 2015 Policy Payouts
NFIP policy depends on type of building
Determines payout – lenders should require only what will be
paid out
General property policy
Always pays cash value
Dwelling policy
May pay replacement cost value but only if:
• It was the primary dwelling (80% of previous year)
• It was “fully insured” (80% insurance to value)
• Single unit dwelling
…otherwise it only pays ACV
53 of 72 Flood Insurance
Carl Pry
April 23, 2015 Insurable Value
Alternatives: lenders “may choose from a variety of approaches or
methods to establish the insurable value. They may use an appraisal
based on a cost-value (not market-value) approach, a construction-
cost calculation, the insurable value used in a hazard insurance
policy…, or any other reasonable approach, so long as it can be
supported.”
Hazard insurance: most policies don’t cover foundations
Below-grade things necessary to run the above-ground house are covered, but
not extra things (rooms, carpet, etc.)
Key word is “supported”; make sure the conclusion is properly
documented
If flood insurance equals hazard insurance, you’re probably good to go, but
have documentation
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54 of 72 Flood Insurance
Carl Pry
April 23, 2015 Multiple Buildings
What if more than one building secures
the loan? Steps:
1. Complete a determination for each building
• Separate SFHDF or reference each building
on same form if part of the same property
2. All the individual amounts together
• Total need not exceed loan amount or max
available under NFIP
3. Allocate coverage among those buildings
located in a SFHA
• Can be varying amounts, but at least some
coverage is required for each building that is
in a SFHA
4. A separate policy is required for each
building requiring coverage
$80,000 Value
$80,000 Value
$80,000 Value
Loan Amount = $150,000
How to Allocate Coverage? (assume all in SFHA)
Coverage: $80,000 $70,000 $0
No Good
Coverage: or: or:
$50,000 $80,000
$100,000
$50,000 $50,000 $40,000
OK
$50,000 $20,000 $10,000
* Or any other allocation where all 3 structures are covered by some amount of insurance
55 of 72 Flood Insurance
Carl Pry
April 23, 2015 Scheduled Building Policy
Available to cover 2 to 10 buildings
Requires specific amount of insurance to be
designated for each building
All buildings must have the same ownership and
the same location
Properties on which the buildings are located
must be contiguous
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56 of 72 Flood Insurance
Carl Pry
April 23, 2015 Detached Garages
Previous “Appurtenant Structures” guidance
“The only appurtenant structure covered by the SFIP is a detached garage at
the described location, which is covered under the Dwelling Form. Coverage is
limited to no more than 10 percent of the limit of liability on the dwelling. Use
of this insurance is at the policyholder's option but reduces the building limit of
liability.”
• Automatically covers the detached garage; the policy doesn’t need to name it
• Actually has to be a garage, however – not for a residence, business, or farming
“Total payment for flood damage to the detached garage and the house
together cannot exceed the building policy limit”
“Garage can only be used for parking and storage. Any other use would void
this coverage; for example, if the garage has a workshop, the coverage would
not apply”
57 of 72 Flood Insurance
Carl Pry
April 23, 2015 Detached Structures
New (Affordability Act) guidance
Effective 3/24/14 (interagency proposal 10/23/14)
Flood insurance not required, in the case of any residential property, for any
structure that is a part of such property but is detached from the primary
residential structure of such property and does not serve as a residence
• Questions: what is “residential property”? What is “not serve as a residence”?
However, note RESPA disclosure requirement:
“Although you may not be required to maintain flood insurance on all
structures, you may still wish to do so, and your mortgage lender may still
require you to do so to protect the collateral securing the mortgage. If you
choose to not maintain flood insurance on a structure, and it floods, you are
responsible for all flood losses relating to that structure.”
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58 of 72 Flood Insurance
Carl Pry
April 23, 2015
Is 80% or 100% RCV adequate for the RCBAP?
Insurable value = RCV of building / number of units
• As of 10/1/07, NFIP requires insurance agents to document the RCV on the
declarations page of new or renewed RCBAP
– “Lenders may rely on the replacement cost value and number of units on the RCBAP
declaration page in determining insurable value unless they have reason to believe that such
amounts clearly conflict with other available information” (Q28)
100% RCV (replacement cost value) required in Q&As
• FEMA: “The RCBAP, insured to its full replacement cost value (RCV) to the extent
possible under the NFIP, is the correct way to insure a residential condominium
building against flood loss”
• Q28: “Ensure the condominium owners association has purchased…RCBAP covering
(replacement cost) of the building” or “obtain a dwelling policy if…the RCBAP
coverage is less than 100 percent of the replacement cost value of the building”
Condominium Coverage
59 of 72 Flood Insurance
Carl Pry
April 23, 2015
Where did 80% come from?
Q24 as previously constituted suggested it was adequate
• “to meet federal flood insurance requirements, an RCBAP should be purchased in an
amount of at least 80 percent of the replacement value of the building…”
• But statute doesn’t suggest what is enough
To avoid a coinsurance penalty, policy must cover at least 80%
of the building’s replacement value
Coinsurance penalty results when a loss settlement does not fully cover the
amount of the loss due to a reduction for inadequate insurance coverage
A. Divide the actual amount of insurance by 80% of RCV or max available, whichever
is less
B. Multiply the amount of loss (before deductible) by A
C. Subtract deductible from B
• Policy will pay the amount in C or amount carried, whichever is less
Condominium Coverage
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60 of 72 Flood Insurance
Carl Pry
April 23, 2015 Condominium Coverage
From Q28: Situation 1 Situation 2 Situation 3
RCV of building $250,000
80% of RCV 200,000
Amount of loss 150,000
Deductible 500
Insurance carried 180,000
(72% RCV)
200,000
(80% RCV)
250,000
(100% RCV)
Step A: Ins/80% .90 1.00 1.25
Step B: Loss * A 135,000 150,000 187,500
Step C: B - Deductible 134,500 149,500 187,000
Amount of Loss not covered 15,500 500 0
Coinsurance Penalty? Yes No No
In compliance? No No Yes
61 of 72 Flood Insurance
Carl Pry
April 23, 2015
If the RCBAP is 80% and unit coverage is still not
enough to cover the minimum amount of insurance
required, additional coverage is required
Supplemented by standard NFIP Dwelling Policy to
cover the shortfall
“The guidance in this question and answer will
apply to any loan that is made, increased, extended,
or renewed after the effective date of this revised
guidance” (9/21/09) – Q29
Condominium Coverage
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62 of 72 Flood Insurance
Carl Pry
April 23, 2015 Biggert-Waters Deductible Changes
Pre-FIRM
$1,500 if flood insurance $100,000 or less
$2,000 if flood insurance more than $100,000
Post-FIRM
$1,000 if flood insurance $100,000 or less
$1,250 if flood insurance more than $100,000
63 of 72 Flood Insurance
Carl Pry
April 23, 2015 Deductible Standards
Lender generally sets the deductible – “business
judgment prerogative”
Not in law or regulation
Fannie and Freddie have standards, as well
Q17: “A lender may not allow the borrower to use
a deductible amount equal to the insurable value of
the property to avoid the mandatory purchase
requirement for flood insurance”
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64 of 72 Flood Insurance
Carl Pry
April 23, 2015 Contents Coverage
Must buildings’ contents be insured too?
Yes, if:
1. The contents are taken as collateral
2. The building in which they sit is taken as collateral
3. The building is located in a SFHA (and must also be covered, of course)
Coverage amount: do the same analysis as for buildings – least of:
• FMV of contents (+ RCV of building)
• Outstanding principal balance of loan, or
• Contents maximum available
– $100,000 for residential contents; $500,000 for commercial
65 of 72 Flood Insurance
Carl Pry
April 23, 2015 Commercial Contents Coverage
Loans secured by equipment but not improved real estate
If a loan is secured only by the equipment (and nothing else), no flood
insurance needed
• Regardless of flood zone of the building (don’t have to obtain determination)
If a loan is cross-collateralized with improved real estate (located in
an flood zone) and the equipment will be housed in the structure(s)
Flood insurance required on both building and contents
SBA loan secured by equipment:
Flood insurance is required, regardless of cross collateralization and/or
improved real estate being also taken
SBA guidelines require flood insurance on just the equipment
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66 of 72 Flood Insurance
Carl Pry
April 23, 2015 What Do We Have to Monitor?
You do NOT have to monitor either flood maps or existing
loans
A flood zone determination is a snapshot event – once the
determination is made, that’s it
If the building is not in a SFHA, you don’t need to make another
determination on that property (unless the loan is increased,
renewed, or extended)
You don’t have to retroactively review your loan portfolio,
either
This includes every 7 years (often misunderstood)
67 of 72 Flood Insurance
Carl Pry
April 23, 2015 What Do We Have to Monitor?
Should we get life-of-loan (LOL) coverage?
There is no regulatory requirement for it
Fannie Mae, Freddie Mac, and FHA (as of 3/1/11) rules require it,
however
If you choose to have it, however, be prepared to live with the
updates (knowledge)
• If you are notified that a property now lies in a SFHA, you have no choice
but to require flood insurance
If insurance is required, you must monitor the policy to
ensure it doesn’t lapse
The lender is typically named as the loss-payee, and the agent to
whom renewal notices are sent
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68 of 72 Flood Insurance
Carl Pry
April 23, 2015 Force Placement
A designated loan must have flood insurance as a condition
of closing
If a borrower will not voluntarily obtain coverage, lender must
deny the loan
Upon renewal, must be done if borrower does not provide
proof of insurance within 45 days of non-renewal
Can’t start the 45-day clock before you notify the borrower, only a
brief delay allowed before notifying (and phone call isn’t adequate
notification, clock would start too late – send the letter)
In some cases you may use the NFIP’s Mortgage Portfolio
Protection Program (MPPP) to bring a portfolio up to date
69 of 72 Flood Insurance
Carl Pry
April 23, 2015 Force Placement
Send a letter(s) to your borrower warning of force
placement
3 (1 every 15 days) if using MPPP; 1 or more letters (your choice)
otherwise
Clock starts when you’re aware (or should be aware) that
insurance is not in place – may result in gaps
Bottom line: if go more than 45 days, examiners “expect the lender
to provide a reasonable explanation for the delay” (76 FR at 64179,
10/17/11)
• Premiums may be added to the loan balance
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70 of 72 Flood Insurance
Carl Pry
April 23, 2015 Force Placement
When must force-placed coverage be in force?
“where there is a brief delay in force placing required
insurance, the Agencies will expect the lender to provide
a reasonable explanation for the delay, for example,
where a lender uses batch processing to purchase force-
placed flood insurance policies”
“Brief” is not defined
• Likely wouldn’t be good practice to wait more than a couple
days
• Make sure the “reasonable explanation” is documented
71 of 72 Flood Insurance
Carl Pry
April 23, 2015 Penalties
Civil Money Penalties (CMPs) for noncompliance
Under the statute, penalties are required for “pattern or practice”
violations of:
1. Purchase of insurance
2. Escrow of premiums
3. Forced placement
4. Notice provisions
What is a pattern or practice?
• “Isolated, unrelated, or accidental occurrences will not constitute a pattern
or practice. However, repeated, intentional, regular, usual, deliberate, or
institutionalized practices will almost always constitute a pattern or practice.
The totality of the circumstances must be considered” (Q81)
$2,000 per violation
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72 of 72 Flood Insurance
Carl Pry
April 23, 2015
Compliance Questions:
Carl Pry
Treliant Risk Advisors
Webinar/Registration Questions:
Mark Bennett
Total Training Solutions
PO Box 310
Waunakee, WI 53597
1-800-831-0678
www.BankWebinars.com
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