V. Lending - Flood Disaster Protection

CMPs cannot be imposed after the expiration of ____ years beginning on the date of occurrence of the violation.

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If an excepted institution no longer qualifies for the escrow exception because its assets exceeded the threshold for two consecutive calendar year ends, it must begin escrowing for any designated loan secured by residential improved real estate or a mobile home made, increased, extended, or renewed on or after ____ _ of the first calendar year of changed status.

July 1

What is the purpose of the National Flood Insurance Program?

The NFIP aims to reduce the impact of flooding by providing affordable insurance to property owners and by encouraging communities to adopt and enforce floodplain management regulations. The FDPA requires federal financial regulatory agencies to adopt regulations prohibiting their regulated lending institutions from making, increasing, extending or renewing a loan secured by improved real estate or a mobile home located or to be located in an SFHA in a community participating in the NFIP unless the property securing the loan is covered by flood insurance. The purpose of the 1994 Act was to increase compliance with flood insurance requirements and participation in the NFIP in order to provide additional income to the National Flood Insurance Fund and to decrease the financial burden of flooding on the Federal government, taxpayers, and flood victims.

There are, however some circumstances in which an institution may not rely on a previous determination, such as:

• If FEMA's map revisions or updates show that the security property has been remapped into an SFHA, or • If the lender contacts FEMA and discovers that map revisions or updates affecting the security property have been made after the date of the previous determination.

Flood insurance, either issued through the NFIP or from a private insurance provider, is required for the term of the loan on buildings or mobile homes when an institution makes, increases, extends or renews a designated loan, meaning all three of the following factors are present:

• The loan (commercial or consumer) is secured by improved real estate or a mobile home that is affixed to a permanent foundation (security property); • The property securing the loan is located or will be located in an SFHA as identified by FEMA; and • The community in which the property is located participates in the NFIP.

An institution may rely on a prior flood determination, whether or not the security property is located in an SFHA, and it is exempt from liability for errors in the previous determination if:

• The previous determination is not more than seven years old, and • The basis for the previous determination was recorded on the SFHDF.

Structures Not Eligible for Flood Insurance Under the NFIP

• Unimproved land, bridges, dams, and roads. • Mobile homes not affixed to a permanent site. • Travel trailers and campers. • Converted buses or vans. • Buildings entirely in, on, or over water into which boats are floated. • Buildings newly constructed or substantially improved on or after October 1, 1983, in an area designated as an undeveloped coastal barrier with the Coastal Barrier Resource System established by the Coastal Barrier Resources Act (Public Law 97-348).

While the escrow requirement pertains generally to any designated loan secured by residential improved real estate or a mobile home, there are two types of exceptions:

1) a small lender exception and a loan-type exception. The regulation provides that an institution is not required to escrow if it has total assets of less than $1 billion as of December 31 of either of the two prior calendar years and, as of July 6, 2012: • The institution was not required by Federal or State law to escrow taxes, insurance premiums, fees, or any other charges for the term of the loan; and • The institution did not have a policy of uniformly and consistently escrowing the same (If a financial institution provides escrow accounts only upon requests from borrowers, this does not constitute a uniform or consistent policy of requiring escrows) 2) In addition, the escrow requirement does not apply to the following types of loans: • Extensions of credit primarily for business, commercial, or agricultural purposes even if secured by residential real estate; • Loans in a subordinate position to a senior lien secured by the same property upon which the borrower has obtained sufficient flood insurance; • Loans secured by a property that is covered by a flood insurance policy with sufficient flood insurance coverage, which is provided by a condominium, cooperative, or homeowners association; • Home equity lines of credit; • Nonperforming loans; or • Loans with a term of no longer than 12 months.

FEMA's condominium master policy is called a Residential Condominium Building Association Policy (RCBAP). The RCBAP covers both the common and individually owned building elements within the units, improvements within the units, and contents owned in common if contents coverage is purchased. The maximum amount of building flood insurance coverage that can be purchased under an RCBAP is either

100 percent of the replacement cost value of the building, or the total number of units in the condominium building times $250,000, whichever is less.

The Biggert-Waters Act also provides that an institution must terminate force-placed insurance within __ days of receipt of confirmation of a borrower's existing flood insurance coverage.

30 Additionally, an institution must refund to the borrower all premiums and fees for force-placed insurance paid by the borrower during any period of overlap between the borrower's policy and the force-placed policy.

NFIP flood insurance policies that are not issued in conjunction with the making, increasing, extending or renewing of a loan have a __-day waiting period.

30 The congressional intent behind this requirement was to prevent the purchase of flood insurance (and any direct loss to the U.S. government) in times of imminent loss. However, if the initial purchase of flood insurance is made during the 13-month period following revision or update of a Flood Insurance Rate Map for the community, there is a one-day waiting period. There is no waiting period when an additional amount of NFIP insurance is required in connection with the making, increasing, extending or renewing of a loan, such as a second mortgage, home equity loan, or refinancing.

An institution or a servicer acting on its behalf is required to purchase or "force place" flood insurance for the borrower if the institution or the servicer determines that coverage is inadequate. An institution, or servicer acting on its behalf, upon discovering that the security property is not covered by an adequate amount of flood insurance, must provide notice to the borrower that the borrower should obtain flood insurance. If the borrower fails to purchase flood insurance in the appropriate amount within __ days, the lender must purchase insurance on the borrower's behalf.

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An institution must notify the Administrator of FEMA, or the Administrator's designee, of the identity of the loan servicer and of any change in the servicer. FEMA has designated the insurance carrier as its designee to receive notice of the servicer's identity and of any change thereof, and at FEMA's request this designation is stated in the regulations. Notice of the identity of the servicer will enable FEMA's designee to provide notice to the servicer of a loan __ days before the expiration of a flood insurance contract. Notice is required to be sent within __ days of the effective date of the transfer of servicing.

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For any loan for which an institution is required to escrow under the regulations, the institution must provide a written notice with the notice of special flood hazards informing the borrower that the institution is required to escrow all premiums and fees for flood insurance required under the regulations. The language in the notice about escrow should be substantially similar to the model clauses provided in Appendix A of the regulations, under the section titled "Escrow Requirements for Residential Loans." The escrow notice may be provided in the notice of special flood hazards or separately The sample form is located in:

Appendix A

The regulations require the escrowing of flood insurance premiums and fees for designated loans secured by residential improved real estate or a mobile home made, increased, renewed, or extended on or after______, 20__

January 1, 2016. In addition, institutions must offer and make available the option to escrow for flood insurance premiums and fees to borrowers with designated loans secured by residential improved real estate or a mobile home outstanding as of January 1, 2016. The escrow provisions are designed to improve compliance with flood insurance requirements by ensuring that borrowers with designated loans secured by residential improved real estate or a mobile home set aside funds to maintain flood insurance for the life of the loan.

An institution that no longer qualifies for the small lender exception must provide a notice of the option to escrow flood insurance premiums and fees for loans outstanding on July 1 of the first calendar year in which it has a change in status by_______ __ of that year. Further, the financial institution must begin escrowing as soon as reasonably practicable after receiving a borrower's request to escrow.

September 30

True or False: Both second mortgages and home equity loans are transactions that may be subject to the mandatory purchase requirements of the FDPA. Because only one NFIP flood insurance policy can be issued on a building, an institution should not request a new NFIP flood insurance policy if one already exists.

True Instead, the institution should have the borrower contact the insurance agent: • To inform the agent of the intention to obtain a loan involving a subordinate lien • To obtain verification of the existence of a flood insurance policy, and • To check whether the amount of insurance covers all loan amounts. As an alternative, the borrower may also consider obtaining a private flood insurance policy in the proper amount.

True or False: Multiple structures that secure a loan located in an SFHA must each be covered by flood insurance, even though the value of one structure may be sufficient to cover the loan amount.

True Under the NFIP, FEMA generally requires one policy per building, but also permits borrowers to insure non-residential buildings using one policywith a schedule separately listing each building. This coverage alternative may be especially useful for loans secured by agricultural properties and improvements.

For loans with approved lines of credit to be used in the future, it may be difficult to calculate the amount of insurance for the loan since the borrower will be drawing down differing amounts on the line at different times. If there is no policy on the collateral, the borrower must, at a minimum, obtain a policy as a requirement for drawing on the line. As a matter of administrative convenience to ensure compliance with the requirements, an institution may take the following alternative approaches:

• As part of its procedures, an institution should review its records periodically so that as draws are made against the line or repayments made to the account, the appropriate amount of insurance coverage can be maintained; or • Upon origination, require the purchase of flood insurance for the total amount of the line, the value of the improved property or the maximum amount of flood insurance coverage available, whichever is less.

For flood hazard determination purposes, the substance of the table funded transaction should control and the typical table funded transaction should be considered a loan made, rather than purchased, by the entity that actually supplies the funds. Will an institution table funding a closed loan be making the loan for FDPA?

Yes Regulated institutions that provide table funding to close loans originated by a mortgage broker or mobile home dealer will be considered to be "making" a loan for purposes of the flood insurance requirements. --- Treating table funded loans as loans made by the funding entity need not result in duplication of flood hazard determinations and borrower notices. The funding entity may delegate to the broker or dealer originating the transaction the responsibility for fulfilling the flood insurance requirements or may otherwise divide the responsibilities with the broker or dealer.

Although a lender may make, increase, extend, or renew a loan in a nonparticipating community, a lender is still required to determine whether the security property is located in an SFHA and if so, to notify the borrower. The lender must also notify the borrower that flood insurance coverage under the NFIP is not available because the community does not participate in the NFIP. If the nonparticipating community has been identified for at least one year as containing an SFHA, properties located in the community will not be eligible for federal disaster relief assistance in the event of a federally declared disaster. Can an institution originate a loan without NFIP insurance?

Yes, private flood insurance may be a suitable option.

Loan servicers must also be notified of special flood hazards. In many cases, the servicer's identity will not be known until well after the loan closing; consequently, notification to the servicer in advance of the loan closing would not be possible or would serve no purpose. Notice to the servicer is required as promptly as practicable after the institution provides notice to the borrower, and must be given - when?

no later than at the time the lender transmits to the servicer other loan data concerning hazard insurance and taxes. Delivery to the servicer of a copy of the borrower's notice suffices as notice to the servicer.

For instance, the maximum amount of coverage on a 50-unit condominium building would be $12,500,000 ($250,000 x 50). If the replacement cost value of the building was $10,000,000, the condominium association could purchase a policy of:

$10,000,000. This amount of insurance would meet the requirements of the regulations for any individual unit insurance requirement in the condominium.

If an institution is found to have a pattern or practice of committing any of these violations, the Agencies are required to assess civil money penalties in an amount not to exceed $____ per violation.

$2,000 Any penalty assessed will be paid into the FEMA National Flood Mitigation Fund. Liability for violations cannot be transferred to a subsequent purchaser of a loan.

The regulation defines a "mutual aid society" as an organization:

(1) whose members share a common religious, charitable, educational, or fraternal bond; (2) that covers losses caused by damage to members' property pursuant to an agreement, including damages caused by flooding, in accordance with this common bond; and (3) that has a demonstrated history of fulfilling the terms of agreements to cover losses to members' property caused by flooding.

The minimum amount of flood insurance required must be at least equal to the lesser of:

- Outstanding Principal balance - Insurable value of property - NFIP maximum for the given structure

The minimum amount of flood insurance coverage on a condominium is:

- outstanding principal balance OR -- maximum insurance of the NFIP -- Insurable value of condo (RCV of condo building/# of units)

A regulated lending institution is required to accept a private insurance policy to satisfy the flood insurance purchase requirement if the policy meets the definition of "private flood insurance" as set forth in the regulation (mandatory acceptance). Can an institution accept flood insurance policies that do not meet the definition of private flood insurance?

Yes, they may exercise discretion to accept these plans. The policy must: • provides coverage in the amount as required under the regulation; • is issued by an insurer that is licensed, admitted or otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located; or in the case of a policy of difference in conditions, multiple peril, all risk or other blanket coverage insuring nonresidential commercial property, is issued by a surplus lines insurer recognized, or not disapproved by the insurance regulator of the State or jurisdiction where the property to be insured is located; • covers both the mortgagor(s) and the mortgagee(s) as loss payees, except in the case of a policy that is provided by a condominium association, cooperative, homeowners association, or other applicable group and for which the premium is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense; and • provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the regulated lending institution documents its conclusion regarding sufficiency of the protection of the loan in writing.

Under the regulation, "private flood insurance" means an insurance policy that:

is issued by an insurance company that is licensed, admitted or otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located, or is recognized, or not disapproved as a surplus lines insurer by the insurance regulator of the State or jurisdiction in which the property to be insured is located in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property; provides flood insurance coverage that is at least as broad as the coverage provided under the NFIP's Standard Flood Insurance Policy (SFIP) for the same type of property, including when considering deductibles, exclusions and conditions offered by the insurer; provides that the insurer will give written notice 45 days before cancellation or non-renewal of flood insurance coverage to the insured and the regulated lending institution, or servicer acting on its behalf; includes information about the availability of flood insurance coverage under the NFIP; includes a mortgage interest clause similar to the clause contained in an SFIP; includes a provision requiring an insured to file suit not later than one year after the date of a written denial of all or part of a claim under the policy; and contains cancellation provisions that are as restrictive as the provisions in an SFIP

The limits of coverage for NFIP flood policies are: • $___,___ for residential property structures and $___,___ for personal contents. • $___,___ for non-residential structures and $___,___ for contents. • $___,___ for non-condominium residential buildings of five units or greater and $___,___ for personal contents.

• $250,000 for residential property structures and $100,000 for personal contents. • $500,000 for non-residential structures and $500,000 for contents. • $500,000 for non-condominium residential buildings of five units or greater and $100,000 for personal contents.

The record keeping requirements of the regulations include retention of:. • Copies of completed SFHDFs in either hard copy or electronic form, for_____________________________ Records of the receipt of the notice of special flood hazards to the borrower and the servicer for ____________________________

• Copies of completed SFHDFs in either hard copy or electronic form, for as long as the institution owns the loan; and • Records of the receipt of the notice of special flood hazards to the borrower and the servicer for as long as the institution owns the loan Examples of records of receipt may include: • A borrower's signed acknowledgment on a copy of the notice, • A borrower-initialed list of documents and disclosures that the lender provided the borrower, or • A scanned electronic image of a receipt or other document signed by the borrower.

Fees charged to the borrower by the institution for flood zone determinations can only be charged when a loan:

• Is made, increased, renewed, or extended; • Is made in response to a remapping by FEMA; or • Results in the purchase of flood insurance under the force placement provisions.

The flood insurance purchase requirement does not apply to the following three loan situations:

• Loans on state-owned property covered under an adequate policy of self-insurance satisfactory to the Administrator of FEMA. The Administrator will periodically publish a list of state property falling within this exemption. • Loans with an original principal balance of $5,000 or less, and having an original repayment term of one year or less. • 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. o A structure that is 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. It is detached from the primary residential structure if it is not joined by any structural connection to that structure. o Whether a structure serves as a residence is based on the institution's good faith determination that the structure is intended for residential use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities, but not necessarily all three.

The FDPA provides penalties for violations four kinds of violations. These include:

• Mandatory flood purchase requirement; • Escrow requirements; • Notice requirements; and • Force placement requirements.

Objectives of the FDPA (the act):

• Provide flood insurance to owners of improved real estate located in SFHAs of communities participating in the NFIP. • Require communities to enact measures designed to reduce or avoid future flood losses as a condition for making federally subsidized flood insurance available. • Require federal financial regulatory agencies to adopt regulations prohibiting their regulated lending institutions from making, increasing, extending, or renewing a loan secured by improved real estate or a mobile home located or to be located in an SFHA of a community participating in the NFIP, unless the property securing the loan is covered by flood insurance. • Require federal agencies, such as the FHA, SBA and the VA not to subsidize, insure, or guarantee any loan if the property securing the loan is in an SFHA of a community not participating in the NFIP.

The NFIP covers improved real property or mobile homes located or to be located in an area identified by FEMA as having special flood hazards. Generally, each insurable structure requires a separate insurance policy. What types of structures are eligible for coverage?

• Residential, industrial, commercial, and agricultural buildings that are walled and roofed structures that are principally above ground. • Buildings under construction where a development loan is made to construct insurable improvements on the land. Insurance can be purchased to keep pace with the new construction. • Mobile homes that are affixed to a permanent site, including mobile homes that are part of a dealer's inventory and affixed to permanent foundations. • Condominiums. • Co-operative buildings. • Flood insurance coverage is also available for personal property and other insurable contents contained in real property or mobile homes located in SFHAs. The property must be insured in order for the contents to be eligible.

Delivery of the notice of special flood hazards must take place within a "reasonable time" before the completion of the transaction. What constitutes "reasonable" notice will necessarily vary according to the circumstances of particular transactions. An institution should bear in mind, however, that a borrower should receive notice timely enough to ensure that:

• The borrower has the opportunity to become aware of the borrower's responsibilities under the NFIP; and • Where applicable, the borrower can purchase flood insurance before completion of the loan transaction. The Agencies generally regard ten days as a "reasonable" time interval.

A regulated lending institution may, at its discretion, accept a plan issued by a mutual aid society in satisfaction of the flood insurance purchase requirement, if the following criteria are met:

• the regulated lending institution's primary Federal supervisory agency has determined that such plans qualify as flood insurance for purposes of the Federal flood insurance statute; • the plan provides coverage in the amount required under the regulation; • the plan covers both the mortgagor(s) and the mortgagee(s) as loss payees; and • the plan provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the regulated lending institution documents its conclusion regarding sufficiency of the protection of the loan in writing