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Federal regulators have finalized a joint rule that amends regulations relating to loans secured by properties in special flood hazard areas. The final rule implements changes to the Flood Disaster Protection Act of 1973 (FDPA) as mandated by the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) and the Biggert-Waters Flood Insurance Reform Act of 2012 (the Biggert-Waters Act).
Matters addressed by the final rule include an exemption from the flood insurance requirement for certain detached structures, the escrow of flood insurance payments, the flood insurance consumer notice, and force-placed insurance. The final rule does not address the private flood insurance provisions in the Biggert-Waters Act. The agencies plan to address these provisions in separate rulemaking. The escrow-related provisions of the final rule and modifications to the flood insurance notice become effective on January 1, 2016. The provisions reflecting the exemption for detached structures and force-placed insurance become effective on October 1, 2015.
Consistent with HFIAA, the final rule reflects an exclusion from the requirement to purchase flood insurance for any structure that is part of a residential property, but is detached from the primary residential structure and does not serve as a residence. In response to commentators’ suggestions, the final rule clarifies the terms “a structure that is part of a residential property,” “detached,” and “serve as a residence.” Note that lenders may still require flood insurance on the detached structures, even if the statute does not require it, to protect the lender’s and borrower’s collateral securing the mortgage.
The final rule also implements provisions in the FDPA, as amended by the Biggert-Waters Act and HFIAA, requiring regulated lending institutions, or servicers acting on their behalf, to escrow premiums and fees for flood insurance for any loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after January 1, 2016, unless the lender or the loan qualifies for an exemption.
The final rule exempts from the escrow requirement certain small lenders with total assets under $1 billion that, on or before July 6, 2012, were not otherwise 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. Further, the final rule includes transition rules for regulated lending institutions that have a change in status and no longer qualify for the small-lender exception.
In addition, the final rule requires that regulated lending institutions not exempted from the escrow requirement, and servicers acting on their behalf, give borrowers the option to escrow flood insurance premiums and fees for loans that are outstanding as of January 1, 2016. Notably, in response to commenters’ requests for sufficient time to comply, the final rule gives regulated lenders until June 30, 2016, to mail or deliver the information about the option to escrow to borrowers. The final rule also requires regulated lending institutions that no longer qualify for the small lender exception to give borrowers the option to escrow flood insurance premiums and fees.
Pursuant to HFIAA, the final rule implements several loan specific exceptions to the general escrow requirement, which include:
• loans that are in a subordinate position to a senior lien secured by the same property for which flood insurance is being provided;• loans secured by residential improved real estate or a mobile home that is part of a condominium, cooperative, or other project development, provided certain conditions are met;• loans that are extensions of credit primarily for a business, commercial, or agricultural purpose;• home equity lines of credit;• nonperforming loans; and,• loans with terms not longer than 12 months.
According to the final rule, when a regulated lending institution determines that an exception no longer applies, the institution must require the escrow of flood insurance premiums and fees. The final rule also includes new sample notice forms and clauses to assist institutions concerning the escrow requirement and the option to escrow. These items include a revised Sample Form of Notice of Special Flood Hazards and Availability of the Federal Disaster Relief Assistance and new sample clause, designated as “Sample Clause for Option to Escrow for Outstanding Loans,” to facilitate compliance with the new requirements.
The Biggert-Waters Act significantly amended National Flood Insurance Program requirements for force-placed flood insurance. The final rule clarifies that lenders, and servicers acting on their behalf, have the authority to charge borrowers for the cost of flood insurance coverage commencing on the date on which the borrower’s coverage lapsed (i.e., the expiration date provided by the policy) or became insufficient. The change effectively resolved a dispute between the industry and federal banking regulators as to whether a borrower could be charged for coverage during the period between the existing borrower policy lapsing or becoming insufficient and the expiration of the 45-day notice period to force-place insurance.
The final rule also details the lender’s or servicer’s obligations to terminate force-placed flood insurance coverage and refund a borrower for payments made.
Lastly, the final rule provides that within 30 days of receipt of a confirmation of a borrower’s existing flood insurance coverage, a regulated lending institution is required to terminate any force-placed insurance purchased by the regulated lending institution, and to refund all premiums paid by the borrower for lender-placed coverage when the two policies overlapped. The final rule establishes the documentary evidence a lender must accept to confirm that a borrower has obtained the correct amount of flood insurance coverage. Under the final rule, this evidence consists of an insurance policy declarations page that includes the existing flood insurance policy number and the identity and contact information for the insurance company or agent.
The final rule is issued jointly by the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Federal Reserve Board, National Credit Union Administration, and Farm Credit Administration. The agencies expect the final rule to be published in the Federal Register shortly.
Ballard Spahr’s Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of the firm’s Consumer Financial Services Group, which is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.
If you have questions, please contact Consumer Financial Services Group Practice Leader Alan S. Kaplinsky at firstname.lastname@example.org, Mortgage Banking Group Practice Leader Richard J. Andreano, Jr., at email@example.com or Marc D. Patterson at firstname.lastname@example.org.
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