The Federal Deposit Insurance Corporation recently approved for release joint proposed regulations to implement provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (the Act). The proposal would amend the Flood Disaster Protection Act of 1973 (FDPA) requirements relating to the escrow of flood insurance payments, acceptance of private flood insurance coverage, and force placement of flood insurance. (As of the date of this alert, the other federal agencies identified in the proposal had not separately announced their approval. Those agencies are the Office of the Comptroller of the Currency, Federal Reserve Board, National Credit Union Administration, and Farm Credit Administration).
Upon its enactment on July 6, 2012, the Act increased the maximum civil penalty for FDPA violations from $350 to $2,000 and eliminated the $100,000 annual cap on total penalties. The Act also modified existing force-placed insurance rules to make clear that 45 days after notification of a lapse, a lender may charge a borrower for the costs of premiums and fees incurred in purchasing insurance commencing on the date on which a borrower’s coverage lapsed or became insufficient.
In addition, the Act clarified the procedures for the termination of force-placed insurance and refund of any premiums and fees paid for overlapping periods in which a borrower's coverage was in place. The civil money penalty and force-placement provisions became effective upon the Act's enactment. (See our prior legal alert for a discussion on the impact of these amendments)
The proposed rulemaking is intended to implement three additional provisions of the Act. Lenders and servicers would be required to establish escrow accounts for flood insurance premiums and fees for any loans secured by residential improved real estate or a mobile home outstanding or entered into after July 6, 2014. Except as may be required by applicable state law, a lender or servicer is not required to escrow if it meets the following criteria:
• It has total assets of less than $1 billion as of December 31 of either of the two prior calendar years.
• As of July 6, 2012, it was not required by federal or state law to escrow taxes or insurance for the term of the loan and did not have a policy requiring escrow of taxes, insurance, or fees.
The Agencies also propose that lenders be required to accept private flood insurance that is at least as broad as the standard flood insurance policy under the National Flood Insurance Program (NFIP) as satisfaction of the flood insurance coverage requirement. The proposal includes a safe harbor under which a private insurance policy would be deemed compliant if a state insurance regulator determines in writing that the policy satisfies the requirements for an acceptable policy.
Finally, lenders would be directed to provide written notice to a borrower about the requirement to escrow flood insurance premiums and the availability of private flood insurance. The notice must inform the borrower that flood insurance providing the same level of coverage as insurance under the NFIP is available from private companies and include a statement encouraging the borrower to compare insurance policies.
The proposed regulations include sample notice forms and clauses to assist institutions in informing borrowers about the availability of private insurance and the escrow requirement. Provisions regarding private flood insurance and the escrow requirement are incorporated into the sample notice of special flood hazards that is provided when a borrower must obtain flood insurance, and there is a separate sample notice regarding the escrow requirements for use with existing policies. Comments on the proposal are due by December 9, 2013.
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.
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