Managing Flood And Other Risks

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1 A WNC Presentation WNC Insurance Services, Inc. 899 El Centro Street, South Pasadena, CA /

2 WNC Fast Facts Celebrating 50 Years Of Service In 2012 With More Than 31 Years In Lender Placed Insurance ICBA and NYBA Endorsed Provider For Lender Placed Insurance And Outsourced Tracking Services Close To 3,000 Financial Institution Clients Nationwide Largest Lender Placed Flood, Wind And Excess Flood Insurance Contract Holder Of Lloyd s Of London In The U.S. Wholly Owned Precise Adjustments, Inc. For Professional Claims Service Strong Ownership Including Kiln Group Ltd. UK, A Wholly Owned Company Of Global Giant Tokio Marine Group Home Office In So. Pasadena, CA With Business Centers In Dallas, Miami And Milwaukee Sales & Servicing Execs In Los Angeles, Dallas, Indianapolis, Little Rock, Atlanta, Orlando And Columbia, S.C. Member Of Independent Community Bankers of America, New York Bankers, Texas Bankers, American Bankers Insurance Association, National Professional Surplus Lines Offices, American Association Of Managing General Agents And Mortgage Bankers Association 2

3 Presenters & Topics Jordan N. Gray, Esq., SVP Compliance and Legal Affairs o o The Flood Act NFIP Reauthorization, FEMA On Private Flood, NY Dept. Of Financial Services, CFPB Fact Sheet, Fannie Mae Servicing Guide John Tullius, Chief Underwriting Officer o o o o o Ways To Meet The Flood Insurance Requirement From A Bank s Perspective: MPPP v. Private Lender Placed Flood FEMA s Six Criteria For Acceptable Private Flood Insurance Lender Placed Coverage For Other Risks Two Ways To Manage Mortgage Portfolio Risk 3

4 Flood And Hazard Rules, Compliance News & Updates By: Jordan N. Gray, Esq., SVP Compliance and Legal Affairs A property in the 100-year floodplain has a 96 percent chance of being flooded in the next hundred years without global warming. The fact that several years go by without a flood does not change that probability. - Earl Blumenauer U.S. Representative (OR) 4

5 The Flood Act: Scope Of Regulation Regulated Lenders Federally Regulated And Federally Insured Lenders Designated Loans Buildings Or Mobile Homes Located In A Special Flood Hazard Area (SFHA) And Any Personal Property In Building If Part Of Collateral 5

6 The Flood Act: General Requirement A member bank shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the overall value of the property securing the designated loan minus the value of the land on which the property is located. 12 CFR (c) 6

7 The Flood Act: Force Placement Requirement If a member bank, or a servicer acting on behalf of the bank, determines at any time during the term of a designated loan that the building or mobile home and any personal property securing the designated loan is not covered by flood insurance or is covered by flood insurance in an amount less than the amount required under paragraph (c) of this section, then the bank or its servicer shall notify the borrower that the borrower should obtain flood insurance, at the borrower's expense, in an amount at least equal to the amount required under paragraph (c) of this section, for the remaining term of the loan. If the borrower fails to obtain flood insurance within 45 days after notification, then the member bank or its servicer shall purchase insurance on the borrower's behalf. The member bank or its servicer may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance. 12 CFR (g) 7

8 FDIC Financial Institution Letter Summary: Flood insurance is required for the life of a loan that is secured by improved real estate located, or to be located, in a special flood hazard area of a community participating in the National Flood Insurance Program. Often, an insurance policy lapses because the borrower does not renew it. Therefore, it is important for institutions to have adequate internal controls to ensure that borrowers maintain appropriate levels of flood insurance coverage for the term of the loan. 8

9 News & Updates FEMA On Private Flood, NFIP 60-day Extension, NFIP Five-Year Reauthorization, NY Bill A10490, CFPB Fact Sheet, And Fannie Mae Servicing Guide Supervised banks and nonbanks may outsource certain functions to service providers due to resource constraints,... to develop and market additional products or services, or rely on expertise that would not otherwise be available without significant investment. - CFPB Bulletin

10 Private Flood Insurance March 16, 2012: FEMA Memorandum W clarifies that the six elements (criteria) in evaluating private flood insurance are suggestions to lenders. FEMA has no authority to rule on the acceptability of private insurance policies and any technical guidance that FEMA issues on the matter is to be regarded solely as advisory and not regulatory in nature. 10

11 NFIP 60-Day Extension May 30, 2012: Congress passes 60-day NFIP Extension day before expiration. Marks sixteenth extension since NFIP expired in Program expired four times in

12 NFIP Five-Year Reauthorization June 29, 2012: Congress passes five-year NFIP reauthorization. The NFIP reauthorization bill was passed as part of HR 4348, under House Report The NFIP reauthorization bill is entitled, Biggert-Waters Flood Insurance Reform Act of

13 NFIP Reauthorization Highlights Here are some important highlights: NFIP extended to September 30, 2017 (five-year reauthorization) Lender penalties increased from $350 to $2,000 and $100,000 penalty cap has been removed Mandatory escrow of flood insurance premium, beginning 2 years after effective date Pre-Firm Deductibles $1,500 for properties under $100,000; $2,000 for those over $100,000 Post-Firm Deductibles $1,000 for properties under $100,000; $1,250 for those over $100,000 Requires notice to be given under RESPA that NFIP and Private flood insurance is available Provides commercial flood coverage for multi-family residential buildings (5 or more families) Authorizes the use of private flood insurance to satisfy the mandatory purchase requirements Provides explicit authority to charge the borrower for coverage in force as of the lapse (i.e. coverage during the 45-day notice period) and requires cancellation refunds within 30 days. 13

14 New York Assembly Bill No Introduced May 29, 2012; Referred To Committee On Banks Force-Placed Insurance Includes Hazard, Flood or Homeowner s Insurance Mortgage Servicer Means A Registered Mortgage Servicer Mortgage Servicer Shall Not Obtain Force-Placed Insurance Without Reasonable Basis If Escrowed Loan, Mortgage Servicer Must Advance Payments To Continue Escrow 14

15 New York Assembly Bill No Reasonable Basis Means At A Minimum, Servicer Must: Send First Written Notice To Borrower Send Second Written Notice At Least 30 Days After First Written Notice Wait 15 Days From Second Notice Date Before Force-Placing Coverage Notices Must Include: Reminder Of Insurance Obligation Statement That Borrower Failed To Provide Proof Of Insurance Required Procedure Borrower Must Follow To Provide Proof Of Insurance Statement That Servicer May Purchase Coverage At Borrower s Expense Coverage Must Be Less Than Last Known Coverage Amount Or Loan Balance Refunds Must Be Paid Within 15 Days Of Cancellation Affiliated Entities For Placing Coverage Are Not Permitted Fee Splitting Is Not Permitted, Including Referral Fees Or Anything Of Value 15

16 NY DFS Holds Hearings On Force-Placed Insurance Held May 17, 18 & 21, 2012 Testimonies From Consumer Advocates, Loan Servicers, Insurance Providers And Homeowners Questions Asked About LPI Process, Premium Rates, Loss Experience, Borrower Notices, Fees, Broker And Agency Commissions, Loan Servicing And Insurance Entity Affiliations 16

17 FACT SHEET Putting The Service Back In Mortgage Servicing. No Surprises, No Runarounds. Proposing new rules to protect consumers from costly surprises or getting the runaround from their mortgage servicers Formal proposal in summer; to finalize in January 2013 Proposed force-placement rules listed under No Surprises Areas Where To Expect New Force-Placement Rules: In case of lapse in borrower s insurance, servicer must ask borrower to provide proof of insurance before charging for it Borrower notices must be: (1) at least 45 days before and (2) at least 15 days before forceplacement Notices must provide good faith estimate of force-placed insurance cost

18 FACT SHEET Servicer must accept any reasonable confirmation from borrower that there is insurance Servicer must terminate forceplaced insurance within 15 days upon reasonable confirmation by borrower and refund forceplaced insurance premiums If servicer has escrow account to pay insurance premiums, servicer must continue borrower s insurance even if delinquent and not force-place 3 Truly No Surprises - List Is Consistent With Dodd-Frank Congress Passed New Mortgage Servicing Laws Including Amending RESPA On Force-Placed Hazard Insurance Congress Expects CFPB To Enforce Dodd-Frank July 10,

19 Servicing Guide Announcement (SVC ) July 10, 2012 Effective Date: June 1, 2012 Coverage Amount Requirements For loans delinquent for 119 days or less, insurance must be at borrower s last known coverage amount For loans delinquent for 120 or more days, insurance amount must be lesser of (1) unpaid principal balance or (2) 100% of insurable value of improvements Unless borrower actively participates in an approved foreclosure workout program, loan is considered less than 119 days delinquent Deductible Requirements $1,000 if policy amount is $100,000 or less $2,500 for all other policy amounts If separate wind deductible, must be 2% of policy amount 19

20 Servicing Guide Announcement (SVC ) Policy Coverage Requirements Lender Placed Insurance (LPI) must remain in force until borrower provides evidence of acceptable coverage or mortgage liquidates LPI must be all perils or all-risk policy excluding personal property LPI may not have a coinsurance clause or any provision that has same effect as coinsurance Borrower Communication Requirements Two notice letters before force-placement New notice letter required for coverage changes due to delinquency Notices must state that LPI does not cover personal property State that LPI may only cover unpaid principal balance; may not be enough to rebuild home State that LPI may be more expensive 20

21 Servicing Guide Announcement (SVC ) Acceptable LPI Carriers Are filed and admitted in every state Have maximum of 180 days to comply Premium rates must be competitive and commercially reasonable Fannie may require servicer to change carrier if unable to timely file rates Borrower Refunds Of LPI Premiums Must Occur Within 15 Days Of Receipt Of Evidence Of Acceptable Insurance LPI Premium Reimbursement Requests Must Exclude Commissions, Tracking, Administrative, And Other Costs Beyond Actual Cost Of LPI Premium 21

22 Servicing Guide Announcement (SVC ) Servicer Must Advance Borrower Insurance Payments On Escrowed Loans For Non-Escrowed, Servicer Advances Insurance Payments By: Revoking escrow waiver of loan agreement Establishing involuntary escrow and begin collecting funds Reinstating a borrower s coverage by advancing premiums Documenting all efforts to reinstate coverage Hazard Insurance Claims And Remittances Servicer must advance deductible if borrower cannot pay a loss Servicer must pay uncovered losses due to untimely claim or other servicer error Servicer may not deduct expenses from REO insurance proceeds 22

23 Lender Placed Flood By: John Tullius, Chief Underwriting Officer Repetitive flood losses are a very serious problem, both for homeowners in floodplain areas and for the NFIP. Nearly forty percent of all flood insurance claims payments are made for losses to just two percent of the insured properties. - Senior FEMA Officials 23

24 Lender Placed Flood Ways To Meet The Flood Insurance Requirement From A Lender s Perspective FEMA s Six Criteria For Acceptable Private Flood Insurance Lender Placed Coverage For Other Risks Two Ways To Manage Mortgage Portfolio Risk 24

25 Lender Placed Flood Ways to Meet Flood Coverage Requirements National Flood Insurance Program (NFIP) NFIP Direct Write Your Own (WYO) Mortgage Portfolio Protection Program (MPPP) Private Flood Insurance Admitted Carrier Surplus Lines Carrier 25

26 From A Lender s Perspective Program Element NFIP Lender Placed Flood (MPPP) Private Lender Placed Flood Programs Premium Rates Higher Rates = greater burden Lower Rates = lower burden Policy Renewal Non-Participating Communities Underwriting Data Cancellation Provisions Condo Unit Owner Assessment Due To Underinsured Association Temporary Housing Allowance Insufficient Limits & Excessive Deductible Not Automatic = increases workload Not Available = potential uninsured losses More Required (community#, map panel) = possible delay in protecting lender s interest More Restrictive = may unnecessarily extend coverage Not Covered = potential uninsured losses Not Covered = greater borrower stress and financial burden Not Covered = potential uncovered claim amounts Automatic = relieves workload Available = property can be insured regardless of community s participation status Minimal Required = facilitates immediate coverage Less Restrictive = coverage canceled when lender says so Covered = lender s interest (loan balance) remains protected Covered = immediately helps borrower cope with loss Coverage Available = allows lender to get complete coverage 26

27 FEMA s Six Criteria For Acceptable Private Flood 1. Licensure Insurer is licensed, admitted or approved by jurisdiction 2. Surplus Lines Recognition Surplus Lines insurer is recognized by jurisdiction 3. Requirement of 45-Day Cancellation/Non- Renewal Notice Provide 45 days written notice to insured & lender of cancellation or non-renewal of flood insurance coverage 4. Breadth of Policy Coverage Coverage is at least as broad as NFIP s Standard Flood Insurance Policy (SFIP) 5. Strength of Mortgage Interest Clause Must be similar to clause in General Conditions of SFIP 6. Legal Recourse Has provision that insured must file suit within one (1) year after written denial of all or part of claim 27

28 Lender Placed Coverage For Other Risks According to the National Fire Protection Association, in 2010, on average, a fire department responded to a fire every 24 seconds in the United States. A structure fire occurs every 65 seconds; a residential fire occurs every 82 seconds; a vehicle fire occurs every 146 seconds. - Insurance Information Institute 28

29 It s Not Only Flood That You Have To Think About There Are Multiple Other Perils To Watch For: Fire And Smoke Water (other than Flood) Wind And Hail Aircraft And Vehicle Damage Riots And Civil Commotion Theft, Vandalism And Malicious Mischief Explosion And Freezing Collapse And Falling Objects (Note: Always refer to policy for full list of covered and excluded perils and other terms.) 29

30 Luckily, There Are Protection Programs Available For Mortgage Loans Lender Placed Hazard Covers Most Major Perils As Listed Lender Placed Wind Covers Wind Damage If Excluded In Borrower s Hazard Policy Blanket Hazard Covers Entire Portfolio To Neutralize Any Unrecognized Exposures For Consumer Loans Collateral Protection For Loan- Level Coverage Blanket VSI For Portfolio-Level Coverage 30

31 When The Winds Blow And The Seas Surge Half Of Each Year Is Atlantic Hurricane Season (6/1-11/30) Most Active Is Mid-August Through Mid-October Hurricane Is A Tropical Storm With Sustained Winds Of Miles Per Hour Storm Eye Usually Miles Wide (Can Extend To 400 Miles) Main Hazards Are Storm Surge, High Winds, Debris, Tornadoes And Rain/Flooding 31

32 When The Winds Blow And The Seas Surge Hurricane Path Can Run Across Entire Eastern Seaboard 45+ Million Coastal Residents From Texas To Maine Hurricane Irene In 2011 Caused Excessive Rain And Damaging Winds From The Carolinas To New England 2012 Forecast: Thirteen Named Storms, Five Becoming Category 1, Two Reaching Category 3 Ensure Your Borrower s Homeowners Policy Includes Wind Damage 32

33 When The Winds Blow And The Seas Surge 6/7/12: CoreLogic Data Analysis States That NYC Is At Greatest Risk Of Hurricane Losses In Number Of Properties Affected And Potential Value Of Damage $168 Billion: Estimated NYC Property At Risk (Includes Long Island And Northern NJ) 4 Million+ Homes In US At Risk For Flood Damage; Over $700 Billion In Insurable Value 2.2 Million Homes Worth $500+ Billion At Risk For Flood Damage Along Atlantic Coast 33

34 Two Ways To Manage Mortgage Portfolio Risk Insourcing Internal Monitoring Lower Cost But With Elevated Risk Profile Exposure Only Reporting (Online With Quick-Issue) Outsourcing Full Outsourced Insurance Tracking Automatic Coverage Reduced Staffing Expense 34

35 Summary And Contacts Flood Rules Jordan N. Gray, Esq., SVP Compliance and Legal Affairs o Flood Act, Regulatory News & Updates Lender Placed Flood And Lender Placed Coverage For Other Risks John Tullius, Chief Underwriting Officer o Meeting Requirements, MPPP, Private Flood, Multi-Peril And Wind If you have questions or would like more information, please contact WNC Insurance Services: o o o Jordan N. Gray, Esq. / ext / jgray@wncfirst.com John Tullius, CUO / ext / jtullius@wncfirst.com Visit our web site: o Visit us at LinkedIn or 35

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