Welcome to Demystifying the Interagency Q&A! 10/28/2013. National Flood Insurance Program. Demystifying the Lender Q&As

Transcription

1 Demystifying the Lender Q&As National Flood Insurance Program 1 Welcome to Demystifying the Interagency Q&A! We will get started in a few minutes. Meanwhile, let s perform a warm up exercise. 2 1

2 Seminar Resources 1. Federal Register- Interagency Q & As Regarding Flood Insurance (July 2009) 2. Federal Register- Interagency Q & As Regarding Flood Insurance (October 2011) 3. Interagency Statement on the Impact of Biggert-Waters Act (March 2013) 4. Joint Notice of Proposed Rulemaking on Loans in Areas Having Special Flood Hazards (October 2013) Q.1 3 Seminar Agenda Designated Loans Amount of Flood Insurance Required Flood Insurance Requirements for: Construction Loans Non-residential Buildings Residential Condominiums Home Equities/Seconds Sale/Transfer Notices 4 2

3 Seminar Agenda Escrows Force Placement Private Flood Insurance Required Use of SFHDF Flood Determination Fees Flood Zone Discrepancies Notices to Borrower Mandatory CMPs 5 Demystifying the Q & As I. Determining When Certain Loans are Designated (Questions 1-7) 6 3

4 What is a designated loan? Designated Loan: A loan secured by a building or mobile home that is located or to be located in a special flood hazard area in which flood insurance is available under the Act. Please note: Emphasis on a building or mobile home as collateral. Q.1 7 Does loan purchase trigger any requirements under the regulation? Loan purchase is not a tripwire No automatic requirement to make a new flood determination or require a borrower to purchase flood insurance However, if a lender becomes aware that flood insurance is required, lender must comply with the rules, including force placement, if necessary. Tripwires are Q.3 8 4

5 Mandatory Purchase Tripwires M-I-R-E Making Increasing Renewing Extending 9 Loan Syndication/Participation Acquisition of an interest in a loan via participation or syndication postorigination is not a mandatory purchase trigger. But a group of lenders that are Making, Increasing, Renewing or Extending a loan by pooling or contributing funds are subject to mandatory purchase requirements. Each participating lender is responsible for ensuring compliance even when a lead lender is designated to handle compliance duties. Q

6 Restructured/Modified Loans Restructured or modified loans that are designated loans Are subject to mandatory purchase regulations if Lender increases the amount of loan, or Extends or renews term of original loan. Q.5 11 Demystifying the Q & As II. III. Determining the Appropriate Amount of Flood Insurance Exemptions from Mandatory Purchase (Questions 8-18) 12 6

7 Amount of Flood Insurance Amount of Flood Insurance = lesser of: Outstanding principal balance of loan(s) Maximum amount of insurance available under the NFIP, which is the lesser of: The maximum limit available for the type of structure; or The insurable value of the structure Q.8 13 NFIP Coverage Limits Emergency Program Regular Program Single Family Building $35,000 $250,000 Contents $10,000 $100,000 Other Residential Building $100,000 $250,000 Non-Residential Building $100,000 $500,000 Contents $100,000 $500,000 7

8 Residential Buildings 1 4 family dwellings Apartments with > than 4 units Condominiums & cooperatives in which at least 75% of square footage is residential Hotels or motels where normal occupancy is 6 months or > Rooming houses with more than 4 roomers Residential buildings permitted incidental non-residential occupancies of less than 25%; 50% for single-family dwellings Q Non-residential Buildings Small businesses, Churches, Schools, Farm buildings (including grain bins and silos), Pool house, clubhouses, recreational, mercantile buildings, Industrial structures, warehouses, nursing homes, Hotels (rental < 6 months) Mixed use buildings with less than 75% residential square footage Q

9 Lender Case Study: Coverage for Multiple Buildings Lender makes a loan in the principal amount of $150,000 secured by five nonresidential buildings, only 3 of which are located in SFHAs Outstanding Loan Balance $150,000 Maximum amount of insurance under NFIP, lesser of Maximum limit available: $500,000 Insurable Value: $100,000 per building (Total $300,000) Amount Required? Q.14 Lender Case Study: Coverage for Multiple Buildings Lender makes a loan in the principal amount of $150,000 secured by five nonresidential buildings, only 3 of which are located in SFHAs Outstanding Loan Balance $150,000 Maximum amount of insurance under NFIP, lesser of Maximum limit available: $500,000 Insurable Value: $100,000 per building (Total $300,000) Amount Required $150,000 (allocated amongst all 3 buildings) Q.14 9

10 Final Question and Answer #9 What is the insurable value of a building? RCV for certain residential and condo buildings RCV for non-residential buildings may not be practical Avoid creating situations where borrower is over-insured Functional/Demolition values Consider loss settlement provisions of NFIP policy Careful not to under-insure 19 Final Question and Answer #9 RCV vs. ACV Replacement Cost Value Cost to repair or replace a building Material of similar kind and quality No deduction for depreciation RCV does not include land values RCV is not market value Q.9* *Final 20 10

11 Final Question and Answer #9 RCV vs. ACV Actual Cash Value Cost to replace an insured item of property at time of loss Less the value of its physical depreciation Based on age, wear and tear Replacement cost less depreciation Q.9* *Final 21 Final Question and Answer #9 Final Answer Insurable value approaches/methods Appraisal based on cost-value approach Construction-cost calculation Insurable value used in hazard policy Any other reasonable approach that can be supported Q.9* *Final 22 11

12 Final Question and Answer #9 Final Answer Wrap-up Note from preamble: It is important for lenders to recognize that insurable value is only relevant to the extent that it is lower than either the outstanding principal balance of the loan or the maximum amount of insurance available from the NFIP. Q.9* *Final 23 Proposed Question and Answer #10 Are there alternative approaches to determining the insurable value of a building? See alternatives suggested in Q. 9 Agencies withdraw question as no longer necessary Q.10* *Withdrawn 24 12

13 Amount of Flood Insurance Insurable Value Alternatives Functional Building Cost Value Demolition/Removal Cost Value Dairy barn functions as storage building Replaced by storage building 26 13

14 Demolition/Removal Cost Value Amount of Flood Insurance Key points to remember: An NFIP policy will not cover an amount exceeding a building s insurable value. Lenders are permitted to require more flood insurance coverage than the minimum required. A lender may not allow a borrower to use a high deductible to avoid mandatory purchase. Exemptions: State-owned properties Original loan balance $5K or less and term one year or less 28 14

15 Demystifying the Q & As Flood Insurance Purchase Requirements IV. Constructions Loans V. Non-Residential Buildings (Questions 19-25) 29 Construction Loans Compliance options: Require purchase of policy at time development loan is made. Require flood insurance at time of specified drawdown of loan for actual construction. Monitor for actual start of construction. No 30-day waiting period with either option. Buildings eligible for coverage prior to walled and roofed Materials and supplies eligible for coverage Rates based on construction drawings Q

16 Non-Residential Buildings Lenders are required to mandate flood insurance for buildings with limited utility or value if they comprise a designated loan. Lenders may consider carving out such buildings from the security it takes for loan. Be careful to analyze all risks of this option, e.g. ability to market property in event of foreclosure. Q Demystifying the Q & As Flood Insurance Purchase Requirements VI. Residential Condominiums (Questions 26-33) 32 16

17 Lender Case Study You take a residential condominium unit located in a 5 story condo building as collateral for a loan. Unit is on 4 th floor Building is within a SFHA Since you feel it highly unlikely that the units on the fourth floor would ever be flooded, what, if anything must you do with regard to the mandatory purchase requirements? 33 (continued) But I Live On The Fourth Floor 34 17

18 Condos and Coverage Forms RCBAP Residential Condominium Building Association Policy Insures a residential condominium building owned by a condominium association. If insured to at least 80% of its replacement cost value at the time of loss or max limit there is no coinsurance penalty. RCBAP automatically provides Replacement Cost (RC) loss settlement for the building elements

19 RCBAP Maximum Amount of Insurance The maximum available building coverage is the replacement cost value of the building and its supporting structure or up to $250,000 per unit times the number of units, whichever is less. 37 RCBAP Residential Condominium Building Association Policy Insures a residential condominium building owned by a condominium association. If insured to at least 80% of its replacement cost value at the time of loss or max limit there is no coinsurance penalty. RCBAP automatically provides Replacement Cost (RC) loss settlement for the building elements

20 RCBAP Revisions to RCBAP Documentation as of 10/1/07 Number of units in structure Statement of Replacement Cost Other Residential Townhouse/Rowhouse No Basement 8 Units Replacement Cost:$939,000 Coverage Amount: $800,000 $ $939, RCBAP Revisions to RCBAP Documentation as of 10/1/10 Agent must update RCV information at least every 3 years RCV notification letter from carrier The letter is to inform you that the Replacement Cost Value (RCV) on file for the building referenced above, insured under the Residential Condominium Building Association Policy (RCBAP), must now be updated. The National Flood Insurance Program (NFIP) requires that the RCV be evaluated every 3 years; it has been at least 3 years since the RCV for the building has been updated

21 Dwelling Policy Form Covers the Residential Unit Owner Insures a single family dwelling unit in a condominium building or a non-condominium 1-4 family dwelling. A condominium unit in a townhouse, rowhouse, high-rise or low-rise building is considered to be a single family dwelling. Maximum limits - $250,000 building & $100,000 contents. 41 General Property Form Covers Other Residential Condo Associations Occupied less than 75% residential and not eligible for RCBAP. Maximum limit of $500,000 per building. The General Property Form provides Actual Cash Value coverage that includes a deduction for depreciation and Replacement Cost coverage is not available

22 RCBAP Co-insurance penalty Policy performance issue NOT compliance tool! 43 Policy Performance vs. Compliance Compliant Loan Co-Insurance Penalty Non-Compliant Loan No Co-Insurance Penalty $1 million RCV $600K Cov. Limit (60%) 10 units Avg. Cov./unit = $60K Loan Amt. = $50K $1 million RCV $800K Cov. Limit (80%) 10 units Avg. Cov./unit = $80K Loan Amt. = $90K 44 22

23 RCBAP Applies Co-Insurance To The Building Penalty Coverage Limit Applies to Building Coverage Limit Amount of insurance at time of loss Amount of insurance required X Amount of Loss (Before Deductible) = Limit of Recovery RCBAP Applies Co-Insurance To The Building Penalty Coverage Limit Applies to Building Coverage Limit $600, 000 Coverage Limit $1 million X.80 = $800,000 X $250,000 loss (Before Deductible) =75.0% = $187,500 (less deductible) 23

24 Unit Owner Coverage Dwelling Policy Pays assessments resulting from direct physical loss by or from flood to building common elements. Loss assessment coverage responds if: No RCBAP RCBAP insured to at least 80% of RCV If not insured to at least 80%: Available for loss assessments to cover building damage in excess of 80% required amount. Will not pay co-insurance penalty/association s deductible. Unit owner coverage is excess over RCBAP see Other Insurance clause. 47 Demystifying the Q & As Flood Insurance Purchase Requirements VII. Home Equities, Lines of Credit, Subordinate Liens and Other Security Interests VIII. Event of Sale/Transfer of Designated Loans (Questions 34-50) 48 24

25 Home Equities/Seconds No significant changes Home equities, second mortgages and other junior liens are subject to mandatory purchase requirements for flood insurance Determinations are required if there is a triggering event (make, increase, extend or renew) 49 Home Equities/Seconds Must obtain least of: loan amount (including the 1st mortgage) maximum available under the NFIP the insurable value of the building Should ensure that borrower adds junior lien holder's name as mortgagee/loss payee to existing policy Lender has option to pull credit report to obtain balance of 1st mortgage 50 25

26 Home Equities/Second Mortgage Lender A makes a first mortgage with a principal balance of $100,000, but improperly requires only $75,000 Lender B makes a $50,000 equity loan Lender B must ensure that policy increased to $150,000, not to only require increase of $50,000 COMBINED Outstanding Loan Balance $100,000 + $50,000 = $150,000 Maximum amount of insurance under NFIP, lesser of Maximum limit $250,000 Insurable Value $200,000 Q.36 Other Security Interests Questions ; Summary of Key Points A loan that finances inventory in a building in a SFHA where the building is not security for the loan is NOT a designated loan. A loan secured by both building and contents when building is in a SFHA requires flood insurance on both the building and its contents. If loan is secured by a building in a SFHA and by contents in another building, flood insurance is not required on the contents. The regulation applies even in circumstances involving abundance of caution. Q

27 Event of Sale/Transfer of Loans No significant changes Notice of Servicer s Identity: Lenders must notify the insurance provider/carrier in writing of the identity of the servicer of the loan and any change in servicer. Notice of change of servicer must be done within 60 days of change effective date. Change notices may be sent directly to the insurance provider by the mortgagee. In the event of merger/acquisition, duty to provide notice falls to successor institution if not provided by the acquired institution prior to effective date of merger/acquisition. Q Demystifying the Q & As IX. Escrow Requirements X. Force Placement XI. Private Flood Insurance (Questions 51-64) 54 27

28 Escrow Requirements Lenders are required to escrow flood insurance premium and fees for mandatory flood insurance if the lender requires the escrow of taxes, hazard insurance premiums or any other charges for residential improved real estate Exception: Voluntary Escrow The 2012 Reform Act contains a provision on escrows that is due for implementation effective July 6, It will be implemented through notice and comment rulemaking. Regulators intend to publish escrow regulations in time to implement prior to July 2014* Interagency Statement of the Impact of Biggert-Waters Act March 29, 2013 Q Proposed Escrow Requirements Joint Notice of Proposed Rulemaking Which loans affected? Required for loans secured by residential improved real estate of mobile homes Outstanding or entered into on or after 7/6/2014 When do escrows begin? Phased in beginning 7/6/2014: Outstanding loans New loans Become designated loans, e.g. map changes Notice to borrowers? New loans Outstanding loans Loans that become designated loans, e.g. map changes Any Exceptions? Total assets < $1 billion Escrows not previously required under Federal/State law* No policy of requiring escrows* *Loans secured by residential improved real estate or a mobile home 56 28

29 Revised Proposed Question and Answer #57 What is the requirement for the force placement of flood insurance under the Act and Regulation? With revisions to proposed Q&As 60 and 62, the agencies are proposing revisions to previously finalized Q&A Q.57* *Proposed 57 Revised Proposed Question and Answer #57 Proposed Answer Lenders are required to force place if all the following occur: Lender determines collateral is in SFHA Flood insurance is available under the Act Lender determines coverage is inadequate or non-existent After required notice, borrower fails to purchase appropriate amount Send 45-day letter Allow time for borrower to purchase flood insurance Force-Place Q.57* *Proposed 58 29

30 Revised Proposed Question and Answer #57 Proposed Answer Notice to borrower must state: Borrower should obtain required amount at borrower s expense If not obtained within 45 days Lender will purchase on behalf of borrower May charge borrower for cost of premium and fees Which are likely more expensive than if borrower purchased Q.57* *Proposed 59 Revised Proposed Question and Answer #57 Proposed Answer Agencies best practices encourage lenders to: Advise borrowers of high cost of force place flood insurance Send borrowers Notice of Special Flood Hazards When borrower not previously required to buy flood insurance, e.g. map change Q.57* *Proposed 60 30

31 Revised Proposed Question and Answer #60 When should a lender send the force placement notice to the borrower? Issue Original proposed question addressed a lenders ability to accelerate notice Revised Q&A focuses on the proper time to send notice Q.60* *Proposed 61 Revised Proposed Question and Answer #60 Proposed Answer To ensure adequate flood insurance coverage is maintained, lender must: Send force placement notice upon determining: Coverage is inadequate Coverage is expired Notice is required when lender learns: Collateral placed in SFHA due to map change Agencies recommend lenders advise borrowers flood coverage is expiring Q.60* *Proposed 62 31

32 Final Question and Answer #61 When must the lender have flood insurance in place if the borrower has not obtained adequate insurance within the 45- day notice period? Declined to set an arbitrary number of days as requested Lenders should have procedures in place to allow force placement to begin after 45-day notice expires Q.61* *Final 63 Final Question and Answer #61 Final Answer Adopted with minor clarifications Lender or servicer shall force place upon expiration of 45-day notice period Agencies expect lenders to provide reasonable explanation for any brief delays, e.g. batch processing Q.61* *Final 64 32

33 Revised Proposed Question and Answer #62 When may a lender or its servicer charge a borrower for the cost of insurance that covers collateral during the 45-day notice period? Issue Original proposed question asked does a lender or servicer have the authority to charge for flood insurance during the notice period Revised Q&A clarifies when a lender may charge borrower 65 Adopted 2012 Reform Act Force Placement Provisions Premium and fees a lender or servicer may charge include: Premium or fees incurred for coverage Beginning on the date flood insurance coverage lapsed or, Did not provide sufficient coverage amount 66 33

34 Adopted 2012 Reform Act Force Placement Provisions Requires lender or servicer within 30 days of: Receiving confirmation of borrower s coverage Terminate force-place insurance Refund all force-placed premium and fees paid by borrower During any overlap in coverage 67 Adopted 2012 Reform Act Force Placement Provisions Requires lender or servicer to: Accept borrower s existing policy declarations page as confirmation Declarations page must include: Existing policy number Identity/Contact information for insurance company or agent Agencies Position: Force placement provisions of the Act became effective upon enactment Interagency Statement of the Impact of Biggert-Waters Act March 29,

35 Proposed Private Flood Insurance Requirements Joint Notice of Proposed Rulemaking Lenders must accept private flood insurance if: Insurer meets state department of insurance requirements Surplus Lines insurer must be recognized by state department of insurance Must be as broad as the NFIP policy 45-Day Cancellation/Non-Renewal Notice Information about availability of flood coverage under NFIP Must contain similar NFIP mortgage interest clause Provision requiring insured to file suit within one year after claim denied Cancellation provisions as restrictive as SFIP under NFIP 2012 Reform Act provision to be implemented through notice and comment rulemaking. Not effective until regulations are issued. 69 Proposed Private Flood Insurance Requirements Joint Notice of Proposed Rulemaking Requires Notice to Borrower to include: Flood insurance is available thru private companies from the NFIP. Available directly from the NFIP (via agent) Flood insurance that provides the same level of coverage as an NFIP policy may be available from private insurance companies. Encourages borrowers to compare and contrast NFIP and private insurance policies Reform Act provision to be implemented through notice and comment rulemaking. Not effective until regulations are issued

36 Demystifying the Q & As XII. Required use of SFHDF XIII. Determination fees XIV. Zone discrepancies XV. Notice of flood hazards XVI. Mandatory CMPs (Questions 65-82) 71 Standard Flood Hazard Determination Form (SFHDF) New Form effective May Year Phase-in Period FEMA Form replaces FEMA Form Not a substitute for the borrower notification form Providing copy to borrower is encouraged to reduce zone discrepancies Can also be used in event of other disputes like LODR Electronic form is acceptable Q

37 Can the SFHDF be reused? May re-use when increasing, extending, renewing or purchasing a loan Cannot be reused when making a new loan Exceptions: Refinancing or assumption by same lender who obtained original determination and multiple loans to the same borrower only if: It is less than 7 years old No new or revised maps have been issued Q Flood Determination Fees When determination is made in connection with M I R E initiated by borrower. Prompted by a revision or updating by FEMA of flood zones. Prompted by FEMA s publication of notices that affect the area where collateral is located.. The determination results in force placement. Q

38 Flood Zone Discrepancies What is a zone discrepancy? Is the discrepancy between high-risk and low- or moderate-risk zone? Lender should determine whether a result of the Grandfather Rule Result of a mistake? Letter of determination review. Q Flood Zone Discrepancies 3 Types of zone discrepancies: Grandfather rating rule Q

39 Map Grandfather Rule Allows a property owner to: 1. Lock in a previous flood zone 2. Lock in a previous Base Flood Elevation 77 Flood Zone Discrepancies 3 Types of zone discrepancies: Grandfather rating rule Too Close to Call Q

40 79 Flood Zone Discrepancies 3 Types of zone discrepancies: Grandfather rating rule Too Close to Call Purposeful manipulation Q

41 Flood Zone Discrepancies 3 Types of zone discrepancies: Grandfather rating rule Too Close to Call Purposeful manipulation Remedies Document use of grandfather rule Q Flood Zone Discrepancies 3 Types of zone discrepancies: Grandfather rating rule Too Close to Call Purposeful manipulation Remedies Document use of grandfather rule See Administrator s April 2008 bulletin Q

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43 Flood Zone Discrepancies 3 Types of zone discrepancies: Grandfather rating rule Too Close to Call Purposeful manipulation Remedies Document use of grandfather rule See Administrator s April 2008 bulletin Document file with actions taken Resolve discrepancies to avoid possible violations Q PRP Eligibility Extension Summary Developed to address the financial burden of mandatory purchase requirements on policy holders in newly mapped areas Buildings newly designated within the SFHA due to a map revision on or after October 1, 2008, are eligible for coverage under the PRP until further notice. Loss history requirements must be met 86 43

44 PRP Eligibility Extension Summary (cont d) Insurance Carrier, not lender, validates PRP extension eligibility Effective 10/1/2010, NFIP declarations pages will display two flood zones: Current Flood Zone Flood Risk/Rated Zone Current Flood Zone flood zone of property on current (revised) Flood Insurance Rate Map (FIRM) Flood Risk/Rated Zone flood zone from the previous map used to rate policy Lenders are not required to investigate or resolve differences between Current Flood Zone and Flood Risk/Rated Zone Rated Zone/Current Zone 88 44

45 Notice to Borrower If multiple borrowers, notice can provided to any one of the borrowers Records of receipt provided by the borrower must be maintained for the time that the lender owns the loan Q Re-use of borrower notice? Unlike the re-use of the SFHDF, the lender must provide a new notice to the borrower, EVEN IF a new determination is not required. Neither the regulation nor the preamble addresses waiving the requirement to provide the notice to the borrower Q

46 Notice to Borrower When a bank makes, increases, extends, or renews a loan secured by a building or mobile home located or to be located in a special flood hazard area The bank shall mail or deliver a written notice to the borrower and servicer in all cases whether or not flood insurance is available under the Act for the collateral securing the loan. Notice to borrower cannot be re-used. Notice must be provided a reasonable time prior to closing. Reasonable is generally regarded as 10 days 91 Notice Requirements Note from Interagency Q&A Preamble: What constitutes reasonable notice will necessarily vary according to the circumstances of particular transactions. Regulated lending institutions should bear in mind, however, that a borrower should receive notice timely enough to ensure that: 1. the borrower has the opportunity to become aware of his/her responsibilities under the NFIP 2. the borrower can purchase flood insurance before completion of the loan transaction

47 Mandatory civil money penalties Original: Not to exceed $350 per violation, with a ceiling of $100,000 during a calendar year. Biggert-Waters Reform Act increases CMPs to $2,000 per violation and eliminates the annual cap. Looking for a pattern or practice of committing violations Failure to: Place Insurance Escrow flood insurance premium Force place insurance Provide notice requirements Q Evaluations - Online We appreciate your participation in this webinar on the Interagency Q&A Update and look forward to your feedback. Please take time to complete and help us improve our training effort! THANK YOU! 94 47

48 Demystifying the Lender Q&As Social Media - Online Follow us on twitter: Like us on Facebook at: LIKE. FOLLOW. LEARN. Lender Training Melanie Graham Dorothy Martinez Rich Slevin Rich Waalkes Sonja Wood Aaron Montanez melanie@h2opartnersusa.com dorothy@h2opartnersusa.com rich@h2opartnersusa.com rwaalkes@h2opartnersusa.com sonja@h2opartnersusa.com nfip-producer@h2opartnersusa.com 96 48

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