2018 CUNA MORTGAGE LENDING REGULATIONS 5-1
Section 5 Flood Disaster Protection Act Background The Flood Disaster Protection Act (FDPA) of 1973 and the National Flood Insurance Reform Act (NFIRA) of 1994 mandate the purchase of flood insurance as a condition of receiving federal or federally-related financial assistance whenever a lender makes, increases, extends or renews any loan secured by improved property located or to be located in a special flood hazard area (SFHA). Where the 1973 Act only required the purchase of flood coverage, the NFIRA requires that flood insurance be maintained for the term of the loan. In addition, the law requires the purchase of flood insurance any time during the loan term if the lender determines that the structure is located in a SFHA. Part 760 of the NCUA s Rules and Regulations implements these provisions for all federally insured credit unions. In addition to NCUA s implementing regulations, credit unions must also comply with the Federal Emergency Management Agency s (FEMA) regulations and guidelines. FEMA is the federal agency under which the National Flood Insurance Program (NFIP)is administered. FEMA duties include: 1. Conducting Flood Insurance Studies in cooperation with community officials throughout the United States to locate SFHAs; 2. Developing the flood maps used by lenders, servicers and flood determination companies in making their flood hazard determinations; and 3. Providing forms and guidance on flood insurance requirements under the NFIP. Of course, FEMA does much more than administer the NFIP. It is the federal agency that coordinates the federal response to emergency situations, including disasters such as earthquakes and tornadoes. However, the focus of this section is only on FEMA s involvement in the NFIP. The mandatory flood insurance purchase provisions only apply to federally-regulated lenders (which includes federally insured state-chartered credit unions), Government Sponsored Enterprises for Housing (GSEs) like Fannie Mae or Freddie Mac, and federal agency lenders. GSEs are privately owned, federally chartered corporations whose sole business is to support residential housing by providing a secondary market for mortgages. GSE guidelines require that the loans they buy that are secured by improved property (for example, buildings) and that are located in SFHAs have flood insurance for the life of the loan. Therefore, credit unions selling loans to the secondary market must also abide by the appropriate GSE flood insurance guidelines. However, these particular guidelines are beyond the scope of this material, so be sure to check with Fannie Mae or Freddie Mac for details. 2018 CUNA MORTGAGE LENDING REGULATIONS 5-2
Glossary of Terms Building: A walled and roofed structure, other than a gas or liquid storage tank, that is principally above ground and affixed to a permanent site, and a walled and roofed structure in the process of construction, alteration, or repair. Emergency Program: typically the first phase under which a community participates in the NFIP. Under the Emergency Program, the minimal amount of federal insurance coverage is available at subsidized rates on all insurable buildings in the community before the effective date of the initial Flood Insurance Rate Map (FIRM). See FIRM FEMA: The Federal Emergency Management Agency, under which the National Flood Insurance Program is administered. FHBM: The Flood Hazard Boundary Map, which is the initial map of a community participating in the NFIP s Emergency Program. The map shows the boundaries of identified special flood hazard areas (SFHA) based on approximate analyses. FIRM: The Flood Insurance Rate Map, which is the official map of a community participating in the NFIP s Regular Program. The map delineates both the special flood hazard areas (SFHA) and the risk premium zones applicable to the community. Flood: A general and temporary condition of partial or complete inundation of normally dry land areas from the overflow of inland or tidal waters or from the unusual and rapid accumulation or runoff of surface waters from any source. (From the NFIP s Standard Flood Insurance Policy) LODR: Letter of Determination Review, which is FEMA s official letter in response to a joint request for review of a lender s flood hazard determination. The LODR either overturns or upholds the lender s finding, or leaves the determination unchanged because insufficient information was provided. A LODR does not amend a FEMA flood map. LOMA: Letter of Map Amendment, which is an official amendment, by letter, of an effective FEMA flood map. A LOMA establishes that a particular property is not located in a SFHA. LOMR: Letter of Map Revision is an official revision, by letter, of an effective FEMA flood map. A LOMR may change flood insurance risk zones, floodplain boundaries, etc. Mobile home: A structure, transportable in one or more sections, built on a permanent chassis, and designed for use with or without a permanent foundation when attached to the required utilities. The term mobile home does not include a recreational vehicle. For purposes of this Act, the term mobile home means a mobile home on a permanent foundation and a manufactured home as that term is used in the NFIP. NFIP: The National Flood Insurance Program, which is a federal program providing flood insurance to owners of property in participating communities nationwide through the cooperative efforts of the federal government and the private insurance industry. PMR: Physical Map Revision, official republication of a FEMA flood map showing changes to the flood plain, base flood elevation, boundaries, etc. Regular Program: The phase of a community s participation in the NFIP where 2018 CUNA MORTGAGE LENDING REGULATIONS 5-3
more comprehensive floodplain management requirements are imposed and higher amounts of federal flood insurance are available based on risk zones and elevations determined by FEMA in a flood insurance study. The Flood Insurance Rate Map (FIRM) is the map used during this phase of the NFIP. See FIRM Residential improved real estate: Real estate upon which a home or other residential building is located or will be located. Servicer: The entity responsible for: (1) Receiving any scheduled, periodic payments from a borrower under the terms of a loan, including amounts for taxes, insurance premiums, and other charges with respect to the property securing the loan; and (2) Making payments of principal, interest, and any other payments from the amounts received from the borrower as required under the terms of the loan. Special flood hazard area (SFHA): The land in the flood plain within a community having at least a one percent chance of flooding in any given year, as designated by FEMA. Standard Flood Hazard Determination Form (SFHDF): FEMA s form 81-93, used to record flood hazard determinations in either printed, computerized, or electronic form. Table funding: A settlement at which a loan is funded by a simultaneous advance of loan funds and an assignment of the loan to the person advancing the funds. Write Your Own (WYO) Program: A cooperative undertaking by the insurance industry and the Federal Insurance Administration which began in 1983. The Program allows participating property and casualty insurance companies to write and service the NFIP s Standard Flood Insurance Policy in their own names. The insurance companies receive an expense allowance for policies written and claims processed, while the federal government retains responsibility for underwriting any losses. The WYO Program operates under the NFIP and is subject to its rules and regulations. National Flood Insurance Program What is the National Flood Insurance Program? Congress authorized the creation of the National Flood Insurance Program (NFIP) through the National Flood Insurance Act of 1968. The NFIP allows property owners to purchase flood insurance protection for both structures and contents. The NFIP provides an incentive for communities to adopt floodplain management ordinances designed to mitigate the effects of flooding on both new and existing construction. Basically, the NFIP provides federal flood insurance to owners of improved real estate (for example, a building) or mobile homes located in a floodplain, if their community participates in the program. Coverage availability The mandatory flood insurance purchase requirements discussed later only apply to structures located in communities participating in the NFIP. In other words, no participating community equals no mandatory flood insurance requirement. However, do keep in mind that the FHA, VA, and SBA are unable to insure or guarantee these loans. That is 2018 CUNA MORTGAGE LENDING REGULATIONS 5-4
not to say that the credit union wouldn t want the member to purchase private flood insurance to protect its security interest. It just means that the purchase of flood insurance becomes the credit union s business decision, not a federal mandate. Emergency and regular programs The Emergency Program is typically the first phase under which a community participates in the NFIP. Under the Emergency Program, only the minimum amounts of insurance coverage are available at subsidized rates on all insurable buildings in the community before the effective date of the initial Flood Insurance Rate Map (FIRM). The Regular Program is the phase of a community s participation in the NFIP where more comprehensive floodplain management requirements are imposed and higher amounts of federal flood insurance are available based on risk zones and elevations determined by FEMA in a Flood Insurance Study. Write Your Own (WYO) Program The WYO Program allows participating property and casualty insurance companies to write and service the NFIP s Standard Flood Insurance Policy in their own names. The insurance companies receive an expense allowance for policies written and claims processed, while the federal government retains responsibility for underwriting any losses. The WYO Program operates under the NFIP and is subject to its rules and regulations. This program has been in existence since 1983. Flood insurance maps According to FEMA, more than 19,000 communities have been identified as susceptible to flooding through the publication of flood maps. Over 95% of these communities participate in the NFIP. As mentioned earlier, FEMA conducts Flood Insurance Studies in cooperation with community officials throughout the United States to determine the location of special flood hazard areas (SFHAs). Based on these studies, FEMA notifies each community of the determination and issues Flood Hazard Boundary Maps (FHBMs) or Flood Insurance Rate Maps (FIRMs) showing the location of the SFHAs. What s the difference between a FHBM and a FIRM? A FHBM is used when the community is still in the Emergency Program, and the FIRM is used when the community graduates to the Regular Program. SFHAs are represented on the FIRMs by darkly shaded areas designated with the letter A or V. Requirement To Purchase Flood Insurance Where Available Mandatory purchase requirement A credit union may not make, increase, extend, or renew any loan on property located in a special flood hazard area (SFHA) unless the building or mobile home and any personal property securing the loan is covered 2018 CUNA MORTGAGE LENDING REGULATIONS 5-5
by flood insurance for the term of the loan. (See NCUA Rules and Regulations, Section 760.3) As previously discussed, the SFHA must be located in an NFIP participating community to trigger the flood insurance purchase requirements. What s an SFHA? It s the land in the flood plain determined by FEMA to have at least a one percent chance of flooding in any given year. Please note that contents coverage is not required unless personal property, in addition to the building, secures the loan. A credit union that acquires a loan from a mortgage broker or other entity through table funding is considered to be making a loan for flood insurance purposes. Therefore, such transactions are covered by the mandatory purchase requirement if the property is located in a SFHA within an NFIP participating community. The mandatory purchase requirements apply to both consumer or commercial loans. However, the impact is primarily on residential mortgage lenders. The requirement to obtain flood insurance applies to any type of loan secured by improved real property, whether the loan is a fixed-rate, variablerate, or balloon loan. The purchase requirement applies to home equity and second mortgage loans as well as first liens on improved real property. 30-day waiting period There is normally a 30-day waiting period before flood insurance goes into effect. Exceptions apply when coverage is placed in conjunction with initial loan activity or the re-mapping of a community. There is no waiting period if: The initial purchase of flood insurance is in connection with making, increasing, extending or renewing a loan. Coverage becomes effective at the time of the loan, provided the application and presentment of premiums are made at or prior to the loan closing. The initial purchase of flood insurance is made within a one-year period following the revision or update of a Flood Insurance Rate Map for an NFIPparticipating community. What about refinancing, home equity loans and modifications? NFIP Policy Issuance #5-98 states that the exception to the 30-day waiting period also applies in situations pertaining to refinancing, placing of second mortgages, and modifying existing mortgages. The policy issuance also applies to: 1. Forced placement of flood insurance. 2. Increased limits at renewal. 3. Map revisions. The policy issuance is included as Appendix 5-C of this section. Please refer to this document for a detailed discussion of the 30-day waiting period rules. Required amount of insurance If the property securing a member s loan is located in a SFHA, he or she will be required to purchase an amount of insurance that is equal to the lesser of the outstanding principal balance of the loan or the maximum limit of coverage available for the particular type of prop- 2018 CUNA MORTGAGE LENDING REGULATIONS 5-6
erty. Flood insurance coverage is limited to the overall value of the property securing the loan minus the value of the land on which the property is located. The credit union s responsibilities cease upon the sale of the loan The credit union s duties with respect to federal flood insurance requirements for a particular loan cease upon the sale of the loan. However, the credit union will still be responsible for compliance with these provisions if it retains servicing rights to the loan. Exemptions The flood insurance requirement does not apply to property securing a loan with an original principal balance of $5,000 or less and a repayment term of one year or less. (NCUA Rules and Regulations, Section 760.4(b)) Exemption for Detached Non-Residential Structures Effective October 1, 2015, Part 760 was amended to no longer require flood insurance on any structure that is detached from the primary residential structure and does not otherwise in and of itself serve as a residence. However, your credit union may still require flood insurance on a detached non-residential structure if deemed necessary from a safety and soundness perspective. What about insuring land? The flood insurance provisions in the NFIRA and NCUA s Part 760 only apply to improved real estate, meaning land with a building or mobile (or manufactured) home on the land. The NFIP does not provide flood insurance coverage for vacant land. The location of a building in relation to the SFHA determines the applicability of the mandatory purchase provisions. Some portion of the building itself, not just the land upon which it is situated, must be located in a SFHA in order for the mandatory purchase requirements to apply. Escrow Requirement Changes to this section are effective January 1, 2016. Please see Appendix 5-D for more information. A credit union will only be required to escrow flood insurance premiums if it requires the escrow of taxes, insurance premiums, fees, or other charges for real estate secured loans. If this is the case, the credit union, or its servicer, must deposit the flood insurance premiums on behalf of the borrower into an escrow account. Once the credit union receives a notice from FEMA or another flood insurance provider that premiums are due, the credit union (or servicer) is responsible for paying the amount owed to the insurance provider from the escrow account by the premium due date. (NCUA Rules and Regulations, Section 760.5) Keep in mind that the escrow account will be subject to escrow requirements in Section 10 of the Real Estate 2018 CUNA MORTGAGE LENDING REGULATIONS 5-7
Settlement Procedures Act (RESPA), which generally limits the amount that may be maintained in escrow accounts for certain types of loans and requires escrow account statements. The Flood Determination Process Required use of the Standard Flood Hazard Determination Form (SFHDF) A credit union must use FEMA s standard flood hazard determination form when determining whether the building or mobile home offered as collateral security for the loan is or will be located in a special flood hazard area where flood insurance is available. (NCUA Rules and Regulations, Section 760.6) The SFHDF is a one-page standard form, with instructions, for recording the results of a flood hazard determination. This form may be used in a printed, computerized, or electronic manner. In 2012, FEMA amended the Standard Flood Hazard Determination Form. The form number has been changed from FEMA Form 81-93 to FEMA Form 086-0-32. This new form expires on May 30, 2015. The Agency will be allowing users a three-year transition period ending on the expiration date so user systems can be changed before final adoption of the form is required. The previous form can be used until that time. Users may choose to update their systems at any time to the new format. The new form can be found at https://www.fema.gov/medialibrary/assets/documents/225 The credit union must retain a copy of the completed form, in either hard copy or electronic form, for the period of time the credit union owns the loan. FEMA does not perform individual property flood hazard determinations, therefore it is the responsibility of the lender to make the determination. The credit union can either complete the form itself or use an outside service to track and analyze FEMA s flood maps. The NFIRA states that a lender may provide for the acquisition or determination of flood hazard information to be made by a person other than the lender only to the extent that such person guarantees the accuracy of the information. Nevertheless, the credit union remains responsible compliance with the SFHDF requirements. (NFIRA, Section 4104b(d)) Use of a previous determination The credit union may not use a previous determination for a new loan. However if the loan involves an increase, extension, renewal, or purchase of an existing loan, the determination may be reused if: It is less than 7 years old. No new or revised flood insurance rate map (FIRM) or flood hazard boundary map (FHBM) has been issued in the interim. It was initially recorded on an SFHDF that became effective or was revised on or after January 2, 1996. 2018 CUNA MORTGAGE LENDING REGULATIONS 5-8
SECTION 4012A(H) of the NFIRA contains an express provision that preempts other federal or state law with respect to flood determination fees charged by lenders. What if the member disputes the credit union s determination that flood insurance is required? Members may contest a flood hazard determination if it was conducted in order to comply with the mandatory federal flood insurance purchase requirements. However, the member may not challenge a determination or the requirement to purchase flood insurance if it is part of the credit union s standard lending practices; for example, private flood insurance required as a condition for all mortgage loans, not in response to the federal mandate. If a member does not agree with the findings on a determination, FEMA has a statutory review process that can be initiated. Both the borrower and the credit union must jointly submit a review request to the Director of FEMA within 45 days after the borrower is notified that the property is in a SFHA. After receiving all required information and the current fee, FEMA will issue a Letter of Determination Review. What if the member disputes the accuracy of the flood maps used to make the determination? There are procedures available for changing or correcting a FIRM which are beyond the scope of the credit union s responsibilities in complying with flood insurance requirements. These procedures involve FEMA s reevaluation of the scientific and technical data used to develop the current map. Members should be advised that, until the matter is resolved in their favor, they are still required to purchase and maintain flood insurance on their mortgage loans with the credit union. The member may request a Physical Map Revision (PMR) or a Letter of Map Change (LOMC). The PMR is a physical change to the affected panels of the flood map and portions of the Flood Insurance Study used to create the map. Changes may also be brought about by a LOMC, which includes a Letter of Map Amendment (LOMA) or a Letter of Map Revision (LOMR). A LOMA amends the current FEMA map and establishes that a specific property is not located in a SFHA. On the other hand, a LOMR is used to change flood zones, flood elevations, and so on. There is also a LOMR-F, which determines if a structure is excluded from a SFHA because it has been elevated above the base flood elevation. For more information on the appropriate procedures, the member should be directed to contact the Mitigation Division Director at the appropriate FEMA Regional Office or the Hazard Identification Branch staff at the FEMA Headquarters Office. Forced Placement of Flood Insurance Part 760.7 of the NCUA s Rules and Regulations was amended effective October 1, 2015, to reflect the following with regards to the forced placement of flood insurance: Your credit union may force-place flood insurance beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount. Your credit union must notify the 2018 CUNA MORTGAGE LENDING REGULATIONS 5-9
member in writing of the deficiency and wait 45 days for them to take action. If the member has taken no action by the end of the 45-day period, your credit union may begin assessing the premiums and fees associated with the force-placed policy to the borrower. Your credit union may charge the borrower for the cost of premiums and fees associated with the force-placed policy beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount. Once your institution has purchased force-placed insurance, within 30 days of being notified that the borrower has obtained their own flood insurance coverage it must: Terminate the force-placed policy; and Refund to the borrower any premiums paid on the force-placed policy during any period of overlap when both the force-placed policy and the borrower s policy were in effect Determination fees The credit union or its servicer may charge a reasonable fee for determining whether the building or mobile home securing the loan is located or will be located in a special flood hazard area. A determination fee may also include, but is not limited to, a fee for life-of-loan monitoring. The NFIRA does not define the term reasonable. A determination fee may be charged if the determination: Is made in connection with a making, increasing, extending, or renewing a loan initiated by the member. Reflects FEMA s revision or updating of floodplain areas or flood-risk zones. Reflects FEMA s publication of a notice or compendium that: affects the area in which the building or mobile home securing the loan is located or may reasonably require a determination whether the building or mobile home securing the loan is located in a special flood hazard area. Results in the purchase of flood insurance coverage by the credit union or its servicer on behalf of the borrower. In addition, the determination fee may be charged to the purchaser or transferee of a loan in the case of the sale or transfer of the loan. (NCUA Rules and Regulations, Section 760.8) Truth In Lending Act Implications When an extension of credit is secured by an interest in real property, the Truth in Lending Act (TILA) and Regulation Z specifically provide that certain costs and fees, if bona fide and in a reasonable amount, need to be disclosed, but need not be included in the calculation of the finance charge. TILA provides that a flood zone determination charge is excludable as a finance charge if it is imposed in connection with the initial decision to grant credit. (See 2018 CUNA MORTGAGE LENDING REGULATIONS 5-10
Regulation Z, Section 1026(c)(7)(iv).) Therefore, a flood zone search fee that does not contain a charge for life-of-theloan monitoring need not be included as part of the finance charge. The fee charged for the initial determination must appear on the HUD Good Faith Estimate and the actual fee must be disclosed on the HUD-1 (or 1A) Settlement Statement. TILA requires that a fee for services to be performed periodically during the term of the loan (for example, life-of-the loan monitoring) may not be excluded from the calculation of the finance charge, regardless of when it was paid. (See Regulation Z Commentary to Section 1026, Paragraph 4(c)(7)(3).) If a consolidated flood determination fee includes life-of-the-loan tracking, which cannot be apportioned between an initial credit decision or future services, the entire charge must be considered part of the finance charge. However, Regulation Z does not apply if the credit union incurs flood zone determination expenses prior to the closing of the loan (for example, expenses incurred from a FEMA re-mapping, or transfer of a fee to a borrower). Notice Requirements Notice of special flood hazards and availability of federal disaster relief assistance Changes to this section are effective January 1, 2016. Please see Appendix 5-D for more information. When a credit union makes, increases, extends, or renews a loan secured by a building or a mobile home located or to be located in a special flood hazard area, the credit union must mail or deliver a written notice to the member and to the servicer in all cases, whether or not federal flood insurance is available under NFIP for the collateral securing the loan. The written notice must include the following information: A warning, in a form approved by FEMA, that the building or the mobile home is or will be located in a special flood hazard area. A description of the flood insurance purchase requirements set forth in the Flood Disaster Protection Act of 1973. A statement, where applicable, that flood insurance coverage is available under the NFIP and may also be available from private insurers. A statement whether federal disaster relief assistance may be available in the event of damage to the building or mobile home caused by flooding in a federally-declared disaster. The credit union must provide the notice to the member within a reasonable time before the completion of the transaction and to the servicer as promptly as practicable after the credit union provides the notice to the member, and in any event no later than the time the credit union provides other similar notices to the servicer concerning hazard insurance and taxes. Notice to the servicer may be made electronically or may be a copy of the notice to the member. See the Appendix for a sample notice. For a checklist of required mortgage disclosures, see Appendix 5-E. 2018 CUNA MORTGAGE LENDING REGULATIONS 5-11
Record of receipt The credit union must retain a record of the receipt of the notices by the member and the servicer for the period of time the credit union owns the loan. Alternate method of notice Instead of providing the notice to the member, the credit union may obtain written assurance from a seller or lessor that, within a reasonable time before the completion of the sale or lease transaction, the seller or lessor has provided the notice to the purchaser or lessee. The credit union must retain a record of the written assurance from the seller or lessor for the period of time the credit union owns the loan. Use of prescribed form of notice A credit union will be in compliance with the notice requirement if it uses the language in the sample notice provided in the Appendix of this section within a reasonable time before the completion of the transaction. (NCUA Rules and Regulations, Section 760.9) Notice of servicer s identity When a credit union makes, increases, extends, renews, sells, or transfers a loan secured by a building or mobile home located or to be located in a special flood hazard area, the credit union must notify FEMA in writing of the identity of the servicer of the loan. FEMA has designated the insurance provider to receive the credit union s notice of the servicer s identity. This notice can be provided electronically if permitted by FEMA. NCUA states in Section 760.10 that the notice must be sent to the insurance carrier that issued the insurance policy so the mortgagee endorsement can be updated. This also helps the credit union ensure the policy is maintained in force. Transfer of servicing rights The credit union must notify FEMA or its designee of any change in the servicer of a loan within sixty days after the effective date of the change. FEMA has designated the various WYO insurance carriers on WYO policies as the agency s representatives to receive the notice regarding any change of servicer. This notice may be provided electronically if permitted by FEMA. Upon any change in the servicing of a loan, the duty to provide notice must transfer to the transferee servicer. See Appendix 5-B for a sample Notification of Change of Servicer form. The information needed by FEMA includes the: Borrower s name. Flood insurance policy number. Property address, including city and state. Name of lender/servicer making notification. Name and address of new servicer. Name and telephone number of contact person at new servicer. (NCUA Rules and Regulations, Section 760.10) 2018 CUNA MORTGAGE LENDING REGULATIONS 5-12
Appendix 5 A Sample Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance Effective January 1, 2016 We are giving you this notice to inform you that: The building or mobile home securing the loan for which you have applied is or will be located in an area with special flood hazards. The area has been identified by the Administrator of the Federal Emergency Management Agency (FEMA) as a special flood hazard area using FEMA s Flood Insurance Rate Map or the Flood Hazard Boundary Map for the following community:. This area has a one percent (1%) chance of a flood equal to or exceeding the base flood elevation (a 100-year flood) in any given year. During the life of a 30-year mortgage loan, the risk of a 100-year flood in a special flood hazard area is 26 percent (26%). Federal law allows a lender and borrower jointly to request the Administrator of FEMA to review the determination of whether the property securing the loan is located in a special flood hazard area. If you would like to make such a request, please contact us for further information. The community in which the property securing the loan is located participates in the National Flood Insurance Program (NFIP). Federal law will not allow us to make you the loan that you have applied for if you do not purchase flood insurance. The flood insurance must be maintained for the life of the loan. If you fail to purchase or renew flood insurance on the property, Federal law authorizes and requires us to purchase the flood insurance for you at your expense. At a minimum, flood insurance purchased must cover the lesser of: (1) The outstanding principal balance of the loan; or (2) The maximum amount of coverage allowed for the type of property under the NFIP. Flood insurance coverage under the NFIP is limited to the building or mobile home and any personal property that secures your loan and not the land itself. Federal disaster relief assistance (usually in the form of a low-interest loan) may be available for damages incurred in excess of your flood insurance if your community s participation in the NFIP is in accordance with NFIP requirements. Although you may not be required to maintain flood insurance on all structures, you may still wish to do so, and your mortgage lender may still require you to do so to protect the collateral securing the mortgage. If you choose not to maintain flood insurance on a structure and it floods, you are responsible for all flood losses relating to that structure. 2018 CUNA MORTGAGE LENDING REGULATIONS 5-13
Availability of Private Flood Insurance Coverage Flood insurance coverage under the NFIP may be purchased through an insurance agent who will obtain the policy either directly through the NFIP or through an insurance company that participates in the NFIP. Flood insurance that provides the same level of coverage as a standard flood insurance policy under the NFIP may be available from private insurers that do not participate in the NFIP. You should compare the flood insurance coverage, deductibles, exclusions, conditions, and premiums associated with flood insurance policies issued on behalf of the NFIP and policies issued on behalf of private insurance companies and contact an insurance agent as to the availability, cost, and comparisons of flood insurance coverage. Escrow Requirement for Residential Loans Federal law may require a lender or its servicer to escrow all premiums and fees for flood insurance that covers any residential building or mobile home securing a loan that is located in an area with special flood hazards. If your lender notifies you that an escrow account is required for your loan, then you must pay your flood insurance premiums and fees to the lender or its servicer with the same frequency as you make loan payments for the duration of your loan. These premiums and fees will be deposited in the escrow account, which will be used to pay the flood insurance provider. Flood insurance coverage under the NFIP is not available for the property securing the loan because the community in which the property is located does not participate in the NFIP. In addition, if the non-participating community has been identified for at least one year as containing a special flood hazard area, properties located in the community will not be eligible for Federal disaster relief assistance in the event of a Federally declared flood disaster. 2018 CUNA MORTGAGE LENDING REGULATIONS 5-14
Appendix 5 B Sample Notification of Change of Service Federal Emergency Management Agency Washington, D.C. 20472 June 4, 1996 NOTIFICATION OF CHANGE OF SERVICER The National Flood Insurance Reform Act (NFIRA) requires federally regulated lending institutions and Federal agency lenders to report changes of Servicer. Section 1364 of the National Flood Insurance Act of 1968, as amended by Section 527 of NFIRA, provides in paragraph (b)(1) that: Each Federal entity... shall by regulation require lending institutions, in connection with the making, increasing, extending, renewing, selling, or transferring any loan described in subsection (a)(1), to notify the Director (or the designee of the Director) in writing during the term of the loan of the servicer of the loan. Such institutions shall also notify the Director (or such designee) of any changes in the servicer of the loan, not later than 60 days after the effective date of such change. [Emphasis added] The Federal Emergency Management Agency is requesting that all notices be sent to the Write Your Own company (insurance carrier issuing flood policy) or agent of record to endorse the flood policy to change the mortgagee or servicer. In order to expedite the processing, please submit the following information to the insurance company: Borrower s Full Name Flood Insurance Policy Number Property Address (including city/state) Name of Bank or Servicer Reporting the Change Name/Telephone Number of Contact Person Name and Address of New Mortgagee of Servicer Name/Telephone Number of Contact Person 2018 CUNA MORTGAGE LENDING REGULATIONS 5-15
Appendix 5 C National Flood Insurance Program (NFIP) Policy Issuance 5-98 NFIP Policy Issuance 5-98 Subject: 30-Day Waiting Period Effective Date: October 1, 1998 This Policy Issuance updates the Federal Insurance Administration s interpretations of the applicability of the 30-day waiting period to various mortgage lending and insurance underwriting situations in Policy Issuance 8-95 (December 5, 1995). This Policy Issuance supersedes Policy Issuance 8-95 and provides answers to additional questions regarding the 30-day waiting period from Write Your Own companies and insurance agents. These interpretations are intended to serve the Congressional intent for the imposition of the 30-day waiting period for the purchase of flood insurance to prevent abuse (i.e., property owners would purchase insurance only when a flood was imminent) and to facilitate lender compliance with the mandatory purchase of flood insurance. Policy Decisions 1. The 30-day waiting period will not apply when there is an existing insurance policy and an additional amount of flood insurance is required in connection with the making, increasing, extension, or renewal of a loan, such as a second mortgage, home equity loan, or refinancing. The increased amount of flood coverage will be effective as of the time of the loan closing, provided the increased amount of coverage is applied for and the presentment of additional premium is made at or prior to the loan closing. Explanation: This interpretation is consistent with a basic objective of the National Flood Insurance Reform Act of 1994 (NFIRA), namely, to facilitate lender compliance with the statutory requirements for flood insurance. The 30-day waiting period was established to prevent abuse by insureds from increasing coverage when flooding was imminent. The exemptions to the waiting period on the other hand were for loan closing situations and to facilitate lender compliance with the flood insurance purchase requirements. [Note: This policy interpretation has been retained from Policy Issuance 8-95 (December 5, 1995) and has not changed.] 2. The 30-day waiting period will not apply when an additional amount of insurance is required as a result of a map revision. The increased amount of coverage will be effective 12:01 a.m. on the first calendar day after the date the increased amount of coverage is applied for and the presentment of additional premium is made. 2018 CUNA MORTGAGE LENDING REGULATIONS 5-16
Explanation: This interpretation is also consistent with a basic objective of the NFIRA to facilitate lender compliance with the statutory requirements for flood insurance. The purchase of additional flood insurance is to comply with the statutory requirement for flood insurance in an amount equal to the outstanding principal balance of the loan for a property owner who was prudent enough to buy voluntarily flood insurance but now must increase the amount to comply with statutory requirements for flood insurance resulting from a Federal Emergency Management Agency map change. [Note: This policy interpretation has been retained from Policy Issuance 8-95 (December 5, 1995) and has not changed.] 3. The 30-day waiting period will not apply when flood insurance is required as a result of a lender determining that a loan which does not have flood insurance coverage should be protected by flood insurance as required by Section 102(e) of the Flood Disaster Protection Act of 1973, as amended by NFIRA, because the building securing a loan is located in a Special Flood Hazard Area. The coverage will be effective upon completion of an application and the presentment of payment of premium. Explanation: The interpretation is consistent with the purpose of the NFIRA to ensure compliance with the statutory requirements for flood insurance protection for property the subject of Federal or federally-related financial assistance even when the discovery is made by lender that flood insurance is required after the loan has closed. It is immaterial whether the lender s discovery of the need for flood insurance results from a scheduled mortgage loan portfolio review or a review of an individual loan file. [Note: This interpretation has been modified from that contained in Policy Issuance 8-95 to now provide that an exemption from the 30-day waiting period applies only to loans in Special Flood Hazard Areas, i.e., those loans for which the statute requires flood insurance.] 4. The 30-day waiting period does not apply when an additional amount of insurance is requested at renewal time that is no more than the amount of increase recommended by the insurer on the renewal bill to keep pace with inflation. The increased amount of coverage will be effective at 12:01 a.m. on the date of policy renewal provided the premium for the increased coverage is received before the expiration of the grace period. The 30-day waiting period applies to any additional amount of insurance requested at renewal time that is higher than any amount of increase offered on the renewal bill provided by the insurer. The beginning of the waiting period is determined by the normal rules. In the event that the insurer is unable to determine the application date and the presentment of premium, the insurer must use the premium receipt date in establishing the effective date for the increased coverage. Explanation: To permit an insured to increase flood coverage to the amount recommended by the insurer as a safeguard against inflation without the 30-day waiting period is consistent with insurance industry practices and does not create a loop- 2018 CUNA MORTGAGE LENDING REGULATIONS 5-17
hole for the kind of abuse Congress specifically wanted to prohibit with the statutory 30-day waiting period. To apply the 30-day waiting period in situations when a policyholder wants to significantly increase the amount of insurance beyond the amount recommended by the insurer to keep pace with inflation is in keeping with Congressional intent. [Note: This policy interpretation has been modified from that contained in Policy Issuance 8-95 to now provide that the 30-day waiting period applies to any additional amount of insurance requested at renewal time that is higher than any amount of increase offered on the renewal bill provided by the insurer.] 5. The waiting period does not apply to a renewal offer to the insured for the next higher limits available under PRP. Explanation: This interpretation is consistent with other interpretations in this Issuance that exempt from the 30-day waiting period modest increases in coverage that are comparable to the inflation adjustment recommended by insurers at renewal. 6. The 30-day waiting period does not apply when an insured decides to rewrite the existing policy at the time of renewal from Standard to a Preferred Risk Policy (PRP), provided that the selected PRP coverage limit amount is no higher than the next highest PRP amount above that which was carried on the Standard policy using the highest of building and contents coverage. In those cases where the Standard policy has only one kind of coverage, either building or contents only, the 30-day waiting period applies. In addition, if the structure is no longer eligible under the PRP or the insured decides to rewrite the existing PRP at renewal time to a Standard policy, the 30-day waiting period does not apply provided the coverage limit amount is no more than the previous PRP coverage amount or the next highest PRP amount above that. Explanation: The change in coverage that results from converting a Standard Policy to a PRP or from converting a PRP to a Standard Policy with the limitations set forth above results in only a modest increase of flood insurance coverage roughly equal to the amount of increase in No. 4 above. 7. Unless the contents are part of the security for a loan, the 30-day waiting period applies to the purchase of only contents coverage by a condominium unit owner at the time of the loan, i.e., where building coverage is not being purchased by the unit owner. Explanation: Since the mandatory purchase of flood insurance applies only to property real improved and/or any personal property which is securing a loan, then a condominium unit owner who exercises his or her own option to buy insurance and is not responding to a lender s mandatory purchase decision is subject to the 30-day waiting period. This interpretation is consistent with other situations where 2018 CUNA MORTGAGE LENDING REGULATIONS 5-18
an exemption to the 30-day waiting period applies only in situations to facilitate lender compliance with NFIRA 8. Provided that the application and premium are received before an anniversary date, the 30-day waiting period does not apply to a cancel/rewrite of a 3-year policy at an anniversary date to obtain Increased Cost of Compliance (ICC) coverage. Explanation: ICC coverage became effective for all new or renewal policies with effective dates on and after June 1, 1997. Those policyholders with 3-year policies without being able to cancel and rewrite in order to obtain ICC coverage would be delayed unnecessarily from obtaining coverage that Congress mandated under the NFIRA. 9. The insurer may rely on an agent s representation on the application that the loan exception applies unless there is a loss during the first 30 days of the policy period. In that case, the insurer must obtain documentation of the loan transaction, such as settlement papers, before adjusting the loss. Explanation: It would be inconsistent with the intent of Congress for the NFIP to impose burdensome and time-consuming documentation requirements for the agent during the application process, in the case of loan transactions which Congress specifically wanted to exempt from the 30-day waiting period. Requiring documentation if a loss occurs during the first 30 days, however, assures that there will be no abuse of the rule. 10. The 30-day waiting period does not apply to a reduction of the deductible effective as of the renewal date. Explanation: The amounts involved are comparable to the modest inflation adjustments recommended by the insurer at renewal. In order to provide a reasonable period of time for the insurers to comply with the new Policy Decisions (5 through 10), the effective date for Policy Decisions 5 through 10 is October 1, 1998. Updated: 9/9/1998 2018 CUNA MORTGAGE LENDING REGULATIONS 5-19
Appendix 5 D Forthcoming Changes to Flood Insurance These changes go into effect January 1, 2016. New Escrow Requirements For all loans made, increased, extended or renewed on or after January 1, 2016 secured by residential property located in a special flood hazard area, your credit union shall require all premiums and fees associated with flood insurance to be escrowed. There are a number of exceptions to this mandatory escrow requirement. They include: The loan is an extension of credit primarily for business, commercial or agricultural purposes; The loan is in a subordinate lien position to a senior lien loan that already provides flood insurance coverage on the property; Flood coverage is provided on the property by a condominium or homeowner s association; The loan is a home equity line of credit (HELOC); The loan is classified as non-performing (90 days or more past due); or The loan has a term of less than 12 months. You need to notify members of this mandatory escrow requirement by including the following additional language on your Notice of Special Flood Hazards form beginning January 1, 2016. Escrow Requirement for Residential Loans Federal law may require a lender or its servicer to escrow all premiums and fees for flood insurance that covers any residential building or mobile home securing a loan that is located in an area with special flood hazards. If your lender notifies you that an escrow account is required for your loan, then you must pay your flood insurance premiums and fees to the lender or its servicer with the same frequency as you make loan payments for the duration of your loan. Those premiums and fees will be deposited in the escrow account, which will be used to pay the flood insurance provider. For loans outstanding as of January 1st that require flood insurance, your credit union must make the option to escrow flood insurance premiums available to the member by providing the following notice. Escrow Option You have the option to escrow all premiums and fees for the payment on your flood insurance policy that covers any residential building or 2018 CUNA MORTGAGE LENDING REGULATIONS 5-20
mobile home that is located in an area with special flood hazards and that secures your loan. If you choose this option: Your payments will be deposited in an escrow account to be paid to the flood insurance provider. The escrow amount for flood insurance will be added to the regular mortgage payment that you make to your lender or its servicer. The payments you make into the escrow account will accumulate over time and the funds will be used to pay your flood insurance policy when your lender or servicer receives a notice from your flood insurance provider that the flood insurance premium is due. To choose this option, follow the instructions below. If you have any questions about the option, contact [name of credit union] at [telephone number]. Certain small lenders are exempt from the mandatory escrow requirements. If your credit union satisfies the following three-part test, neither escrow provision described above is applicable to your institution: You had total assets of less than $1 billion as of December 31st of either of the two prior calendar years; On or before July 6, 2012, you were not required under Federal or State law to escrow property taxes or homeowner s insurance premiums on loans secured by residential property; and On or before July 6, 2012, your credit union did not have a policy to escrow property taxes or homeowner s insurance on loans secured by residential property. Notice Requirements In an attempt to encourage borrowers to consider options for flood insurance outside of the National Flood Insurance Program ( NFIP ), effective January 1, 2016, your credit union must include the following language on your Notice of Special Flood Hazards: Availability of Private Flood Insurance Coverage Flood insurance coverage under the NFIP may be purchased through an insurance agent who will obtain the policy either directly through the NFIP or through an insurance company that participates in the NFIP. Flood insurance that provides the same level of coverage as a standard flood insurance policy under the NFIP may be available from private insurers that do not participate in the NFIP. You should compare the flood insurance coverage, deductibles, exclusions, conditions, and premiums associated with flood insurance policies issued on behalf of the NFIP and policies issued on behalf of private insurance companies and contact an insurance agent as to the availability, cost, and comparisons of flood insurance coverage. 2018 CUNA MORTGAGE LENDING REGULATIONS 5-21