Flood Insurance- Biggert Waters May Bring Some Big Changes

The passage of the Biggert Waters Act ("BWA") will bring some changes to the overall administration of loans in a flood zone for all banks.  However, for Banks with a sound compliance program for flood insurance the changes should be absorbed easily.  While some of the changes will be implemented through regulations, other changes are effective immediately.  In our opinion, the best approach is to start to address all of the changes immediately.

Force Placed Insurance Changes Required  by the Act

The FDPA has always required that when lenders determine that insurance is either inadequate or about to expire, borrowers must be notified immediately.  The lender is also required to force place insurance on the borrowers property if the borrowers fails to purchase the required insurance with 45 days after receiving notice.   One of the new provisions in the regulation addresses one of the areas of confusion that was part of this process.  Under the new provisions of the Act, the lender can charge fees that cover the complete time period from when the insurance lapsed or was deemed insufficient.   In other words, the fees that Banks can charge can go all the way back to the date that the insurance expired or was found to be inadequate. 

A second provision of the Act deals with lenders responsibility upon receiving notice that the borrower has purchased their own insurance.  Banks are directed  that they have 30 days to terminate a forced placed policy and refund fees for insurance that overlaps with the borrowers insurance.   

The changes to the Act also help to clear up another area that had caused some confusion; the documentation that the lender can use to prove that  insurance is in force.  According to the Act a declarations  page that has the insurance policy number as well as contact information for the insurance agent will be sufficient.    In the past, many regulators were requiring an actual binder before Banks could satisfy the documentation requirements.  

It is worth noting that these changes take place without the need for further regulations.  

Civil Money Penalties

In the past, one of the least scary parts of the flood insurance compliance was the fact that the civil money penalties that could be assessed were, quite frankly, very small.   This slap-on-the-wrist benefit has significantly been changed.  Individual penalties for violations can now be as large as $2,000 and the penalty cap per year has been removed.  In the unfortunate situation where examiners find a pattern and practice of violations, then civil money penalties can now become quite high!    

This section of the law will become active without  further regulations. 

Private Flood Insurance

One area of significant change is that Banks are now directed to accept private flood insurance  to meet the requirements of the regulation.  This is not to say that the insurance has to be private, but if the basic requirements of the Act are met, then private insurance can and should be accepted.  As a part of this provision, Banks will be expected to provide a notice to borrowers that will include  at least the following information:

·         That flood insurance is available from both private insurers and from the NFIP directly;

·         Flood Insurance that provides the same level of coverage as the NFIP is available privately:

·         Borrowers should shop around for the best deal

The best news here is that these provisions will not be effective until final regulations have been implemented.  However, proposed regulations have been submitted for public comment and there is nothing in the proposed regulations that appears to change the notification requirements.  

Escrow Requirements

One of the areas of largest departure from the past is a requirement that Banks establish an escrow account for payment of flood insurance for improved reals estate loans when the improvements are in a flood area.   These requirements will apply to all Banks that are larger than $1 billion in assets as of July 6, 2014. 

Managing Change

For our clients that already have a sound system for administering the flood insurance portfolio, these changes should create very little consternation.  The notice requirements for force-placed insurance should already be in place be a part of the ongoing practice of administering these loans.  However, now would be an excellent time to review your current policies and procedures to make sure that they do in fact detail what should be done when staff discover that insurance is either insufficient, or will soon expire.   

Now is also a great time to review the process for following up when a customer notifies the Bank that they did in fact obtain satisfactory insurance.  It appears that the new provisions of the BWA will create some liability for banks that do not respond by canceling forced placed insurance and refunding any money for overlapping coverage.   The systems in place must help the Bank respond quickly and accurately.  

We note that while final regulations are now being proposed, both the civil money penalty and forced placed provisions of the Act are considered self- enacting.