Flood Insurance 2002 - Total Training Solutionsttsmedia.ttstrain.com/FloodInsCmp042315.pdfRegulations: 61 FR 45684 (August 29, 1996) – NOT transferred to CFPB • 12 CFR 22 (OCC);

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0 of 72 Flood Insurance

Carl Pry

April 23, 2015

A TTS Production

Flood Insurance Compliance Issues and

Enforcement Topics that

Continue to Plague Lenders

Carl Pry

April 23, 2015


Carl Pry

April 23, 2015 Biggert-Waters

Biggert-Waters Flood Insurance Reform Act of 2012

Part of Transportation Bill, H.R. 4348; July 6, 2012 (Pub. L. 112-141)

When was/is it effective?

• Interagency Statement 3/29/13: force placement and civil money penalty provisions became

effective upon enactment

Reauthorized NFIP through September 2017

Increased CMPs to $2,000 per violation for failure to:

1. Require flood insurance

2. Provide notice of special flood hazards

3. Force place required flood insurance

4. Escrow flood insurance (required escrow accounts)

5. Provide notice to applicable servicer upon transfer

6. Accept comparable private policy in lieu of NFIP policy

Page 2


Carl Pry

April 23, 2015 Affordability Act

Homeowner Flood Insurance Affordability Act of

2014

H.R. 3370

Addressed negative consequences resulting from

Biggert-Waters, including dramatic increases in

premiums and requirements for escrows

Mandates FEMA make available a high-deductible

policy for residential properties

• Increases maximum loss deductible for damages to covered

properties from $5,000 to $10,000


Carl Pry


Guidance? Regulations?

“The Administrator [meaning FEMA] shall issue final

guidance and rate tables necessary to implement the

provisions of and the amendments made by this Act not

later than eight months following the date of the

enactment of this Act”

• No such guidance yet; regulators waiting as well

GAO Report (14-297R)

• FEMA still must address provisions in Biggert-Waters and

Affordability Act that affect many aspects of NFIP, including

its finances, rate setting, and participation

Page 3


Carl Pry


Flood insurance premium issues

addressed by FEMA in Bulletin

W-1401

http://www.nfipiservice.com/Stakeholder/pd

f/bulletin/w-14011.pdf

Overview found beginning on

page 3

Refunds

Premium rates

New surcharges on all policies

Grandfathering

Mapping


Carl Pry

April 23, 2015 Escrow Requirements

Most escrow requirements were scheduled to take effect July 6, 2014

(Biggert-Waters) – delayed to January 1, 2016

Would have applied on that date

Timing requirements have changed

Exemptions from escrow requirement (not flood insurance

requirement)

Junior liens (subordinate to senior lien secured by same residential real

property where flood insurance is already being provided)

Business purpose loans secured by residential real estate

HELOCs

Nonperforming loans

Loans with terms 12 months or less

Condos/co-ops if the property is covered by flood insurance paid for by the

condo association, co-op, homeowners association, or similar group

http://www.nfipiservice.com/Stakeholder/pdf/bulletin/w-14011.pdf





Page 4


Carl Pry

April 23, 2015 Escrow Requirements

Interagency proposal issued October 24, 2014:

Applies to any loan originated, refinanced, increased, extended, or renewed on

or after January 1, 2016

• Residential real estate as collateral

Institutions with assets < $1 billion do not have to escrow if they do not have a

policy of escrowing for such items

• Unless the loan is an HPML under Reg. Z

• However: each Agency shall create regulations requiring all institutions to make

available the option to escrow for flood insurance premiums in accordance with

escrow requirements of RESPA for:

– Exempt institutions (asset thresholds)

– Any loan made prior to January 1, 2016 where flood insurance is required

Institutions with assets < $1 billion and have a consistent escrow policy; and

those with assets $1 billion and over

• Required to escrow for flood insurance


Carl Pry

April 23, 2015 NFIA and Regulations

Why do we have these rules?

Who are we protecting here?

• Protecting the Federal Government from disaster relief payments

• Not protecting your borrowers, although there is an obvious benefit to them

National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of

1973 introduced the requirements (42 USC 4001 et. seq.)

Regulations

Mandated by the National Flood Reform Act (Part V of the Riegle Community

Development and Regulatory Improvement Act) of 1994

Regulations: 61 FR 45684 (August 29, 1996) – NOT transferred to CFPB

• 12 CFR 22 (OCC); 208 (FRB – in Reg. H); 339 (FDIC); 760 (NCUA)

Each version is virtually identical – all following the same requirements

Regulatory expectations beyond statutory and regulatory requirements

Page 5


Carl Pry

April 23, 2015 Flood Handbook Withdrawn

FEMA’s Mandatory Purchase of Flood Insurance Guidelines

booklet was removed from its website Feb. 5, 2013


Carl Pry

April 23, 2015 Coverage

What loans are covered?

Any loan secured by improved real estate or insurable mobile

home

• Collateral-dependent, not purpose-dependent

– Includes “abundance of caution” or personal guarantees

• You can “carve out” a building from your security interest, but you should

“fully analyze the risks of this option”

What is improved real estate?

“Improved” means an insurable building (most any type)

What makes it insurable?

• 2 load-bearing walls and a roof

• More than 50% of the building’s value is above ground

Certain buildings are not insurable

• Buildings built completely over water, such as boathouses

Page 6


Carl Pry

April 23, 2015 Manufactured Homes

Manufactured Housing is also known as “factory-built housing”

One-family dwelling unit

Having characteristics of site-built housing

Legally classified as real property

Built on a permanent chassis

Built and installed under the Federal Manufactured Home Construction and Safety

Standards (HUD Code) – 24 CFR 3280.2

• The “housing must be essentially ready for occupancy upon leaving the factory and being

transported to a building site”

• A red HUD tag with a stamped serial number may be attached to the home guaranteeing that the

home was built to conform to HUD’s code

Also may be called “factory-built housing,” which is:

Modular, panelized, or prefabricated

Factory Built homes may display a blue Building Officials and Code Administrators

(BOCA) tag, which means the home was built to local zoning requirements


Carl Pry

April 23, 2015 Manufactured Home Insurability

What manufactured homes are covered?

The home must fulfill 3 conditions to be insurable:

1. Sits on a permanent foundation – can you tow it away?

2. Complies with any applicable community tie-down regulations,

AND

3. Connected to utilities – electric, gas, sewer, etc.

If any of these 3 are not met, no insurance needed (even if in a

flood zone)

• No determination necessary, either

Tied

Down?

Connected

to Utilities? Insurable

Permanent

Foundation?

Manufactured

Home Test:

Page 7


Carl Pry

April 23, 2015 Manufactured Home Insurability

Doesn’t matter whether the land is owned or rented

Flood insurance protects structures, not land

Also doesn’t matter whether the land secures the loan or

not

• Note this is the opposite of the RESPA applicability standard

What if you don’t know where it will be located

before the loan closes? When should we do the

determination and send a notice?

“as soon as practicable…and, if possible, before

completion of the loan transaction”


Carl Pry

April 23, 2015

Each unit is separately insurable

Doesn’t matter what floor the unit is on – all

are considered equally

• Common interest in the entirety

• Losses are shared equally

RCBAP

If the building is 75% of more residential,

condo association may purchase a RCBAP

• If not eligible (nonresidential), General

Property Form policy is used

• Dwelling policy available for individual units

Each unit is insurable to $250,000 in a

residential condo; $500,000 for each

commercial condo building

Declarations page of a RCBAP must show

the building’s RCV and number of units in

each building (as of 10/1/07)

Condominiums

Page 8


Carl Pry

April 23, 2015 Construction Loans

The statute does not directly address this situation

But is a covered loan (Q20) and insurance is available (Q21)

Insurability of the structure begins once construction rises

above the ground above the BFE (in an ‘A’ or ‘V’ zone)

Materials to be used in the construction, but yet to be walled and

roofed, are eligible for coverage (not required, though)

“While an NFIP policy may be purchased prior to the start of

construction, as a practical matter, coverage under an NFIP policy

is not effective until actual construction commences or when

materials or supplies intended for use in such construction,

alteration, or repair are contained in an enclosed building on the

premises or adjacent to the premises” (Q21)


Carl Pry

April 23, 2015 Construction Loans: What to Do

1. Get determination before construction begins

Don’t avoid getting a determination until later; i.e. after the loan closes

If the finished building will be in a SFHA, provide the notice before the loan

closes

2. Options: secure the policy before closing the loan (if possible) or

“allow a borrower to defer the purchase of flood insurance until either

a foundation slab has been poured and/or an elevation certificate has

been issued” (Q22)

“However, the lender must require the borrower to have flood insurance in

place before the lender disburses funds to pay for building construction” (Q22)

• Have internal controls to ensure this

• Gap or blanket policies are generally not acceptable here

Require purchase at the time of a specified drawdown of the loan for actual

construction

Page 9


Carl Pry

April 23, 2015 When is a Determination Required?

In certain instances, you must determine the flood zone where the

structure is located What loans? Again, when you have a loan secured by improved real estate or

an insurable mobile home

When must a determination be done? Events (MIRE):

Doesn’t matter what you call it – is it effectively one of these events,

i.e. refis, workouts, restructures, etc.?

Make (originate) a loan

Increase an existing loan

Renew an existing loan

Extend an existing loan

Flood determination required – triggering

events Adding to a loan you made previously (more time or $)


Carl Pry

April 23, 2015 Determinations: Knowledge is King

The flood insurance rules revolve around knowledge that

structure lies in a flood zone

Making, increasing, renewing, or extending a covered loan are

the only 4 events where you must obtain knowledge of a

structure’s flood status

• Note that a loan purchase is NOT one of the four

– You don’t have to do a new determination upon purchasing a loan (due

diligence, though)

You are always free to determine the flood zone status of a

property at any other time, but you must then live with the results

• If you know you have a building securing a loan in a SFHA, you must

obtain insurance

Page 10


Carl Pry

April 23, 2015 Determinations

Who can perform the determination?

Determining flood zone status means locating the property’s

location on a FIRM (Flood Insurance Rate Map) or FHBM

(Flood Hazard Boundary Map) issued by FEMA

• A FHBM is preliminary, with limited flood risk information; is replaced by

a FIRM

You may always do the determination yourself

If it is done by a third party, that third party must guarantee its

accuracy

• This is commonly done by insurance companies or flood insurance

specialists, but be careful about having appraisers do them


Carl Pry

April 23, 2015 Exceptions

Exception from the rules means no determination is necessary

State-owned property that is self-insured

Original loan amount is $5,000 or less AND term of 1 year or less

• This is not a home-stretch exemption/cancellation

If a manufactured home does not meet conditions for insurability, no company

would issue a policy

Exceptions from insurability – do the determination, provide a

notice (if in SFHA), but insurance is not required

The community does not participate in the NFIP

Structures located in Coastal Barrier Resources Act of 1982 (CBRA) areas

• NFIP insurance is unavailable on new buildings built in these areas – as of the later

of 1982 or when the area was designated as a CBRA3

Page 11


Carl Pry

April 23, 2015 Flood Insurance Maps and Zones

Examples of flood insurance rate maps (FIRMs)

Available from vendors or from FEMA’s Map Service Center directly: 800-358-9616, online at http://msc.fema.gov


Carl Pry

April 23, 2015 Flood Insurance Maps and Zones

Flood zones are marked on the map

There are over 100 different zone designations

“A” or “V” ( for wave velocity risk) are high risk

“X”: shaded for moderate risk, or unshaded for low risk

• “B” (moderate risk) and “C” (low risk) appear on older maps

“D” means not evaluated for flood yet, but flooding risk is

possible; “M” indicates mudflow risk; “E” indicates erosion risk

(not listed on maps, though)

• Even though insurance is not required in these areas, take the risk into

account (25 % of NFIP claims are for buildings located in low-risk areas)

Changes (compendiums) periodically published in the

Federal Register

http://msc.fema.gov/

Page 12


Carl Pry

April 23, 2015 Other Zones

CBRS and OPAs

CBRS: Coastal Barrier Resources System

• From the Coastal Barrier Resources Act of 1982 (CBRA), which was passed

to discourage development on undeveloped coastal barrier areas

• CBRS areas (also known as CBRAs) are mainly along East and Gulf Coasts

and along Great Lakes

OPA: Other Protected Area

• Environmentally protected, for example

Both are identified on FIRMs (diagonal lines)

Coverage for buildings in OPAs and CBRAs is only available

upon certain conditions (permits, building built before certain date

depending on the program)


Carl Pry


Mapping

Coordinate with Technical Mapping Advisory Council,

establish ongoing program where Administrator will

review, update, and maintain NFIP rate maps

Biggert-Waters and amendments mandated certain

improvements in this area

Communities making progress on improvements

Will be eligible for flood insurance; premiums will be

same as if improvements were complete

Page 13


Carl Pry

April 23, 2015 Community Status Book

FEMA publication lists cities and counties within a

specific state

Identifies the community panel number, latest map

available for the community, and whether the

community is participating in the NFIP.

May be obtained from FEMA at 800-358-9616 or on

FEMA’s website

Use these to see if maps have changed at all

If the map date has changed, you can’t use it


Carl Pry

April 23, 2015 Required Insurance

If the determination shows the structure is located

in a Special Flood Hazard Area (SFHA), insurance

is required

Zones beginning with “A” (flood risk) or “V” (wave

velocity risk) are SFHAs

• A1-30 and V1-30 on older maps; AE and VE on newer maps

• This means in any one year, there is a 1% (or better) chance of

flooding

• Over a 30-year period, the area has a 26% chance of flooding

Page 14


Carl Pry


RESPA notice

Notification of flood insurance and availability of flood insurance

under NFIP or private insurance company

• Whether or not RE is located in SFHA

• CFPB has not issued any change to RESPA to implement this requirement

yet

Policy disclosure

Each policy must state all conditions, exclusions and other

limitations on flood insurance coverage in plain English,

boldface type and in font size twice that of

policy body


Carl Pry

April 23, 2015 Determination Challenges

“You read the map wrong – it really is not in a

SFHA”

The maps are hard to read, especially online

You can get a final determination from FEMA: Letter of

Determination Review (LODR)

• Must be done within 45 days of the borrower being

notified that insurance is required

• Costs $80; results returned within 45 days

• In the meantime, require insurance

Page 15


Carl Pry


What about documentation

suggesting the property is not likely

to flood?

Such as an engineer’s certification,

elevation certificate, or others

Answer: FEMA’s maps are the final

word

• FEMA guidelines of 7/13/89,

reprinted in 1999 and 2007

Guidelines (pg. 17)

• Yes, the booklet was revoked but

this is still the final word

Nevertheless, until the map is physically amended or revised, lenders are bound by the information shown on FEMA maps unless a LOMA has been issued by FEMA for the building. Lenders may not close a loan on the basis of a guarantee or indemnification from a flood vendor or other third party as a substitute for a LOMA.


Carl Pry


What if the property really is not likely to flood?

FEMA must change the map through a LOMC: Letter of Map Change

Letter of Map Amendment (LOMA) reflects natural elevations above the BFE

• Could also be from inadvertent errors

• Nationwide remapping effort to eliminate these errors (Map Mod Project)

Letter of Map Revision (LOMR) reflects man-made changes that raise the site

above the BFE (Base Flood Elevation)

• Also may see LOMR-F (Letter of Map Amendment Based on Fill)

• Must be approved by the community

• If the building’s bottom floor has merely been raised above the BFE, insurance is still

required, although at a lower rate

FEMA’s “Scientific Resolution Panel” (SRL) provides independent technical

experts to resolve flood hazard data

“A lender may never waive the flood insurance requirement…”

Page 16


Carl Pry

April 23, 2015 Relying on a Previous Determination

Must we do a new determination every time we make a covered loan?

“A previous determination may not be reused when making a new loan”

However, when it is a junior lien loan from the first mortgagee and the purchase

requirements had been met for the first mortgage (i.e. adequate insurance, if required) and

there has been no remapping:

• “Assuming the requirements…are met and the same lender made the first mortgage, then a new

determination may not be necessary, when the existing determination is not more than seven

years old, there have been no map changes, and the determination was recorded on an SFHDF”

• “If, however, a lender other than the one that made the first mortgage loan is making the junior

lien loan, a new determination would be required because this lender would be deemed to be

‘‘making’’ a new loan” (Q37)





Adding to a loan you made previously (more time or $)

For a second mortgage or home equity loan, you may rely on a

previous determination ONLY if you performed the original

determination; otherwise perform a new determination


Carl Pry


Must we do a new determination every time we change an

existing loan?

Life of loan coverage is not a substitute for a new determination (or

proper reliance)

If relying on previous determination that showed property is

in a SFHA, must provide a new notice – cannot rely on

previous notice





Adding to a loan you made previously (more time or $)

You MAY rely on a previous determination that you procured

Page 17


Carl Pry


If you add to an existing loan, you can rely upon a previous

determination (that you procured – cannot rely on someone else’s

determination) if 3 conditions are met (Q68):

1.The previous determination is less than 7 years old

• This does not mean you have to re-determine every 7 years (is not a shelf-life issue)

2.The determination you are relying upon must be recorded on the SFHDF (1/2/96)

3.The flood zone hasn’t changed since the time of the original determination

• If a change results in the property now being in either an A or V zone, insurance is

required

• If the map has changed and the property is now in some other zone (other than “A” or

“V”), insurance is not required, but you can’t rely on the old determination – get a new

one


Carl Pry

April 23, 2015 Flood Zone Discrepancies

If policy is written for a different zone than shown on the

determination, is it a violation?

As long as proper coverage is in place, shouldn’t it be a

risk/review issue?

What exactly is a discrepancy?

• “A lender should only be concerned about a discrepancy on the Standard

Flood Hazard Determination Form (the SFHDF) and the one on the flood

insurance policy if the discrepancy is between a high-risk zone (A or V) and

a low- or moderate-risk zone (B, C, D, or X). In other words, a lender need

not be concerned about subcategory differences between flood zones on

these two documents” (Q71)

• However, should “systematically compare” the designations

Page 18


Carl Pry


Duty to check for discrepancies

FDIC-FIL-114-2007:

• “It is important for institutions…to have internal

controls in place to verify that borrowers are

maintaining adequate flood insurance coverage for the

life of the loan. Such controls include: Checking flood

insurance policies to confirm that they were written for

the risk zone noted in the flood determination and, if

not, resolving the difference”


Carl Pry


Dealing with differences

Is it from a mistake? Re-check the determination

NFIP’s “Grandfather Rule” allows reliance on determination

originally issued before changes were made to the FIRM

• “Continued use of a rating on an insured property when the initial flood

insurance policy was issued prior to changes in the hazard rating for the

particular flood zone where the property is located” (Q71)

– Substantiate (document) the findings

Preferred Risk Policy (PRP)

• Available at reduced rate, allowed to continue paying at lower

premium

• Make sure the policy has continued – no lapses or gaps in coverage

Page 19


Carl Pry


If can’t resolve with the insurance

company: (Q71)

“Lender should notify the insurance

agent about the insurer’s duty

pursuant to FEMA’s letter of April

16, 2008 (W–08021), to write a flood

insurance policy that covers the most

hazardous flood zone. When

providing this notification, the lender

should include its zone information

and it should also notify the insurance

company itself.”

“The lender should substantiate these

communications in its loan file”


Carl Pry

April 23, 2015 Participation in the NFIP

For flood insurance to be required, the community must

participate in the National Flood Insurance Program (NFIP)

20,000+ communities identified; over 95% participate in the program

• NFIP Community Status Book (CSB) lists status of participating and non-

participating, Emergency Program, and suspended communities (available online)

• OCC Bulletin 2008-4: CSB not being used by some determination providers, relying

on FEMA’s Flood Map Status Information Service (FMSIS), which may not always

be current

Participation means the community enters into an agreement with FEMA to

take steps to reduce flooding risks

• In return, NFIP (federal) flood insurance policies are available

If there are no maps, you know the community does not participate

• Some non-participating communities have maps, though

Page 20


Carl Pry

April 23, 2015 Participation in the NFIP

What if the community does not participate?

No flood insurance is required by regulation (regardless of what

flood zone the property is in), though you are always free to

require it of your borrower

• This is a risk decision

You must still do the determination, complete the SFHDF, and

give notice if the building is in a SFHA

No Federal government-guaranteed loans (FHA, VA, or SBA)

loans can be made (if the building is in a SFHA)

• Fannie and Freddie follow this requirement, as well


Carl Pry

April 23, 2015 SFHDF

Must be completed for every loan

No need for any signature, initials, etc.

Don’t need to provide a copy

Retain copy in loan file for as long as

you own the loan

New FEMA flood form; not “officially

issued”

There is a 3-year transition period for the

new form, so you don’t have to use new

form until May 2015 (??)

Changed B3 (LOMA/LOMR Number)

Didn’t change instructions

Page 21


Carl Pry

April 23, 2015

A notice be given to the borrower if

the structure is located in a SFHA

Don’t need to provide a notice if property

is not located in a SFHA

You must provide the notice even if the

community does not participate in the

NFIP (if the structure is in a SFHA)

Need be provided only to one borrower

This must be provided in writing a

reasonable time before closing

Loosely defined as 10 days

A shorter time is OK if the borrower

understands the responsibilities

It must be acknowledged (signed,

initialed, etc.) by the borrower

Retain for as long as you own the loan

Notice of Special Flood Hazards

Recommended language of the notice is found in Appendix A of each version of the regulation


Carl Pry

April 23, 2015

What must be kept in the loan file?

1. SFHDF (Determination form) – in all cases

2. Notice of Special Flood Hazards – only if in a SFHA

3. Evidence of insurance (if required)

• This may be a copy of application and premium payment, or copy of the

declarations page of the policy (not binder or certificate of insurance)

• Acord forms? Depends on regulator

30-day wait requirement for policies?

Policies generally are effective beginning 30 days after issuance

However, they are effective immediately if issued due to a legal

requirement to have flood insurance

Evidence of Compliance

Page 22


Carl Pry

April 23, 2015

Standard Flood Insurance Policies

(SFIP)

General Property Form, Dwelling Form,

RCBAP

May be underwritten by private insurance

carriers to NFIP standards (Write-Your-

Own, or WYO, companies)

Older “Preferred Risk Policies” (PRPs)

may still be out there (eligibility extended

through 2012)

• Low-cost coverage in NFIP regular

communities

Flood Insurance Policies


Carl Pry


Private flood insurance

Purchase of private flood insurance instead of NFIP policy will meet

mandatory purchase requirement (Biggert-Waters)

Lenders must provide a notice to borrowers about private flood insurance

Force-placed insurance termination and refund

Lender or servicer must accept borrower’s insurance policy declarations page

that includes flood policy number and insurance company or agent and contact

number

Within 30 days of receipt by lender or servicer of confirmation of borrower’s

existing coverage, lender or servicer must:

• Terminate any force-placed insurance

• Refund all force-placed insurance premiums and fees charged to the borrower

during any overlap

Page 23


Carl Pry

April 23, 2015

Private flood insurance policies and FEMA requirements – obsolete?

Mandatory Purchase of Flood Insurance Guidelines (p. 58) required 6 elements

of compliance for all private flood insurance policies:

1. Licensure

2. Surplus Lines Recognition (Non-Residential Commercial)

3. Required 45-Day Notice of Cancellation/Non-Renewal Notice

4. Breadth of Policy Coverage

5. Strength of Mortgage Interest Clause

6. Legal Recourse

Mandatory Purchase Guidelines have been revoked – Biggert-Waters rendered

moot?

Most “gap” or “blanket” policies that cover multiple risks don’t cover

all 6 elements for flood

NFIP vs. Private Policies


Carl Pry

April 23, 2015 Biggert-Waters and Premiums

Note some of these delayed by Affordability Act

Actuarial rates to be phased in over a 4-year period for following

properties built prior to 1975 (rates will increase 25% per year until

premiums reaches actuarial rate)

Second Homes

Severe repetitive loss properties

Damage exceeds 50% of FMV

Commercial buildings

For all other properties, 20% increase per year (5 years) until full

actuarial rate is reached

Subsidies are prohibited for properties not previously insured by

NFIP or lapsed policies

Increases annual cap on premium rate increases from 10% to 20%

Except for properties covered under the subsidy phase out

Page 24


Carl Pry

April 23, 2015 Amount of Coverage

All-or-nothing: if any part of a building is located in a SFHA, it’s all in

“Partial coverage” only for part in the SFHA is not permitted

Minimum amount required is the least of the following 3 values:

1. The “insurable value” of the structure (improvements) – generally 100% RCV,

including foundation and supporting structures

• This equals the overall value of property minus the value of land

– Low value buildings on high-value land? Doesn’t matter – insure the building(s)

– What if the value of the land is more than the loan amount? Doesn’t matter

2. The outstanding principal balance of the loan(s)

3. The maximum available under the NFIP (per structure, NOT per loan)

• $250,000 PER residential structure*, $500,000 PER commercial structure*

– Be careful of multiple buildings securing a loan

You may always require more, at your option (up to loan amount)

• Risk management decision


Carl Pry

April 23, 2015 Amount of Coverage

Minimum amount required is the least of the following:

1. Insurable value of improvements

2. Outstanding principal balance of the loan(s)

3. Maximum available under the NFIP per structure

Check to ensure senior liens are also covered – may have to “cure this

deficiency”

“additional flood insurance coverage be added … in the amount of … the

combined total outstanding principal balance of the first and second loan” (Q36)

“The lender on the second mortgage cannot comply … by requiring flood

insurance only in the amount of the outstanding principal balance of the second

mortgage without regard to the amount of flood insurance coverage on a first

mortgage” (Q36)

Examples:

Page 25


Carl Pry


* Multi-family structures

5 or more units eligible for flood insurance under

NFIP

Coverage limited to $500,000 per structure

• New coverage limits available for new policies,

policy renewals, or existing policies with change

endorsements that are effective on or after June 1,

2014


Carl Pry

April 23, 2015 What is “Insurable Value”?

“Insurable value”: Q9 (76 FR 64175,

10/17/11)

“Lenders should avoid creating a

situation in which the insured pays

for more coverage than the NFIP

would pay in the event of a loss.”

Problem: “nonresidential properties,

and even some residential properties,

where the insurance loss payout

would normally be based on actual

cash value, which is RCV less

physical depreciation”

Page 26


Carl Pry

April 23, 2015 Insurable Value

Replacement Cost Value (RCV)

Cost to replace property with the same kind of material and

construction without deduction for depreciation

Again, lenders should avoid creating a situation in which the

insured pays for more coverage than NFIP would pay in the event

of a loss

• For nonresidential properties (and some residential properties) where loss

payout would normally be based on ACV (RCV less physical depreciation),

insurance policies written at RCV may require an insured to pay for

coverage that exceeds the amount NFIP would pay

• “it is reasonable for lenders, in determining the amount of flood insurance

required, to consider the extent of recovery allowed under the NFIP policy

for the type of property being insured”


Carl Pry


For ranching, farming, and industrial buildings, insurable

value may be determined by functional building cost value

or demolition/ removal cost value

Functional Building Cost Value:

• Cost to repair or replace a building with commonly used, less costly

construction materials and methods that are functionally equivalent

Demolition/Removal Cost Value:

• Lender may calculate insurable value as the demolition/removal cost value,

which is cost to demolish the remaining structure and remove the debris

• May be used when a building is not important to the ongoing nature of the

business and as such would not be replaced if damaged or destroyed by a

flood

Page 27


Carl Pry

April 23, 2015 Policy Payouts

NFIP policy depends on type of building

Determines payout – lenders should require only what will be

paid out

General property policy

Always pays cash value

Dwelling policy

May pay replacement cost value but only if:

• It was the primary dwelling (80% of previous year)

• It was “fully insured” (80% insurance to value)

• Single unit dwelling

…otherwise it only pays ACV


Carl Pry


Alternatives: lenders “may choose from a variety of approaches or

methods to establish the insurable value. They may use an appraisal

based on a cost-value (not market-value) approach, a construction-

cost calculation, the insurable value used in a hazard insurance

policy…, or any other reasonable approach, so long as it can be

supported.”

Hazard insurance: most policies don’t cover foundations

Below-grade things necessary to run the above-ground house are covered, but

not extra things (rooms, carpet, etc.)

Key word is “supported”; make sure the conclusion is properly

documented

If flood insurance equals hazard insurance, you’re probably good to go, but

have documentation

Page 28


Carl Pry

April 23, 2015 Multiple Buildings

What if more than one building secures

the loan? Steps:

1. Complete a determination for each building

• Separate SFHDF or reference each building

on same form if part of the same property

2. All the individual amounts together

• Total need not exceed loan amount or max

available under NFIP

3. Allocate coverage among those buildings

located in a SFHA

• Can be varying amounts, but at least some

coverage is required for each building that is

in a SFHA

4. A separate policy is required for each

building requiring coverage

$80,000 Value

$80,000 Value

$80,000 Value

Loan Amount = $150,000

How to Allocate Coverage? (assume all in SFHA)

Coverage: $80,000 $70,000 $0

No Good

Coverage: or: or:

$50,000 $80,000

$100,000

$50,000 $50,000 $40,000

OK

$50,000 $20,000 $10,000

* Or any other allocation where all 3 structures are covered by some amount of insurance


Carl Pry

April 23, 2015 Scheduled Building Policy

Available to cover 2 to 10 buildings

Requires specific amount of insurance to be

designated for each building

All buildings must have the same ownership and

the same location

Properties on which the buildings are located

must be contiguous

Page 29


Carl Pry

April 23, 2015 Detached Garages

Previous “Appurtenant Structures” guidance

“The only appurtenant structure covered by the SFIP is a detached garage at

the described location, which is covered under the Dwelling Form. Coverage is

limited to no more than 10 percent of the limit of liability on the dwelling. Use

of this insurance is at the policyholder's option but reduces the building limit of

liability.”

• Automatically covers the detached garage; the policy doesn’t need to name it

• Actually has to be a garage, however – not for a residence, business, or farming

“Total payment for flood damage to the detached garage and the house

together cannot exceed the building policy limit”

“Garage can only be used for parking and storage. Any other use would void

this coverage; for example, if the garage has a workshop, the coverage would

not apply”


Carl Pry

April 23, 2015 Detached Structures

New (Affordability Act) guidance

Effective 3/24/14 (interagency proposal 10/23/14)

Flood insurance not required, in the case of any residential property, for any

structure that is a part of such property but is detached from the primary

residential structure of such property and does not serve as a residence

• Questions: what is “residential property”? What is “not serve as a residence”?

However, note RESPA disclosure requirement:

“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 to not maintain flood insurance on a structure, and it floods, you are

responsible for all flood losses relating to that structure.”

Page 30


Carl Pry

April 23, 2015

Is 80% or 100% RCV adequate for the RCBAP?

Insurable value = RCV of building / number of units

• As of 10/1/07, NFIP requires insurance agents to document the RCV on the

declarations page of new or renewed RCBAP

– “Lenders may rely on the replacement cost value and number of units on the RCBAP

declaration page in determining insurable value unless they have reason to believe that such

amounts clearly conflict with other available information” (Q28)

100% RCV (replacement cost value) required in Q&As

• FEMA: “The RCBAP, insured to its full replacement cost value (RCV) to the extent

possible under the NFIP, is the correct way to insure a residential condominium

building against flood loss”

• Q28: “Ensure the condominium owners association has purchased…RCBAP covering

(replacement cost) of the building” or “obtain a dwelling policy if…the RCBAP

coverage is less than 100 percent of the replacement cost value of the building”

Condominium Coverage


Carl Pry

April 23, 2015

Where did 80% come from?

Q24 as previously constituted suggested it was adequate

• “to meet federal flood insurance requirements, an RCBAP should be purchased in an

amount of at least 80 percent of the replacement value of the building…”

• But statute doesn’t suggest what is enough

To avoid a coinsurance penalty, policy must cover at least 80%

of the building’s replacement value

Coinsurance penalty results when a loss settlement does not fully cover the

amount of the loss due to a reduction for inadequate insurance coverage

A. Divide the actual amount of insurance by 80% of RCV or max available, whichever

is less

B. Multiply the amount of loss (before deductible) by A

C. Subtract deductible from B

• Policy will pay the amount in C or amount carried, whichever is less


Page 31


Carl Pry

April 23, 2015 Condominium Coverage

From Q28: Situation 1 Situation 2 Situation 3

RCV of building $250,000

80% of RCV 200,000

Amount of loss 150,000

Deductible 500

Insurance carried 180,000

(72% RCV)

200,000

(80% RCV)

250,000

(100% RCV)

Step A: Ins/80% .90 1.00 1.25

Step B: Loss * A 135,000 150,000 187,500

Step C: B - Deductible 134,500 149,500 187,000

Amount of Loss not covered 15,500 500 0

Coinsurance Penalty? Yes No No

In compliance? No No Yes


Carl Pry

April 23, 2015

If the RCBAP is 80% and unit coverage is still not

enough to cover the minimum amount of insurance

required, additional coverage is required

Supplemented by standard NFIP Dwelling Policy to

cover the shortfall

“The guidance in this question and answer will

apply to any loan that is made, increased, extended,

or renewed after the effective date of this revised

guidance” (9/21/09) – Q29


Page 32


Carl Pry

April 23, 2015 Biggert-Waters Deductible Changes

Pre-FIRM

$1,500 if flood insurance $100,000 or less

$2,000 if flood insurance more than $100,000

Post-FIRM

$1,000 if flood insurance $100,000 or less

$1,250 if flood insurance more than $100,000


Carl Pry

April 23, 2015 Deductible Standards

Lender generally sets the deductible – “business

judgment prerogative”

Not in law or regulation

Fannie and Freddie have standards, as well

Q17: “A lender may not allow the borrower to use

a deductible amount equal to the insurable value of

the property to avoid the mandatory purchase

requirement for flood insurance”

Page 33


Carl Pry

April 23, 2015 Contents Coverage

Must buildings’ contents be insured too?

Yes, if:

1. The contents are taken as collateral

2. The building in which they sit is taken as collateral

3. The building is located in a SFHA (and must also be covered, of course)

Coverage amount: do the same analysis as for buildings – least of:

• FMV of contents (+ RCV of building)

• Outstanding principal balance of loan, or

• Contents maximum available

– $100,000 for residential contents; $500,000 for commercial


Carl Pry

April 23, 2015 Commercial Contents Coverage

Loans secured by equipment but not improved real estate

If a loan is secured only by the equipment (and nothing else), no flood

insurance needed

• Regardless of flood zone of the building (don’t have to obtain determination)

If a loan is cross-collateralized with improved real estate (located in

an flood zone) and the equipment will be housed in the structure(s)

Flood insurance required on both building and contents

SBA loan secured by equipment:

Flood insurance is required, regardless of cross collateralization and/or

improved real estate being also taken

SBA guidelines require flood insurance on just the equipment

Page 34


Carl Pry

April 23, 2015 What Do We Have to Monitor?

You do NOT have to monitor either flood maps or existing

loans

A flood zone determination is a snapshot event – once the

determination is made, that’s it

If the building is not in a SFHA, you don’t need to make another

determination on that property (unless the loan is increased,

renewed, or extended)

You don’t have to retroactively review your loan portfolio,

either

This includes every 7 years (often misunderstood)


Carl Pry

April 23, 2015 What Do We Have to Monitor?

Should we get life-of-loan (LOL) coverage?

There is no regulatory requirement for it

Fannie Mae, Freddie Mac, and FHA (as of 3/1/11) rules require it,

however

If you choose to have it, however, be prepared to live with the

updates (knowledge)

• If you are notified that a property now lies in a SFHA, you have no choice

but to require flood insurance

If insurance is required, you must monitor the policy to

ensure it doesn’t lapse

The lender is typically named as the loss-payee, and the agent to

whom renewal notices are sent

Page 35


Carl Pry

April 23, 2015 Force Placement

A designated loan must have flood insurance as a condition

of closing

If a borrower will not voluntarily obtain coverage, lender must

deny the loan

Upon renewal, must be done if borrower does not provide

proof of insurance within 45 days of non-renewal

Can’t start the 45-day clock before you notify the borrower, only a

brief delay allowed before notifying (and phone call isn’t adequate

notification, clock would start too late – send the letter)

In some cases you may use the NFIP’s Mortgage Portfolio

Protection Program (MPPP) to bring a portfolio up to date


Carl Pry


Send a letter(s) to your borrower warning of force

placement

3 (1 every 15 days) if using MPPP; 1 or more letters (your choice)

otherwise

Clock starts when you’re aware (or should be aware) that

insurance is not in place – may result in gaps

Bottom line: if go more than 45 days, examiners “expect the lender

to provide a reasonable explanation for the delay” (76 FR at 64179,

10/17/11)

• Premiums may be added to the loan balance

Page 36


Carl Pry


When must force-placed coverage be in force?

“where there is a brief delay in force placing required

insurance, the Agencies will expect the lender to provide

a reasonable explanation for the delay, for example,

where a lender uses batch processing to purchase force-

placed flood insurance policies”

“Brief” is not defined

• Likely wouldn’t be good practice to wait more than a couple

days

• Make sure the “reasonable explanation” is documented


Carl Pry

April 23, 2015 Penalties

Civil Money Penalties (CMPs) for noncompliance

Under the statute, penalties are required for “pattern or practice”

violations of:

1. Purchase of insurance

2. Escrow of premiums

3. Forced placement

4. Notice provisions

What is a pattern or practice?

• “Isolated, unrelated, or accidental occurrences will not constitute a pattern

or practice. However, repeated, intentional, regular, usual, deliberate, or

institutionalized practices will almost always constitute a pattern or practice.

The totality of the circumstances must be considered” (Q81)

$2,000 per violation

Page 37


Carl Pry

April 23, 2015

Compliance Questions:

Carl Pry

Treliant Risk Advisors

[email protected]

Webinar/Registration Questions:

Mark Bennett

Total Training Solutions

PO Box 310

Waunakee, WI 53597

1-800-831-0678

www.BankWebinars.com

[email protected]

Contact Information

Upcoming Webinars

• Compliance Perspectives: A Monthly Update – April 23

• Home Equity Lines of Credit – April 28

• SSN's, EIN's and ITIN's: Your Job as Withholding

Agent – April 28

• Opening New Accounts II - Business Accounts – April

29

• Reg E Compliance - Five Best Practices for Handling

Disputes – April 29

• Officer Calling: Prospecting, Preparing & Presentation

– May 5

• Lending 101 – May 5

• Bullet Proof Your Loan Portfolio – May 6

• Opening New Accounts III - Trust, Fiduciary and Minor

Accounts – May 6

• Start Coaching & Stop Hovering Over the Branch –

May 7

• BSA Series: Part II - Growing Your CDD Questionnaire

for Business Accounts – May 8

• For Sales Managers: Why Aren't Your Bankers Selling?

– May 11

Documents

Flood Insurance 2002 - Total Training Solutionsttsmedia.ttstrain.com/FloodInsCmp042315.pdfRegulations: 61 FR 45684 (August 29, 1996) – NOT transferred to CFPB • 12 CFR 22 (OCC);