Comment Invited on New Flood Insurance Guidance

In 2009 seven federal agencies that supervise banks,rncredit unions, thrifts, and the Farm Credit System (the regulators) revised thernInteragency Questions and AnswersrnRegarding Flood Insurance which is designed to provide guidance for lendersrnregarding administration of the National Flood Insurance Program (NFIP).  At that time five new questions and answersrnwere proposed for the guidance and public comment was invited.  </p

Significant input was received on these questionsrnand the regulators have, in response, adopted two questions, numbers 9 and 61rnwith minimal revisions and withdrawn Question 10.  Question 9 related to determination of insurablernvalue and Question 61 to enforcement of a 45 day period for force placingrninsurance.  Question 10 was deemedrnunnecessary in light of changes to Question 9.  </p

Comments received on the two remaining questionsrnwere sufficient to cause regulators to rewrite them and these changes than triggeredrnrevision of an additional established question.  The regulators are now requesting publicrncomment on these three revised questions and answers.</p

As written, Question 60 addressed the permissibilityrnof a lender’s acceleration of the 45-day notice period for forced placement byrnsending a notice to the borrower before private coverage expires.  The original answer was that the lender couldrnsend that notice but not use the notice to shorten the 45-day period.  Comments were generally to the point that thernguidance thwarted the flood insurance program’s purpose of ensuring continuousrnflood insurance coverage through the life of the loan.</p

The question and answer as revised:</p

Question 60:  Whenrnshould a lender send the force placement notice to the borrower?</p

Answer:  “Tornensure that adequate flood insurance coverage is maintained throughout the termrnof the loan, a lender or its servicer must notify a borrower whenever floodrninsurance on the collateral has expired or is less than the amount required forrnthe property.  The lender must send thisrnnotice upon making a determination that the flood insurance coverage isrninadequate or has expired, such as upon receipt of the notice of cancellationrnor expiration from the insurance provider or as a result of an internal floodrnpolicy monitoring system.”  This answerrnalso applies when flood insurance coverage is newly required because of a floodrnmap change.</p

Question 62 covered whether a borrower could ever berncharged for the cost of forced placed coverage during the 45 day noticernperiod.  The comments on this questionrnlargely challenged the regulators’ contention that a lender/servicer had nornauthority to change for coverage during the notice period.  Several comments addressed the goal ofrncontinuous coverage throughout the life of a loan and others raised issues ofrnborrowers double-paying for coverage or, conversely, abusing the “free ride”rnpossibilities of the regulation.  </p

The question and answer as revised:</p

Question 62: rnWhen may a lender or its servicer charge a borrower for the cost of insurancernthat covers collateral during the 45-day notice period?</p

Answer:  Arnlender/servicer may charge for insurance coverage for any part of the 45-dayrnnotice period in which no adequate borrower-purchased flood insurance coveragernis in effect “if the borrower has given the lender or its servicer the expressrnauthority to charge the borrower for such coverage as a contractual conditionrnof the loan being made.”   The answer furtherrnencourages institutions to explain their force-placement policies to borrowers -rnincluding charging within the 45 day period – and to escrow flood insurancernpremiums.</p

Question 57 which was previously finalized has nowrnbeen revised to clarify when a lender is required to send a force-placementrnnotice to the borrower.  Under thernrevision, the lender is required to send such a notice if all of thernfollowing are in effect:</p<ul class="unIndentedList"<liThe lenderrndetermines at any time during the life of the loan that the property securingrnthe loan is located n a Special Flood Hazard Area (SFHA);</li<liFloodrninsurance under the Act is available for improved property securing the loan;</li<liThe lenderrndetermines that flood insurance coverage is inadequate or does not exist; and</li<liAfterrnrequired notice, the borrower fails to purchase the appropriate amount ofrncoverage within 45 days.</li</ul

Comments are invited on thesernchanges and on other issues and concerns regarding compliance with the federalrnflood insurance statutes and regulations. Comments are due 45 days afterrnpublication in the Federal Register, which is expected shortly.

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