Flood Insurance Rules
Flood compliance has been challenging historically, and it has become more complex with the recent implementation of a new flood check form, flood changes included in the CFPB’s mortgage servicing rules, and the promulgation of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters).
The National Flood Insurance Program (NFIP) is administered primarily under two statutes: the National Flood Insurance Act of 1968 (1968 Act) and the Flood Disaster Protection Act of 1973 (FDPA). The FDPA requires federal financial regulatory agencies to adopt regulations prohibiting their regulated lending institutions from making, increasing, extending or renewing a loan secured by improved real estate or a mobile home located or to be located in a standard flood hazard area (SFHA) in a community participating in the NFIP unless the property securing the loan is covered by flood insurance.
Flood Law Reforms
The Biggert-Waters Flood Insurance Reform Act of 2012 is a law passed by Congress and signed by the President in 2012 that extends the National Flood Insurance Program (NFIP) for five years, while requiring significant program reform.
In early 2014, the Homeowner Flood Insurance Affordability Act of 2013 was signed into law. The law delays some sections of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters) to prohibit the Federal Emergency Management Agency (FEMA) Administrator from providing flood insurance to a prospective insured at rates less than those estimated for any property purchased after the expiration of a designated six-month period (currently, any property purchased after July 6, 2012). The law includes the following:
- Reinstates lower flood insurance premium rates for grandfathered properties repealed by Biggert-Waters;
- Extends the effective date for new escrow rules under Biggert-Waters from July 6, 2014, to January 1, 2016;
- Sets the effective date for the escrow requirements to loans closed on or after the new effective date (January 1, 2016); and,
- Makes flood insurance premium escrows optional for:
- Junior liens (when the proper coverage is maintained with the first lien);
- Condo and co-op loans (when the Residential Condominium Building Association Policy (RCBAP) is covered by flood insurance);
- Home Equity Lines of Credit (HELOC);
- Commercial purpose loans secured by a residence;
- Nonperforming loans; and,
- Loans with a term less than 12 months (typically construction or temporary financing).
Certain aspects of the law became effective January 1, 2016:
- Escrow required as of January 1, 2016 – Under HFIAA, regulated institutions will be required to escrow flood insurance premiums and fees secured by residential improved real estate or mobile homes that are made, increased, renewed or extended on or after January 1, 2016, unless the loan qualifies for a statutory exemption or the institution itself is exempt because it has total assets of less than $1 billion and meets certain other criteria.
- Options for borrowers as of January 1, 2016 – HFIAA requires non-exempt institutions to provide borrowers of residential loans already on the books as of January 1, 2016, the option to escrow flood insurance premiums and fees.