The Biggert-Waters Flood Insurance Reform Act passed by Congress last year made a number of changes to the National Flood Insurance Program (NFIP). It was not clear from the language of the Act when some provisions were to become effective, and in March, the Fed, FDIC, OCC, NCUA and the Farm Credit Administration issued an interagency guidance on the effective dates. As noted in the guidance, some provisions became effective on passage while others will not become effective until implementing regulations are written. The provisions which became effective with passage on July 6, 2012 are:
Force placement. The following amendments concerning force placement of flood insurance became effective on passage:
- The borrower may be charged premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or the borrower did not provide sufficient coverage amount, including the 45-day force placement notice period ;
- The lender or servicer must, within 30 days of receipt of confirmation of the borrower’s existing flood coverage, terminate any force- placed insurance and refund all force-placed insurance premiums and any related fees for any period of overlap between the borrower’s policy and the force-placed policy; and
- The lender or servicer must accept as confirmation of the borrower’s existing flood policy a declarations page that includes the flood policy number and the identity and contact information for the insurance company or agent.
Civil money penalties. Effective with passage, the maximum civil money penalty for a flood violation has been increased to $2,000, and the per year penalty cap has been deleted.
The following provisions will not become effective until implementing regulations are issued:
Private flood insurance. Once implementing regulations become final, lenders will be required to accept private flood policies if the coverage satisfies the standards in the Act. In addition, required disclosures to borrowers will include statements that:
- Flood insurance under the NFIP is available from private insurance companies or from the NFIP directly;
- Flood insurance that provides the same level of coverage as an NFIP policy may be available from private insurance companies; and
- Borrowers are encouraged to compare policies.
Escrow of flood premiums. Once implementing regulations become final, lenders and servicers will be required to escrow for flood premiums on all loans secured by residential real estate or a mobile home outstanding or entered into after July 6, 2014, unless exempt. Except where state law requires otherwise, lenders with less than $1 billion in total assets will be exempt unless, as of July 6, 2012, the lender was not otherwise required by federal or state law to escrow taxes or insurance for the term of the loan, and the lender did not, as a matter of policy, require escrow of taxes and insurance.
Flood Q & A. The agencies made a few minor changes to the proposed Q & A and said they expect to undertake a full review of the Interagency Questions and Answers once final regulations are written.
Premium rates. While not mentioned in the interagency guidance, one of the most significant changes brought about by the Act are increases in premium rates to more closely reflect true flood risks. Subsidized rates for properties other than primary residences are being phased out over a period of time. Owners of non-primary or secondary residences located in a flood hazard area will see rate increases of 25% per year beginning January 1, 2013 until rates reflect true risk. Owners of properties that have experienced severe or repeated flooding and owners of business properties will likewise see rate increases of 25% per year beginning October 1, 2013 until rates reflect true risk. Policies covering primary residences will be able to keep their subsidized rates until the property is sold, the policy lapses, a new policy is purchased, or the property suffers severe, repeated flood losses. NFIP is encouraging policy holders experiencing premium increases to talk to their agent about their options, obtain an elevation certificate and make sure their premium rate is correct, and to consider higher deductibles.
Flood guidelines rescinded. Because of the Biggert Waters changes, FEMA has determined that its Mandatory Purchase of Flood Insurance Guidelines publication (the September 2007 blue book) is outdated and has rescinded the publication. No word on how long it might take FEMA to update the publication, but it seems likely it will not be until sometime after final regulations are issued under the Act. In the meantime, though, I would hang on to my copy. It and the interagency Q & A are the best written guidance we have right now.