On July 6, 2012, President Obama signed into law the Biggert-Waters Flood Insurance Reform and Modernization Act of 2012 (Biggert-Waters Reform Act) extending the National Flood Insurance Program (NFIP) until September 30, 2017. The Act, however, does more than just extend the NFIP. Part of a larger piece of legislation, the Act makes other changes to the National Flood Insurance Act that include new flood compliance requirements and increased penalties for violations. Some of the new requirements are effective on enactment and some will require the banking agencies to issue new or revised regulations. It does not appear that banks need to take immediate action, but it is important to have an understanding of the new requirements and how they will ultimately affect your bank’s flood compliance procedures.
The Biggert-Waters Reform Act is contained in Division F of the larger “Moving Ahead for Progress in the 21st Century Act” or “MAP 21” that also included changes to federal transportation and student loan laws. It appears that some provisions of Division F became effective on the date of enactment, July 6, 2102, while others have a later effective date. In some instances, the effective date may depend on regulations to be written, but that is not always clear from the language of the Act.
The following sections appear to be effective immediately:
- Section 100203 which re-authorizes the NFIP for five years;
- Section 100208 which increases civil money penalties from $350 to $2000 per violation and eliminates the $100,000 cap on penalties; and
- Section 100210 which establishes minimum deductibles for claims under the NFIP.
The following sections contain a delayed effective date:
- Section 100205 which phases out flood insurance premium subsidies for residential properties other than an individual’s primary residence and for business properties and increases the cap on annual premium increases from 10 to 20%. This section is effective 90 days after enactment, or October 6, 2012.
- Section 100209 which imposes an escrow requirement for flood insurance which becomes effective two years after enactment, or July 6, 2014.
The increase in CMPs and the new escrow requirement are, obviously, big changes. It is not clear whether increased CMPs might be applied to violations which occurred before the effective date of the change. The escrow requirement will apply to all existing mortgages outstanding on the July 6, 2014, effective date, not just new mortgages originated afterwards. The Act authorizes the federal banking agencies to write implementing regulations which include an exemption for banks with less than $1 billion in assets if the bank is not otherwise required by state or federal law to escrow for taxes or insurance, and the bank did not have a policy of requiring escrows for taxes or insurance.
The following sections are silent as to a specific effective date, but since they appear to require regulations to be written, it does not appear that they will become effective right away:
- Section 100222 which amends RESPA to add a new disclosure explaining flood insurance and the availability of flood insurance under the NFIP or from a private insurance company, whether or not the real estate is located in a special flood hazard area.
- Section 100244 which amends requirements for force-placement of flood insurance.
- Section 100239 clarifying when a lender can accept private flood insurance to satisfy the mandatory purchase requirement.
Section 100222 will require amendment of RESPA disclosures by the CFPB and that may be something the CFPB will incorporate in the final T1LA-RESPA disclosures now under consideration. Section 100244 on forced placement does not specifically require implementing regulations to be written. However, the banking agencies have that authority and some of the requirements appear to conflict with the proposed new interagency Flood Q&A. The banking agencies will need to make the following changes to the rules on force placement:
- Clarify that while a lender cannot force place until 45 days after notification of a lapse, the borrower may be charged for the premiums and fees incurred for coverage dating back to the flood insurance lapse date;
- Require cancellation of force-placed coverage within 30 days of receipt of proof of flood insurance;
- Direct that a lender or servicer must accept an insurance policy declarations page that includes the existing flood insurance policy number and the identity of, and contact information for, the insurance company or agent as sufficient proof of insurance; and
- Require a lender or servicer to refund all force-placement premiums or fees paid by the borrower during any period of overlapping coverage between the force-placed coverage and the borrower’s policy.
Section 100239 requires lenders and Fannie Mae and Freddie Mac to accept a private flood policy if the private policy meets certain requirements, which are yet to be defined, as satisfaction of the mandatory purchase requirement. Violations may result in the issuance of a CMP. It also requires lenders to provide a notice to a borrower about private insurance that explains that flood insurance providing the same level of coverage as a NFIP policy may be available from a private company and that encourages the borrower to compare the coverage, deductibles, exclusions, conditions, and premiums of a NFIP policy with a private insurance policy.
While not entirely clear, it appears that the requirement to accept a private policy and to give the new notice may not be effective until regulations are written. However, the language of the Act complicates things. It authorizes Fannie Mae and Freddie Mac to establish requirements relating to the financial solvency, strength, or claims paying ability of the private insurance companies whose policies those entities will accept. In another subsection, the Act appears to also authorize the federal banking agencies and the Federal Housing Finance Agency to set these requirements. Hopefully, the agencies will give banks further guidance and work together on a joint rule to establish these standards.
