Consumer Compliance Outlook: Third Quarter 2012

Compliance Spotlight

Congress Extends the National Flood Insurance Program and Amends the National Flood Insurance Act and the Flood Disaster Protection Act

On July 6, 2012, President Obama signed into law H.R. 4348, the Moving Ahead for Progress in the 21st Century Act. Title II of this law contains the Biggert-Waters Flood Insurance Reform Act of 2012 (the Biggert-Waters Act),* which extends the National Flood Insurance Program (NFIP) until September 30, 2017, and amends the National Flood Insurance Act of 1968 (NFIA) and the Flood Disaster Protection Act of 1973 (FDPA). Some of the Biggert-Waters Act’s provisions provide for the following changes:

  • Increasing civil money penalties (CMPs) against regulated lending institutions with a “pattern or practice” of violating certain flood insurance requirements from $385 to $2,000 for each violation and removing the $135,000 statutory cap on the amount of CMPs that may be assessed against an individual financial institution in a single calendar year. The changes will likely result in significantly higher CMPs on financial institutions that are determined to have engaged in a pattern or practice of violations of the federal banking agencies’ flood insurance regulations implementing the NFIA and the FDPA.
  • Requiring lenders or servicers, within 30 days of receipt of a confirmation of the borrower’s existing flood insurance coverage, to terminate force-placed insurance and refund any premiums paid by the borrower for the force-placed insurance (and any related fees charged to the borrower with respect to the force-placed insurance) during any period when both the borrower’s policy and the lender’s policy were in effect.
  • Declining to extend subsidies for flood insurance, effective October 6, 2012, for policies issued or lapsed after July 6, 2012, and for certain existing policies covering:
    • business properties;
    • residential properties that are not the owners’ primary residence;
    • properties that have incurred substantial damage exceeding 50 percent of the fair market value of the property on or after July 6, 2012;
    • properties that have a substantial improvement exceeding 30 percent of the fair market value of the properties on or after July 6, 2012;
    • properties that have severe repetitive losses (as defined by the Biggert-Waters Act for single-family properties and by Federal Emergency Management Agency (FEMA) regulation for multi-family properties);
    • properties that have incurred flood-related damage in which the cumulative payments equaled or exceeded the fair market value of the property; or
    • prospective policyholders who refuse to accept offers of mitigation assistance from FEMA (including an offer to relocate) following a major disaster or in connection with a repetitive or severe repetitive loss property.
  • Phasing in premium increases for policies losing subsidies described above, with increases capped at 25 percent per year until premiums equal the actuarial cost of the policies.
  • Increasing the annual limit on premium increases for other FEMA policies from 10 percent to 20 percent.
  • Requiring that any property located in an area participating in the NFIP will have the risk premium rate charged for flood insurance adjusted to reflect the current risk of flood, subject to any other provision of the act, and that any increase in the applicable rate will be phased in over a five-year period, at the rate of 20 percent for each year. If the area was not previously designated as having special flood hazards but becomes designated as having such an area, the risk premium rate for flood insurance purchased on or after July 6, 2012, for a property located in such an area shall be phased in over a five-year period, at the rate of 20 percent for each year.
  • Requiring each federal entity for lending regulation, including the Federal Reserve Board, to direct regulated lending institutions, by regulation (after consultation and coordination with the Federal Financial Institutions Examination Council) (FFIEC), to accept private flood insurance under certain circumstances.
  • Requiring federal agency lenders and the government-sponsored enterprises to accept private flood insurance policies under certain circumstances.
  • Requiring lenders to disclose to borrowers that: (i) flood insurance is available from private insurance companies that issue standard flood insurance policies on behalf of the national flood insurance program or directly from the national flood insurance program; (ii) flood insurance that provides the same level of coverage as a standard flood insurance policy may be available from a private insurance company that issues policies on behalf of the company; and that (iii) the borrower is encouraged to compare the flood insurance coverage, deductibles, exclusions, conditions, and premiums associated with flood insurance policies issued on behalf of the national flood insurance program and policies issued on behalf of private insurance companies and to direct inquiries regarding the availability, cost, and comparisons of flood insurance coverage to an insurance agent.
  • Requiring each federal entity for lending regulation, including the Federal Reserve Board, to direct regulated lending institutions, by regulation (after consultation and coordination with the FFIEC), effective July 6, 2014, to establish escrows for flood insurance premiums unless the institution: (i) has total assets of less than $1 billion; and on or before July 6, 2012, (ii) did not have a policy consistently and uniformly requiring the escrow of taxes, insurance premiums, fees, or any other charges; and (iii) was not required under federal or state law to deposit taxes, insurance premiums, fees, or any other charges into an escrow account. The preceding exceptions may not be applicable if state law requires the escrow of flood insurance premiums.
  • Authorizing FEMA to accept flood insurance premiums in installments for policyholders who are not required to escrow premiums.
  • Establishing a minimum deductible for property to which construction or substantial improvements occurred on or before December 31, 1974, or before the effective date of an initial flood insurance rate map of (i) $1,500, if the flood insurance coverage for such structure covers loss or damage in an amount equal to or less than $100,000, and (ii) $2,000, if the flood insurance coverage for such structure covers loss or damage in an amount greater than $100,000.
  • Establishing a minimum deductible for property to which construction or substantial improvements occurred after December 31, 1974, or after the effective date of an initial flood insurance rate map of (i) $1,000, if the flood insurance coverage for such structure covers loss or damage in an amount equal to or less than $100,000, and (ii) $1,250, if the flood insurance coverage for such structure covers loss or damage in an amount greater than $100,000.