Federal Banking Agencies Issue Flood Insurance Guidance

The federal banking agencies, together with the Farm Credit Administration, have issued joint guidance on amendments to the Flood Disaster Protection Act of 1973 (FDPA). The amendments were part of the Biggert-Waters Flood Insurance Reform Act of 2012 (Act), enacted on July 6, 2012. Participating in the guidance were the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the National Credit Union Administration.

In Financial Institution Letter 14-2013, the agencies state that the Act’s increased penalties for FDPA violations became effective on July 6, 2012. The Act increased the maximum civil penalty for a FDPA violation from $350 to $2,000 and removed the maximum annual penalty cap of $100,000.

For loans required to be insured by the FDPA, a lender or servicer must notify the borrower of the need to purchase flood insurance if the borrower’s coverage lapses or is less than the required amount. If the borrower fails to purchase the insurance within 45 days of notification, the lender or servicer must force place the insurance. According to the guidance, effective July 6, 2012, the Act amended the FDPA’s force placement provisions to: 

  • Expressly authorize a lender or servicer to charge the borrower premiums and fees for coverage beginning on the date the insurance lapsed or provided insufficient coverage
  • Require a lender or servicer, within 30 days of receiving confirmation of the borrower's coverage, to terminate any force-placed insurance and refund premiums and fees the borrower paid for any period in which the borrower’s coverage and the force-placed insurance overlapped
  • Require a lender or servicer to accept, as confirmation of a borrower’s policy, a declarations page that includes the existing policy number and insurer or agent contact information

The agencies indicate that they plan to propose new regulations to implement the Act’s provisions dealing with private flood insurance and escrows and take the position that “until regulations are issued,” those provisions are not effective. (Presumably, this is a reference to final regulations.) The Act’s private flood insurance provision amended the FDPA’s mandatory purchase requirement to require lenders to accept private insurance with coverage that satisfies the FDPA’s standards and make certain related disclosures.

The escrow provision, which only applies to loans secured by residential improved real estate or mobile homes, requires lenders and servicers, subject to certain limitations, to escrow flood insurance premiums and fees. The guidance states that the agencies “intend to publish escrow regulations in sufficient time for the industry to implement them prior to July 2014.”

Finally, the guidance addresses the Act’s impact on the agencies’ Interagency Questions and Answers Regarding Flood Insurance.

On May 29, 2013, from 12 p.m. to 1 p.m. ET, Ballard Spahr will hold a webinar, “Regulatory and Litigation Challenges to Lender-Placed Insurance.” More information on the webinar and a link to register can be found here.

Ballard Spahr's Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of the firm's Consumer Financial Services Group, which is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, or Mark J. Levin at 215.864.8235 or levinmj@ballardspahr.com.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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