FDIC San Francisco Region Regulatory Teleconference

1. FDIC San Francisco RegionRegulatory Teleconference Flood Insurance Best Practices – Protecting You and Your Customer June 18, 2008

2. Introductions Opening Remarks Robert J. Wirtz Assistant Regional Director – Compliance Presenters Hollee Oberholzer Senior Compliance Examiner Heather Gilliams Compliance Review Examiner

3. Overview • Regulatory Requirements • Coverage Calculations • Flood Compliance – Problem Areas • FEMA Guide Changes • Proposed Revisions to Interagency Q&As • Best Practices • Resources • Question and Answer Session

4. Regulatory Requirements • Determinations • Notifications • Coverage • Escrow • Force Placement

5. Determination Requirements • Completion of Standard Flood Hazard Determination Form (SFHDF) • Use of prior determination • Retain copy of SFHDF over life of loan

6. Notification Requirements • Notice to borrower and servicer • Required for structures located in participating and non-participating communities • Delivery of notice within reasonable time prior to closing • New notice required for each origination, extension, increase, and renewal

7. Coverage Requirements Mandatory Purchase Provision If improved property located in Special Flood Hazard Area (SFHA), lender CANNOT: • Make • Extend • Renew • Increase Without sufficient flood insurance coverage over the life of the loan

8. Coverage Requirements (cont.) Minimum Coverage Equal To Lesser of: • Outstanding principal balance of loan(s); or • Maximum NFIP coverage available; or • Full insurable value (100% replacement cost value [RCV]) of building and/or contents

9. NFIP Maximum Coverage Limits

10. Escrow Requirements • Flood insurance premiums must be escrowed when lender requires escrow for other purposes, such as taxes or hazard insurance • Not required for voluntary escrow accounts • Types of property covered: • Single-family • Multi-family • Manufactured homes

11. Force Placement Requirements If lender determines that property is not adequately insured: • Provide notice to borrower of requirement to obtain adequate coverage • Provide borrower opportunity to obtain necessary insurance (45 days) • If borrower fails to obtain coverage within 45 days, must purchase insurance on behalf of borrower • May charge borrower cost of premiums and fees incurred

12. Calculating Coverage • Multiple Structures • Requirements • Example • Condominium Coverage • Requirements • Example – RCBAP exists • Example – no RCBAP exists

13. Multiple Structures • Only one policy can be issued per structure • Each insurable structure located in a SFHA must have insurance • Aggregated insurance coverage must be adequate to cover loan (unless maximum RCV or NFIP limit has been reached) • Distribution of coverage among buildings is at lender’s discretion

14. Multiple Structure Example Question: How much insurance is required? Loan secured by three buildings in SFHA • One single-family residence: • Valued at $200,000 (exclusive of land) • Two commercial buildings: • One valued at $1,000,000 (exclusive of land) • One value at $300,000 (exclusive of land) • Loan amount is $2,000,000 (first lien)

15. Multiple Structure Example (cont.) Answer: $1,000,000

16. Condo Coverage Requirements Dwelling Policy Required Coverage is Lesser of: • Outstanding principal balance of loan(s); or • Maximum amount of insurance available under NFIP, which is lesser of: • Max limit for residential condo unit ($250,000), or • “Insurable value” of condo unit – RCV of building / # units

17. Condo Coverage Requirements (cont.) Residential Condominium Association Policy (RCBAP) No coinsurance (Dwelling Policy) required if: • Current: RCBAP = 80 percent of building RCV • Proposed: RCBAP = 100 percent of building RCV* * FIL 23-2008: Proposed Revisions to Interagency Questions and Answers Regarding Flood Insurance

18. Condominium Coverage Example – RCBAP Exists Question: Is additional insurance (Dwelling Policy) required? • Principal balance loan: $300,000 • Number of units: 50 • RCV (100%): $15 million • RCBAP: $12.5 million

19. Condominium Coverage Example – RCBAP Exists (cont.) Answer: No • Determine required unit coverage: $250,000 Lesser of: • Loan amount: $300,000 • Insurable value of unit: $300,000 ($15 million RCV/50 units) • Max NFIP coverage: $250,000 • Compare to RCBAP’s per unit coverage: $250,000 • Per unit coverage: $250,000 ($12.5 million/50 units)

20. Condominium Coverage Requirements – No RCBAP Question: What amount of coverage (Dwelling Policy) must lender require? • Outstanding principal balance: $175,000 • Number of units: 50 • RCV: $10 million

21. Condominium Coverage Requirements – No RCBAP Answer: $175,000 Lesser of: • Loan amount: $175,000 • Insurable value of unit: $200,000 ($10 million RCV/50 units) • Max NFIP coverage: $250,000

22. Flood Compliance – Problem Areas During 2007, 20% of exams in SF Region had one or more violations of Part 339 Problem Areas: • Insufficient coverage • Lack of coverage at origination • Lapse in coverage • Late borrower notification • No borrower notification • Force placement requirements • Flood determinations

23. Flood Compliance – Problem Areas (cont.) • Insufficient coverage • Multiple Structures – no insurance on one or more buildings • Junior Liens – did not consider first lien balance • Cash-out refinances – did not increase coverage • Insured for incorrect risk rating zone • Excessive deductibles • No insurance on building and/or contents at origination • Premiums collected at closing • Use of binder to demonstrate proof on insurance • Abundance of caution loans • No contents coverage – commercial loans

24. Flood Compliance – Problem Areas (cont.) • Lapse in coverage • Lack of monitoring for coverage • Misconception that life of loan flood determination coverage monitors flood insurance coverage • Late borrower notification • Providing notice at closing • Obtaining SFHDF after underwriting complete – delays delivery of notice • No borrower notification • Refinances, extensions, renewals, increases • Properties in non-participating communities

25. Flood Compliance – Problem Areas (cont.) • Force placement requirements • Failure to notify borrower of inadequate coverage • Failure to force place after 45 days of notification • Use of standard flood determination form • Not obtaining flood determination • Not retaining SFHDF

26. Civil Money Penalties (CMPs) • Mandatory CMPs for pattern or practiceof violations of following requirements: • Purchase of flood insurance • Escrow of flood insurance premiums • Forced placement of flood insurance • Borrower Notification • Servicer Notification • Penalty of up to $385 per violation, maximum $125,000 per year

27. San Francisco Region Flood CMPs • Since January 2007, 10 CMPs have been issued for flood insurance violations • Penalties up to $55,000 • Seeing an upward trend in CMP cases, both in number and the amount of CMP

28. Pattern or Practice • Not defined by Flood Disaster Protection Act • Facts and circumstances weighed for each case • Look to guidance and experience under other regulations • Regulation B (Equal Credit Opportunity Act) • The Policy Statement on Discrimination in Lending • Regulation Z (Truth in Lending)

29. Pattern or Practice (cont.) • Factors considered (but not limited to): • Common cause • Existence of written policy or established practice • Duration of violations • Relationship among violations • Significance in relation to total number of applicable transactions • Prior violations • Effectiveness of flood insurance policies, procedures, training, monitoring, and audit function

30. FEMA Guide Changes Mandatory Purchase of Flood Insurance Guidelines Highlights of Revisions (effective September 2007): • Section A • Flowchart illustrating mandatory purchase process at loan origination • Section B • Flood zone discrepancies between SFHDF and policy • Letter of Determination Review (LODR)

31. FEMA Guide Changes (cont.) • Section C • Purchasing coverage for construction loans • Section D • RCBAP coverage • Declarations page must show RCV and number of units • Recommends 100% RCV • Section E • Flowchart describing tripwires during life of loan

32. Interagency Flood Q&As* • Proposed Revisions • Comment period ended May 20, 2008 • Agencies received 60 unique comments • Final adoption anticipated by year-end • New topics: • Second liens • Syndications/participations • Flood zone discrepancies • Imposition of CMPs • Substantive modifications: • Construction loans • Condominium loans * FIL 23-2008: Proposed Revisions to Interagency Questions and Answers Regarding Flood Insurance

33. Interagency Flood Q&As (cont.) • Second liens • Must ensure sufficient coverage for all loans (or max available) • Syndications/participations • Participating lender expected to undertake due diligence to ensure lead lender or agent: • Obtains insurance where necessary • Has controls in place to monitor for compliance • Agreements should provide for lead or agent to provide info to participants • Flood zone discrepancies • Must have process in place to identify and resolve discrepancies • Imposition of CMPs • General standards for determining pattern or practice

34. Interagency Flood Q&As (cont.) • Construction loans • May require purchase at time loan is made (best practice); OR • When foundation slab poured or elevation certificate issued; provided adequate internal controls are in place • Condominium loans • RCBAP = 100% of RCV (or # units x $250,000) • If adopted, updated coverage required for: • New loan originations, extensions, increases, renewals – immediately after effective date • Existing loans – first policy renewal after effective date • If RCBAP insufficient, borrower must obtain Dwelling Policy to make up difference

35. Best Practices • Comprehensive written procedures and training • Order SFHDF upon receipt of completed application • Send borrower notification immediately • Retain documentation of when notice provided/mailed • Appraisals • Request breakdown of value of structure(s) • Review flood policies • Risk rating zone matches SFHDF • Deductible does not exceed NFIP maximums • Centralize • Reviews of flood policies • Monitoring of flood insurance

36. Best Practices (cont.) • Secondary reviews of designated loans • Prior to closing • Notification and purchase requirements • Frequent flood determination vender queries • Determinations in SFHA • Periodic reviews of tickler system • Targeted audits of designated loans • Map changes • Life of loan determinations • No LOL – review portfolio

37. Resources • Part 339 – FDIC Rules & Regulations http://www.fdic.gov/regulations/laws/rules/2000-6100.html#2000part339 • Mandatory Purchase of Flood Insurance Guidelines – September 2007 http://www.fema.gov/library/viewRecord.do?id=2954 • Flood Insurance Manual – May 2008 http://www.fema.gov/business/nfip/manual.shtm • Answers to Questions about the NFIP http://www.fema.gov/business/nfip/qanda.shtm

38. Resources (cont.) Financial Institution Letters: • FIL 23-2008: Proposed Revisions to Interagency Questions and Answers Regarding Flood Insurance http://www.fdic.gov/news/news/financial/2008/fil08023.html • FIL 114-2007: Managing Risks Associated With Lapses in Flood Insurance Coverage http://www.fdic.gov/news/news/financial/2007/fil07114.html • FIL 81-2001: Strengthening Compliance with Federal Flood Insurance Requirements http://www.fdic.gov/news/news/financial/2001/fil0181.html

39. Question and Answer Session

40. Further Questions? Please Contact Your Local Review Examiner