Flood Insurance Requirements & Spotlight on Loan Servicing BCAC Seminar March 2012
Objectives and Summary • Flood Insurance Requirements • Review & Best Practices • Spotlight on Loan Servicing • Current Environment • Notable Litigation • Servicemembers Civil Relief Act • Loss Mitigation & Foreclosure Practices
Flood Disaster Protection Act of 1973 • Written policies and procedures • Make, Increase, Renew or Extend (MIRE) • Amount of Insurance • Contents Insurance on Commercial Loans • Escrow Requirements • Force-Placement • Special Flood Hazard Determination Form • Life of Loan Coverage
Objectives of the FDPA • Providing flood insurance to owners of improved real estate located in special flood hazard areas (SFHAs) of communities participating in the National Flood Insurance Program (NFIP). • Requiring communities to enact measures designed to reduce or avoid future flood losses as a condition for making federally subsidized flood insurance available. • Requiring federal financial regulatory agencies to adopt regulations prohibiting their regulated lending institutions from making, increasing, extending, or renewing a loan secured by improved real estate or a mobile home located, or to be located, in an SFHA of a community participating in the NFIP unless the property securing the loan is covered by flood insurance. • Prohibiting federal agencies, such as the Federal Housing Administration, the Small Business Administration, and the Department of Veterans Affairs, from subsidizing, insuring, or guaranteeing any loan if the property securing the loan is in an SFHA of a community not participating in the NFIP.
Federal Emergency Management Agency (FEMA) • FEMA administers the National Flood Insurance Program (NFIP). Its responsibilities include: • Identifying communities with SFHAs • Issuing flood-boundary and flood-rate maps for flood-prone areas • Making flood insurance available through the NFIP ‘‘Write Your Own’’ program, which enables the public to purchase NFIP coverage from private companies that have entered into agreements with the Federal Insurance Administration • Assisting communities in adopting flood plain-management requirements • Administering the insurance program. Note: Licensed property and casualty insurance agents and brokers provide the primary connection between the NFIP and the insured party. Licensed agents sell flood insurance, complete the insured party’s application form, report claims, and follow up with the insured for renewals of the policies.
Basic Requirements • A lending institution must require flood insurance for the term of a loan when all three of the following factors are present: • The institution makes, increases, extends, or renews a loan (commercial or consumer) secured by improved real estate or a mobile home that is affixed to a permanent foundation, • The loan is secured by property located in a special flood hazard area as identified by FEMA, and • The community participates in the NFIP. (Information on whether a community participates in the NFIP can be obtained from FEMA’s web site, www.fema.gov.)
Special Circumstances • In the case of mobile homes, the criteria for coverage relate to whether the mobile home is affixed to a permanent foundation. An institution does not have to obtain a security interest in the underlying real estate in order for the loan to be covered. • Flood insurance requirements also apply to loans where a security interest in improved real property is taken only ‘‘out of an abundance of caution.’’ • A typical table-funded transaction should be considered a loan that is made, rather than purchased, by the entity that actually supplies the funds. Regulated institutions that provide table funding to close loans originated by a mortgage broker or mobile home dealer are considered to be ‘‘making’’ a loan for purposes of the flood insurance requirements.
Amount of Flood Insurance Required • The amount of flood insurance required must be at least equal to the lesser of: (1) the outstanding principal balance of the loan, (2) the maximum amount available under the NFIP, or (3) the total value of the secured property (land and improvements) minus the total value of the land. • Since March 1995, the maximum amounts of coverage for flood policies have been • $250,000 for residential property structures and $100,000 for contents • $500,000 for nonresidential structures and $500,000 for contents
Commercial Loans & Contents Insurance • Reminder: Flood Insurance is required on contents when the following conditions are met: • The Bank makes, increases, renews or extends a loan secured by property in a SFHA, and • A security interest is taken on building contents or “all business assets.” • Word to the wise: Consider the value of the building contents before taking as collateral on the loan.
Flood Insurance Monitoring Procedures • Consider adopting a Clear to Close procedure: • Require a pre-closing review of all flood insurance documents by a designated individual independent of the lending area and Loan Administration before the loan officer is given authority to proceed with loan closing. • Pre-closing review should include examination of the Flood Insurance Policy declarations page or the application and paid-receipt for compliance with all flood insurance requirements, as well as review of the completed flood insurance coverage calculation form, to ensure the proper amount of flood insurance has been obtained.
Special Situations—Second Mortgages and Home Equity Loans • Both second mortgages and home equity loans fall within the purchase provisions of the FDPA. As only one NFIP policy may be issued for a building, an institution should not request a new flood insurance policy if one already exists. Instead, the institution should have the borrower contact the insurance agent • To inform the agent of the intention to obtain a loan involving a subordinate lien • To obtain verification of the existence of a flood insurance policy • To check whether the amount of insurance covers all loan amounts
Second Mortgages • After obtaining this information, the insurance agent should increase the amount of coverage, if necessary, and issue an endorsement that identifies the institution as a lien holder.
Special Situation— Condominium Policies • Condominium associations are able to manage their flood insurance needs and meet their by-law requirements without relying on the actions of the unit owners under a special type of flood insurance policy issued by FEMA—a Residential Condominium Building Association Policy (RCBAP). • For Condo Loans, the maximum amount of flood insurance is the lesser of 1) the number of units X $250,000, or 2) 100% of the replacement value of the condo buildings.
Escrow Requirements • An institution must require the escrow of flood insurance premiums for loans secured by ‘‘residential improved real estate’’ if it requires the escrow of funds to cover other charges associated with the loan, such as taxes, hazard or fire insurance premiums or other fees. • The escrow requirement does not apply if the institution does not require the maintenance of other escrows or the establishment of an escrow account in connection with the particular type of loan, even if permitted by the loan documents.
Standard Flood Hazard Determination Form • Whenever an institution makes, increases, extends, or renews any loan secured by improved real property or a mobile home, it must use the Standard Flood Hazard Determination Form (SFHDF) developed by FEMA. • Form may be used in printed or electronic format. • Retain a copy of the completed form, in either hard copy or electronic format, for the period of time your institution owns the loan. • A copy of the form is available on FEMA’s website (www.fema.gov).
Reliance on Prior Determination • When determining whether flood insurance is required, an institution may consider the conclusions from a previous flood hazard area determination if both of the following conditions are met: • The previous determination is not more than seven years old. • The basis for that determination was recorded on the SFHDF mandated by the Reform Act. • An institution may not rely on a previous determination set forth on an SFHDF when it makes a loan—only when it increases, extends, renews, or purchases a loan.
Force-Placement Requirements • If at any time during the life of the loan the institution or its servicer determines that flood insurance is required or is deficient, then the institution must take steps to ‘‘force-place’’ the required insurance. • Under the Reform Act, an institution, or a servicer acting on its behalf, must purchase, or force-place, flood insurance for the borrower if the institution or the servicer determines that the security property is not covered by any insurance or by an adequate amount of flood insurance. Before purchasing flood insurance in the appropriate amount on the borrower’s behalf, however, the institution must first provide the borrower with a notice of the deficiency and the opportunity to obtain the correct amount of insurance. If the borrower fails to obtain the insurance within forty-five days of the date of the notice, then the institution may force-place the insurance.
FNMA on Force-Placement • The issue of force-placed insurance has been thrust into the limelight this month by Fannie Mae. Forced-place insurance is a practice that some insurance companies and banks utilize to force homeowners to purchase expensive insurance policies. • Spurred by state, federal and consumer attention, Fannie Mae has announced that it will be changing the rules concerning forced-placed insurance. • Fannie Mae will be overseeing forced-placed insurance policies itself instead of allowing banks and other financial institutions to do so. The company notes that forced-place insurance is often an issue because most homeowners are required to purchase insurance coverage as a provision of their mortgage. These mortgages sometimes impose strict requirements regarding the type of coverage homeowners must have, making their options slim. Fannie Mae has issued a letter to several insurance companies in the U.S. inviting them to compete in the market as a way to bring more options to consumers and reduce the abuse of forced-place insurance practices.
Determination Fees • An institution or its servicer may charge a reasonable fee to the borrower for the costs of making a flood-hazard determination under the following circumstances: • The determination is triggered by a borrower-initiated transaction (that is, the lender is making, increasing, extending, or renewing a loan at the borrower’s request). • The determination reflects FEMA’s revision of maps. • The determination results in the purchase of flood insurance by the lender under the forced-placement provision. • Such reasonable fee can include a fee for life-of-loan monitoring by either the institution, its servicer, or a third party, such as a flood-hazard-determination company.
Truth in Lending Act Issues • The fee for conducting an initial flood-hazard determination is excluded from the finance charge. However, the exclusion does not apply to fees for services to be performed periodically during the term of the loan, regardless of when the fee is collected. • If a creditor is uncertain about what portion of a fee to be paid at consummation or loan closing is related to the initial decision to grant credit, the entire fee may be treated as a finance charge.
Notice Requirements • When the security property is or will be located in a SFHA, the institution must provide a written notice to the borrower and the servicer. • The written notice must contain the following information: • A warning that the building or mobile home is or will be located in a SFHA • A description of the flood insurance purchase requirements contained in section 102(b) of the FDPA, as amended • A statement as to whether flood insurance coverage is available under the NFIP and may also be available from private insurers • A statement as to whether federal disaster relief assistance may be available in the event of damage to the building or mobile home caused by flooding in a federally declared disaster
Timing of the Notice • Delivery of notice must take place within a ‘‘reasonable time’’ before completion of the transaction. • Best practice is to provide the Notice 10 days prior to loan closing.
Recordkeeping Requirements • An institution must retain • Copies of completed SFHD forms, in either hard copy or electronic format, for as long as the institution owns the loan • Records of the receipt of the notice to the borrower and the servicer for as long as the institution owns the loan • No particular form is required for the record of receipt; however, the record should contain a statement from the borrower indicating that the borrower has received the notification. • A borrower’s signed acknowledgment on a copy of the notice • A borrower-initialed list of documents and disclosures that the lender provided the borrower • A scanned electronic image of a receipt or other document signed by the borrower
Penalties and liabilities • Civil money penalties may be imposed for violations of the following: • Flood insurance purchase requirements • Escrow requirements • Notice requirements • Forced-placement requirements • If an institution is found to have a pattern or practice of committing violations, the agencies must assess civil penalties in an amount not to exceed $385 per violation, with a total amount against any one regulated institution not to exceed $125,000 in any calendar year. Penalties are paid into the National Flood Mitigation Fund. Liability for violations may not be transferred to a subsequent purchaser of a loan. Liability for penalties expires four years from the time of the occurrence of the violation.
Current Environment • Regulators and DOJ are currently scrutinizing mortgage servicing and default management practices. • Prudential Regulators • -OCC Bulletin 2011-29 • -OCC guidance of June 30, 2011 • -Interagency Review of Foreclosure Policies and Practices, April 2011 • CFPB • -Examination Guidelines published October 2011 • -Every examination must consider • Compliance Management • Potential UDAAP issues • Risks to Consumers • Discrimination • State Attorneys General • -Multi-state AG Settlement • -Several AGs moving forward with separate investigations
Current Environment, continued • Department of Justice • -Fair Lending MOU with FTC, HUD • -Fair Servicing focus • FHFA Lawsuits • -Sued 17 financial institutions
Summary of Multistate/Federal Settlement of Foreclosure Misconduct Claims • The settlement between the State AGs and 5 leading bank mortgage services resulted in $25 billion in monetary sanctions and relief. • $10 billion dedicated to principal reduction • $5.2 billion for other forms of homeowner assistance such as unemployed payment forbearance, relocation assistance, waiving of deficiency balances, anti-blight programs and benefits for service members • $3 billion for refinancing underwater homes for current borrowers • $2.5 billion paid to participating states • Borrower Payment Fund - dedicated to providing cash payments to borrowers affected in the foreclosure crisis. This fund is in addition to a restitution fund being established by the prudential regulators.
Current Focal Points • Management of Foreclosure Process • Dual Track Processing • Affidavit and Notarization Process • Enhanced Documentation • Regulatory Compliance – e.g., SCRA and Bankruptcy • Third Party Service Provider Oversight
Interagency Reviewof Foreclosure Policies and Practices • Guidance of April 2011 • -The guidance stems from the prudential regulators’ (FRB, OTS and OCC) review of mortgage services during Q4 2010. • Included Ally Bank/GMAC, Aurora Bank, Bank of America, Citibank, • EverBank, HSBC, JPMorgan Chase, MetLife, OneWest, PNC, • Sovereign Bank, SunTrust, U.S. Bank, and Wells Fargo • -Servicers must retain an independent firm to conduct a thorough review of foreclosure actions that occurred between January 2009 and December 2010. • Borrowers who have been identified as having been harmed through foreclosure deficiencies must receive compensation. • These reviews will be subject to regulatory oversight.
Interagency Reviewof Foreclosure Policies and Practices • Because the interagency review only covered sample files and did not review borrowers who were delinquent, yet not in foreclosure, it is believed that all of the problems of the foreclosure crisis have not been identified. Issues pertaining to misapplied payments, unreasonable fees, and loan modifications may yet be discovered. In short, the problems may be more widespread than previously thought. • The following areas were reviewed in the foreclosure assessment: • Policies and procedures • Organizational structure and staffing • Management of third-party service providers • Quality control and internal audit • Compliance with applicable laws
Interagency Reviewof Foreclosure Policies and Practices • Loss mitigation (i.e., the degree to which servicers offered loan modifications and work-outs) • Critical documents (i.e., assignments and endorsement of notes) • Risk management (i.e., whether appropriate risks were identified – financial, reputational, and legal risks) • Critical weaknesses in servicers’ foreclosure governance processes were identified as well as inadequate supervision of third-party vendors, including foreclosure attorneys.
Interagency Reviewof Foreclosure Policies and Practices • Although examiners found that borrowers subject to foreclosure action were seriously delinquent on their loans, at the same time they also found numerous instances were foreclosure actions moved forward when it was not appropriate, including the following intervening conditions: • -the borrower was covered by SCRA • -the borrower filed for bankruptcy prior to the foreclosure action • -the borrower qualified for or was paying in accordance with a trial modification
Renewed Focus on Servicemembers Civil Relief Act (SCRA) • The SCRA covers all Active Duty servicemembers, Reservists and members of the National Guard while on active duty. The protection begins on the date of entering active duty and generally terminates within 30 to 90 days after the date of discharge from active duty. • Last year, Holly Petraeus was appointed by Elizabeth Warren, founder of the federal Consumer Financial Protection Bureau, to head the agency's Office of Servicemember Affairs. Her job is to educate military consumers; to monitor their consumer complaints; and to get other government agencies involved in the cause. • Citi and other banks have gotten into trouble when they foreclosed upon servicemembers
SCRA continued • The Servicemember's Civil Relief Act (SCRA) expanded and improved the former Soldiers' and Sailors' Civil Relief Act. The SCRA provides a wide range of protections for individuals entering, called to active duty in the military, or deployed servicemembers. It is intended to postpone or suspend certain civil obligations to enable service members to devote full attention to duty and relieve stress on the family members of those deployed servicemembers. A few examples of such obligations you may be protected against are: • Outstanding credit card debt • Mortgage payments • Pending trials • Taxes • Terminations of lease
Interagency Reviewof Foreclosure Policies and Practices • Six Significant Weaknesses • (1) Foreclosure Process Governance • (2) Organization Structure and Availability of Staffing • (3) Affidavit and Notarization Practices • (4) Documentation Practices • (5) Third-Party Vendor Management • (6) Control (QC) and Audit
Six Significant Weaknesses • Foreclosure Process Governance – Inadequate policies and procedures, lack of monitoring and controls, lack of audit trails, lack of compliance with applicable regulations, not enough audits, and lack of communication of risks to boards. • Organization Structure and Availability of Staffing – Disorganization, inadequate staffing levels, and an increased volume of foreclosures. • Affidavit and Notarization Practices – Individuals signing affidavits did not personally verify accuracy of document or have personal knowledge attested to in the document. • Documentation Practices – Fees charged were often inaccurate, resulting both in under-charges and over-charges. • Third Party Vendor Management – Not robust enough. • Control QC and Audit – Weak QC processes and not enough audits.
Interagency GuidanceMaking Things Right • Six Elements of Making Things Right: • Compliance Program • Foreclosure Review • Dedicated Resources – Single Point of Contact • Third-Party Management • Management Information Systems • Risk Assessment
Foreclosure File Review • File collection process • Require detailed checklists of all state laws and regulations for each state being reviewed • Checklists should include details pertaining to: • – Default servicing fees • – SCRA • – Bankruptcy • – Loss mitigation activity • Checklists should be in format that minimizes reviewer discretion
Foreclosure Risk Assessment • File Management and Documentation • Enhanced Checklists w/State Law Requirements • Purpose of file review • - Identify financial injuries to borrowers and reimburse as appropriate • - OCC/FRB provided guidance on remediation / Consent Orders • - Identify technical errors in process – and fix going forward • - Use checklists that allow for a yes/no/could not be determined • - Determine problem foreclosure firms – and sever ties/fix problems • - Document retention checklists
CFPB Focus on Loan Servicing • Focus on gathering information and complaints directly from consumers. • Agreement with FTC on access its Sentinel consumer complaint database. • Information-sharing MOUs and agreements with federal and state agencies including banking regulators, FFIEC, FinCEN, NAAG, and Conference of State Bank Supervisors. • General CFPB exam guidance states that “every examination must include a review” of • - Compliance management • - Potential UDAAPs • - Regulatory compliance matters presenting “risks” to consumers • - Discrimination
CFPB Examination Guidelines • Nine Modules: • Servicing Transfers • Payment Processing and Account Maintenance • Customer Inquiries and Complaints • RESPA and Force-Placed Insurance • Credit Reporting • Information Sharing and Privacy • Collections • Loss Mitigation • Foreclosure Practices
Fair Servicing Scrutiny • Increased regulatory, DOJ, and examination focus on fairness in loan servicing and foreclosure practices. • Regulators are engaged in heightened scrutiny of servicing issues, with unprecedented attention to loan-level servicing data. • Scrutiny of foreclosure disparities between protected classes and others. • Increased consumer complaints alleging discrimination in loan servicing. • Poorly documented or undocumented servicing decisions. • High levels of litigation alleging loan servicing discrimination. • Fair Lending Unit within DOJ Civil Rights Division analyzing discrimination in loan modifications. • Demographics at census tract level likely to be an analytical driver.
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