| By Mitch Hockman, Sentry Advisors, LLC Background & Overview In July 2012, Congress passed the Biggert-Waters Flood Insurance Reform Act, mandating significant changes to flood insurance practices. Key provisions from this law are set to take effect on December 31, 2024. Under the final rule, borrowers who are not already required to escrow their monthly flood insurance premiums will have the option at the time of a new application (or at the time of renewal for existing customers) to pay them annually or in monthly installment payments using automatic, electronic payments through their insurer. This new requirement will affect any first lien consumer closed-end loan, any loan secured by a subordinate lien, and any Home Equity Lines of Credit. Additionally, the final rule states “This rule will fulfill the statutory requirements by allowing residential and commercial policyholders to pay their premiums in 11 to 12 payments over the course of the year”. This language confirms the newly established requirements apply to both residential and commercial borrowers. https://www.federalregister.gov/d/2024-2521 3/p-36 Other Compliance Implications With the implementation of this new rule, there are several other key compliance implications institutions will need to consider. Force Placement Requirements Flood Vendor Due Diligence Escrow Accounts Force Placement Requirements Section 44 CFR 61.10 under the new rule is being revised to state “FEMA will not issue or renew flood insurance unless it received the full amount due, which is either presentment of the full premium or presentment of the first of a monthly premium installment payment inclusive of all surcharges, fees and assessments.” https://www.federalregister.gov/d/2024-25213/p-18 Keeping the Flood Disaster Protection Act requirements in mind, should a borrower under this new rule miss a payment in their installment plan, institutions will have to send a 45-day force placement notice to borrowers. Prior to this final rule, the chance of a customer missing a premium payment might occur once per year; however, with the new rule, even with automatic payments, a customer has 12 opportunities to miss a payment. Institutions that do not require escrow will likely need to consider amending force placement procedures to ensure notices are sent in a timely manner. Flood Vendor Due Diligence It is frequent practice for institutions to rely on third party flood vendors to monitor their flood positive portfolios. Many times, these companies will notify institutions of coverage lapses, policy expirations, and flood zone changes. Given the final rule will affect all newly originated and seasoned flood loans (upon renewal of existing policies), institutions must consider whether their flood vendor can adequately track the monthly premium payments and give timely notification of any lapses in coverage. Instead of flood loans being reviewed annually, there is likely to be a large pool of loans that will now have to be monitored monthly to ensure no lapses in coverage. Partnering with a capable vendor will help streamline compliance with the new rule. Escrow Accounts Alternatively, for institutions that meet the small servicer definition as stated in section 12 CFR 1026.41(e)(4) of Regulation X and therefore do not have to offer escrow, a discussion may be warranted to determine whether your institution wants to start requiring escrow accounts for applicable loans to mitigate the risk of noncompliance with flood insurance and force placement requirements. |
Financial Services Risk Management