CUNA Regulatory Comment Call

July 31, 2009

EXECUTIVE SUMMARY

• NCUA and the other financial institution regulators have updated the interagency questions and answers regarding flood insurance (Q&As) that were originally published in 1997, and the agencies are requesting public comment on additional, proposed Q&As. The Q&As are intended to serve as guidance on flood insurance requirements for financial institutions, agency personnel, and the public.
• The Q&As have been updated in response to issues that have been brought to the attention of the agencies since they were originally published in 1997. These changes include new questions and answers in a number of areas, including second lien mortgages, civil money penalties, loan participations, construction loans, and condominiums. In addition to addressing new areas, these changes are also intended to provide clearer guidance, including clarifying areas of potential misunderstanding.
• The regulators have also issued for comment additional Q&As that address the calculation of “insurable value” and the requirements for the forced placement of insurance when the property is no longer insured or underinsured.
• The effective date of these revisions is September 21, 2009. Comments in response to the proposed Q&As are also due by September 21, 2009. Please submit your comments to CUNA by September 10, 2009.

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at mdunn@cuna.coop and to Senior Assistant General Counsel Jeff Bloch at jbloch@cuna.coop; or mail them to Mary and Jeff c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6732, if you would like a copy of the Q&As or you may access them here.

BACKGROUND

The National Flood Insurance Reform Act of 1994 (Act) comprehensively revised the flood insurance laws. NCUA and the other federal financial institution regulators issued a joint final rule in 1996 to implement the Act. These agencies then decided to issue additional guidance, resulting in the Q&As that were published in 1997. The agencies have now revised the Q&As and are requesting comment on additional Q&As with regard to the calculation of insurable value and the forced placement of insurance when the property is no longer insured or underinsured.

DESCRIPTION OF THE CHANGES TO THE Q&As

Here are the significant changes to the Q&As that have now been finalized:

• Description of more specific circumstances in which flood insurance would be required.
• Explanation that if a Federal Emergency Management Agency (FEMA) map change removes a building from a flood zone, the lender does not have to continue requiring flood insurance, but has the option to require flood insurance for risk management purposes.
• The lender may, but is not required, to review existing loans on a periodic basis to determine if there is adequate flood insurance.
• More guidance to determine the proper amount of flood insurance that the borrower should be required to purchase and the proper deductible. This would also include additional guidance on the maximum limit of coverage that is available for a particular type of property in a flood zone and would clarify that lenders may require more than the minimum required coverage.
• Flood insurance requirements are not triggered if a loan is restructured or modified, unless the loan amount is increased.
• More guidance on making flood insurance determinations for subordinate lien loans.
• For subsequent loans on a property, a previous flood insurance determination may be used if it was made within the previous seven years, the basis for the determination was reflected in the Special Flood Hazard Determination Form, and there have been no map revisions or updates affecting the property since that earlier determination.
• Additional guidance on the mandatory flood insurance requirements for construction loans that are used to erect buildings that will be located in a flood zone and clarification that land located in a flood zone does not require flood insurance. Lenders must make the flood determination prior to the origination of the construction loan. Insurance may be purchased at that time or, in most circumstances, the lender may permit borrowers defer the purchase until the foundation has been poured and/or the elevation certificate has been issued. The required 30-day waiting period would not apply if the purchase of the insurance is deferred.
• Additional guidance on flood insurance requirements for nonresidential buildings and clarification that the only buildings requiring flood insurance would be those within the flood zone.
• Clarification that the amount of flood insurance required for a condominium in a flood zone would be the lesser of the outstanding principal balance of the loan or the maximum amount of coverage available under the flood insurance program. The lender must require additional insurance if the balance of the loan is higher than the maximum amount of available flood insurance, which could either be an individual owner’s policy or a general condominium policy. The lender must force- place the flood insurance if adequate insurance is not purchased within 45 days after the lender sends notification that there is inadequate insurance on the property. These revisions also clarify the penalties if there is inadequate flood insurance. The revised guidance for condominiums will apply to existing loans as of the first flood insurance policy renewal period that follows the effective date of these proposed revisions to the Q&As.
• Clarification that with respect to loan syndications and participations, individual participating lenders are responsible for complying with the flood insurance requirements if they acquire an interest in the loan at the time it is made. This does not mean the individual lenders have to undertake the necessary actions, but must perform due diligence to ensure that the lead lender and agent are taking the necessary actions to ensure compliance. Those acquiring an interest in the loan after the loan is made would not be subject to the flood insurance requirements.
• Gap, blanket insurance, or other private policies may be appropriate if it meets existing flood insurance guidelines. Even if they do meet the guidelines, they may be appropriate until force placement insurance is obtained in situations in which the previous insurance lapsed and the borrower failed to renew the policy.
• Additional guidance on how lenders should respond if confronted with a discrepancy between the flood insurance zone designations on the hazard determination form and the flood insurance policy. This includes requiring that actions be taken to resolve the discrepancy and to use the higher risk zone designation if the discrepancy cannot be resolved. This also addresses the circumstances in which there may be a finding that the lender violated the flood insurance requirements.
• Clarification that the Notice of Special Flood Hazards must be provided to the borrower each time a loan is made, increased, extended, or renewed, even if a new determination is not required.
• Additional information about the civil money penalties that may be assessed, including the circumstances in which they may be assessed and the maximum penalty amounts.

Here are the additional, proposed changes to the Q&As:

• There will be two additional Q&As to address “insurable value,” which is equivalent to the “replacement cost.” This may be obtained by using the hazard insurance policy, an appraisal based on a cost-value approach, or a construction cost calculation. There will be two alternatives for nonresidential buildings in which the borrower would not replace if damaged or destroyed or would replace with differently to better reflect the purpose of the structure. One alternative will be to use a replacement cost valuation to reflect that less costly materials will be used if the replacement structure will be different than the original. The other alternative will be to use a valuation that reflects the cost to demolish and remove the original structure if it will not be replaced.
• There will be three additional Q&As with regard to the force placement of flood insurance in which the lender may obtain such insurance 45 days after notifying the borrower that the previous insurance has lapsed. These Q&As clarify that the 45-day period cannot begin until the lender has sent the notice, regardless of when the insurance lapsed. Although the lender may delay implementing the force placed insurance if the borrower fails to act within the 45-day period, any delay should be brief there should be a reasonable explanation. Lenders may not charge the borrower for the cost of insurance coverage during this 45-day period.

• Do you have concerns with the proposed Q&As with regard to the replacement cost valuations and the provisions for implementing force placement insurance when the previous insurance has lapsed?
  
  

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• Other comments?
  
  

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