The Division of Banks held an informational hearing on September 11 in connection with flood insurance rules it will be issuing that would require creditors, including banks, to deliver certain disclosures to home mortgage loan borrowers if a borrower is required to purchase flood insurance. The rules would implement Chapter 177 of the Acts of 2014, An Act Further Regulating Flood Insurance, which was signed into law by Governor Patrick on July 23. The new flood insurance law, which goes into effect on November 20, 2014, prohibits a creditor from requiring flood insurance in an amount greater than the balance of the mortgage on a 1- to 4-family residential property. The law also prohibits a creditor from requiring flood insurance coverage with less than a $5,000 deductible or that includes coverage for contents. The law requires that a disclosure of certain requirements of the law be provided if a borrower is required to purchase flood insurance on such a residential property and directs the Commissioner of Banks to adopt regulations to implement the law. Public comments submitted to the Division of Banks have sought to clarify whether the law applies only to residential (i.e., owner-occupied) properties or to investment properties that may be underwritten as commercial mortgages and how often flood insurance coverage amounts would need to be reassessed, among other things. The Division of Banks has not yet released a proposed rule to implement the new flood insurance requirements.
Nutter Notes: The Flood Disaster Protection Act of 1973 (“FDPA”), as amended by the National Flood Insurance Reform Act of 1994, requires the federal banking agencies to adopt regulations prohibiting 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 a special flood hazard area (“SFHA”) of a community participating in the National Flood Insurance Program (“NFIP”), unless the property securing the loan is covered by flood insurance. Under the FDPA and its implementing regulations, the amount of insurance must be at least equal to the lesser of the outstanding principal balance of the loan or the maximum limit of coverage available for the particular type of property under the National Flood Insurance Act of 1968 (the “NFIA”). Flood insurance coverage under the NFIA is limited to the overall value of the property securing the designated loan minus the value of the land on which the property is located. The federal rules also require the lender to deliver a written notice to the borrower if the property is located in an SFHA about whether or not flood insurance is available under the NFIA for the collateral securing the loan. The federal flood insurance requirements are applicable to any loan secured by a building or mobile home that is located or to be located in an SFHA in which flood insurance is available under the NFIA. In addition, government guaranteed or insured loans (secured or unsecured) cannot be made if the community has been mapped for SFHAs by the Federal Emergency Management Agency but the community does not participate in the NFIP.