New law washes away some Biggert-Waters damage

Congress has passed, and the President has signed, the Homeowner Flood Insurance Affordability Act of 2014.

The legislation reverses some of the damage done by the Biggert-Waters Flood Insurance Reform Act of just two years ago to homeowners who have, or will be, facing significant increases in flood insurance premiums.

Relief for hammered homeowners

Much of the focus of Congress in passing the law, and why it received enough bi-partisan support, was because it was primarily intended to relieve homeowners who were facing unanticipated increases in flood insurance premiums this year and for the foreseeable future, as well as impacting home sales in parts of the country that can least afford it.

Most of the headlines about the new law focus on the premium relief for homeowners, and rightfully so. Lawmakers were persuaded to take action by stories of homeowners who were seeing dramatic increases in flood insurance premiums.

The new law will help homeowners by limiting annual rate increases to 18% per year. It also eliminates the sales trigger, which required homebuyers to pay the full risk rate for flood insurance when a home was sold. That was definitely putting a damper on home sales in many parts of the country.

What new law means for lenders

But, there is also some impact of the new law on lenders. The primary effect is the change to the escrow rules for flood insurance premiums. The regulators’ flood insurance escrow rules for the Biggert-Waters law, which are still in proposed form, and scheduled to become effective in July 2014, will now have to be revised and re-proposed under the new law.

However, the new law postpones the effective date for mandatory escrowing of flood insurance premiums for affected loans to Jan. 1, 2016.

Additional exemptions have also been added. In addition to the exemption for lenders under $1 billion, exemptions have been added for:

• Business purpose loans secured by residential improved real estate or a mobile home

• Home equity lines of credit

• Loans with terms of not longer than 12 months

• Nonperforming loans

• Loans in a subordinate position to a senior lien secured by the same residential property for which flood insurance is being provided at the time of the origination of the loan

• Loans secured by condominiums that are covered by an acceptable group association policy

Regulators have to issue regulations to implement the statute. The statute also includes a provision that requires the agencies to issue regulations to direct regulated institutions to offer and make available to a borrower the option to have the borrower’s payment of premiums and fees for flood insurance escrowed.

What that will look like, we’ll have to wait and see. In the meantime, it appears that the requirement to escrow all flood insurance premiums beginning July 2014 is on hold.

Don’t forget the disclosures

A new law wouldn’t be complete without at least some new disclosure. Lawmakers can’t resist adding at least some new disclosure to a new law. Included in the new law is an amendment to RESPA in the form of an added disclosure to the Special Information Booklet. The new statement reads:

“Although you may not be required to maintain flood insurance on all structures, you may still wish to do so, and your mortgage lender may still require you to do so to protect the collateral securing the mortgage. If you choose to not maintain flood insurance on a structure, and it floods, you are responsible for all flood losses relating to that structure.”

The moral of the story here is, don’t order too many Special Information Booklets right now. They are already out of date.

The reason for this disclosure and change to the Special Information Booklet is another change made by the new law: Elimination of the requirement to obtain flood insurance for detached structures on residential properties.

A guest house or a detached garage with a living space above the garage are two examples. This may be welcome news for compliance folks. Missing flood insurance policies for multiples structures has been cited as a technical compliance violation in recent compliance examinations.

However, lenders may not want to be too quick to change their policy of requiring flood insurance on all structures to protect the collateral in the event of a flood. For safety and soundness reasons, it is still a good idea to require flood insurance for all collateral in a flood zone.

More information will be coming soon about the new Flood legislation. Back to the drawing board for the regulators with the flood escrow rules.