# Presentation: 306361

## FDIC San Francisco RegionRegulatory Teleconference

- Flood Insurance Best Practices – Protecting You and Your Customer
*June 18, 2008*

## Introductions

- _Opening Remarks_
- 	*Robert J. Wirtz*
*	**Assistant Regional Director – Compliance*
- _Presenters_
*Hollee Oberholzer*
*Senior Compliance Examiner*
*Heather Gilliams*
*Compliance Review Examiner*

## Overview

- Regulatory Requirements
- Coverage Calculations
- Flood Compliance – Problem Areas
- FEMA Guide Changes
- Proposed Revisions to Interagency Q&As
- Best Practices
- Resources
- Question and Answer Session

## Regulatory Requirements

- Determinations
- Notifications
- Coverage
- Escrow
- Force Placement

## Determination Requirements

- Completion of Standard Flood Hazard Determination Form (SFHDF)
- Use of prior determination
- Retain copy of SFHDF over life of loan

## Notification Requirements

- Notice to borrower and servicer
- Required for structures located in participating _and_ non-participating communities
- Delivery of notice within reasonable time prior to closing
- New notice required for each origination, extension, increase, and renewal

## Coverage Requirements

**Mandatory Purchase Provision**
- If improved property located in Special Flood
- Hazard Area (SFHA), lender CANNOT:
- Make
- Extend
- Renew
- Increase
- Without sufficient flood insurance coverage over
- the life of the loan

## Coverage Requirements (cont.)

- Minimum Coverage Equal To _**Lesser**_ of:
- Outstanding principal balance of loan(s); or
- Maximum NFIP coverage available; or
- Full insurable value (100% replacement cost value [RCV]) of building and/or contents

## NFIP Maximum Coverage Limits

| Structure 
Type | Building Coverage | Content Coverage |
| --- | --- | --- |
| Residential | $250,000 | $100,000 |
| Commercial | $500,000 | $500,000 |

## Escrow Requirements

- Flood insurance premiums must be escrowed when lender _requires_ escrow for other purposes, such as taxes or hazard insurance
- Not required for voluntary escrow accounts
- Types of property covered:
- Single-family
- Multi-family
- Manufactured homes

## Force Placement Requirements

- If lender determines that property is not adequately
- insured:
- Provide notice to borrower of requirement to obtain adequate coverage
- Provide borrower opportunity to obtain necessary insurance (45 days)
- If borrower fails to obtain coverage within 45 days, must purchase insurance on behalf of borrower
- May charge borrower cost of premiums and fees incurred

## Calculating Coverage

- Multiple Structures
- Requirements
- Example
- Condominium Coverage
- Requirements
- Example – RCBAP exists
- Example – no RCBAP exists

## Multiple Structures

- Only one policy can be issued per structure
- Each insurable structure located in a SFHA _must_ have insurance
- Aggregated insurance coverage must be adequate to cover loan (unless maximum RCV or NFIP limit has been reached)
- Distribution of coverage among buildings is at lender’s discretion

## Multiple Structure Example

**Question:**  How much insurance is required?
- Loan secured by three buildings in SFHA
- One single-family residence:
- Valued at $200,000 (exclusive of land)
- Two commercial buildings:
- One valued at $1,000,000 (exclusive of land)
- One value at $300,000 (exclusive of land)
- Loan amount is $2,000,000 (first lien)

## Multiple Structure Example (cont.)

| Structure | (A)
Improvement Value | (B)
Max NFIP
Available | Lesser of
A and B |
| --- | --- | --- | --- |
| Single-family | $200,000 | $250,000 | $200,000 |
| Commercial #1 | $1,000,000 | $500,000 | $500,000 |
| Commercial 
# 2 | $300,000 | $500,000 | $300,000 |
| Aggregate of max building coverage |  |  | $1,000,000 |
| Loan amount |  |  | $2,000,000 |
| Lesser of aggregate coverage and loan amount |  |  | $1,000,000 |

**Answer: $1,000,000**

## Condo Coverage Requirements

**Dwelling Policy**
- Required Coverage is _**Lesser**_ of:
- Outstanding principal balance of loan(s); or
- Maximum amount of insurance available under NFIP, which is lesser of:
- Max limit for residential condo unit ($250,000), or
- “Insurable value” of condo unit – RCV of building / # units

## Condo Coverage Requirements (cont.)

**Residential Condominium **
**Association Policy (RCBAP)**
- No coinsurance (Dwelling Policy) required if:
- _Current_: RCBAP = 80 percent of building RCV
- _Proposed_: RCBAP = 100 percent of building RCV*
- * *FIL 23-2008: Proposed Revisions to Interagency Questions and Answers Regarding Flood Insurance*

## Condominium Coverage Example – RCBAP Exists

**Question:**  Is additional insurance (Dwelling Policy) 		required?
- Principal balance loan:  $300,000
- Number of units: 50
- RCV (100%): $15 million
- RCBAP: $12.5 million

## Condominium Coverage Example – RCBAP Exists (cont.)

**Answer:  **No
- Determine required unit coverage: $250,000
-     _Lesser_ of:
- Loan amount:  $300,000
- Insurable value of unit:  $300,000 ($15 million RCV/50 units)
- Max NFIP coverage:  $250,000
- Compare to RCBAP’s per unit coverage: $250,000
- Per unit coverage:  $250,000 ($12.5 million/50 units)

## Condominium Coverage Requirements – No RCBAP

**Question:**  What amount of coverage (Dwelling 			Policy) must lender require?
- Outstanding principal balance:  $175,000
- Number of units:  50
- RCV:  $10 million

## Condominium Coverage Requirements – No RCBAP

**Answer:**  $175,000
- _Lesser_ of:
- Loan amount:  $175,000
- Insurable value of unit:  $200,000 ($10 million RCV/50 units)
- Max NFIP coverage:  $250,000

## Flood Compliance – Problem Areas

- During 2007, 20% of exams in SF Region had one
- or more violations of Part 339
- Problem Areas:
- Insufficient coverage
- Lack of coverage at origination
- Lapse in coverage
- Late borrower notification
- No borrower notification
- Force placement requirements
- Flood determinations

## Flood Compliance – Problem Areas (cont.)

- Insufficient coverage
- Multiple Structures – no insurance on one or more buildings
- Junior Liens – did not consider first lien balance
- Cash-out refinances – did not increase coverage
- Insured for incorrect risk rating zone
- Excessive deductibles
- No insurance on building and/or contents at origination
- Premiums collected at closing
- Use of binder to demonstrate proof on insurance
- Abundance of caution loans
- No contents coverage – commercial loans

## Flood Compliance – Problem Areas (cont.)

- Lapse in coverage
- Lack of monitoring for coverage
- Misconception that life of loan flood _determination_ coverage monitors flood _insurance_ coverage
- Late borrower notification
- Providing notice at closing
- Obtaining SFHDF after underwriting complete – delays delivery of notice
- No borrower notification
- Refinances, extensions, renewals, increases
- Properties in non-participating communities

## Flood Compliance – Problem Areas (cont.)

- Force placement requirements
- Failure to notify borrower of inadequate coverage
- Failure to force place after 45 days of notification
- Use of standard flood determination form
- Not obtaining flood determination
- Not retaining SFHDF

## Civil Money Penalties (CMPs)

- Mandatory CMPs for *pattern or practice**** ***of violations of following requirements:
- Purchase of flood insurance
- Escrow of flood insurance premiums
- Forced placement of flood insurance
- Borrower Notification
- Servicer Notification
- Penalty of up to $385 per _violation_, maximum $125,000 per year

## San Francisco Region Flood CMPs

- Since January 2007, 10 CMPs have been issued for flood insurance violations
- Penalties up to $55,000
- Seeing an upward trend in CMP cases, both in number and the amount of CMP

## Pattern or Practice

- Not defined by Flood Disaster Protection Act
- Facts and circumstances weighed for each case
- Look to guidance and experience under other regulations
- Regulation B (Equal Credit Opportunity Act)
*The Policy Statement on Discrimination in Lending*
- Regulation Z (Truth in Lending)

## Pattern or Practice (cont.)

- Factors considered (but not limited to):
- Common cause
- Existence of written policy or established practice
- Duration of violations
- Relationship among violations
- Significance in relation to total number of applicable transactions
- Prior violations
- Effectiveness of flood insurance policies, procedures, training, monitoring, and audit function

## FEMA Guide Changes

***Mandatory Purchase of Flood Insurance Guidelines***
- Highlights of Revisions (effective September 2007):
- Section A
- Flowchart illustrating mandatory purchase process at loan origination
- Section B
- Flood zone discrepancies between SFHDF and policy
- Letter of Determination Review (LODR)

## FEMA Guide Changes (cont.)

- Section C
- Purchasing coverage for construction loans
- Section D
- RCBAP coverage
- Declarations page must show RCV and number of units
- Recommends 100% RCV
- Section E
- Flowchart describing tripwires during life of loan

## Interagency Flood Q&As*

- Proposed Revisions
- Comment period ended May 20, 2008
- Agencies received 60 unique comments
- Final adoption anticipated by year-end
- New topics:
- Second liens
- Syndications/participations
- Flood zone discrepancies
- Imposition of CMPs
- Substantive modifications:
- Construction loans
- Condominium loans
- * *FIL 23-2008: Proposed Revisions to Interagency Questions and Answers Regarding Flood Insurance*

## Interagency Flood Q&As (cont.)

- Second liens
- Must ensure sufficient coverage for all loans (or max available)
- Syndications/participations
- Participating lender expected to undertake due diligence to ensure lead lender or agent:
- Obtains insurance where necessary
- Has controls in place to monitor for compliance
- Agreements should provide for lead or agent to provide info to participants
- Flood zone discrepancies
- Must have process in place to identify and resolve discrepancies
- Imposition of CMPs
- General standards for determining pattern or practice

## Interagency Flood Q&As (cont.)

- Construction loans
- May require purchase at time loan is made (best practice); OR
- When foundation slab poured or elevation certificate issued; _provided_ adequate internal controls are in place
- Condominium loans
- RCBAP = _100%_ of RCV (or # units x $250,000)
- If adopted, updated coverage required for:
- New loan originations, extensions, increases, renewals –
- 	immediately after effective date
- Existing loans – first policy renewal after effective date
- If RCBAP insufficient, borrower must obtain Dwelling Policy to make up difference

## Best Practices

- Comprehensive written procedures and training
- Order SFHDF upon receipt of completed application
- Send borrower notification immediately
- Retain documentation of when notice provided/mailed
- Appraisals
- Request breakdown of value of structure(s)
- Review flood policies
- Risk rating zone matches SFHDF
- Deductible does not exceed NFIP maximums
- Centralize
- Reviews of flood policies
- Monitoring of flood insurance

## Best Practices (cont.)

- Secondary reviews of designated loans
- Prior to closing
- Notification and purchase requirements
- Frequent flood determination vender queries
- Determinations in SFHA
- Periodic reviews of tickler system
- Targeted audits of designated loans
- Map changes
- Life of loan determinations
- No LOL – review portfolio

## Resources

- Part 339 – FDIC Rules & Regulations
- 	_[http://www.fdic.gov/regulations/laws/rules/2000-6100.html#2000part339](http://www.fdic.gov/regulations/laws/rules/2000-6100.html#2000part339)_
*Mandatory Purchase of Flood Insurance Guidelines – *September 2007
*	*_[http://www.fema.gov/library/viewRecord.do?id=2954](http://www.fema.gov/library/viewRecord.do?id=2954)_
- Flood Insurance Manual – May 2008
- 	_[http://www.fema.gov/business/nfip/manual.shtm](http://www.fema.gov/business/nfip/manual.shtm)_
- Answers to Questions about the NFIP
- 	_[http://](http://www.fema.gov/business/nfip/qanda.shtm)__[www.fema.gov/business/nfip/qanda.shtm](http://www.fema.gov/business/nfip/qanda.shtm)_

## Resources (cont.)

- Financial Institution Letters:
- FIL 23-2008: Proposed Revisions to Interagency Questions and Answers Regarding Flood Insurance
- 	_[http://www.fdic.gov/news/news/financial/2008/fil08023.html](http://www.fdic.gov/news/news/financial/2008/fil08023.html)_
- FIL 114-2007: Managing Risks Associated With Lapses in Flood Insurance Coverage
- 	_[http://www.fdic.gov/news/news/financial/2007/fil07114.html](http://www.fdic.gov/news/news/financial/2007/fil07114.html)_
- FIL 81-2001: Strengthening Compliance with Federal Flood Insurance Requirements
- 	_[http://www.fdic.gov/news/news/financial/2001/fil0181.html](http://www.fdic.gov/news/news/financial/2001/fil0181.html)_

## 
Question and Answer Session

- Question and Answer Session

## Further Questions?

| Northern California, Nevada,
Hawaii, Pacific Islands
Heather Gilliams
(415) 808-8110
hgilliams@fdic.gov | Southern California
Elizabeth Gonzales
(949) 582-2858 ext. 4335
egonzales@fdic.gov |
| --- | --- |
| Washington, Oregon, 
Idaho, Alaska
Phil Peters
(206) 284-1112 ext. 4839	
ppeters@fdic.gov | Utah, Arizona, 
Montana, Wyoming
Carol Saccomonto
(415) 808-8117
csaccomonto@fdic.gov |

- Please Contact Your Local Review Examiner