FDIC San Francisco Region Regulatory Teleconference

1. 1 FDIC San Francisco RegionRegulatory Teleconference Flood Insurance Best Practices – Protecting You and Your Customer June 18, 2008

2. 2 Introductions Opening Remarks Robert J. Wirtz Assistant Regional Director – Compliance Presenters Hollee Oberholzer Senior Compliance Examiner Heather Gilliams Compliance Review Examiner

3. 3 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

4. 4 Regulatory Requirements Determinations Notifications Coverage Escrow Force Placement

5. 5 Determination Requirements Completion of Standard Flood Hazard Determination Form (SFHDF) Use of prior determination Retain copy of SFHDF over life of loan

6. 6 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

7. 7 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

8. 8 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

9. 9 NFIP Maximum Coverage Limits

10. 10 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

11. 11 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

12. 12 Calculating Coverage Multiple Structures Requirements Example Condominium Coverage Requirements Example – RCBAP exists Example – no RCBAP exists

13. 13 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

14. 14 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)

15. 15 Multiple Structure Example (cont.) Answer: $1,000,000

16. 16 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

17. 17 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

18. 18 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

19. 19 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)

20. 20 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

21. 21 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

22. 22 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

23. 23 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

24. 24 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

25. 25 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

26. 26 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

27. 27 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

28. 28 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)

29. 29 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

30. 30 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)

31. 31 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

32. 32 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

33. 33 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

34. 34 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

35. 35 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

36. 36 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

37. 37 Resources Part 339 – FDIC Rules & Regulations 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 Flood Insurance Manual – May 2008 http://www.fema.gov/business/nfip/manual.shtm Answers to Questions about the NFIP http://www.fema.gov/business/nfip/qanda.shtm

38. 38 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 FIL 114-2007: Managing Risks Associated With Lapses in Flood Insurance Coverage 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

39. 39 Question and Answer Session

40. 40 Further Questions?