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FDIC San Francisco Region Regulatory Teleconference - Flood Insurance Best ...

2. Introductions. Opening RemarksRobert J. WirtzAssistant Regional Director

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FDIC San Francisco Region Regulatory Teleconference

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FDIC San Francisco RegionRegulatory Teleconference

Flood Insurance Best Practices – Protecting You and Your Customer

June 18, 2008

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Opening Remarks

Robert J. Wirtz

Assistant Regional Director – Compliance


Hollee Oberholzer

Senior Compliance Examiner

Heather Gilliams

Compliance Review Examiner

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  • Regulatory Requirements

  • Coverage Calculations

  • Flood Compliance – Problem Areas

  • FEMA Guide Changes

  • Proposed Revisions to Interagency Q&As

  • Best Practices

  • Resources

  • Question and Answer Session

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Regulatory Requirements

  • Determinations

  • Notifications

  • Coverage

  • Escrow

  • Force Placement

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Determination Requirements

  • Completion of Standard Flood Hazard Determination Form (SFHDF)

  • Use of prior determination

  • Retain copy of SFHDF over life of loan

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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

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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

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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

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NFIP Maximum Coverage Limits

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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

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Force Placement Requirements

If lender determines that property is not adequately


  • 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

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Calculating Coverage

  • Multiple Structures

    • Requirements

    • Example

  • Condominium Coverage

    • Requirements

    • Example – RCBAP exists

    • Example – no RCBAP exists

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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

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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)

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Multiple Structure Example (cont.)

Answer: $1,000,000

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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

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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

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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

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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)

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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

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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

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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

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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

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    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

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    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

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    Civil Money Penalties (CMPs)

    • Mandatory CMPs for pattern or practiceof 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

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    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

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    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)

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    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

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    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)

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    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

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    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

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    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

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    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

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    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

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    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

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    • Part 339 – FDIC Rules & Regulations

    • Mandatory Purchase of Flood Insurance Guidelines – September 2007

    • Flood Insurance Manual – May 2008

    • Answers to Questions about the NFIP

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    Resources (cont.)

    Financial Institution Letters:

    • FIL 23-2008: Proposed Revisions to Interagency Questions and Answers Regarding Flood Insurance

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

    • FIL 81-2001: Strengthening Compliance with Federal Flood Insurance Requirements

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    Question and Answer Session

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    Further Questions?

    Please Contact Your Local Review Examiner