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Flood Insurance Rule Changes

On July 6, 2012, President Obama signed into law the transportation bill, which included the Biggert-Waters Flood Insurance Reform Act of 2012. Most important, the Act extended the National Flood Insurance Program which was scheduled to expire on July 31, 2012 to September 30, 2017. The most significant element of the Act is that flood insurance premiums in the future will be determined based on an actuarial basis rather than being subsidized by the government and, therefore, will increase substantially. For persons that already have flood insurance, in most cases, the increase will be incremental over the next five years.

The Act contains several other provisions that more directly affect financial institutions. Those provisions are:

  • The civil money penalty for a flood insurance violation is increased from $350 to$2000, and there is no longer an aggregate maximum.
  • The NFIP insurance available for residential structures with more than four units is increased from $250,000 to $500,000. For 1-4 family residential structures, it remains at $250,000.
  • If a financial institution makes a loan secured by improved real estate or a mobile home located in a flood hazard area, it must establish an escrow for flood insurance. The exception to the rule is that if the institution has assets of less than $1,000,000,000 and on the date of the enactment of the Act it did not have a policy requiring the escrow of taxes and casualty insurance premiums on residential real estate and mobile home loans and is not required by state law to escrow for taxes and insurance. This provision will become effective two years from the date of the enactment of the Act. While the language of the Act is unclear, it appears to expand the mandatory escrow provisions now in place for residential real estate to loans secured by commercial real estate. If an escrow is required, a payment must be required to the escrow with every scheduled payment on the loan.
  • A clarification that flood insurance underwritten by a private company meets the requirements of the Act if it meets the underwriting requirements of Fannie Mae and Freddie Mac and that a financial institution must accept qualifying private flood insurance when flood insurance is required.
  • A requirement that a notice be given to all borrowers of loans secured by improved real estate, whether the real estate is or is not in a designated flood hazard area, that flood insurance is available from the NFIP or from a private company.
  • A requirement that lenders provide a notice to covered borrowers stating that flood insurance is available from private insurance companies as well as the NFIP, that the insurance available from private companies has the same level of coverage as policies issued by the NFIP and encourages borrowers to compare private insurance coverage with that from the NFIP.
  • A requirement that a lender cancel force placed flood insurance coverage within 30 days of receiving confirmation that a borrower has acceptable insurance in place and rebate the force place insurance premium for any period that the borrower has provided insurance.

Again, the principal thrust of the Act is to minimize the government cost in providing flood insurance. Premiums will increase, private insurance is being encouraged, and FEMA is given the authority to reinsure the coverage that it issues. People who are required to purchase flood insurance will not like the new provisions real well, but for the majority of us who do not need flood insurance, it is a glimmer of fiscal responsibility on the part of the government. The implementation of the new provisions is dependent on the agency responsible, in most cases FEMA, issuing implementing rules and regulations. It is unknown when those will be written and published, but FEMA is usually fairly prompt in reacting to the changes in the flood laws.
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The above article was provided to Andrews Hooper Pavlik PLC (AHP) courtesy of TriComply, the compliance arm of TriNovus. AHP does not guarantee accuracy of the information provided in the article and it should not be construed as professional advice. If you have any questions regarding this article, please contact Randy Morse, CPA, partner and leader of AHP’s Financial Institution practice. AHP provides a broad range of accounting, auditing, tax, and consulting services to financial institutions throughout the state of Michigan and beyond.

TriComply compliance service offer banks a full compliance package that provides them with quality assistance at an affordable price. TriComply provides the TriComply knowledgebase, compliance manual, policy manual (written and reviewed), compliance newsletter (weekly), advertisement review, compliance calendar, helpful resources and an online training library of compliance webinars.

The CFPB now has control over certain consumer protection laws. As a result, TriComply has put out a product called CFPB Comparisons: What Really Changed. This produce allows you to see the changes firsthand versus going line by line on your own. Thus saving you hours of stress, anxiety and work. Please contact Starr Largin at 205.588.4316 or or Darryl Brasfield at to receive information regarding TriComply or to schedule a demo.