Hold Back the Flood Waters: Keeping Up with FDPA to Ensure Mortgage Compliance
By Ed Marcheselli
June 3, 2019
Ed Marcheselli is managing director of Learning & Development for BAI, Chicago, a nonprofit, independent organization that delivers actionable insights for the financial services industry.
What will be the most expensive natural disaster this year? Based on winter 2018-19 being the wettest on record in the United States, the NOAA predicts it could be flooding.
In an April report, the Weather Channel anticipates large parts of the country could be facing significant flood risks this summer, due to the already saturated soils and accounting for even an average-impact hurricane season.
With the Mississippi and Ohio River Basins already dealing with flooding earlier this spring, and a significant percentage of the country facing an elevated risk of flooding this summer, mortgage professionals need to be diligent about providing efficient and effective employee training in order to comply with the Flood Disaster Preparation Act of 1973.
Flood insurance is a critical component of any loan on a commercial or residential property that sits in a high-risk flood zone. Since most homeowners' insurance policies do not specifically cover flood damage, regulators require special policies and expect lenders to determine whether the loan requires coverage.
Mortgage leaders may ask, "What is the consequence of not following FDPA regulations?" Currently, the penalty is $2,000 for each violation with no accrued maximum--not to mention the financial losses that result from flood damage to an uninsured or underinsured building.
While the law itself has been in effect for more than four decades, the criteria for determining eligibility and the regulations outlining borrower communication are constantly shifting. Common violations can include failing to determine the property's flood zone status, failing to maintain insurance through the life of the loan and failing to notify borrowers of flood insurance requirements. Mortgage leaders should build FDPA compliance training into their annual professional development plans to ensure that they are compliant with the latest regulatory expectations.
Recent Developments in FDPA Requirements
FDPA has been revised many times over the years. On average, Congress amends it about once a decade, including reforms outlined in the National Flood Insurance Reform Act of 1994, the Biggert-Waters Act of 2012 and the Homeowner Flood Insurance Affordability Act of 2014.
Most recently, the Office of the Comptroller of the Currency and the Federal Reserve released a final rule offering guidance to financial services organizations related to the acceptance of private flood insurance for properties in special flood zones. The challenge the revisions attempt to address is that over the decades, flood insurance has become one of the most expensive settlement costs faced by borrowers, potentially ranging between $200-500 per month in addition to the mortgage payment. Lenders are also limited in which insurance companies they can accept flood policies from due to the legal definitions of an accepted plan.
Effective July 1, however, financial services organizations will have more flexibility in defining the standards needed to meet the legal definition of "private flood insurance." This should enable mortgage professionals to have a broader choice of prices and coverages that still protect the property without disqualifying some borrowers due to the additional costs of mandated insurance.
Training Lenders to Communicate FDPA Requirements to Borrowers
It is important that mortgage leaders ensure their FDPA training includes educating lenders on how to communicate necessary information with borrowers. For example, lenders must provide a written notice of special flood hazard areas to a borrower--and receive acknowledgement of the notice from the borrower--at least 10 days prior to closing to enable time to obtain a suitable policy. Without evidence of proper flood insurance, the closing must be delayed. This notice is required to be retained for the life of the loan.
Additionally, while many borrowers assume their real estate agent will let them know if they are in a flood plain, it is actually the lender's responsibility to determine the flood status and to notify borrowers within a reasonable time before loan closing.
Other areas of confusion arise around topics such as escrow. The FDPA requires lenders to specifically include flood insurance premiums in the escrow for general insurance and taxes. Additionally, once a policy has been identified, lenders must communicate with the borrower if it is determined that the policy is insufficient to cover the cost of the property. This applies even if the determination occurs after closing, such as if new flood zone maps move a property into a flood zone. If the borrower refuses the coverage or fails to purchase appropriate insurance within 45 days of notice, lenders are required to purchase, or force-place, the insurance on their behalf.
Under the Biggert-Waters Act, lenders can charge the borrower for their costs. However, if a homeowner proves existing flood insurance coverage, the lender must terminate the force-placed insurance within 30 days of receipt.
The easiest way to ensure compliance is to build FDPA training into an organization's regular development schedule. Lenders can leverage compliance training courses that can be conducted online or in person. Ensuring mortgage employees have the training necessary to follow FDPA guidelines can build a levee to protect against the fines and regulatory actions for rising flood insurance requirements.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)