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					Flood Insurance Requirements &
   Spotlight on Loan Servicing

       BCAC Seminar
        March 2012
Objectives and Summary
•   Flood Insurance Requirements
    • Review & Best Practices

•   Spotlight on Loan Servicing
     • Current Environment
     • Notable Litigation
     • Servicemembers Civil Relief Act
     • Loss Mitigation & Foreclosure Practices

Flood Disaster Protection Act
Flood Disaster Protection Act of 1973

•   Written policies and procedures
•   Make, Increase, Renew or Extend (MIRE)
•   Amount of Insurance
•   Contents Insurance on Commercial Loans
•   Escrow Requirements
•   Force-Placement
•   Special Flood Hazard Determination Form
•   Life of Loan Coverage

Objectives of the FDPA
•   Providing flood insurance to owners of improved real
    estate located in special flood hazard areas (SFHAs) of
    communities participating in the National Flood Insurance
    Program (NFIP).
•   Requiring communities to enact measures designed to
    reduce or avoid future flood losses as a condition for
    making federally subsidized flood insurance available.
•   Requiring federal financial regulatory agencies to adopt
    regulations prohibiting their regulated lending institutions
    from making, increasing, extending, or renewing a loan
    secured by improved real estate or a mobile home
    located, or to be located, in an SFHA of a community
    participating in the NFIP unless the property securing the
    loan is covered by flood insurance.
•   Prohibiting federal agencies, such as the Federal Housing
    Administration, the Small Business Administration, and the
    Department of Veterans Affairs, from subsidizing, insuring,
    or guaranteeing any loan if the property securing the loan
    is in an SFHA of a community not participating in the NFIP.

Federal Emergency Management
Agency (FEMA)
 FEMA administers the National Flood Insurance
  Program (NFIP). Its responsibilities include:
• Identifying communities with SFHAs
• Issuing flood-boundary and flood-rate maps for
  flood-prone areas
• Making flood insurance available through the NFIP
  ‘‘Write Your Own’’ program, which enables the
  public to purchase NFIP coverage from private
  companies that have entered into agreements with
  the Federal Insurance Administration
• Assisting communities in adopting flood plain-
  management requirements
• Administering the insurance program. Note:
  Licensed property and casualty insurance agents
  and brokers provide the primary connection
  between the NFIP and the insured party. Licensed
  agents sell flood insurance, complete the insured
  party’s application form, report claims, and follow
  up with the insured for renewals of the policies.

Basic Requirements
•   A lending institution must require flood insurance
    for the term of a loan when all three of the
    following factors are present:
     • The institution makes, increases, extends, or
         renews a loan (commercial or consumer)
         secured by improved real estate or a mobile
         home that is affixed to a permanent
     • The loan is secured by property located in a
         special flood hazard area as identified by
         FEMA, and
     • The community participates in the NFIP.
         (Information on whether a community
         participates in the NFIP can be obtained
         from FEMA’s web site, www.fema.gov.)

    Special Circumstances
•   In the case of mobile homes, the criteria for
    coverage relate to whether the mobile home is
    affixed to a permanent foundation. An
    institution does not have to obtain a security
    interest in the underlying real estate in order for
    the loan to be covered.
•   Flood insurance requirements also apply to
    loans where a security interest in improved real
    property is taken only ‘‘out of an abundance of
•   A typical table-funded transaction should be
    considered a loan that is made, rather than
    purchased, by the entity that actually supplies
    the funds. Regulated institutions that provide
    table funding to close loans originated by a
    mortgage broker or mobile home dealer are
    considered to be ‘‘making’’ a loan for purposes of
    the flood insurance requirements.

    Amount of Flood Insurance Required

•    The amount of flood insurance required must be
     at least equal to the lesser of:
     (1) the outstanding principal balance of the loan,
     (2) the maximum amount available under the
     NFIP, or
     (3) the total value of the secured property (land
     and improvements) minus the total value of the

•    Since March 1995, the maximum amounts of
     coverage for flood policies have been
      • $250,000 for residential property structures
         and $100,000 for contents
      • $500,000 for nonresidential structures and
         $500,000 for contents

    Commercial Loans &
    Contents Insurance
•   Reminder: Flood Insurance is required on
    contents when the following conditions are met:
     1) The Bank makes, increases, renews or
        extends a loan secured by property in a
        SFHA, and
     2) A security interest is taken on building
        contents or “all business assets.”

     •   Word to the wise: Consider the value of the
         building contents before taking as collateral
         on the loan.

    Flood Insurance Monitoring
•   Consider adopting a Clear to Close procedure:
•   Require a pre-closing review of all flood
    insurance documents by a designated individual
    independent of the lending area and Loan
    Administration before the loan officer is given
    authority to proceed with loan closing.
•   Pre-closing review should include examination of
    the Flood Insurance Policy declarations page or
    the application and paid-receipt for compliance
    with all flood insurance requirements, as well as
    review of the completed flood insurance
    coverage calculation form, to ensure the proper
    amount of flood insurance has been obtained.

    Special Situations—Second
    Mortgages and Home Equity Loans
•   Both second mortgages and home equity loans
    fall within the purchase provisions of the FDPA.
    As only one NFIP policy may be issued for a
    building, an institution should not request a new
    flood insurance policy if one already exists.
    Instead, the institution should have the borrower
    contact the insurance agent
      • To inform the agent of the intention to obtain
         a loan involving a subordinate lien
      • To obtain verification of the existence of a
         flood insurance policy
      • To check whether the amount of insurance
         covers all loan amounts

    Second Mortgages
•   After obtaining this information, the insurance
    agent should increase the amount of coverage, if
    necessary, and issue an endorsement that
    identifies the institution as a lien holder.

    Special Situation— Condominium
•   Condominium associations are able to manage
    their flood insurance needs and meet their by-
    law requirements without relying on the actions
    of the unit owners under a special type of flood
    insurance policy issued by FEMA—a Residential
    Condominium Building Association Policy
•   For Condo Loans, the maximum amount of flood
    insurance is the lesser of
         1) the number of units X $250,000, or
         2) 100% of the replacement value of the
         condo buildings.

    Escrow Requirements
•   An institution must require the escrow of flood
    insurance premiums for loans secured by
    ‘‘residential improved real estate’’ if it requires
    the escrow of funds to cover other charges
    associated with the loan, such as taxes, hazard
    or fire insurance premiums or other fees.
•   The escrow requirement does not apply if the
    institution does not require the maintenance of
    other escrows or the establishment of an escrow
    account in connection with the particular type of
    loan, even if permitted by the loan documents.

    Standard Flood Hazard
    Determination Form
•   Whenever an institution makes, increases,
    extends, or renews any loan secured by
    improved real property or a mobile home, it must
    use the Standard Flood Hazard Determination
    Form (SFHDF) developed by FEMA.
•   Form may be used in printed or electronic
•   Retain a copy of the completed form, in either
    hard copy or electronic format, for the period of
    time your institution owns the loan.
•   A copy of the form is available on FEMA’s
    website (www.fema.gov).

    Reliance on Prior Determination

•   When determining whether flood insurance is
    required, an institution may consider the
    conclusions from a previous flood hazard area
    determination if both of the following conditions
    are met:
•   The previous determination is not more than
    seven years old.
•   The basis for that determination was
    recorded on the SFHDF mandated by the
    Reform Act.
•   An institution may not rely on a previous
    determination set forth on an SFHDF when it
    makes a loan—only when it increases, extends,
    renews, or purchases a loan.

    Force-Placement Requirements
•   If at any time during the life of the loan the
    institution or its servicer determines that flood
    insurance is required or is deficient, then the
    institution must take steps to ‘‘force-place’’ the
    required insurance.
•   Under the Reform Act, an institution, or a servicer
    acting on its behalf, must purchase, or force-place,
    flood insurance for the borrower if the institution or
    the servicer determines that the security property is
    not covered by any insurance or by an adequate
    amount of flood insurance. Before purchasing flood
    insurance in the appropriate amount on the
    borrower’s behalf, however, the institution must first
    provide the borrower with a notice of the deficiency
    and the opportunity to obtain the correct amount of
    insurance. If the borrower fails to obtain the
    insurance within forty-five days of the date of
    the notice, then the institution may force-place the

    FNMA on Force-Placement
•   The issue of force-placed insurance has been thrust into
    the limelight this month by Fannie Mae. Forced-place
    insurance is a practice that some insurance
    companies and banks utilize to force homeowners to
    purchase expensive insurance policies.
•   Spurred by state, federal and consumer attention, Fannie
    Mae has announced that it will be changing the rules
    concerning forced-placed insurance.
•   Fannie Mae will be overseeing forced-placed insurance
    policies itself instead of allowing banks and other financial
    institutions to do so. The company notes that forced-place
    insurance is often an issue because most homeowners
    are required to purchase insurance coverage as a
    provision of their mortgage. These mortgages sometimes
    impose strict requirements regarding the type of coverage
    homeowners must have, making their options slim. Fannie
    Mae has issued a letter to several insurance companies in
    the U.S. inviting them to compete in the market as a way
    to bring more options to consumers and reduce the abuse
    of forced-place insurance practices.

    Determination Fees
•   An institution or its servicer may charge a
    reasonable fee to the borrower for the costs of
    making a flood-hazard determination under the
    following circumstances:

     • The determination is triggered by a borrower-
       initiated transaction (that is, the lender is
       making, increasing, extending, or renewing a
       loan at the borrower’s request).
     • The determination reflects FEMA’s revision of
     • The determination results in the purchase of
       flood insurance by the lender under the forced-
       placement provision.

•   Such reasonable fee can include a fee for life-of-
    loan monitoring by either the institution, its servicer,
    or a third party, such as a flood-hazard-
    determination company.

    Truth in Lending Act Issues
•   The fee for conducting an initial flood-hazard
    determination is excluded from the finance
    charge. However, the exclusion does not apply
    to fees for services to be performed periodically
    during the term of the loan, regardless of when
    the fee is collected.
•   If a creditor is uncertain about what portion of a
    fee to be paid at consummation or loan closing is
    related to the initial decision to grant credit, the
    entire fee may be treated as a finance charge.

    Notice Requirements
•   When the security property is or will be located
    in a SFHA, the institution must provide a written
    notice to the borrower and the servicer.
•   The written notice must contain the following
      • A warning that the building or mobile home is
         or will be located in a SFHA
      • A description of the flood insurance
         purchase requirements contained in section
         102(b) of the FDPA, as amended
      • A statement as to whether flood insurance
         coverage is available under the NFIP and
         may also be available from private insurers
      • A statement as to whether federal disaster
         relief assistance may be available in the
         event of damage to the building or mobile
         home caused by flooding in a federally
         declared disaster

    Timing of the Notice
•   Delivery of notice must take place within a
    ‘‘reasonable time’’ before completion of the
•   Best practice is to provide the Notice 10 days
    prior to loan closing.

    Recordkeeping Requirements
•   An institution must retain
     • Copies of completed SFHD forms, in either
        hard copy or electronic format, for as long as
        the institution owns the loan
     • Records of the receipt of the notice to the
        borrower and the servicer for as long as the
        institution owns the loan
•   No particular form is required for the record of
    receipt; however, the record should contain a
    statement from the borrower indicating that the
    borrower has received the notification.
     • A borrower’s signed acknowledgment on a
        copy of the notice
     • A borrower-initialed list of documents and
        disclosures that the lender provided the
     • A scanned electronic image of a receipt or
        other document signed by the borrower

    Penalties and liabilities
•   Civil money penalties may be imposed for
    violations of the following:
     • Flood insurance purchase requirements
     • Escrow requirements
     • Notice requirements
     • Forced-placement requirements

•   If an institution is found to have a pattern or
    practice of committing violations, the agencies must
    assess civil penalties in an amount not to exceed
    $385 per violation, with a total amount against any
    one regulated institution not to exceed $125,000 in
    any calendar year. Penalties are paid into the
    National Flood Mitigation Fund. Liability for
    violations may not be transferred to a subsequent
    purchaser of a loan. Liability for penalties expires
    four years from the time of the occurrence of the

Spotlight on Loan Servicing
Current Environment

Regulators and DOJ are currently scrutinizing mortgage servicing and default
management practices.

•   Prudential Regulators
         -OCC Bulletin 2011-29
           -OCC guidance of June 30, 2011
           -Interagency Review of Foreclosure Policies and Practices, April 2011

•   CFPB
        -Examination Guidelines published October 2011
           -Every examination must consider
                  Compliance Management
                  Potential UDAAP issues
                  Risks to Consumers
                  Discrimination

•   State Attorneys General
          -Multi-state AG Settlement
           -Several AGs moving forward with separate investigations

Current Environment, continued

• Department of Justice
      -Fair Lending MOU with FTC, HUD
      -Fair Servicing focus

• FHFA Lawsuits
      -Sued 17 financial institutions

Summary of Multistate/Federal Settlement of
Foreclosure Misconduct Claims
• The settlement between the State AGs and 5 leading bank mortgage
  services resulted in $25 billion in monetary sanctions and relief.
• $10 billion dedicated to principal reduction
• $5.2 billion for other forms of homeowner assistance such as
  unemployed payment forbearance, relocation assistance, waiving of
  deficiency balances, anti-blight programs and benefits for service
• $3 billion for refinancing underwater homes for current borrowers
• $2.5 billion paid to participating states
• Borrower Payment Fund - dedicated to providing cash payments to
  borrowers affected in the foreclosure crisis. This fund is in addition
  to a restitution fund being established by the prudential regulators.

    Current Focal Points

•   Management of Foreclosure Process
•   Dual Track Processing
•   Affidavit and Notarization Process
•   Enhanced Documentation
•   Regulatory Compliance – e.g., SCRA and
•   Third Party Service Provider Oversight

Interagency Review
of Foreclosure Policies and Practices
Guidance of April 2011
-The guidance stems from the prudential regulators’ (FRB, OTS and
OCC) review of mortgage services during Q4 2010.
               Included Ally Bank/GMAC, Aurora Bank, Bank of America, Citibank,
               EverBank, HSBC, JPMorgan Chase, MetLife, OneWest, PNC,
               Sovereign Bank, SunTrust, U.S. Bank, and Wells Fargo

-Servicers must retain an independent firm to conduct a thorough
review of foreclosure actions that occurred between January 2009 and
December 2010.
               Borrowers who have been identified as having been harmed through
               foreclosure deficiencies must receive compensation.

               These reviews will be subject to regulatory oversight.

Interagency Review
of Foreclosure Policies and Practices
Because the interagency review only covered sample files and did not
review borrowers who were delinquent, yet not in foreclosure, it is
believed that all of the problems of the foreclosure crisis have not been
identified. Issues pertaining to misapplied payments, unreasonable
fees, and loan modifications may yet be discovered. In short, the
problems may be more widespread than previously thought.

The following areas were reviewed in the foreclosure assessment:
• Policies and procedures
• Organizational structure and staffing
• Management of third-party service providers
• Quality control and internal audit
• Compliance with applicable laws

Interagency Review
of Foreclosure Policies and Practices
• Loss mitigation (i.e., the degree to which servicers offered loan
  modifications and work-outs)
• Critical documents (i.e., assignments and endorsement of notes)
• Risk management (i.e., whether appropriate risks were identified –
  financial, reputational, and legal risks)

Critical weaknesses in servicers’ foreclosure governance processes
were identified as well as inadequate supervision of third-party vendors,
including foreclosure attorneys.

Interagency Review
of Foreclosure Policies and Practices
Although examiners found that borrowers subject to foreclosure action
were seriously delinquent on their loans, at the same time they also
found numerous instances were foreclosure actions moved forward
when it was not appropriate, including the following intervening

        -the borrower was covered by SCRA
        -the borrower filed for bankruptcy prior to the foreclosure action
        -the borrower qualified for or was paying in accordance with a
        trial modification

Renewed Focus on
Servicemembers Civil Relief Act (SCRA)
    The SCRA covers all Active Duty servicemembers, Reservists and
    members of the National Guard while on active duty. The protection
    begins on the date of entering active duty and generally terminates
    within 30 to 90 days after the date of discharge from active duty.

(1) Last year, Holly Petraeus was appointed by Elizabeth Warren,
    founder of the federal Consumer Financial Protection Bureau, to
    head the agency's Office of Servicemember Affairs. Her job is to
    educate military consumers; to monitor their consumer complaints;
    and to get other government agencies involved in the cause.
(2) Citi and other banks have gotten into trouble when they foreclosed
    upon servicemembers

SCRA continued

The Servicemember's Civil Relief Act (SCRA) expanded and improved
the former Soldiers' and Sailors' Civil Relief Act. The SCRA provides a
wide range of protections for individuals entering, called to active duty
in the military, or deployed servicemembers. It is intended to postpone
or suspend certain civil obligations to enable service members to
devote full attention to duty and relieve stress on the family members of
those deployed servicemembers. A few examples of such obligations
you may be protected against are:

•Outstanding credit card debt
•Mortgage payments
•Pending trials
•Terminations of lease

Interagency Review
of Foreclosure Policies and Practices
Six Significant Weaknesses
(1) Foreclosure Process Governance
(2) Organization Structure and Availability of Staffing
(3) Affidavit and Notarization Practices
(4) Documentation Practices
(5) Third-Party Vendor Management
(6) Control (QC) and Audit

Six Significant Weaknesses

1. Foreclosure Process Governance – Inadequate policies and
   procedures, lack of monitoring and controls, lack of audit trails, lack
   of compliance with applicable regulations, not enough audits, and
   lack of communication of risks to boards.
2. Organization Structure and Availability of Staffing –
   Disorganization, inadequate staffing levels, and an increased
   volume of foreclosures.
3. Affidavit and Notarization Practices – Individuals signing
   affidavits did not personally verify accuracy of document or have
   personal knowledge attested to in the document.
4. Documentation Practices – Fees charged were often inaccurate,
   resulting both in under-charges and over-charges.
5. Third Party Vendor Management – Not robust enough.
6. Control QC and Audit – Weak QC processes and not enough

Interagency Guidance
Making Things Right
Six Elements of Making Things Right:
(1) Compliance Program
(2) Foreclosure Review
(3) Dedicated Resources – Single Point of Contact
(4) Third-Party Management
(5) Management Information Systems
(6) Risk Assessment

Foreclosure File Review

• File collection process
• Require detailed checklists of all state laws and regulations for each
  state being reviewed
• Checklists should include details pertaining to:
        – Default servicing fees
        – SCRA
        – Bankruptcy
        – Loss mitigation activity
• Checklists should be in format that minimizes reviewer discretion

Foreclosure Risk Assessment

File Management and Documentation
Enhanced Checklists w/State Law Requirements

Purpose of file review
        - Identify financial injuries to borrowers and reimburse as
        - OCC/FRB provided guidance on remediation / Consent Orders
        - Identify technical errors in process – and fix going forward
        - Use checklists that allow for a yes/no/could not be determined
        - Determine problem foreclosure firms – and sever ties/fix
        - Document retention checklists

CFPB Focus on Loan Servicing

• Focus on gathering information and complaints directly from
• Agreement with FTC on access its Sentinel consumer complaint
• Information-sharing MOUs and agreements with federal and state
  agencies including banking regulators, FFIEC, FinCEN, NAAG, and
  Conference of State Bank Supervisors.
• General CFPB exam guidance states that “every examination must
  include a review” of
       - Compliance management
       - Potential UDAAPs
       - Regulatory compliance matters presenting “risks” to
       - Discrimination

CFPB Examination Guidelines

Nine Modules:
1.   Servicing Transfers
2.   Payment Processing and Account Maintenance
3.   Customer Inquiries and Complaints
4.   RESPA and Force-Placed Insurance
5.   Credit Reporting
6.   Information Sharing and Privacy
7.   Collections
8.   Loss Mitigation
9.   Foreclosure Practices

Fair Servicing Scrutiny

Increased regulatory, DOJ, and examination focus on fairness in
loan servicing and foreclosure practices.
• Regulators are engaged in heightened scrutiny of servicing issues, with
  unprecedented attention to loan-level servicing data.
• Scrutiny of foreclosure disparities between protected classes and others.
• Increased consumer complaints alleging discrimination in loan servicing.
• Poorly documented or undocumented servicing decisions.
• High levels of litigation alleging loan servicing discrimination.
• Fair Lending Unit within DOJ Civil Rights Division analyzing discrimination in
  loan modifications.
• Demographics at census tract level likely to be an analytical driver.

Visit us at ICSriskadvisors.com to view all of
our research and development center online
resources. Subscribe to our blog, download our
white papers, attend our webinars, and deliver
the confidence of more to your organization.

Pamela C. Buckley, CRCM
Director, New England Region
P. 781.330.9341
E. pbuckley@icsriskadvisors.com


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