Recent changes to the Flood Disaster Protection Act (FDPA) could have financial institutions struggling to stay above water when it comes to flood insurance mandates. FDPA penalties are a whopping 419% higher than previous penalties per violation, and the penalty cap has also been eliminated. So, it’s time for financial institutions to get up to speed on the latest regulatory updates for flood insurance policies and procedures.
What You Need to Know About Penalties
For a number of years, the FDPA has required regulators to issue civil money penalties to financial institutions that violate FDPA rules and regulations. What’s changed is the cost that regulators can now assess in penalties:
- Penalties rose from $385 to $2,000 per violation
- The penalty cap has been eliminated
Obtaining standard flood hazard determinations remains the foundation of the rules and regulations. And, financial institutions must still provide adequate notification to, and attain acknowledgement from, customers when they’re securing loans for properties located within flood zones.
New Flood Disaster Protection Act Rules
There are a number of new rules resulting from new FDPA legislation, including:
- Financial institutions and servicers acting on a borrower’s behalf now have the authority to charge the borrower for the cost of force-placed insurance beginning the date on which the borrower’s coverage becomes insufficient; however:
- Force-placed insurance must be terminated and related premiums must be refunded within 30 days of confirmation of the borrower’s purchase of sufficient flood insurance.
- Lenders or servicers must accept a properly executed declaration page as confirmation to ensure adequate coverage throughout the life of the loan.
- For residential property, flood insurance is no longer required for structures detached from primary residential structures (and do not serve as residences), which removes the need to attain flood insurance for such structures; however:
- Banks may still require borrowers to obtain and maintain flood insurance for reasons of safety and soundness.
- Lenders or servicers must escrow flood insurance premiums for loans that are secured by improved residential real estate or mobile homes, and that are made, increased, extended, renewed or refinanced on or after Jan. 1, 2016.
- Financial institutions must now provide borrowers that have loans outstanding as of Jan. 1, 2016, with notification of the option to escrow prior to June 30, 2016.
Flood Disaster Protection Act Exceptions for Financial Institutions
Financial institutions with total assets less than $1 billion are exempt from escrow provisions if on or before July 6, 2012:
- The bank was not required by federal or state law to escrow taxes or insurance for the loan; and
- The bank did not have a policy to require escrow of taxes and insurance.
Additional exceptions to escrow requirements also apply to the following:
- Loans in subordinate positions to senior loans
- Loans with terms shorter than 12 months
- Properties covered by flood insurance policies provided by condominiums, cooperatives or other project developments
- Credit extensions primarily used for business, commercial or agricultural purposes
- Home equity lines of credit (HELOC)
- Non-performing loans
Flood Disaster Protection Act Effective Dates
FDPA rules have a staggered implementation dates. Forced-placed requirements and detached structure exemptions are effective Oct. 1, 2015, and the escrow requirement portions of the rules and regulations are not effective until Jan. 1, 2016.
Is your bank or financial institution prepared for changes to flood insurance rules and regulations? Don’t take the risk—find out how CSI can help keep your financial institution from drowning in federal compliance rules and regulations. Check out our free on-demand webinar to learn more.
Keith Monson serves as CSI’s chief risk officer. In this role, Monson maintains an enterprisewide compliance framework for risk assessment and reporting, as well as other key components of CSI’s corporate compliance program. With nearly 25 years of banking experience, he has a wide range of expertise in the compliance arena, having served as chief compliance officer for both large and small financial institutions. His experience also includes assisting financial institutions as a compliance consultant and, most recently, as chief risk officer. Keith’s diverse background allows him to support financial institutions with the design and continued enhancement of core compliance practices that are sustainable, create consistency and provide flexibility.