FDIC San Francisco Region Regulatory Teleconference Flood Insurance

FDIC San Francisco Region Regulatory Teleconference Flood Insurance Best Practices – Protecting You and Your Customer June 18, 2008 1

Introductions Opening Remarks Robert J. Wirtz Assistant Regional Director – Compliance Presenters Hollee Oberholzer Senior Compliance Examiner Heather Gilliams Compliance Review Examiner 2

Overview l Regulatory Requirements l Coverage Calculations l Flood Compliance – Problem Areas l FEMA Guide Changes l Proposed Revisions to Interagency Q&As l Best Practices l Resources l Question and Answer Session 3

Regulatory Requirements l Determinations l Notifications l Coverage l Escrow l Force Placement 4

Determination Requirements l Completion of Standard Flood Hazard Determination Form (SFHDF) l Use of prior determination l Retain copy of SFHDF over life of loan 5

Notification Requirements l Notice to borrower and servicer l Required for structures located in participating and non-participating communities l Delivery of notice within reasonable time prior to closing l New notice required for each origination, extension, increase, and renewal 6

Coverage Requirements Mandatory Purchase Provision If improved property located in Special Flood Hazard Area (SFHA), lender CANNOT: l l Make Extend Renew Increase Without sufficient flood insurance coverage over the life of the loan 7

Coverage Requirements (cont. ) Minimum Coverage Equal To Lesser of: l Outstanding principal balance of loan(s); or l Maximum NFIP coverage available; or l Full insurable value (100% replacement cost value [RCV]) of building and/or contents 8

NFIP Maximum Coverage Limits Structure Type Building Coverage Content Coverage Residential $250, 000 $100, 000 Commercial $500, 000 9

Escrow Requirements l Flood insurance premiums must be escrowed when lender requires escrow for other purposes, such as taxes or hazard insurance l Not required for voluntary escrow accounts l Types of property covered: l l l Single-family Multi-family Manufactured homes 10

Force Placement Requirements If lender determines that property is not adequately insured: l Provide notice to borrower of requirement to obtain adequate coverage l Provide borrower opportunity to obtain necessary insurance (45 days) l If borrower fails to obtain coverage within 45 days, must purchase insurance on behalf of borrower l May charge borrower cost of premiums and fees incurred 11

Calculating Coverage l Multiple Structures l l l Requirements Example Condominium Coverage l l l Requirements Example – RCBAP exists Example – no RCBAP exists 12

Multiple Structures l Only one policy can be issued per structure l Each insurable structure located in a SFHA must have insurance l Aggregated insurance coverage must be adequate to cover loan (unless maximum RCV or NFIP limit has been reached) l Distribution of coverage among buildings is at lender’s discretion 13

Multiple Structure Example Question: How much insurance is required? Loan secured by three buildings in SFHA l One single-family residence: l l Two commercial buildings: l l l Valued at $200, 000 (exclusive of land) One valued at $1, 000 (exclusive of land) One value at $300, 000 (exclusive of land) Loan amount is $2, 000 (first lien) 14

Multiple Structure Example (cont. ) Answer: $1, 000 Structure (A) Improvement Value (B) Max NFIP Available Lesser of A and B Single-family $200, 000 $250, 000 $200, 000 Commercial #1 $1, 000 $500, 000 Commercial #2 $300, 000 $500, 000 $300, 000 Aggregate of max building coverage $1, 000 Loan amount $2, 000 Lesser of aggregate coverage and loan amount $1, 000 15

Condo Coverage Requirements Dwelling Policy Required Coverage is Lesser of: l Outstanding principal balance of loan(s); or l Maximum amount of insurance available under NFIP, which is lesser of: l l Max limit for residential condo unit ($250, 000), or “Insurable value” of condo unit – RCV of building / # units 16

Condo Coverage Requirements (cont. ) Residential Condominium Association Policy (RCBAP) No coinsurance (Dwelling Policy) required if: l Current: RCBAP = 80 percent of building RCV l Proposed: RCBAP = 100 percent of building RCV* * FIL 23 -2008: Proposed Revisions to Interagency Questions and Answers Regarding Flood Insurance 17

Condominium Coverage Example – RCBAP Exists Question: Is additional insurance (Dwelling Policy) required? l Principal balance loan: $300, 000 l Number of units: 50 l RCV (100%): $15 million l RCBAP: $12. 5 million 18

Condominium Coverage Example – RCBAP Exists (cont. ) Answer: No Determine required unit coverage: $250, 000 l Lesser of: l l l 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 2) l Per unit coverage: $250, 000 ($12. 5 million/50 units) 19

Condominium Coverage Requirements – No RCBAP Question: What amount of coverage (Dwelling Policy) must lender require? l Outstanding principal balance: $175, 000 l Number of units: 50 l RCV: $10 million 20

Condominium Coverage Requirements – No RCBAP Answer: $175, 000 Lesser of: l Loan amount: $175, 000 l Insurable value of unit: $200, 000 ($10 million RCV/50 units) l Max NFIP coverage: $250, 000 21

Flood Compliance – Problem Areas During 2007, 20% of exams in SF Region had one or more violations of Part 339 Problem Areas: l l l l Insufficient coverage Lack of coverage at origination Lapse in coverage Late borrower notification No borrower notification Force placement requirements Flood determinations 22

Flood Compliance – Problem Areas (cont. ) l Insufficient coverage § § § l 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 23

Flood Compliance – Problem Areas (cont. ) l Lapse in coverage § § l Late borrower notification § § l Lack of monitoring for coverage Misconception that life of loan flood determination coverage monitors flood insurance coverage 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 24

Flood Compliance – Problem Areas (cont. ) l Force placement requirements § § l 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 25

Civil Money Penalties (CMPs) l Mandatory CMPs for pattern or practice of violations of following requirements: l l l 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 26

San Francisco Region Flood CMPs l Since January 2007, 10 CMPs have been issued for flood insurance violations l l Penalties up to $55, 000 Seeing an upward trend in CMP cases, both in number and the amount of CMP 27

Pattern or Practice l Not defined by Flood Disaster Protection Act l Facts and circumstances weighed for each case l Look to guidance and experience under other regulations l l l Regulation B (Equal Credit Opportunity Act) The Policy Statement on Discrimination in Lending Regulation Z (Truth in Lending) 28

Pattern or Practice (cont. ) l Factors considered (but not limited to): l Common cause l Existence of written policy or established practice l Duration of violations l Relationship among violations l Significance in relation to total number of applicable transactions l Prior violations l Effectiveness of flood insurance policies, procedures, training, monitoring, and audit function 29

FEMA Guide Changes Mandatory Purchase of Flood Insurance Guidelines Highlights of Revisions (effective September 2007): l Section A l l Flowchart illustrating mandatory purchase process at loan origination Section B l Flood zone discrepancies between SFHDF and policy l Letter of Determination Review (LODR) 30

FEMA Guide Changes (cont. ) l Section C l l Purchasing coverage for construction loans Section D l RCBAP coverage l l l Declarations page must show RCV and number of units Recommends 100% RCV Section E l Flowchart describing tripwires during life of loan 31

Interagency Flood Q&As* l Proposed Revisions l l New topics: l l l Comment period ended May 20, 2008 Agencies received 60 unique comments Final adoption anticipated by year-end Second liens Syndications/participations Flood zone discrepancies Imposition of CMPs Substantive modifications: l l Construction loans Condominium loans * FIL 23 -2008: Proposed Revisions to Interagency Questions and Answers Regarding Flood Insurance 32

Interagency Flood Q&As (cont. ) l Second liens l l Must ensure sufficient coverage for all loans (or max available) Syndications/participations l Participating lender expected to undertake due diligence to ensure lead lender or agent: l l Agreements should provide for lead or agent to provide info to participants Flood zone discrepancies l l Obtains insurance where necessary Has controls in place to monitor for compliance Must have process in place to identify and resolve discrepancies Imposition of CMPs l General standards for determining pattern or practice 33

Interagency Flood Q&As (cont. ) l Construction loans l l l 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 l RCBAP = 100% of RCV (or # units x $250, 000) l l 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 34

Best Practices l Comprehensive written procedures and training l Order SFHDF upon receipt of completed application l l l Appraisals l l Request breakdown of value of structure(s) Review flood policies l l l Send borrower notification immediately Retain documentation of when notice provided/mailed Risk rating zone matches SFHDF Deductible does not exceed NFIP maximums Centralize l l Reviews of flood policies Monitoring of flood insurance 35

Best Practices (cont. ) l Secondary reviews of designated loans l l l Prior to closing Notification and purchase requirements Frequent flood determination vender queries l Determinations in SFHA l Periodic reviews of tickler system l Targeted audits of designated loans l Map changes l l Life of loan determinations No LOL – review portfolio 36

Resources l Part 339 – FDIC Rules & Regulations http: //www. fdic. gov/regulations/laws/rules/20006100. html#2000 part 339 l Mandatory Purchase of Flood Insurance Guidelines – September 2007 http: //www. fema. gov/library/view. Record. do? id=2954 l Flood Insurance Manual – May 2008 http: //www. fema. gov/business/nfip/manual. shtm l Answers to Questions about the NFIP http: //www. fema. gov/business/nfip/qanda. shtm 37

Resources (cont. ) Financial Institution Letters: l FIL 23 -2008: Proposed Revisions to Interagency Questions and Answers Regarding Flood Insurance http: //www. fdic. gov/news/financial/2008/fil 08023. html l FIL 114 -2007: Managing Risks Associated With Lapses in Flood Insurance Coverage http: //www. fdic. gov/news/financial/2007/fil 07114. html l FIL 81 -2001: Strengthening Compliance with Federal Flood Insurance Requirements http: //www. fdic. gov/news/financial/2001/fil 0181. html 38

Question and Answer Session 39

Further Questions? Please Contact Your Local Review Examiner Northern California, Nevada, Hawaii, Pacific Islands Heather Gilliams (415) 808 -8110 hgilliams@fdic. gov Washington, Oregon, Idaho, Alaska Phil Peters (206) 284 -1112 ext. 4839 ppeters@fdic. gov Southern California Elizabeth Gonzales (949) 582 -2858 ext. 4335 egonzales@fdic. gov Utah, Arizona, Montana, Wyoming Carol Saccomonto (415) 808 -8117 csaccomonto@fdic. gov 40