On July 6, 2012, the Biggert-Waters Flood Insurance Reform Act of 2012 (“B-W Act”) became law. The B-W Act made several substantial changes to the flood insurance rules, many of which affected lenders. While most provisions were effective only after implementing regulations are written, two major provisions of the B-W Act, one regarding the force placement of flood insurance and the other increasing the civil money penalties for violations of the flood insurance rules, became effective immediately upon enactment. Specifically, those requirements are:
Then, on March 29, 2013, the regulatory Agencies issued an interagency statement that the above changes were indeed the Agencies' position on Biggert-Waters. The Agencies then identified three other significant provisions of the B-W Act affecting lenders that would not be effective until implementing regulations were issued.
Those three provisions were:
As to the escrow requirement, the Agencies stated, "It is the Agencies position that this provision of the Act is not effective until regulations are issued. The Agencies intend to publish escrow regulations in sufficient time for the industry to implement them prior to July 2014."
On October 30, 2013, the Agencies published in the Federal Register a "Joint Notice of Proposed Rule Making on Loans in Areas Having Special Flood Hazards." It encompassed the B-W Act's provisions that required regulatory implementation with one exception. That exception was an amendment to RESPA requiring that a section be added to the Special Information Booklet regarding flood insurance. Because RESPA is now under the jurisdiction of the Consumer Financial Protection Bureau, that change must be enacted by the CFPB. To date, the change has not been addressed.
The joint notice proposed regulations for the acceptance of private flood insurance, and the escrow requirements provide for an exemption for certain institutions with less than $1 billion in assets. The proposal includes the timing requirements for requiring escrow for residential improved real estate, including an exemption for existing policies where escrow wouldn't be required until the flood insurance policy renewal. Additionally, the proposal includes model forms to meet the notice requirements. The proposed effective date was in keeping with the B-W Act, July 6, 2014, but nothing has been finalized.
The flood insurance rate increases as a result of the B-W Act were quite cumbersome. For this and other reasons, in March 2014, Congress stepped in and passed the Homeowners Flood Insurance Affordability Act (“HFIAA”) which put on hold many of the premium increases in flood insurance that were required by Biggert Waters. The HFIAA also provided for one key requirement, “mandatory escrowing”, to answer the million dollar question: What should a lender do if there is no further guidance from the regulatory agencies before July?
Under the Homeowners Flood Insurance Affordability Act, the B-W Act requirement regarding escrow for flood insurance on covered loans come July 6, 2014, was repealed. Instead, HFIAA requires the Agencies to implement regulations to address the B-W Act and amendments to it under HFIAA, including the escrow and notice requirements with an effective date of January 1, 2016.
Long story short, and what this all boils down to, is they have to write the regulations first, and the effective date is extended.
It appears that the Agencies are now going back over the October proposal to determine what potential changes must be made to coincide with the amended requirements of Biggert-Waters through the Homeowner Flood Insurance Affordability Act. The revised proposal is expected in the coming months, with hopes of sooner rather than later.
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