This was the Special Focus section for the May 2020 Compliance Journal, click here to view the entire edition.
On March 9, 2020, the federal financial institution agencies (agencies) issued a joint press release to encourage financial institutions to meet the financial needs of customers affected by the coronavirus (COVID-19 emergency). Since then, the agencies have issued additional guidance, clarification, and in some instances, relief, to aid financial institutions to better assist their customers and continue to meet regulatory requirements.
Many financial institutions currently offer deferral or modification agreements to borrowers experiencing financial hardship caused by the COVID-19 emergency. Such arrangements may trigger the rules governing loans in areas having special flood hazards. This article covers the resources provided by the agencies, which discuss how financial institutions can help borrowers affected by the COVID-19 emergency and continue to meet the flood insurance requirements.
The Flood Disaster Protection Act (FDPA), as implemented by the agencies’ rulemaking, requires that each time a financial institution makes, increases, extends, or renews (MIRE event) a loan it must determine whether the property is in a special flood hazard area (SFHA). Flood insurance is generally required for the term of the loan for buildings or mobile homes when in a SFHA. If, at any time during the life of the loan, flood insurance is deficient, the financial institution must initiate force placement procedures.
Over the past months, many financial institutions have worked with struggling borrowers affected by the COVID-19 emergency by offering various forms of modifications, extensions, and deferral agreements. When these agreements trigger a MIRE event, such as by extending the loan term, then flood insurance requirements apply. For example, if a financial institution offers aid to an affected borrower by deferring payments and extending their loan’s maturity, this action “extends” the loan and results in a MIRE event. Such agreements could thus trigger requirements such as establishing escrow for flood insurance payments and fees, making a flood zone determination on the property securing the loan, or providing the notice of special flood hazards to the borrower. The FDPA and the agencies’ implementing regulations do not provide for a waiver of these requirements in emergency situations. However, the Board of Governors of the Federal Reserve (FRB) and the Federal Deposit Insurance Corporation (FDIC) have issued guidance regarding flood requirements, to help banks meet the needs of their borrowers.
FRB has stated that when exercising supervisory and enforcement responsibilities, it will take into account the unique circumstances impacting borrowers and institutions resulting from the COVID-19 emergency. Financial institutions should make good-faith efforts demonstrably designed to support consumers and comply with the flood insurance requirements. In addition, supervisory feedback for institutions will be focused on identifying issues, correcting deficiencies, and ensuring appropriate remediation to consumers. FRB does not expect to take a public enforcement action against an institution, provided that the circumstances were related to the COVID-19 emergency and that the institution made good faith efforts to support borrowers and comply with the flood insurance requirements, as well as responded to any needed corrective action.
- FDIC has acknowledged that as financial institutions work to accommodate borrowers during the COVID-19 emergency, meeting flood requirements could pose challenges for lenders and delay relief for borrowers in need. Therefore, FDIC has stated that when working with borrowers impacted by the COVID-19 emergency triggers a MIRE event, lenders may, if applicable:
- Rely temporarily on a loan’s previous flood hazard determination on file rather than obtain a new one during the COVID-19 emergency;
- Delay the establishment of escrow accounts for applicable loans until after the COVID-19 emergency; and
- Delay providing a written flood notice to a borrower until after the COVID-19 emergency if a property is located in a Special Flood Hazard Area (SFHA) and informing consumers about the availability for special disaster relief assistance in the event of a flood. Prior to providing written notice, the lender may, at its discretion, choose to use another method to inform the borrower of this information (e.g. by email or telephone).
FDIC has stated that lenders should have a system in place to ensure deferred flood insurance requirements are addressed as soon as reasonably practicable. FDIC examiners, under the FDIC’s discretionary examination authority, will not criticize lenders’ good faith flood insurance compliance efforts to accommodate borrowers in a safe and sound manner during the COVID-19 emergency.
National Flood Insurance Program Renewal
On March 28, 2020, the Federal Emergency Management Agency (FEMA) issued Bulletin W-20002 (Bulletin) to extend the grace period to renew the National Flood Insurance Program (NFIP) policies that expire between February 13, 2020 and June 15, 2020 from 30 days to 120 days. Thus, a borrower will be covered by the NFIP policy if the flood insurance premium is paid before the 120-day grace period expires.
As discussed above, the FDPA provides requirements and procedures for the force placement of flood insurance when a designated loan is not covered by a sufficient amount of flood insurance. The rules require that under force placement procedures, the lender must notify the borrower when adequate flood insurance is not in place. If the borrower does not provide evidence of sufficient coverage within 45 days after notification, the lender must force place flood insurance in an amount that will satisfy the regulatory requirements. However, in light of the Bulletin, FRB has stated that for NFIP policies expiring during the FEMA emergency period:
- A lender may provide the required notice to the borrower after determining the policy has expired with an indication that the NFIP grace period has been extended for 120 days. Lenders may inform borrowers that, in light of the Bulletin, force placement will not occur until after the end of the 120-day period.
- Alternatively, a lender may provide the required notice to the borrower at least 45 days before the end of the 120-day grace period.
- For either alternative, the lender must force place flood insurance on the borrower’s behalf if the borrower does not pay the premium by the end of the 120-day grace period.
- As discussed above, FRB does not expect to take supervisory or enforcement action against the lender for violating the flood insurance force placement requirements, provided that the circumstances were related to COVID-19, and that the lender has made good-faith efforts to support borrowers and comply with the flood insurance requirements, as well as responded to any needed corrective action.
- Lenders should be aware that if they force place flood insurance for NFIP policies that expire during the FEMA emergency period prior to the expiration of the 120-day grace period and the borrower pays the premium by the end of the 120-day grace period, consistent with the flood insurance regulatory requirements, the lender would be required to refund the borrower for any overlapping flood insurance coverage.
The flood rules have not been waived. However, FRB and FDIC have encouraged financial institutions to assist customers affected by the COVID-19 emergency. In order to better assist financial institutions accomplish those goals and meet borrower needs while complying with the flood rules, both agencies have issued the guidance discussed in this article. Additionally, FEMA allows greater flexibility to affected borrowers covered by certain NFIP policies. Financial institutions should consider the appropriate guidance when determining how to meet existing flood requirements for borrowers affected by the COVID-19 emergency. When relying upon such guidance to make a decision with respect to complying with flood requirements, financial institutions should carefully document the circumstances, the steps the institution took to comply with the flood rules, and the considerations leading to the decision.