Consumer Compliance Outlook
Congress Passes the Homeowner Flood Insurance Affordability Act of 2014
On March 21, 2014, President Barack Obama signed into law H.R. 3370, the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA).1 The law repeals and modifies certain provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (BWA) and makes other changes to the National Flood Insurance Program (NFIP).
Congress enacted the BWA, in part, to address the NFIP’s growing deficit. The BWA directed the Federal Emergency Management Agency (FEMA) to phase out subsidies and grandfathered rates and implement actuarially sound pricing for flood insurance to reflect the risk of floods. After updating flood insurance rate maps (FIRMs) in some parts of the country, FEMA began publishing preliminary notices with premiums in some cases that had increased substantially as a result of the remapping activities. Many policyholders affected by these changes expressed concerns that the new premiums were unaffordable.
The banking industry closely followed these developments because of concern that higher flood insurance premiums might contribute to increased mortgage delinquencies or defaults. Real estate sales in areas with significant rate increases were also being adversely affected because some potential homebuyers could not afford the new premiums. Congress passed the HFIAA to address those concerns and implement other changes to the NFIP.
Among the HFIAA’s key provisions are:
- Section 3 repeals the provision in the BWA that eliminated subsidies on properties purchased after July 6, 2012, on properties with no insurance on that date, and on properties where the policy lapsed as of that date, unless the lapse occurred because the property was no longer required to retain coverage. As a result, FEMA must refund any excess premiums paid by policyholders after July 6, 2012. Subsidies will continue to be phased out for pre-FIRM nonprimary residences, business properties, properties experiencing severe repetitive loss, or properties that were substantially damaged or improved. This section also implements the ability of a purchaser to assume the seller’s policy at existing premium rates.
- Section 4 repeals the provision of the BWA that phased out grandfathered rates. Grandfathering allows certain property owners to be protected from a future rate increase that results from a property being remapped into a higher-risk zone. Grandfathering will also apply when a property eligible for grandfathered rates is sold to a new owner.
- Section 5 limits rate increases to 18 percent per year for individual policies, except for nonprimary residences, business properties, properties experiencing severe repetitive or cumulative loss, or properties that are substantially damaged or improved. For the exceptions, rate increases are limited to 25 percent per year until full-risk rates are achieved. For any individual class of properties, rate increases are limited to 15 percent per year.
- Section 6 clarifies rates for properties newly mapped into areas with special flood hazards. For the first year, the property is charged the preferred risk premium, after which full-risk rates are phased in, but increases cannot exceed the limits in Section 5.
- Section 8 applies an annual assessment of $25 per policy on all NFIP primary homes and $250 on second homes and commercial properties. The assessment, which is designed to help to fund the costs of the HFIAA, expires after risk-based premiums are fully implemented.
- Section 13 clarifies that flood insurance is not required for a detached nonresidential structure that is part of a residential property (such as a greenhouse). However, lenders have the discretion to require insurance on these structures. Section 13 also amends the Real Estate Settlement Procedures Act (RESPA) to require a new disclosure in the settlement cost booklet that lenders must provide to applicants for loans subject to the RESPA: “Although you may not be required to maintain flood insurance on all structures, you may still wish to do so, and your mortgage lender may still require you to do so to protect the collateral securing the mortgage. If you choose to not maintain flood insurance on a structure and it floods, you are responsible for all flood losses relating to that structure.”
- Section 15 modifies the definition of “substantial improvements to a property” from 30 percent of its fair market value to 50 percent. A substantial improvement triggers full-risk rates, although the rate increases are phased in at 25 percent per year until full-risk rates are achieved.
- Section 16 makes changes to the affordability study required under the BWA. Under the HFIAA, the deadline for completing the study is extended to September 21, 2015, and the following additional items must be considered in the study:
- options for maintaining affordability if premiums for flood insurance coverage increase to an amount greater than 2 percent of the liability coverage under the policy
- the effect that establishing catastrophe savings accounts would have on the long-term affordability of flood insurance coverage
- options for modifying the surcharge under Section 8 (previously discussed), including consideration of homeowner income, property value, or risk of loss
- Section 24 requires FEMA to designate a flood insurance advocate to ensure fair treatment of policyholders.
- Section 25 changes the effective date for the mandatory escrow requirement for flood insurance premiums and fees from residential loans entered into or outstanding on or after July 6, 2014, to residential loans that are originated, refinanced, increased, extended, or renewed on or after January 1, 2016. For loans outstanding on January 1, 2016, but not subject to one of the exceptions to the escrow requirement, lenders and servicers must offer and make available to borrowers the option to escrow flood premiums and fees. Section 25 also expands the types of properties exempt from the escrow requirement to include:
- business purpose loans secured by residential real estate
- home equity lines of credit
- loans with a term of less than 12 months
- nonperforming loans
- subordinate loans secured by the same residential real estate
- loans secured by a condominium covered by a condominium association policy
- Section 26 requires FEMA to establish guidelines that provide alternative mitigation measures for buildings that cannot be elevated, including building materials and floodproofing.
- Section 28 requires FEMA to clearly communicate to individual property owners the cost of full risk-based premiums, whether or not the owners pay the full actuarial rates.
- Section 30 requires FEMA to consult with local communities before undertaking a remapping and to discuss the mapping models FEMA will be using. This section also requires FEMA to notify congressional representatives for affected districts, prior to the issuance of any preliminary map, of community outreach schedules and the estimated number of properties that will be affected by proposed map changes.
Additional information on the HFIAA and its implementation is available on FEMA’s website.