FDIC Civil Money Penalty re Flood Insurance
In September, the Federal Deposit Insurance Corporation (FDIC) issued an order to pay a civil money penalty to a bank that
“[m]ade, increased, extended, or renewed loans secured by a building or mobile home located or to be located in a special flood hazard area without requiring that the collateral be covered by flood insurance; and . . .
[f]ailed to comply with proper procedures for force-placing flood insurance in instances where the collateral was not covered by flood insurance at some time during the terms of the loan.”
The order did not contain much in the way of specific allegations, but it does highlight an important lesson to remember as credit unions transition their members from forbearance to permanent modifications. As members receive permanent modifications, credit unions should be mindful that the National Credit Union Administration’s (NCUA) flood insurance rules—like the FDIC rules referenced in the order (Part 339 of title 12 of the Code of Federal Regulations)—prohibit credit unions from “mak[ing], increas[ing], extend[ing], or renew[ing] any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan.” Under the flood insurance rules, “[d]esignated loan means a loan secured by a building or mobile home that is located or to be located in a special flood hazard area in which flood insurance is available under the Act.”
When a member exits forbearance and receives a permanent modification of a loan secured by a building in a special flood hazard area, the interagency flood insurance questions and answers proposed in 2020 suggest that it is possible that the modified loan may become subject to the flood insurance requirements:
“APPLICABILITY 6. Does the Regulation apply to loans that are being restructured or modified?
It depends. If the loan otherwise meets the definition of a designated loan and if the lender increases the amount of the loan, or extends or renews the terms of the original loan, then the Regulation applies.”
The interagency questions and answers, however, also suggest that there are certain modifications that may not make certain flood insurance requirements applicable:
“Escrow 4. Does the requirement to escrow flood insurance premiums and fees apply when a loan does not experience a triggering event, such as when the loan is modified without being increased, extended, or renewed; the loan is assumed by another borrower; or the building securing the loan is remapped into a Special Flood Hazard Area (SFHA)?
No, subject to certain exceptions. The Regulation provides that a lender or its servicer is required to escrow flood insurance premiums and fees when a designated loan is made, increased, extended, or renewed (a triggering event), unless either the lender or the loan is excepted from the escrow requirement. Until the loan experiences a triggering event, the lender is not required to escrow flood insurance premiums and fees, unless: (i) A borrower requests the escrow in connection with the requirement that the lender provide an option to escrow for outstanding loans; or (ii) the lender determines that a loan exception to the escrow requirement no longer applies.”
To the extent modifications are increasing the amount of the loan or extending or renewing the term of the loan, there may be a triggering event under the flood insurance rules that requires compliance with the requirements to purchase flood insurance, create an escrow for flood insurance, force-place flood insurance, etc. Credit unions may want to revisit their policies and procedures to ensure that compliance with any applicable flood insurance rules has been addressed in the modification process.