Pub. 6 2015 Issue 3

fall 2015 27 West Virginia Banker Chap Donovan is a Senior Manager at Arnett Carbis Toothman LLP, Certified Public Accountants, Charleston, West Virginia. ACertified Public Accountant, Certified Regulatory Compliance Manager,andCertifiedTreasuryProfes- sional, Mr. Donovan has forty e years experience in the financial institutions industry. He provides audit, internal audit, loan review, and compliance consulting services to community banks through the firm’s Financial Institutions Service Group. Mr. Donovan can be contacted at 800-642-3601 or chap. donovan@actcpas.com or other project development covered by flood insurance purchased by the group association • HELOCs • Non-performing loans • Loans with a term of 12 months or less In addition to mandatory escrows, the HI- FAA and the implementing rules include a provision to offer borrowers the option to escrow flood insurance premiums and fees that applies to loans outstanding as of January 1, 2016. The escrow option would need to be offered by banks other than those subject to the small bank exception via a notice to affected borrow- ers. Borrowers with loans already subject to escrow of taxes and insurance as well as loans covered by the subordinate lien exception would not need to receive the option to escrow notice. In recognition of the complexities of implementation, the regulations require that the option to escrow notice be provided by June 30, 2016. Banks that initially satisfy the small bank exception but at a later date no longer qualify are required to offer the option to escrow by July 1 of the succeed- ing calendar year following the lender’s change in status. Force-Placed Insurance The new rules include implementation of the force-placed provisions of BWA. Under current regulations, if a lender determines at any time during the term of a loan subject to flood insurance that the loan is not covered by flood insurance or is covered but in an insufficient amount, the lender must notify the borrower. If bor- rower fails to obtain appropriate coverage within 45 days of notification, the lender must purchase insurance on behalf of the borrower and may charge the borrower for the premium and fees incurred in purchas- ing the insurance. The 45 day notice was typically provided at the end of the grace period of 30 days after the policy expira- tion date. For policies written under the National Flood Insurance Program, only the lender has coverage during the grace period. The borrower has coverage only if the premium is paid by the end of the grace period. Under the new regulations, the lender must provide the 45 day notice to a bor- rower at the time policy lapses or coverage is determined to be insufficient as opposed to the prior practice of waiting until the end of the grace period. The regulations likewise clarify when the lender must force-place the insurance. According to the regulators, the objective should be to ensure continuous coverage for both the borrower and the lender. Regulators further noted that most force-placed flood insurance policies are private rather than the program administered by FEMA, with newly issued private policies generally not having a 30 day waiting period. Accord- ingly, the new regulations affirm that lend- ers may provide force-placed insurance at any time during the 45 day notice period and would not need to wait until the end of the grace period to act. The new regulations clarify that a lender may charge a borrower for force-placed insurance at the time of purchase. If the borrower later obtains coverage that overlaps with the force-placed policy, the lender would be required to refund any premiums paid by borrower for the overlap period. The lender may bill the borrower at the time of placement or wait until to bill the borrower at a later date, at the expi- ration of the 45 day notice, for example. Detached Structures HIFAA and the implementing regulations add an exemption for mandatory purchase of flood insurance covering detached structures. Specifically, in the case of a loan secured by residential property in a special flood hazard area, no flood insurance is required on a structure that is detached from the primary residence and does not serve as a residence, subject to zoning and safety and soundness consider- ations. Instead of a bright line test of for a structure to be used as a residence, the regulations expect the lender to make a good faith determination as to whether the structure serves as a residence. In addi- tion, to adequately protect its collateral, a lender may require flood insurance on detached structures that contribute to the value of the collateral, even though not required by regulation. This exemption is intended to apply to “residential property” even if the loan’s purpose is business, commercial, or ag- ricultural. However, detached structures used primarily for commercial, business, or agricultural purposes should be ade- quately protected by flood insurance as collateral given their value to borrower and lender and should not be covered by the detached structures exemption. In conclusion, mandatory escrow, op- tional escrow, changes to force-placement of flood insurance, and the detached structures exemption may require some analysis to determine how each bank will be affected. Covered lenders will likely require significant additional staff train- ing, re-tooling of processes, and changes to borrower communications to meet the applicable deadlines. n