Effective October 1, 2021, FEMA updated its Special Flood Insurance Policy forms to bring them in conformance with the requirements stipulated in the final rule FEMA published in July 2020, “Conforming Changes To Reflect the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) and the Homeowners Flood Insurance Affordability Act of 2014 (HFIAA), and Additional Clarifications for Plain Language,” available on the Federal Register. This change included FEMA’s new risk rating methodology (Risk Rating 2.0).
This is nice, but what does it mean for the average banker?
Well, part of the changes included an update to the National Flood Insurance Program (NIFP) declaration pages. One of the changes includes no longer displaying flood zone information. The reasoning behind this change stems from the implementation of a new pricing methodology called Risk Rating 2.0.
Per FEMA, discounts to policyholders in communities that participate in the Community Rating System will continue. Communities will continue to earn National Flood Insurance Program rate discounts of 5% – 45% based on the Community Rating System classification. However, since Risk Rating 2.0 does not use flood zones to determine flood risk, the discount will be uniformly applied to all policies throughout the participating community, regardless of whether the structure is inside or outside of the Special Flood Hazard Area. So, because flood zones will not be used to determine risk (which in turn determines premiums), the relevance of zone consistency between a flood determination and Risk Rating 2.0 flood policy would appear to be moot.
The roll out of the new methodology will occur in two phases:
- PHASE I – New policies beginning Oct. 1, 2021 will be subject to the new rating methodology. Also beginning Oct. 1, existing policyholders eligible for renewal will be able to take advantage of immediate decreases in their premiums.
- PHASE II – All remaining policies renewing on or after April 1, 2022 will be subject to the new rating methodology.
The introduction of this new methodology will require banks to be on their toes until Risk Rating 2.0 is fully implemented in 2022. As bankers we have trained ourselves to search for discrepancies in flood zones. The impetus behind this validation was that if a flood policy were written to the wrong flood designation, that borrower would be underinsured in the event of a flood. Given the new methodology (Risk Rating 2.0), this no longer is a concern.
The other open question concerns renewing policies between now and April 1, 2022. Will the declaration pages for renewing policies that are not written using Risk Rating 2.0 use the new format? If so, how will we know if the policy was renewed using Risk Rating 2.0 or not? Granted, this is a small window of time (only six months) that this question will be relevant. If renewing declaration pages are given using the new format, should we assume that a renewing policy has not had any changes made to the risk rating assumptions that might impact coverage? In these situations, you may want to ask for supplemental information to document flood zone status or that the policy was underwritten using the Risk Rating 2.0 methodology.
At this point, we have not received any guidance from the Agencies concerning their expectation on how banks are to manage these changes/questions. TCA will be monitoring for any guidance issued by the Agencies.
One last point: The change in methodology by FEMA should not be construed to mean banks no longer need to pull flood determinations. FEMA states:
Using Flood Insurance Rate Maps (FIRMs) for Mandatory Purchase and Floodplain Management
FEMA’s flood map data informs the catastrophe models used in the development of rates under Risk Rating 2.0. That is why critical flood mapping data is necessary and essential for communities. It informs floodplain management building requirements and the mandatory purchase requirement.
These NFIP changes in no way affect the Agency flood regulation and associated guidance. That said, it may explain the change in guidance noted in the proposed Flood Q&As concerning zone discrepancies. Under the proposed Q&As, a bank will only be required to “consider” documenting the discrepancy. Beyond this, it need only require the borrower to have the appropriate amount of insurance coverage. Please note, at the time of this article, this Q&A was still in proposed status and could be changed again prior to being finalized due to conflicting information about revised declaration pages. If you should receive a policy that was not underwritten using Risk Rating 2.0, existing guidance concerning discrepancies should be followed.
ZONE 1. What should a lender do when there is a discrepancy between the flood hazard zone designation on the flood determination form and the flood insurance policy?
If a lender receives a policy declarations page that has a flood zone designation that is different from the flood zone shown on the SFHDF, it should consider documenting the discrepancy in the loan file. If the SFHDF indicates that the building securing the loan is in an SFHA, the lender must require the appropriate amount of insurance coverage in accordance with the Act and Regulation, but the lender is not otherwise required to resolve a discrepancy between the flood zone designation on the SFHDF and the designation on the flood insurance policy declarations page provided by the borrower.
This guidance applies to any flood zone discrepancy that arises in connection with a mortgage loan that is made, increased, extended or renewed. In addition, the guidance applies to any building that has been rated in accordance with NFIP procedures. For a policy issued under the NFIP, if a misrating is discovered at the time of loss resulting from an incorrect flood zone, and a policyholder has underpaid the flood insurance premium, a policyholder may keep the contracted coverage limits if an additional premium is paid. Once paid, a revised declarations page will be issued showing the corrected flood zone. The lender will receive a copy of the declarations page and may receive a copy of the underpayment notice. If the borrower does not pay the additional premium, resulting in inadequate coverage, lenders must proceed with force-placement procedures. On the other hand, if a policyholder has overpaid the flood insurance premium as a result of a misrating, FEMA may allow a refund of insurance premiums under certain circumstances. See NFIP Flood Insurance Manual for specific instructions. Private policies may resolve flood zone discrepancies differently.
Confused by all these changes? Contact TCA for A Better Way to navigate the intricacies of the NFIA.
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