By the Division of Banks


Frequently Asked Questions
on Chapter 177 of the Acts of 2014,
An Act Further Regulating Flood Insurance

Background

Chapter 177 of the Acts of 2014 (Chapter 177), An Act Further Regulating Flood Insurance, was signed into law on July 23, 2014 and became effective on November 20, 2014.  Chapter 177 amends Massachusetts General Laws chapter 183 by adding section 69 (Section 69), which prohibits creditors and creditors’ representatives from requiring flood insurance that is greater than the balance of a residential mortgage loan, includes coverage for contents, or that includes a deductible of less than $5,000.  The provisions of Section 69 apply to residential first mortgage loans, subordinate liens, home equity lines of credit, and home equity loans.  Section 69 also requires that creditors, creditors’ representatives, and insurance producers provide borrowers with a notice about flood insurance coverage before it is purchased. 

Provided below are responses to several questions relating to the implementation of Chapter 177.

General

Q. When does Chapter 177 become effective?

A. Chapter 177 was signed by the Governor on July 23, 2014, and takes effect 120 days after signature.  Therefore, the law became effective on November 20, 2014.

Q. Will the notice requirements of Chapter 177 apply to loan applications already in process as of the effective date or only to those applications taken on or after the effective date?

A.  The notice provisions of Chapter 177 will apply to loan applications received on or after November 20, 2014 as well as to any loan application which is in a pending status on November 20, 2014 for which the determination of the need to purchase flood insurance is made on or after November 20, 2014. 

The notice provisions of Chapter 177 will also apply to any existing mortgage on residential property as of the effective date that is not located in a special flood hazard area designated by the Federal Insurance Administrator as of November 20, 2014, but becomes designated as within a special flood hazard area after the effective date of Chapter 177.

Q. Will the Division of Banks promulgate regulations to implement Chapter 177?

A. Yes, the Division filed proposed regulations with the Secretary of the Commonwealth on November 21, 2014.  The proposed regulation is entitled 209 CMR 57.00: Flood Insurance.  Following publication of the proposed regulations, the Division will hold a public hearing to receive comments on the proposed regulation for consideration in finalizing the regulations. 

Q. When will the Division of Banks hold the public hearing to finalize the regulations?

A.  The Division will hold a public hearing at 10:00 a.m. on Tuesday, December 16, 2014 at 1000 Washington St., Hearing Room 1-E, Boston, Massachusetts.  The Division will also accept written comments until the expiration of the written comment period on Monday, December 29, 2014.  Written comments may be submitted to the Massachusetts Division of Banks, 1000 Washington St., 10th Floor, Boston, MA 02118-6400 or at dob.comments@state.ma.us

Compliance

Q.  Are the creditor and creditor’s representative required to comply with Chapter 177 before the Division of Banks finalizes regulations to implement the new law?

A.  Yes.  Chapter 177 is effective on November 20, 2014 and compliance with the new law will be required as of that date.

Q. Will the Division of Banks include a Model Notice to be issued to the purchaser or owner of the residential property?

A.  Yes, the Division intends to include a Model Notice as part of the regulations promulgated to implement the provisions of Chapter 177.

Q.  Until such time as the implementing regulations and the Model Notice are finalized, can the written notice required by Chapter 177 be combined with another disclosure or notice provided to the purchaser or owner of residential property?

A.  Yes.  Prior to the effective date of the implementing regulations and the Model Notice, the notice required by Chapter 177 may be combined with another disclosure or notice.  If combined, such disclosure containing the additional notice required by Chapter 177 must be provided to the purchaser or owner at the time the purchaser or owner is notified of the need to purchase or pay for flood insurance in accordance with the timing requirements of the new law.   

Alternatively, the creditor or creditor’s representative may satisfy the notice requirement by providing the written notice as a separate notice.  If a separate notice is to be provided, the Division would deem a creditor’s or creditor’s representative’s use of the following sample form pdf format of chapter177sampleform.pdf
to be compliant with Chapter 177.

Whichever method of notice is implemented by the creditor or creditor’s representative prior to the finalization of the regulations, the notice must be provided in clear and conspicuous print and a copy of the notice must be retained in the creditor’s and creditor’s representative’s records to illustrate compliance and to have available for inspection by the Division’s examiners.

Q. Will a creditor or creditor’s representative be authorized to change the Model Notice in any way?

A.  No.  Aside from the text designated within brackets for the identification of the appropriate party, the Model Notice must strictly conform to the form of notice established under 209 CMR 57.00 et seq.

Q. Under applicable federal law, in a transaction including multiple borrowers, the lender is only required to send the Notice of Special Flood Hazard to one of the borrowers in the transaction when the lender determines that the residential property is located in a special flood hazard area.  In a designated loan transaction that includes multiple borrowers, is it sufficient to send the Notice of Flood Insurance Coverage to only one of the borrowers?

A. No, the creditor or creditor’s representative must send the Notice of Flood Insurance Coverage to each of the borrowers in the transaction at the time the borrower is notified of the need to purchase or pay for flood insurance.

Q. Will compliance with Chapter 177 and the Division’s regulation be required when the owner of a residential property is required to purchase or pay for flood insurance under a reverse mortgage?

A. Yes, a reverse mortgage is considered a designated loan if the reverse mortgage is secured by residential property located in a special flood hazard area where flood insurance is available under the National Flood Insurance Act, as amended.

 Q. Under the provisions of 209 CMR 57.00 et seq., as principal on the mortgage is repaid, the owner of the residential property may request a reduction of coverage upon renewal of flood insurance policy to an amount not exceeding the outstanding principal mortgage balance at the beginning of the policy year.  If an owner does not request a reduction, may the flood insurance policy be renewed for the same coverage which was in effect for the prior period?

A. Yes, absent a contractual provision to reduce the coverage to an amount not exceeding the then outstanding principal mortgage balance, if the owner of the residential property does not request a reduction of coverage, the flood insurance policy may be renewed for the same coverage which was in effect for the expiring policy period.  However, Chapter 177 prohibits the creditor or creditor’s representative from requiring the owner to purchase or pay for flood insurance coverage for the renewal period that exceeds the outstanding principal mortgage balance or the full value of a home equity line of credit.    

Q. Will compliance with Chapter 177 and the Division’s regulation be required when a  creditor or creditor’s representative makes, increases, extends, or renews a junior mortgage, home equity line of credit, or home equity loan secured by a mortgage on residential property located in a special flood hazard area in which flood insurance is available under the National Flood Insurance Act?

A. Yes, the creditor or creditor’s representative originating the junior mortgage or home equity product must comply with Chapter 177 and the Division’s regulation.  The creditor or creditor’s representative should instruct the borrower to contact their insurance agent to discuss amendments to the existing flood insurance policy.

Q. If an agency that provides financial assistance in the form of an insurance or a guaranty of a residential mortgage loan (i.e. the Federal Housing Administration, Veteran's Administration, or the Small Business Administration) requires flood insurance coverage in an amount exceeding the outstanding principal mortgage balance, is the creditor or creditor’s representative prohibited from originating an agency insured or guaranteed loan for the borrower?

A. No, Chapter 177 prohibits a creditor or creditor’s representative from requiring the purchase or payment of flood insurance that is at a coverage amount exceeding the applicable limits under M.G.L. c. 183 § 69 for a mortgage loan, home equity line of credit, or home equity loan.  If the insuring or guaranteeing agency is not itself a creditor or creditor’s representative in the transaction, the Division would not construe an agency condition on flood insurance coverage which must be satisfied to obtain assistance through such program as a requirement of the creditor or creditor’s representative originating the mortgage loan.