Background
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.
When did Chapter 177 become effective?
Chapter 177 was signed into law on July 23, 2014, and became effective on November 20, 2014.
Will the Division of Banks (DOB) promulgate regulations to implement Chapter 177?
Yes, the DOB filed final regulations with the Secretary of the Commonwealth which take effect on Friday, September 11, 2015. The regulation is entitled 209 CMR 57.00: Flood Insurance
Does the notice requirements of Chapter 177 apply to loan applications already in process as of November 20, 2014 or only to those applications taken on or after November 20, 2014?
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.
Does Chapter 177 and the implementing regulations at 209 CMR 57.00 et seq. apply to the renewal of a flood insurance policy on an existing residential mortgage loan that was made prior to November 20, 2014?
Yes, for a mortgage loan made prior to November 20, 2014 on a residential property located in a special flood hazard area, the creditor or creditor’s representative must comply with Chapter 177 and 209 CMR 57.00 et seq. beginning with the first time the flood insurance policy is renewed after Friday, September 11, 2015, or when the mortgage loan is refinanced, whichever occurs first.
The provisions of Chapter 177 will also apply to any existing mortgage on residential property as of November 20, 2014 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 November 20, 2014.
Can the DOB confirm the timing of the determination of the principal mortgage balance in reference to the definition of the limitation on required flood insurance coverage?
Chapter 177 and 209 CMR 57.00 et seq. define the limitation on required flood insurance coverage as the principal mortgage balance on a first or junior mortgage, “at the beginning of the year for which the policy shall be in effect.”
The determination of the principal mortgage balance for the purpose of establishing the maximum required flood insurance coverage amount must be based upon the principal mortgage balance as of the start date of the policy term for which the flood insurance policy will be in effect, not as of the start of the calendar year in which the policy is renewed. For example, if a renewing flood insurance policy year were to cover the period from June 1, 2015 until May 31, 2016, a creditor or creditor’s representative would be prohibited from requiring the homeowner to purchase or pay for flood insurance on the residential property in a coverage amount exceeding the outstanding principal mortgage balance as of June 1, 2015
What is the “full value” of the credit line for a home equity line of credit for the purpose of calculating the maximum amount of flood insurance that a homeowner may be required to purchase?
The “full value” of the credit line for a home equity line of credit is the maximum amount of credit available to the borrower under the terms of the home equity line of credit, not the actual amount drawn by the borrower under the line of credit at the time of the initial term or renewal of the flood insurance policy.
Is compliance with Chapter 177 and the DOB’s regulation be required when the owner of a residential property is required to purchase or pay for flood insurance under a reverse mortgage?
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.
Does Chapter 177 prohibit a purchaser or owner of residential property from purchasing flood insurance coverage in an amount exceeding the principal mortgage balance or coverage for contents of the home, or selecting a deductible lower than $5,000?
No, a purchaser or owner may voluntarily choose to purchase flood insurance coverage in an amount exceeding the principal mortgage balance, coverage for contents, or a deductible lower than $5,000, but a creditor or creditor’s representative may not require such terms.
If an agency providing financial assistance requires flood insurance that either exceeds the outstanding principal mortgage balance or includes a deductible of less than $5,000, or both, can the creditor originate an agency insured or guaranteed loan?
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. Chapter 177 also prohibits a creditor or creditor’s representative from requiring flood insurance coverage that includes a deductible of less than $5,000. However, if the insuring or guaranteeing agency is not itself a creditor or creditor’s representative in the transaction, the DOB 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 or modifying the mortgage loan.
However, the creditor or creditor’s representative originating or modifying the agency loan will be required to provide the borrower with the Notice About Flood Insurance Coverage in accordance with Section 69 and 209 CMR 57.00 et seq. The creditor or creditor’s representative is encouraged to undertake reasonable steps to clarify for the borrower any differences between a higher flood insurance coverage amount for the program loan and the statements included in the Notice About Flood Insurance Coverage regarding limitations on maximum required coverage amounts.
Is compliance with Chapter 177 and the DOB’s regulation required when a creditor makes or changes a junior mortgage, home equity line of credit, or home equity loan secured by a mortgage located in a special flood hazard area?
Although flood insurance may be available under the National Flood Insurance Act - the creditor or creditor’s representative originating the junior mortgage or home equity product must comply with Chapter 177 and the DOB'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.
If an owner does not request a reduction, may the flood insurance policy be renewed for the same coverage amount which was in effect for the prior period?
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.
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.
Will the DOB include a model notice to be issued to the purchaser or owner of the residential property?
Yes, a model notice (Notice About Flood Insurance Coverage) is included within the regulations promulgated to implement the provisions of Chapter 177.
Will a creditor or creditor’s representative be authorized to change the Notice About Flood Insurance Coverage in any way?
No, the Notice About Flood Insurance Coverage must strictly conform to the form of notice established under 209 CMR 57.00 et seq.
In a loan transaction including multiple borrowers, is it sufficient to send the Notice About Flood Insurance Coverage to only one of the borrowers?
Yes, pursuant to 209 CMR 57.04(6), the creditor or creditor’s representative may send the Notice About Flood Insurance Coverage to either of the borrowers in the transaction at the time the borrower is notified of the need to purchase or pay for flood insurance. If the creditor or creditor’s representative sends the Notice About Flood Insurance Coverage to only one borrower, the notice should be sent to the same borrower to whom the creditor or creditor’s representative sends the Notice of Special Flood Hazards. If one purchaser or owner is only a surety or guarantor and will not reside in the property, the creditor or creditor’s representative must provide the Notice About Flood Insurance Coverage to the principal debtor.