By Diana Banks
The American Bankers Association is alerting bankers to some potential disruption associated with flood insurance due to FEMA's \”Risk Rating 2.0\” program. The program is really a new pricing methodology which leverages industry guidelines and cutting-edge technology, enabling FEMA to \”deliver rates which are actuarially sound, equitable, simpler to understand and better reflect a property's flood risk.\” While rate increases continue to be capped at 18% per year for many properties, having properties re-rated will still represent a significant increase in flood insurance costs for many borrowers.
Moreover, Risk Rating 2.0 will probably affect borrowers who have not previously seen large increases within their flood insurance premiums. Borrowers can also be informed as to what their full premium rate will be after future yearly increases are included. These full premium rates might be substantial in some cases.
Banks along with other lenders should be ready for queries about these alterations in flood insurance and understand where you can direct borrowers with questions regarding their coverage. Frontline retail staff as well as customer support representatives ought to be apprised of this information to facilitate a smooth transition during FEMA's changes this spring. Further, banks may consider blanket communications to any or all borrowers in special flood hazard areas regarding these changes.
ABA expects that \”Write Your Own\” insurance companies, which administer the majority of FEMA flood insurance plans, will begin communicating these changes to borrowers for insurance plan renewals scheduled for April 1, 2022, or later. Because changes to our policy are usually communicated in advance, we expect to see communications begin as soon as February.
What bankers can share
Given these expected communications from insurers, ABA is advising bankers to be aware that queries about flood insurance plans ought to be forwarded to the borrower's insurance agent as listed on the flood policy. Borrowers may also be directed to contact their homeowner's insurance policy agent, as it may be the same agent as flood insurance.
If borrowers need assistance getting a flood insurance provider, they can be directed to FEMA resources at FloodSmart.gov/flood-insurance-provider or call the NFIP at 877-336-2627. Additionally, private market flood insurance, which is not administered through the NFIP, can also be accessible. Borrowers can search on the internet or contact the state insurance commissioner within the jurisdiction where the rentals are located for an insurance carrier that provides private flood insurance plans.
Escrow and servicing issues
Furthermore, bankers and mortgage servicers should be aware of the following escrow and servicing issues related to flood insurance considering Risk Rating 2.0:
First, for flood policy renewals, FEMA or the WYO carrier will be sending new bills for the flood insurance premium, which may cause escrow increases or decreases. Borrowers might have questions regarding these changes. Again, questions specific to the policy premiums or coverage should be directed to the flood insurance carrier as well as agent for that policy.
Second, as Risk Rating 2.0 is rolled out, FEMA is allowing agents to make use of provisional ratings for renewal policies. This may cause after-the-fact adjustments by lenders and mortgage servicers, because the provisional rating may return a premium-due amount that's either higher or less than the actual policy premium.
This is comparable to a current issue of policy reformation occurring after a flood insurance application is submitted. If the insurance professional bakes an error in the policy that leads to more premium due, the NFIP will issue a letter with a new bill that indicates when the additional premium is not paid, the policy benefit will be reduced to match the premium received. FEMA anticipates that agents may use provisional ratings if the agent does not have all the necessary information to properly rate the insurance policy underneath the new Risk Rating 2.0 program. Should a provisional rating occur, and any additional premium due is not paid on the timely basis, the lender or servicer must start the lender-placed insurance process for that difference between the insurance policy benefit and also the federally required amount.
As always, ABA stands prepared to assist our bankers with any questions they may have concerning flood compliance or any other compliance issue. Please e mail us at 1-800-BANKERS or [email protected].
Diana Banks is VP and senior counsel for regulatory compliance and policy at ABA.