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Massachusetts Division of Banks Gears Up to Implement State Law Limiting Flood Insurance Requirements on Residential Properties

On Thursday, September 11, 2014 the Massachusetts Division of Banks held a public hearing regarding regulations to implement Chapter 177 of the Acts of 2014, An Act Further Regulating Flood Insurance (the “Act”). The Division will continue to accept written comments concerning the regulations until 5 p.m. on September 18, 2014.

The Act, which was signed into law by Governor Patrick on July 23, 2014 and takes effect on November 20, 2014, prohibits creditors from requiring flood insurance that:

  • has a coverage amount exceeding the outstanding principal balance of the creditor’s loan at the beginning of the coverage year (or the credit limit on a home equity line of credit);
  • specifies a deductible of less than $5,000.
  • has coverage for contents; or

The Act also requires creditors to provide “a purchaser or owner of residential property” with the following notice in “clear and conspicuous print” at the time the purchaser/owner is notified of the need to purchase or pay for flood insurance:

Please note that the flood insurance we are requiring you to purchase will only protect your creditor’s or lender’s interest in your property. Massachusetts law prohibits a creditor or lender from requiring you to purchase flood insurance in excess of the amount of your principal mortgage and, in the case of a home equity line of credit, home equity loan or second and subsequent mortgage, the full value of the credit line, outstanding principal on the equity loan or second or subsequent mortgage on that property at the beginning of the year for which the policy will be in effect. The insurance may not be sufficient to pay for many needed repairs after a flood and may not compensate you for your losses in the property due to the flood. If you wish to protect your home or investment, you may want to purchase more flood insurance than the amount we are requiring you to buy.

The law applies to 1- to 4-family residential properties, but is not expressly limited to owner-occupied properties.

Although the advisability of the Act is no longer on the table for discussion (it was adopted unanimously by the Massachusetts House and by a vote of 34-3 in the Senate), the Division of Banks was soliciting input on prospective regulations it is required to promulgate. The Division circulated a list of questions covering topics such as whether there should be a model disclosure notice, whether the notice should include additional information (for example, about the risk of under-insurance), whether the borrower should be required to acknowledge receipt of the notice, etc.

At the hearing, representatives of the insurance and financial institutions industries offered testimony on these questions as well as on the Act more generally. Although it was generally acknowledged that the purpose of the Act was to reduce insurance premiums for consumers, several of the witnesses expressed concern that the Act would increase the risk of consumer underinsurance and, in turn, would result in consumers being unable to repair or rebuild their homes after a major disaster. Due to this risk, the majority of the witnesses voiced support for a model disclosure that would provide homeowners with as much information as possible on the risk of underinsurance and would further advise homeowners to consult a licensed insurance professional when deciding on the appropriate amount of insurance. Some of the witnesses further suggested that the disclosure be provided by insurance agents instead of creditors, as the agents would be better equipped to advise consumers on insurance options. Many of the witnesses also supported including an acknowledgement of the borrower’s receipt of the disclosure.

As to the overall content of the regulations, the witnesses requested that the Division of Banks provide as much information as possible as to the obligations imposed upon creditors and loan servicers. Specifically, the witnesses requested clarity on the method of calculating the outstanding principal balance at the beginning of a coverage year, the treatment of subordinate liens, whether the statute will apply only to new loans and, if not, how pre-existing loans will be treated under the Act, and whether the statute will apply to loans on non-owner-occupied properties. Several of the witnesses suggested that the regulations should include a “safe harbor” for creditors who act in good faith to comply with the terms of the Act and its implementing regulations. It was generally agreed that a definitional section would be helpful, in particular with respect to the scope of the term “purchaser or owner of residential property” to whom notices are to be delivered.

In light of the short time frame before the Act goes into effect on November 20th, the Division of Banks does not anticipate promulgating final regulations before the effective date. Accordingly, creditors are left to interpret the Act as best they can until the regulations are issued.

For further information, please contact the Banking & Financial Institutions attorney you work with.