Insights

Earlier this year the Massachusetts legislature passed legislation to impose certain limitations on creditor requirements to purchase flood insurance. Under the statute (Chapter 177 of the Acts of 2014, the "Act") creditors and their representatives are subject to certain prohibitions in connection with a 1-to-4-family residential mortgage transaction. Specifically, the Act prohibits:

• Requiring flood insurance coverage in an amount greater than the principal mortgage balance outstanding at the beginning of the year in which the flood policy will be effective;
  • For HELOCs, the creditor may not require the purchase of flood insurance coverage in an amount exceeding the full value of the credit line at the beginning of the year in which the flood policy will be in effect; and
  • For home equity loan or other subordinate lien products the creditor may not require the purchase of flood insurance coverage in an amount exceeding the outstanding principal on the equity loan or other junior lien product at the beginning of the year in which the flood policy will be in effect.
• Requiring contents coverage; or
• Requiring a deductible of less than $5,000.

In addition to these prohibitions, the Act calls for the creditor, its representatives, and insurance producers to provide a disclosure at the time the home buyer or owner is informed of the need to purchase flood insurance. This notice informs consumers of the prohibitions described above, along with the fact that the coverage they may be required by their mortgagor to purchase may be insufficient to compensate them for their losses should a flood occur.

In the run-up to the Thanksgiving holiday, the Division of Banks issued two pieces documents that shed some additional light on the requirements of the Act. The first is a Frequently Asked Questions document (the "FAQ"). The FAQ clarifies that the requirements of the Act apply to all applications received on or after November 20th, as well as any applications in a pending status where the flood determination is received on or after November 20th. It also notes that the Act will apply to any existing residential mortgages in areas that are not currently in special flood hazard areas, but that become designated as such areas on or after November 20, 2014.

Perhaps the most helpful guidance provided by the FAQ is its provision of a form of sample consumer notice. As mentioned above, the Act requires that a disclosure be provided to consumers at the time they are informed of the requirement to purchase flood insurance. While the implementing regulations (again, yet to be issued) will include a model form of this notice, the Act does not. The FAQ clarifies that while promulgation of the regulation remains in limbo creditors and creditor's representatives may either provide the notice in combination with another notice or disclosure or may provide a stand-alone form. The FAQ provides a sample form that may be used if the creditor or creditor's representative sends the notice as a stand-alone form. The sample notice may be found at http://www.mass.gov/ocabr/docs/dob/chapter177sampleform.pdf.

Shortly after issuing the FAQ, the Division of Banks also issued a proposed form of regulation to implement the requirements of the Act. The proposed regulations were the subject of a public hearing on December 16th. Unlike the FAQ, the proposed regulations will require the use of a model form (which is currently identical in content and format to the sample provided with the FAQ) in all cases. The proposed regulation also clarifies that the model form must be provided at the same time the consumer receives the Notice of Special Flood Hazards. A new form of notice is not required upon an annual basis or at the time the owner is notified of the need to renew an existing policy. However, a new form of notice must be provided when there is an increase, extension, or renewal of an existing mortgage loan (which are also triggers for flood insurance coverage under federal law).

It remains to be seen whether the regulation will be adopted in its current form. However, because the Act is currently effective creditors must ensure that they adhere to both the substantive limitations of the Act and its notification requirement.

Thomas P. Quinn is a partner in the Fall River, MA office of Hudson Cook, LLP. Tom can be reached at 774-365-4758 or by email at tquinn@hudco.com.