Insights

Massachusetts is about to cross the finish line in implementing its flood insurance limits and notification requirement that became effective in last November.

As a refresher, Massachusetts revised its statutes to prohibit creditors or creditors' representatives from requiring borrowers to purchase flood insurance:

• Coverage in an amount greater than the outstanding principal balance at the beginning of the year in which the policy becomes effective (for HELOCs this amount is calculated based on the maximum amount of credit available to the borrower under the HELOC, not the amount actually advanced by the borrower; for home equity loans or other junior liens the amount in question is the outstanding principal balance on such loan at the beginning of the year for which the policy shall be in effect);
• Contents coverage; or
• With a deductible of less than $ 5,000.

In addition to these substantive limitations, the statute also requires creditors (or creditors' representatives) to provide a notice to borrowers informing them of these limits and using language prescribed by the statute. This notice must be provided to the purchaser or borrower of residential property at the time she or he is notified of the need to purchase flood insurance. These requirements became effective on November 20 of 2014.

The Act adopting these requirements also called for the Division of Banks to promulgate regulations to implement them. Although a proposed version of this regulation was issued for review and comment late last year, it has remained ineffective for the past nine months due to a regulatory freeze imposed by then newly minted Governor Charlie Baker.

With that freeze now lifted, the Division of Banks published a final version of the regulation. Found at Part 57 of the Division of Banks regulations, the final version will become effective on September 11, 2015. While it is identical to the proposed version on a number of substantive points, the final version does include some notable clarifications and changes. Specifically, the final version:

• Clarifies that if a transaction involves more than one creditor or creditor's representatives, they collectively need to provide only a single notice to the borrower. These parties may decide who among them will provide the notice.
• Clarifies that only a single notice is required to multiple borrowers who have joint primary liability on the subject loan.
• Provides a new model form of notice that must be used verbatim. While this model notice continues to include a signature line for the borrower to acknowledge receipt of the disclosure, the final version of the regulation clarifies that a signature is not required when the notice is provided in connection with a creditor force-placing insurance coverage.

Accompanying the final version of the regulation was a new and improved Frequently Asked Questions document that provides additional interpretive gloss to the final regulation. While similar to the FAQ on this topic that preceded it, the new version also includes some helpful clarifications. For one, it notes that, while both the statute and implementing regulation prohibit a creditor or creditor's representative from requiring coverage amounts in excess of the limits described above, purchasers or borrowers are free to voluntarily purchase coverage in excess of these limits (or with a deductible of less than $5,000). Similarly, if an agency (such as the VA or the FHA) that provides default insurance or a guaranty to a creditor requires coverage beyond what is permitted by the law, the FAQ clarifies that this will be permissible so long as the agency is not also a creditor or creditor's representative in the transaction. While creditors are required to provide the standard form of notice - without revision - in such instances, the FAQ encourages creditors and/or their representatives to undertake additional reasonable steps to clarify the requirements of the program in question, as compared to the different coverage requirements disclosed on the notice.

Finally, the FAQ document provides that there will be a 60-day implementation period after September 11, 2015 to permit creditors to update their system to accommodate the new form of notice. While creditors should strive to implement the new form of notice by the effective date of the final regulation, the absolute drop-dead date for implementing the new form of notice pursuant to the FAQ appears to be November 10, 2015.

Thomas Quinn is a partner in the Fall River, Massachusetts office of Hudson Cook, LLP. Tom can be reached at 774.365.4758 or by email at tquinn@hudco.com.