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DHS FEMA NFIP Services - eWaterwark Article
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Keeping Up With the SFHAs
David Maurstad, FEMA
Adapted from an article for lenders and loan servicers that appeared in the January 2007 edition
of Servicing Management magazine.
Flood Insurance Rate Maps (FIRMs) are the tools FEMA uses to designate the level of flood risk
(low, moderate, or high) that property owners face. High-risk zones are those in which there is at
least a 1-percent annual chance of flooding. FIRMs also provide a basis for calculating the premiums
that property owners will pay for flood insurance.
To establish the flood zones, studies are conducted to determine the current flood risk, which is then
shown on the flood map. FEMA is in the process of updating the FIRMs as part of a nationwide effort
known as Flood Map Modernization. The new maps will reflect changes in water flow and drainage patterns
caused by urban growth, surface erosion, and other forces.
Areas now identified as low-to-moderate flood risk zones may be identified as high flood risk zones,
also known as Special Flood Hazard Areas (SFHAs). In these areas, flood insurance is mandated for
mortgages from federally-regulated lenders. SFHAs receive that designation because history and
geography show that significant floods have occurred and will occur in the region. It is good business
to ensure that 100 percent of property owners in these high-risk flood areas are financially
protected.
The updated FIRMs also will show some buildings previously identified in high flood risk areas as
now being in low-to-moderate flood risk areas, where flood insurance is not mandated but is available
at a lower price. Property owners should be advised that, although the mandatory purchase requirement
no longer applies, the NFIP's Preferred Risk Policy (PRP) is still available, offering both building
and contents coverage at significant savings. More than 25 percent of NFIP claims are paid in the
low-to-moderate flood risk areas.
Even when flood risk zones don't change, periodic review of insurance coverage is a good idea.
Because flood insurance policies do not provide annual coverage increases for inflation, flood
insurance limits may periodically need to be increased to keep pace with rising property values.
Now is the time for lenders and loan servicers to meet their flood insurance compliance needs and
ensure adequate protection for their borrowers' equity interests!
Should unprotected or underinsured loans be revealed, it is the lender's and loan servicer's
responsibility to notify the property owner about any flood insurance requirements. While a majority
of property owners will comply with this request and obtain their own flood insurance policy or an
increase in coverage, some borrowers will not. For those who do not fulfill this obligation, the lender
or loan servicer is accountable for bringing the mortgage into compliance. To help protect the lender
from financial repercussions and enable adherence to the law, FEMA provides the lending industry with
an option to place Federally backed flood insurance under the Mortgage Portfolio Protection
Program (MPPP).
The MPPP
Introduced on January 1, 1991, the MPPP is a tool that provides lenders and loan servicers the
capability to provide lender-placed Federally backed flood insurance in order to protect their
collateral interests and meet their compliance requirements.
The National Flood Insurance Reform Act of 1994 requires the forced placement of flood insurance
when noncompliance is identified, and the MPPP provides a forced placement vehicle. Whether lender
placement is accomplished by use of non-Federally backed flood insurance or via the MPPP, lenders
must provide notice to borrowers. Notification requirements are detailed in the Mandatory Purchase of Flood Insurance
Guidelines booklet available on the NFIP website.
The MPPP was intended to offer lenders an interim solution to meet their compliance requirement,
while allowing borrowers an opportunity to obtain flood insurance at a lesser cost. The MPPP is an
annual policy and, although it cannot be renewed, it can be rewritten each year if the required
procedures are followed. At the end of the MPPP first year policy term, three letters of notification
must be sent to the borrower in accordance with Addendum 2, located in Appendix 9 of the Mandatory
Purchase booklet. The letters provide property owners with ample opportunities to show evidence of
adequate flood insurance coverage or proof that they have contacted their local insurance agent or
company to purchase the necessary coverage. Acceptable proof of insurance is a paid receipt for the
annual premium and copy of the flood insurance application, or the flood insurance policy
declarations page.
Only a property located in an SFHA can carry an MPPP policy. Use of the MPPP to supplement or increase
coverage limits on an existing NFIP policy is not allowed. Lenders and loan servicers will have to look
to the private sector for lender-placed flood insurance if borrowers cannot be persuaded to increase
their NFIP flood insurance policy limits. The MPPP is written by insurance companies that participate
in the NFIP's Write Your Own (WYO) Program. A listing of these companies is
available online.
Educating the Homeowner
To ensure compliance with federal regulations, protect collateral interests, and limit the need for
lender-placed flood insurance, lenders are encouraged to educate borrowers about the requirement to
purchase and maintain adequate flood insurance coverage for buildings located, or to be located, in
identified SFHAs. After all, protection of the investment is in the best interest of both borrowers
and lenders. It is important for borrowers to understand that, if they fail to maintain
adequate flood insurance coverage during the term of the loan, their lender will, at the borrowers'
expense, purchase a flood insurance policy for them. A lender-placed policy will likely cost
the property owner more than a voluntarily purchased flood insurance policy.
After the loan is closed, lenders and loan servicers can easily remind their borrowers about the
importance of maintaining their flood insurance coverage. Flood insurance information that can be
included in mailings to borrowers is available at no charge through the FEMA Distribution Center
(800-480-2520).
Now serving as Federal Insurance Administrator and FEMA's Assistant Administrator for
Mitigation, David Maurstad was once Mayor of Beatrice, Nebraska, served as a Nebraska State Senator,
and later held the office of Lieutenant Governor of Nebraska. He joined FEMA in 2001 as the Director
of the Region VIII Office.
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| Last Modified:
Friday, 21 January 2011 |
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