Enactment - On September 23, 1994, President Clinton signed the Community Development and Regulatory Improvement Act of 1994 (The Act), of which Title V is the National Flood Insurance Reform Act of 1994. The primary sections of this law which affect financial institutions are summarized below. Quote marks identify actual language taken from the law.

Scope - Federal agencies are directed to create these Flood regulations for all lending institutions and servicers subject to their supervision. These agencies include the Federal Reserve System, FDIC, Comptroller of The Currency, OTS, NCUA and Farm Credit Administration. Fannie Mae, Freddie Mac and Ginnie Mae are also directed to implement procedures providing similar flood requirements for loans which they purchase. The director of the Federal Emergency Management Agency or FEMA (the Director) is instructed to create further improvements to the National Flood Insurance Program (NFIP) and Federal flood management. These regulations will apply to all loans secured by improved real estate, including first and second mortgages as well as home equity and mobile home loans.

Timing - Since the law directs Federal agencies to create regulations based on provisions of the law, for the most part, there was a lag while the regulations were created, reviewed and implemented. FEMA and the NFIP also created new policies and procedures. Fannie Mae and Freddie Mac issued their guidelines effective November 1994 and June 1995 respectively. Most financial institutions become subject to new requirements issued by the above mentioned regulators effective October 1, 1996.

Flood Insurance Purchase Requirements - Regulators will direct "regulated lending institutions not to make, increase, extend, or renew any loan secured by improved real estate or a mobile home located or to be located in an area that has been identified by the Director as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968, unless the building or mobile home and any personal property securing such loan is covered for the term of the loan by flood insurance in an amount at least equal to the outstanding principal balance of the loan or the maximum limit of coverage made available under the Act with respect to the particular type of property, whichever is less."

Exception To Flood Purchase Requirements - Any loan having an outstanding principal balance of $5000 or less and a repayment term of 1 year or less.

Escrow of Flood Insurance Payments - "...if a regulated lending institution requires the escrowing of taxes, insurance premiums, fees, or any other charges for a loan secured by residential improved real estate or a mobile home, then all premiums and fees for flood insurance under the National Flood Insurance Act of 1968 for the real estate or mobile home shall be paid to the regulated lending institution or other servicer for the loan in a manner sufficient to make payments as due for the duration of the loan." Escrow accounts shall be subject to the provisions of section 10 of RESPA.

Notification to Borrower of Lack of Coverage - "...if at the time of origination or at any time during the term of a loan" on property in a Special Flood Hazard Area (SFHA), "the lender or servicer for the loan determines that the building or mobile home and any personal property securing the loan is not covered by flood insurance or is covered by such insurance in an amount less than the amount required for the property...the lender or servicer shall notify the borrower under the loan that the borrower should obtain, at the borrower's expense, an amount of flood insurance for the building or mobile home and such personal property that is not less than "the outstanding balance or maximum NFIP available "for the term of the loan."

Purchase of Coverage on Behalf of Borrower - "If the borrower fails to purchase such flood insurance within 45 days after notification...the lender or servicer for the loan shall purchase the insurance on behalf of the borrower and may charge the borrower for the cost of premiums and fees incurred by the lender or servicer for the loan in purchasing the insurance."

Review of Determination Regarding Required Purchase - The borrower and lender may jointly request the Director of FEMA to review a determination of whether the building or mobile home is in a SFHA. The Director must provide a letter of determination (which is final) within 45 days after receiving the request. If a request is made in connection with the origination of a loan, and the Director's determination is not provided before closing, then the purchase of flood insurance cannot be required until the Director's letter is provided.

Penalties for Failure to Require Flood Insurance or Notify Borrower - "Any regulated lending institution that is found to have a pattern or practice of committing violations... shall be assessed a civil penalty by the appropriate Federal entity for lending regulation" not to exceed $350 for each violation with a total against any one lender during a calendar year of $100,000. Regulators may take other "remedial actions" as well as assess other penalties available to them. Violations include: making, increasing, extending, or renewing loans in violation of the Flood regulations; escrow requirements; notice requirements under The National Flood Insurance Act of 1968; or failure to provide notice or purchase flood insurance coverage as required.

Transfer Liability - Any sale or transfer of a loan does not affect the liability of the transferring institution for prior violations. A lender is not liable for violations committed by another lender that previously held the loan.