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Fed posts flood insurance Q&As

The Federal Reserve Board has issued Consumer Affairs Letter 20-7, "Flood Insurance Compliance in Response to the Coronavirus," with two frequently asked questions regarding flood insurance compliance requirements during the national emergency caused by the COVID-19 pandemic.

Q1. If a bank works with its borrowers by extending maturities/payments or balloon payments due to the COVID-19 emergency, would the bank be required to make a new flood zone determination and provide new notices of special flood hazards for the extended loan?

A1. Under the federal flood statutes and the Federal Reserve’s implementing regulation, flood insurance requirements are generally triggered upon the making, increasing, renewing, or extending of any designated loan. If a lender modifies a loan by extending the loan term, then this change is a triggering event, and flood insurance requirements would apply, provided no other existing exception to the requirements under the Federal Reserve’s regulation is applicable. Such requirements may include establishing escrow for flood insurance payments and fees, making a flood zone determination on the property securing the loan, or providing the notice of special flood hazards to the borrower. The federal flood statutes and the Federal Reserve’s implementing regulation do not provide for a waiver of these requirements in emergency situations.

However, consistent with the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" dated April 7, 2020, when exercising supervisory and enforcement responsibilities, the Federal Reserve will take into account the unique circumstances impacting borrowers and institutions resulting from the COVID-19 emergency. The Federal Reserve will take into account an institution’s good-faith efforts demonstrably designed to support consumers and comply with the flood insurance requirements. The Federal Reserve expects that supervisory feedback for institutions will be focused on identifying issues, correcting deficiencies, and ensuring appropriate remediation to consumers. The Federal Reserve does not expect to take a public enforcement action against an institution, provided that the circumstances were related to the COVID-19 emergency and that the institution made good faith efforts to support borrowers and comply with the flood insurance requirements, as well as responded to any needed corrective action.

Q2: How does FEMA Bulletin W-20002 affect the force placement requirement under the Flood Disaster Protection Act and the implementing regulation?

A2: On March 29, 2020, the Federal Emergency Management Agency (FEMA) announced in Bulletin W-20002 that the grace period to renew National Flood Insurance Program (NFIP) policies that expire between February 13, 2020 and June 15, 2020 (FEMA emergency period) has been extended from 30 days to 120 days due to the COVID-19 emergency. Based on Bulletin W-20002, a borrower will be covered by the NFIP policy if the flood insurance premium is paid before the 120-day grace period expires.

In accordance with the flood insurance force placement regulations, when a lender makes a determination that a designated loan is not covered by a sufficient amount of flood insurance, it must notify the borrower. If the borrower does not provide evidence of sufficient coverage within 45 days after notification, the lender must force place flood insurance in an amount that will satisfy the regulatory requirements. However, in light of Bulletin W-20002, for NFIP policies expiring during the FEMA emergency period:

  • A lender may provide the required notice to the borrower after determining the policy has expired with an indication that the NFIP grace period has been extended for 120 days. Lenders may inform borrowers that, in light of Bulletin W-20002, force placement will not occur until after the end of the 120-day period.
  • Alternatively, a lender may provide the required notice to the borrower at least 45 days before the end of the 120-day grace period.
  • For either alternative, the lender must force place flood insurance on the borrower’s behalf if the borrower does not pay the premium by the end of the 120-day grace period.
  • Consistent with the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)” dated April 7, the Federal Reserve does not expect to take supervisory or enforcement action against the lender for violating the flood insurance force placement requirements, provided that the circumstances were related to the COVID-19 national emergency, and that the lender has made good faith efforts to support borrowers and comply with the flood insurance requirements, as well as responded to any needed corrective action.
  • Lenders should be aware that if they force place flood insurance for NFIP policies that expire during the FEMA emergency period prior to the expiration of the 120-day grace period and the borrower pays the premium by the end of the 120-day grace period, consistent with the flood insurance regulatory requirements, the lender would be required to refund the borrower for any overlapping flood insurance coverage.


Congress receives FTC report

The FTC has submitted a report to Congress updating lawmakers on the agency’s efforts to educate consumers about their rights to dispute and correct errors in their credit reports. Lawmakers requested the report as part of the fiscal year 2020 spending bill that funds the FTC and other federal agencies. Under the Fair Credit Reporting Act, consumer reporting agencies must have reasonable procedures to ensure the accuracy of consumers’ reports and give consumers the ability to dispute and correct errors. Consumer reports are used to determine a consumer’s eligibility for credit, insurance, housing, employment, and other benefits. Errors in consumer reports can cause consumers to be denied credit or other benefits, or pay a higher price for them.


Fannie and Freddie loan processing flexibilities extended

The FHFA reports it has extended several loan origination flexibilities currently offered by Fannie Mae and Freddie Mac designed to help borrowers during the COVID-19 national emergency. Those flexibilities are extended until at least June 30 and include:

  • Alternative appraisals on purchase and rate term refinance loans;
  • Alternative methods for verifying employment before loan closing;
  • Flexibility for borrowers to provide documentation (rather than requiring an inspection) to allow renovation disbursements (draws); and
  • Expanding the use of powers of attorney and remote online notarization to assist with loan closings.​


FDIC posts CRA compliance exam ratings

The FDIC has issued a list of 67 state nonmember banks recently evaluated for compliance with the Community Reinvestment Act (CRA). The list covers evaluation ratings that the FDIC assigned to institutions in February 2020. Sixty-one were rated Satisfactory and two rated Needs to Improve.. Congratulations to the four banks that were rated Outstanding (links are to their evaluations):


Fed publishes April SLOOS

The April 2020 Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months, which generally corresponds to the first quarter of 2020.

Loans to businesses—Respondents to the April survey indicated that, on balance, they tightened their standards and terms significantly on commercial and industrial (C&I) loans to firms of all sizes. Banks reported stronger demand for C&I loans from large and middle-market firms, while demand for C&I loans from small firms was about unchanged. Meanwhile, banks tightened standards and reported weaker demand across all three major commercial real estate (CRE) loan categories—construction and land development loans, nonfarm nonresidential loans, and multifamily loans—over the first quarter of 2020.

Loans to households— Banks tightened standards across all three consumer loan categories—credit card loans, auto loans, and other consumer loans—over the first quarter of 2020, on net, while moderate fractions of banks tightened their lending standards on most categories of residential real estate (RRE) loans. Banks reported stronger demand for all categories of closed-end mortgage loans and weaker demand for all categories of consumer loans.

The survey also included two sets of special questions—the first about C&I loan demand across firms’ industries over the past six months, and the second about changes in commercial real estate lending policies over the past year. Banks reported that C&I loan demand from borrowers from most industries changed little over the past six months, and most banks that reported stronger demand cited an increase in customers’ precautionary demand for cash and liquidity and a decrease in customers’ internally generated funds as reasons for stronger demand. In their answers to the special questions about CRE lending policies, banks reported having tightened loan-to-value ratios, debt service coverage, and the spreads of loan rates over their costs of funds across all three major CRE loan categories over the past year.


Tools for renters regarding eviction protection

The Federal Housing Finance Agency has announced that Fannie Mae and Freddie Mac have created online multifamily property lookup tools to help renters determine if they are protected from evictions during the COVID-19 national health emergency. The tools will allow renters to find out if the multifamily property where they reside has an Enterprise-backed mortgage. Under the CARES Act, renters living in a property with an Enterprise-backed mortgage are covered by a temporary eviction moratorium. Landlords with Enterprise-backed mortgages can enter forbearance if their tenants cannot pay rent due to COVID-19 loss of income. Renters living in multifamily properties with Enterprise-backed mortgages who need support should reach out to the Fannie Mae Helpline at 877-542-9723, if Fannie Mae backs their building's mortgage, or the Freddie Mac Helpline at 800-404-3097, if Freddie Mac backs their building's mortgage.


NY Fed issues FAQs on PMCCF and SMCCF

The Federal Reserve Bank of New York has updated its FAQs on the Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facilities. The facilities were established to support credit to large employers. According to the FAQs, the SMCCF—which provides liquidity for outstanding corporate bonds—will begin purchasing eligible ETFs in early May and eligible corporate bonds “soon thereafter.” The PMCCF is expected to be operational in the next few weeks.


SBA adds to PPP FAQs

The Small Business Administration has updated its FAQ on Paycheck Protection Program Loans to add questions 40–42.

  • Question 40 indicates that a borrower's PPP loan forgiveness amount will not be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer. An interim final rule to that effect can be expected soon.
  • Question 41 addresses seasonal employers' ability to make all the required certifications on the Borrower Application Form if the employer elects to use the summer months of 2019 to calculate its maximum PPP loan amount.
  • Question 42 clarifies the borrower-eligibility status of nonprofit hospitals exempt from taxation under section 115 of the Internal Revenue Code.


New IRS guidance on tax impact of PPP loan forgiveness

The IRS issued guidance last week regarding the deductibility for Federal income tax purposes of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a PPP loan. IRS Notice 2020-32 clarifies that no deduction is allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan, and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.


Consumer credit applications decline

The CFPB has issued a report examining the effects of the COVID-19 pandemic. The report found that consumer credit applications—measured by the number of credit pulls or “hard inquiries” that lenders perform when a consumer applies for new credit—declined substantially in March.

The report found that between the first and last week of March, auto loan inquiries dropped by 52 percent, new mortgage inquiries dropped by 27 percent, and revolving credit card inquiries declined by 40 percent compared to usual patterns seen in the data in earlier years. Additionally, the drops are significantly more pronounced for consumers with higher credit scores, consistent with the possibility that higher credit score consumers have more flexibility in either their credit needs or the timing of their credit needs.

The report also found significant geographic variation in the decline in inquiries, with states in the South and Mountain regions experiencing smaller drops and the Northeast and California experiencing the largest drops. The report relates the drop in inquiries to two variables measuring the effects of the pandemic at the state level: the COVID-19 case rate and the share of workers filing for unemployment insurance benefits in the last weeks of March. The report found a strong correlation between the decline in inquiries and the COVID-19 case rate, as well as the decline in inquiries and the unemployment insurance claims share, for some categories of credit.


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