AFFORDABILITY ACT – CONTROVERSY ON DETACHED STRUCTURES

On March 23 Congress passed the Homeowner Flood Insurance Affordability Act. The Affordability Act revises certain sections of Biggert-Waters, eliminates or delays other sections and creates new rules. Section 13 of the Affordability Act is causing some controversy. It adds:

  • The following exclusion to Subsection (c) of section 102 of the Flood Disaster Protection Act of 1973:

(3)  DETACHED STRUCTURES.—Notwithstanding any other provision of this section, flood insurance shall not be required, in the case of any residential property, for any structure that is a part of such roperty but is detached from the primary residential structure of such property and does not serve as a residence.

  • The following to RESPA Settlement Cost Booklet (SCB):

(14)  Although you may not be required to maintain flood insurance on all structures, you may still wish to do so, and your mortgage lender may still require you to do so to protect the collateral securing the mortgage. If you choose to not maintain flood insurance on a structure, and it floods, you are responsible for all flood losses relating to that structure.

What Seems to be Clear

  • The change applies to loans secured by residential properties.
  • Insurance is not required on structures detached from the residential property if the structures are not used as residential properties. Detached garage? Farm buildings on a loan secured by real property? Pool house, maintenance building or other structure at an apartment building?
  • Home owners are not required to purchase flood insurance for detached structures but the lender may still require the insurance.
  • The Settlement Cost Booklet includes information about the risks of the exclusion.

What is Not so Clear

  • Section 13 does not have a delayed effective date, so it appears to be effective immediately. While the exclusion could be effective immediately, it appears that the change to the SCB must occur at the same time. The CFPB is not expected to issue the revised SCB until sometime in 2015. So when is the change effective? We are reluctant to jump into the change before we get guidance from the regulators.

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