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Congress Passes the Homeowner Flood Insurance Affordability Act of 2014

On March 21, 2014, President Obama signed into law H.R. 3370, the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA).¹ The law repeals and modifies certain provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (BWA) and makes other changes to the National Flood Insurance Program (NFIP).

Congress enacted the BWA, in part, to address the NFIP's growing deficit. The BWA directed the Federal Emergency Management Agency (FEMA) to phase out subsidies and grandfathered rates and implement actuarially sound pricing for flood insurance to reflect the actuarial risk of floods. Some policyholders — those with subsidized policies for nonprimary residences, for businesses, for properties with severe repetitive loss, for properties whose cumulative flood insurance payments exceeded the properties' fair market value, and for properties substantially damaged or improved — were scheduled for premium increases of 25 percent per year until full-risk rates were achieved beginning in 2013 or at policy renewal. For policies that covered newly purchased properties, policies for which coverage had lapsed, or new policies covering an existing property for the first time, subsidies were eliminated and full-risk rates were imposed at the end of 2013. Moreover, after updating flood insurance rate maps (FIRMs) in some parts of the country, FEMA began publishing preliminary notices with premiums that had increased substantially as a result of the remapping activities. Many policyholders affected by these changes expressed concerns that the new premiums were unaffordable. Congress passed the HFIAA to address those concerns and implement other changes to the NFIP.

The legislation has been closely watched by community banks because of concern that borrowers could default on their mortgages if the flood insurance premiums became unaffordable. Real estate sales in areas with significant rate increases were also being adversely affected because some potential homebuyers could not afford the new premiums.

The HFIAA's key provisions include the following:

• Section 3 repeals the provision in the BWA that eliminated subsidies on properties purchased after July 6, 2012, on properties with no insurance on that date, and on properties for which the policy lapsed as of that date, unless the lapse occurred because the property owner was no longer required to retain coverage. As a result, FEMA must refund any excess premiums paid by policyholders after July 6, 2012. Subsidies will continue to be phased out for pre-FIRM nonprimary residences, business properties, properties experiencing severe repetitive loss, or properties that were substantially damaged or improved. This section also implements the ability of a purchaser to assume the seller's policy at existing premium rates.
• Section 4 repeals the provision of the BWA that phased out grandfathered rates. Grandfathering allows certain property owners to be protected from a future rate increase that results from a property being remapped into a higher-risk zone. Grandfathering will also apply when a property eligible for grandfathered rates is sold to a new owner.
• Section 5 limits rate increases to 18 percent per year for individual policies, except for nonprimary residences, business properties, properties experiencing severe repetitive or cumulative loss, or properties that are substantially damaged or improved. For the exceptions, rate increases are limited to 25 percent per year until full-risk rates are achieved. For any individual class of properties, rate increases are limited to 15 percent per year.
• Section 6 clarifies rates for properties newly mapped into areas with special flood hazards. For the first year, the property is charged the preferred risk premium, after which full-risk rates are phased in, but increases cannot exceed the limits in section 5 above.
• Section 8 applies an annual assessment of $25 per policy on all NFIP primary homes and $250 on second homes and commercial properties. The assessment expires after risk-based premiums are fully implemented. The assessment is designed to help fund the costs of the HFIAA.
• Section 13 clarifies that flood insurance is not required for a nonresidential detached structure on a residential property. However, lenders have the discretion to require insurance on these structures.
• Section 15 modifies the definition of "substantial improvements to a property" from 30 to 50 percent of its fair market value. A substantial improvement triggers full-risk rates, though the rate increases are phased in at 25 percent per year until full-risk rates are achieved.
• Section 24 requires FEMA to designate a flood insurance advocate to ensure fair treatment of policyholders.
• Section 25 changes the effective date for the mandatory escrow requirement from July 6, 2014, to January 1, 2016. For loans that are subject to the escrow requirement but originated prior to January 1, 2016, the banking agencies must issue a regulation requiring lenders and servicers to notify borrowers of the option to escrow flood premiums. Section 25 also expands the types of properties exempt from the escrow requirement to include business purpose loans secured by residential real estate, home equity lines of credit, loans shorter than 12 months, nonperforming loans, subordinate loans secured by the same residential real estate, and loans secured by a condominium covered by a condominium association policy.
• Section 26 requires FEMA to establish guidelines that provide alternative mitigation measures for buildings that cannot be elevated, including building materials and flood proofing.
• Section 28 requires FEMA to clearly communicate to individual property owners the cost of full risk-based premiums, whether or not the owners pay the full actuarial rates.
• Section 30 requires FEMA to consult with local communities before undertaking a remapping and to discuss the mapping models FEMA will be using. This section also requires FEMA to notify congressional representatives of affected districts, prior to issuance of any preliminary map, about community outreach schedules and the estimated number of properties that will be affected by proposed map changes.

Additional information on the HFIAA and its implementation is available on FEMA's website at www.fema.gov/flood-insurance-reform-law.