New Massachusetts Flood Law--the Short Story
Political move or welcome relief from onerous Federal requirements? Here's a brief overview on the new Flood regulation in Massachusetts.
Currently, only the statute from the legislature is finalized--but it is brief and leaves many questions. We're hoping that the DOB issues more detailed regulations in time to explain how to implement and interpret the new rule, but there have been no promises made.
But here's what we do know!
Effective Date
The MA Flood law will be effective on November 20, 2014. If the DOB issues more detailed regulations in time, we will use that to comply ... if not, we'll just have to work with the statute- we have to comply by November 20 either way.
DOB Involvement
The DOB is in charge of this regulation, not the AG as was originally planned. The MMBA and others pushed for the DOB to be responsible with the hope that the DOB is more responsive to our concerns.
Basics: 2 Parts
As it applies to residential mortgages in Massachusetts, the new Flood law has two new requirements.
FIRST, the new law prohibits lenders from requiring borrowers to
purchase Flood insurance that:
Exceeds the outstanding principal balance
In other words--lenders cannot require replacement cost
The balance is calculated at the beginning of the year
2. Includes coverage for contents (not that we'd do that on residential properties anyway)
3. Includes a deductible of less than $5,000
So this is a reversal in how we think about things ... instead of thinking about the deductible being too large, now we have to worry about requiring it to be too small.
Note:
The law prohibits lenders from "requiring" borrowers to do this. They are still free to do so if they wish--they can pay for replacement cost coverage or for a deductible under $5,000.
SECOND, the law requires a new disclosure to be given out at the same time you disclose that Flood is required. The language for this disclosure can be found here. DOB regulations will hopefully clarify how/when this disclosure should be given.
Some Questions:
What Did I Hear About a Conflict with Federal Law?
There has been some buzz that the MA law conflicts with Federal law and is therefore invalid. Remember, in the U.S., State law is trumped by Federal law to the extent they are inconsistent. Our recommendation for lenders? Don't get your hopes up. Unless a court or federal regulator addresses this specifically (which they have not), we can't just ignore a law issued by the State legislature. Bottom line: Even if there was a conflict (which we don't think is likely), it wouldn't do us any good now anyway.
What if I'm Operating in Different States?
Are you a lender operating in different states? Remember, this law is only for Massachusetts--not, for example, for New Hampshire. Will you require replacement cost coverage in NH but not in MA? Will you do the same across the board? We'd be interested to hear what your strategies are ... feel free to call to discuss and share.
Criticism
We don't have any comment on whether the law is the best or worst idea ever. But we've certainly had some clients bend our ear about this one! Here are some of the complaints: Is this best for the borrower? Common sense tells us that many borrowers are just going to go for the cheapest option. What happens when a hurricane levels my borrower's $650,000 Cape house, but there was only Flood insurance for $150,000 (the loan amount)? Does this even matter at all in light of the Federal Flood changes? (Remember- the Feds recently repealed much of the Biggert-Waters Act that made the Flood increases so politically offensive). What do you think?
Other news/thoughts/trivia:
Tomorrow the CFPB is expected to confirm what we already guessed; that it will be expanding their regulatory coverage to audit non-bank auto lenders. No doubt they expect to find that women and minorities are paying more for car loans than white males. There was a good WSJ article on this yesterday called "U.S. Consumer-Finance Regulator Plans Auto-Lending Examinations." So Honda, Ford, etc. would be under such federal supervision for the first time. Remember that Dodd-Frank specifically prevents the CFPB from regulating auto dealers ... but by regulating these other agencies, they should be able to accomplish the same effect anyway.
Compliance not cool enough for you? Need an idea for a pep talk for your compliance department? Well- check out "Jack Ryan: Shadow Recruit" a movie with Kevin Costner about a compliance officer who is recruited by the CIA, survives a helicopter explosion, saves the USA from terrorists, and rescues his fiance from a group of well-armed terrorists with little more than a torque wrench. Little known secret: This based-on-real-events story is based on a popular compliance guru located here in Mass.
Like it or not, we all negotiate. Whether it's a business deal, for a raise, over the price of a car, or where to go for dinner. But the traditional mode of negotiating is outdated and not productive. In the old way, parties battle over positions, and try to score points; there is a winner and loser. "I'll give you $300,000 for the house. $320-. $305- or I walk!" ... there is no rhyme or reason, they will eventually settle on a price that is not based on comps or the house's features (logical factors), but rather on an irrational, random number. People "win" just by being more stubborn than the other. But there is a new way of negotiating. One where both parties win by seeking to determine, working side-by-side, what is actually fair. One part of fairness is focusing on objective criteria. In this case, the seller would say, "give me a reason why I should accept a lower offer, I'm willing to accept a fair offer, but you need to show me why your offer is fair." If the buyer can point to an appraisal or repair work that needs to be done, he can perhaps give an objective justification for his low bid. Staying objective keeps emotions separate from the negotiation, so you can discuss the matter logically without letting ego get in the way.
**Concepts here adapted from "Getting to Yes," by Roger Fisher and William Ury of the Harvard Negotiation Project. (c) 2011.
"Everything of value is built on trust, from financial systems to relationships."
- David Horsager
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**These are our opinions. We're not authorized, or willing, to express those of others.**