Massachusetts has moved one step closer to a law to limit the right of lenders to require flood insurance in excess of their loan amount or to require the borrower to insure the contents of the property or maintain a deductible of less than $5,000.00.
The legislation, House Bill 3783, passed the Senate on June 26th, with 34 senators voting in favor of the bill. The bill passed the Massachusetts House on March 12, 2014 with no dissenting votes.
Law will restrict lenders from requiring limits for flood insurance in excess of loan balance
The proposed law prohibits a creditor from requiring in a mortgage, note or otherwise, that a purchaser or owner of residential property purchase or pay for flood insurance on the property:
1. At a coverage amount that exceeds the outstanding mortgage loan from the creditor;
2. That requires the purchaser or owner to insure the contents of the property with the mortgage; or
3. That requires the purchaser or owner to maintain a deductible of less than $5,000.00.
The law when signed by the Governor will require a a specific notice that will be required in each instance when a creditor requires in a mortgage note or otherwise the owner or purchaser to purchase or pay for flood insurance on the property. This notice must have in clear and conspicuous print the following statement:
Please note that the flood insurance we are requiring you to purchase will only protect your creditor/lender’s interest in your property. It may not be sufficient to pay for many needed repairs after a flood and may not compensate you for your losses in the property due to the flood. If you wish to protect your home or investment, you may wish to purchase more flood insurance than the amount we are requiring you to buy.
Response to flood insurance rate increases.
The Massachusetts bill was sponsored by the Speaker of the Massachusetts House, Robert A. DeLeo and by Martha Coakley, the Attorney General, along with several other representatives from various districts affected by the flood insurance increases
This bill resulted from the effects of the 2012 Biggert-Waters Flood Insurance Reform Act that passed to lessen the $24 billion deficit generated from the Federal flood insurance program.
In order to soften the effects of substantial rate increases needed to put the Federal flood program on a sound actuarial footing, on March 21, 2014 President Obama signed the bi-partisan Homeowner Flood Insurance Affordability Act of 2014. This legislation deferred some rate increases, limited other rate increases to 18 percent per year and called for a limit of flood premiums to 1 percent of the total coverage of each policy.
Massachusetts bill will lower premiums by allowing homeowners to reduce coverage.
The bill passed by the House or Representatives and Senate will allow homeowners to reduce their premium by reducing their coverage. Under the bill, homeowners will still have to cover, if required by the loan terms, the amount of their lender’s mortgage or note. As a result, the bill leaves the homeowner vulnerable to a flood loss where their insurance only pays off the lender’s loan, but the homeowner receives no payment for their property loss.
Attorney General Martha Coakley, in a statement issued by her office, asserted that the bill would help families that would see dramatic increases in their flood insurance premiums stay in their homes.
Impairment of contract clause of U.S. Constitution may limit effect of bill
The sponsors of the bill have to believe that the law will apply to existing loans to be effective. However, there may be legal questions whether this bill, when it becomes law, can effect existing mortgage contracts in the state. The application of this law to existing contracts, as apparently contemplated by the bill’s sponsors, may raise Constitutional questions under the United States Constitution’s Contract Clause. This clause provides that “no state shall …pass any….law impairing the Obligations of Contract.” If this constitutional provision applied, the bill’s prohibition would only effect mortgage contracts executed after the bill became law. That would mean the restrictions in the bill would only have future application. Existing homeowners, whom the bill intended to benefit, would then gain little or no relief from any contractually mandated flood insurance premiums under their mortgages.
Bill certain to become law
The bill now goes through the formal procedure of “engrossment” as it has been “passed to be engrossed” in each branch. Engrossment is the printing of a bill on special parchment. After this printing process completes, the House of Representatives and then the Senate will then enact the engrossed bill.
In this case, based on the prior votes, enactment is a mere formality. Following enactment, the bill goes to the Governor for signature. There is no reason to believe the Governor will not sign. In any event, the super majorities that passed this bill make it effectively veto proof since there is more than enough votes to override a veto by the two thirds majority required.
This bill should be the law within several weeks.
