AFR Compliance Update: New York Assembly Bill A5073

The New York Assembly Bill A5073, passed in the 2024 legislative session, has been signed into law by New York Governor Kathy Hochul. This bill prohibits all mortgage lenders from requiring homeowners in the State of New York to purchase flood insurance coverage that:

• Exceeds the outstanding principal mortgage balance at the start of the policy year; or,
• Includes coverage for personal property contents.

This new law mandates that lenders provide clear notice to borrowers, stating that the required flood insurance protects only the lender's interest and may not cover all repair costs or personal losses in the event of a flood.

During the National Flood Association’s December 2024 webinar, titled “Navigating the Ever-Changing Flood Industry Requirements and Regulations,” a panel of speakers, including Patrick Sullivan from Assurant, Heather Wright from Bradley Arant Boult Cummings LLP, Teshale Smith from the American Bankers Association, and David Wolter from Newmark, discussed the feasibility of enforcing Assembly Bill A5073.

The panel also highlighted potential conflicts between A5073 and federal legislation, particularly the National Flood Insurance Act of 1968 (NFIA) and regulations under the Biggert-Waters Flood Insurance Reform Act of 2012 and the Homeowner Flood Insurance Affordability Act of 2014.

3 Key Areas of Potential Conflict:

1. Lender Discretion for Risk Mitigation
   
   • 42 U.S. Code § 4012a requires flood insurance coverage at least equal to the lesser of:
     
     • The outstanding principal balance of the loan, or
     • The maximum coverage available under the National Flood Insurance Program (NFIP).
   • The Revised Interagency Q&A’s Regarding Flood Insurance, published in 2022, state that a lender may require more flood insurance than the minimum required by the regulation.
   • Under A5073, lenders are prohibited from requiring homeowners to purchase flood insurance beyond coverage that exceeds the outstanding principal balance of the mortgage at the start of the policy year, effectively preventing lenders from requiring coverage up to the full replacement cost value of the property. This limitation increases financial risk to lenders in catastrophic loss scenarios, as the insurance payout may be insufficient to repair or rebuild the property. Without adequate insurance, lenders may be left with underinsured collateral, increasing the likelihood of loan defaults and financial losses.
2. Regulations on Lender Discretion:
   • The Revised Interagency Q&As also mandate lenders to require coverage for personal contents if they take a security interest in a building and its contents located in a Special Flood Hazard Area (SFHA).
   • A5073 conflicts with federal law by barring lenders from mandating flood insurance coverage for personal contents, when personal property is being used to secure the loan.
3. Uniform Compliance Challenges:
   • Lenders operating nationally must comply with federal law, and state laws like A5073 could create inconsistency in compliance requirements. Federal law typically preempts state law when there is a direct conflict.

Steps Towards Compliance

The panel discussed changes lenders must make to their mortgage loan agreements to comply with A5073. Standard mortgage agreements often include clauses requiring borrowers to obtain flood insurance beyond the outstanding mortgage balance or to cover personal property contents.

To comply with A5073, lenders issuing mortgage loans in New York must:

• Revise agreements to limit flood insurance requirements to no more than the outstanding principal balance of the loan at the start of the policy year.
• Remove any requirements mandating flood insurance coverage for personal property contents. As mentioned above, this requirement goes against federal law when secured by personal property.

In addition to loan agreements, lenders must update their disclosure notices. Federal law requires lenders to provide disclosures regarding flood insurance under the NFIP, but these may not align with A5073’s consumer protection mandates. Disclosure notices in New York must now:

• Clearly state that the flood insurance required by the lender protects only the lender’s interest.
• Advise borrowers that the required policy may not cover all repair costs or personal property losses in the event of a flood.
• Encourage borrowers to consider additional coverage for full protection of their property and belongings.

Lenders must also revise loan servicing documents, escrow documentation, and policy letters. These documents should reflect A5073’s limitations, removing any language implying that borrowers must maintain flood insurance for personal property contents or for amounts exceeding the loan balance.

Beyond documentation, lenders need to update internal underwriting and compliance policies as well as audit and quality control processes to ensure alignment with A5073.

Jurisdiction

A5073 applies to loans or lines of credit secured by improved residential real property located in New York State. For example, a lender in Tennessee issuing a loan for property located in New York to a borrower residing outside New York must still comply with A5073’s requirements.

This law applies to all banks, credit unions, mortgage companies, loan servicers, private lenders, and other financial institutions acting as mortgagees for residential real estate transactions in New York.

Enactment

A5073 applies to new loans as well as loans that are renewed, extended, or increased after its enactment. The bill was signed into law by Governor Hochul on December 13, 2024, becoming Chapter 557 of the Laws of 2024, and it took effect immediately upon signing.

However, the Governor’s Approval Memorandum indicates an agreement with the Legislature to amend the coverage requirement to the lesser of:

• The outstanding loan amount; or,
• The replacement value of the property.

This suggests that further legislation could modify A5073 significantly, particularly regarding questions like whether HELOCs are included in the unpaid loan balance and whether "residential" refers only to 1-4 unit properties.

Additionally, the New York Governor’s Office has stated that while the law is in effect, it will not be enforced until the New York Department of Financial Services issues enforcement guidance.

The compliance experts at AFR will monitor the progress of A5073 and provide ongoing updates and recommendations. Subscribe to our blog to stay informed about this legislation.