Your Existing Loan Portfolio: Does It Comply With The Flood Insurance Requirements?
Lenders are and have always been responsible for maintaining compliance with flood insurance requirements for the loans in their portfolio as well as for the loans which they originate. If flooding occurs and affected properties do not have flood insurance, the bank can be held liable for the losses.
Although the act does not require lenders to review and recertify their existing loan portfolio, it is prudent to consider taking certain steps to be confident that the portfolio is in compliance. Your decision as to whether to review the entire portfolio should be based on your confidence in the compliance level of the portfolio. The portfolio should have a high compliance record for both correct searches and insurance if required when the loan was closed, and for maintenance of insurance during the life of the loan.
The most common violation in the flood insurance program was the failure of lenders to ensure the maintenance of flood insurance for the life of the loan. Consequently, Congress placed stringent requirements for life of loan insurance, and stiff penalties for failures in compliance.
As you monitor your loans, be sure to check how the flood zone status for the property was determined. The same concern about renewals of insurance coverage motivated Congress to provide lenders with clear authority to force place flood insurance.
This authority was effective immediately upon passage of the Act (September 23, 1994). Consequently, if you review your portfolio and find a need for flood insurance, you should take steps to notify the customer and, if necessary, place the insurance.
Life of loan certification
Under ?4012a(b)(1) of the National Flood Insurance Act, the lender is responsible for flood insurance compliance for the term of the loan in an amount at least equal to the outstanding principal balance or the maximum limit of coverage under the Act, whichever is less. Your bank has several options for compliance.
First, the bank may maintain responsibility for its loans by regularly monitoring the portfolio each time a flood map change occurs in its lending area. The law now requires FEMA to review and revise as needed flood maps every six months. If your bank chooses this option, the bank remains liable for compliance with flood insurance on each of its loans subject to the Act.Second, the bank may outsource the responsibility by contracting with a service to conduct the flood searches and certify compliance. The Act requires such outside service providers to guarantee their work and they thus become liable for errors. There are now a number of companies who conduct flood searches and offer "life of loan" coverage for a fixed fee, typically $22.50.
Either approach is permissible. The advantage of the second approach is that the bank, for a fee which can be passed on to the customer, can have the initial and ongoing searches performed by a service provider and also transfer liability to that service provider.
- Audit your loan originations to determine whether the bank is complying with requirements for determining whether properties are located in a flood zone. Remember to review all loans secured by improved real estate, including commercial loans.
- If you identify any violations, be sure your lending staff gets the correct compliance procedures and any necessary training.
- Review your existing loan portfolio to determine whether flood insurance has been renewed on properties located in flood zones. If you find any violations, consider the need for a portfolio wide review.
- Develop procedures to ensure compliance on insurance renewals for existing loans in your bank's portfolio.
- Consider the advantages and disadvantages of life of loan certification. Discuss this with management and your lending staff.
Copyright © 1995 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 1, 11/95
First published on 11/01/1995