Question & Answer
Question: The new flood requirements do not require that each bank conduct a portfolio review of its loans. Does this mean that the bank is not liable for any loans in the portfolio secured by property in a flood zone that are non insured?
Answer: No. As the lender, you are responsible for identifying when flood insurance is needed. You axe correct that the current regulations do not require a portfolio search. However the reason for this is to minimize regulatory burden, but not to change the responsibilities of the lender.
The regulation gives you a choice. You may choose the safest, most conservative course and conduct a portfolio search. Or, you may take alternative steps to comply with the flood insurance regulations. The choice should be based on knowledge of the bank's compliance level in both making loans and in maintaining flood insurance renewals on properties located in flood hazard areas.
You can also choose how to review your portfolio. For example, you can review every loan or you can select loans for review. For example, if you have good records on the location of properties, you could select loans secured by properties in areas that are in or near flood hazard zones. Either census tract or zip codes will give you a rough cut that will put you somewhere in the neighborhood. If you choose a method like this, be careful. Floods have no respect for political boundaries. Be inclusive.
The bottom line, however, is that if you choose to ride out the risk and not review loans in your portfolio for flood insurance compliance, you are the insurer when the flood comes!
Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 16, 10/96
First published on 10/01/1996