Stemming The Flood Of Violations

Examiners find violations of the flood hazard insurance requirements - lots of them. That's bad enough. But on top of the findings are the consequences. Flood insurance problems are common enough that the regulatory agencies have been told to put a stop to the violations. As a result, institutions having flood hazard violations face mandatory civil money penalties.

With mandatory penalties waiting in the wings for a few slip-ups, the institution's internal audit and compliance procedures are very important. Catching seepage in the flood compliance program is definitely worth the time and effort spent. Mistakes have to be fixed, no matter who finds them. But when the examiners find the mistake, the penalties get added on.

Internal audit and monitoring for flood hazard insurance compliance should include steps that review compliance with each requirement or step where examiners find violations. Since violations occur both in the underwriting and loan closing process and in the failure to maintain insurance, the flood hazard compliance audit should include a comprehensive look at the life of the loan.

Action Steps

For loans secured by "improved real property", pull the Standard Flood Hazard Determination Form. Check it for completeness. Be thorough.
Completeness includes the institution's number, the date of determination, the address of the property, and the flood hazard finding. Omission of this information makes the common violation list.
Check the dates. Look at the date the determination was requested. Compare that date to the date of application, date of the appraisal, and the date of closing. The flood hazard determination should be requested after application but well before closing is scheduled.
Compare addresses of security property to the address checked on the Standard Flood Hazard Determination form to be sure that the correct property was certified.
Pull and review all loans in your sample for which the security property is located in a flood hazard zone. Compare the date of flood hazard determination to the date of loan closing to see that customers had enough time to purchase required insurance.
Check these files for copies of the notice sent to the applicants notifying them of the requirement for flood hazard insurance. Again, check the date of the notice and compare this to the date of the determination to see whether the notice was sent promptly.
Compare the date of notification to the date of closing for these same loans.
Now check the date insurance was purchased or took effect. Be sure that this was in advance of or on the date of closing.
Perform all of these reviews and checks on commercial loans secured by improved real property. Pay special attention to the timing of flood hazard determinations relative to the dates on loan instruments.
For commercial loans with multiple transactions under one loan file, track the dates of flood hazard determinations and compare these with the security instruments to be sure that property securing the loan(s) was properly certified at or before the time it was used as security.
For all loans subject to an insurance requirement, find out how the insurance status is checked and how insurance is maintained. Lapses of policies is another common - and very expensive - violation.
Check insurance policy amounts and compare this to the value of improvements and contents for the property. Be sure that the borrower has enough insurance in place.
Review all forms of notes used for loans secured by improved real property. Make sure that the forms include a clause that requires the customer to obtain and maintain flood hazard insurance if the property is ever located in a flood hazard zone.