Would there be an issue if a bank made a decision not to make a loan if it was in a flood hazard area? My immediate thought was "redlining" a particular area and issues of what type of adverse action reason would be given for denial. Is there something in black and white I can "hang my hat on"?

All I can find is where it says a lender may decline to make a loan when flood insurance is not available.

If it's your bank's policy to consider those a "high risk" loan and you apply it consistently, it would not, IMHO, be considered redlining. It would apply anywhere to anyone in a DFHA.

Would it make a difference if the bank does not make ANY loans on ANY houses in ANY SFHA? I'm talking about a blanket policy, here. If you are not making loans in a particular area because it is in a SFHA, is that not a type of redlining?

I believe that is within the bank's discretion. My question is - what do you do if the maps change and you have one that 'moves' into an SFHA?

I agree with QBB. For example, you have a section of town by the river. It just happens to be in a SFHA and also just happens to have the majority of your minority population living there. A policy of not making loans based on the SFHA is going to have a disparate impact on the minority populations and you are not going to be able to defend this with any legitimate business necessity argument. Potential flood losses can be easily mitigated with flood insurance. I, for one, cannot see a legitimate purpose for such a policy.

I think Randy hit the nail on the head with the reference to disparate impact. By definition it is a seemingly innocent "policy" that has the POTENTIAL to adversely affect a particular class of applicants.

If you apply the "we don't make loans in the flood zone" I don't think it would be a fair lending issue. My opinion.

See, I agree with David, however I respect Randy's take on it as well and may depend on your particular market. IF the only FZ area you have also happens to be a low-income area, it could be perceived as a deceptive way to get around lending in the area.

If you were in my market, however, spreadout within 2 states and you had that policy (which we don't, BTW)...it would be purly a management decision and would not bear any impact on Fair Lending.

Joker,

From a common-sense perspective, I agree with you and David. However (being the pessimistic person that I am) I would be concerned about the potential of a group of affected individuals in any given affected location being able to cause a stir from a fair lending standpoint.

Each bank should evaluate their risk either way... the one thing you have to keep in mind though is the worst case scenario. We learned the hard way recently that even though we were justified in a particular action under a regulation, it still cost us a small fortune to defend that position (and those particular costs were not recoverable).

Maybe I am just a little "gun shy" now....

Great topic - I can see both side of the argument here. In most cases I would recommend a bank not have such a policy. Since ther risk can be mitigated by flood insurance and Randy's statement about fair lending is valid. However, I could see where a bank may have a policy stating they would not make loans with collateral is located in a flood zone in a non-participating community. Remember fedral flood insuranceis is not available and other is very difficult to get in a non-participating community. A community bank located in a non-participating community could have significant risk to capital if there is a catistohic loss affecting a number of its loans and the borrowers do not have sufficient financial backing to support the loss.

Think Lake Delton in Wisconsin. The City of lake Delton is a non-participating community. We all saw the footage of the nice lake homes sliding into the water.

Please rember this is not legal advice. Consult your regulator and attorneyt.

E Street

I, also, can see if from both sides. Our risk is spread out, but I can think of a few instances where S&S could easily overrule...case in point:

Multi-million dollar home on Island with on $250K in insurance...not necessarily a good thing. In this economy, you can't even totally offset by the borrower's net worth/integrity/etc.

I'm really glad I'm not a LO anymore.

Thanks for all of your input. I will send it "up the food chain". My first thought was "Oh, my, you can't do that". Then, I really couldn't find anything to support that thought except the reverse side - meaning the possible implication of who might be trying to get a loan from those SFHAs. Very interesting subject.

Thanks again.

The problem you will eventually run into that plays right into the scenario that Randy presents is when that exception is made for the one non-protected class applicant, that is the CEO's friend or a loan officer "ignores" the policy for a "good" customer, and you make a loan on a property located in a SFHA.