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#1666 - 05/08/01 08:29 PM Another Flood Question
Jan94 Offline
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Joined: Mar 2001
Posts: 828
USA
This was a question posed by a senior manager who had a commercial loan that was known to be a SFHA. As far as we know there was no flood determination, but apparently the borrower had knowledge of the property being in a flood zone. The borrower did obtain flood insurance. The question is, since the borrower already has the flood insurance is it "required" that they have a flood determination form in file? The senior manager wants to waive the determination requirement. Is this permitted? Thank you.

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#1667 - 05/08/01 09:42 PM Re: Another Flood Question
Lucy Griffin Offline

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Lucy Griffin
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No. The act and regulation prohibit making a loan unless the determination is made. Then, if the property is in a flood hazard zone, the borrower must produce insurance before closing. The determination must be documented on the FEMA form and whoever makes the determination must stand behind it -- especially when there is a flood. So, you should still do the determination. Flood is a top priority for examiners right now -- even for those not located along the Mississippi. This is simply not the time to save $14 or so and pay a civil money penalty later.

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#1668 - 05/08/01 09:56 PM Re: Another Flood Question
La. Lady Offline
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La. Lady
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According to a workshop that I attended for Lenders regarding flood insurance, it appears that "every" loan must have a completed form in the folder. The information must be retained as long as the lender owns the loan.

Even though the customer obtained insurance, does not release the lender from the obligation of determination.

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#1669 - 05/08/01 10:00 PM Re: Another Flood Question
Andy_Z Offline
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My experience tells me (read that as I answered to a violation) that the job is not over until the paperwork is done.

We had coverage, in file, since the day the loan was made. But because we and the borrower knew before the loan was even done, we didn't have the letter advising the borrower that the property was in a SFHA.

While we met the intent of the Reg., we failed to meet the technical requirements.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

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#1670 - 05/09/01 03:40 PM Re: Another Flood Question
Lucy Griffin Offline

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Lucy Griffin
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There's nothing like experience! Andy offers the perfect illustration of what examiners mean when they ask you about the FEMA flood hazard determination forms.

In the same vein, it is worth advising management (and your commercial lenders) that flood hazard insurance is at the top of examiner's priorities this year. They have been told to go find and fix. This is not the time to cut any corners.


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#1671 - 05/10/01 03:29 PM Re: Another Flood Question
Anonymous
Unregistered

One other thing to watch for- we just had an exam by the FDIC. They looked at the coverage amounts and flood zone on the insurance policy versus the zone on the determination. Two things were found happening; The insurance companies were usually doing their own determination and going with theirs for insurance coverage; and the borrowers would sometimes choose cheaper insurance, thereby insuring their property, but not for the zone intended. We had overlooked that- as long as it was flood insurance, it was filed with the policy. Now we check the zone and coverage type.

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#1672 - 05/11/01 04:51 AM Re: Another Flood Question
Jan94 Offline
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Joined: Mar 2001
Posts: 828
USA
Thank you for all the input! We have been "advised" by our examiner several times that flood will be extremely important in our upcoming exam. Our senior management and lenders have been put on notice; however in this situation my senior manager said this particular requirement lacked "common sense" and he would not get a determination since insurance is in place. So I think all we can do is make sure the file is documented and move on.

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#1673 - 05/10/01 06:36 PM Re: Another Flood Question
David Dickinson Offline
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Central City, NE
This senior manager you speak of needs an attitute adjustment. Print this string and hand it to him or her. Flood is one of the most, if not the most, serious compliance regulations there are. If your bank doesn't follow the rules exactly, the bank can have huge civil liability.

In addition to completing a SFHDF, as others have told you, don't forget to present a Flood Hazard Notice to these borrowers. I know that it may seem illogical - "Sign this form that tells you what you already know" but it is absolutely necessary to remove the liability from the bank.

The compliance professionals that have commented to you are not stupid. This is very serious problem. Furthermore, your manager is contributing to the problem, not helping.

[This message has been edited by David Dickinson (edited 05-10-2001).]

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#1674 - 05/11/01 04:34 AM Re: Another Flood Question
Andy_Z Offline
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As David said, print the thread, give it to them, and say "sometimes the letter of the law doesn't make sense, but that is the way it is. Meeting these requirements isn't our biggest worry. It's easy to comply. And wouldn't we look stupid getting hit after we knew this."

The good thing about a mistake is learning from it. The best thing is learning from someone else's.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

_________________________
AndyZ CRCM
My opinions are not necessarily my employers.
R+R-R=R+R
Rules and Regs minus Relationships equals Resentment and Rebellion. John Maxwell

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#1675 - 05/11/01 02:04 PM Re: Another Flood Question
RVFlyboy Offline
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RVFlyboy
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Soaring over Georgia
Once lenders understand the purpose of the flood regs, it helps them to understand some of the other things that don't seem to make much sense to them. The primary purpose of the flood regs is to protect the Federal Goverment from paying excessive flood disaster relief. Banks are simply the delivery vehicle deemed most effective by the government, since they are involved in so many property purchase transactions. That the banks also get some protection from the flood insurance is only a secondary benefit.

I would argue that lawyers would have been an even better choice for the government to impose flood determination burdens, since they would even be involved in many cash purchase transactions, but apparently the lawyers have better lobbyists than the banks.

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Opinions expressed are my own, and do not necessarily reflect those of my employer.

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#1676 - 05/13/01 08:34 PM Re: Another Flood Question
Lucy Griffin Offline

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Lucy Griffin
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While you are making and distributing copies of this thread, make a copy for your CFO together with the advise that he/she should set aside funds for civil money penalties based on flood violations!

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#1677 - 05/18/01 01:16 PM Re: Another Flood Question
Jan94 Offline
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Joined: Mar 2001
Posts: 828
USA
We recently participated in the ABA telephone conference on flood and thankfully had a few of the commercial lenders hear from the experts what we have been repeatedly telling them. All of our senior/executive management are aware of the consequences for not complying. Thank you for your comments.

Here's another situation that came up yesterday: A lender has originated a "construction" loan. The loan is only for 6 months and is for the lot only. The "intent" of the borrower is to construct a home on the lot within the next six months (there is no guarantee of this). The bank has not committed to do a permanent loan for construction of the home.

The lender obtained a flood determination and charged the customer $19 at closing (the location was not in a SFHA). Since this loan was just for the lot, should we have gotten the determination at this point? If not, would we need to reimburse our customer?


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#1678 - 05/18/01 02:03 PM Re: Another Flood Question
Sheila Steck Offline
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Joined: Oct 2000
Posts: 16
Winona, MN
We always get a SFHDF before we close the construction loan deal. No you don't need insurance on a bare land, but once you have a walled structure you do. It's best to do it up front and know where you are - instead of half way through construction say, oh by the way, you need flood insurance. How would you monitor the project? Once the walls are up, if in a flood zone, you already have a violation.

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#1679 - 05/18/01 06:25 PM Re: Another Flood Question
Andy_Z Offline
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To the largest extent I agree with Sheila. If we financed only the lot and had no intention of doing the construction, I'd have probably offered to save the customer the money and not gotten the flood check without their approval, but told the customer it would be needed later. (Remember, they should have an appraisal that already tells them the flood zone, though likely without any guaranty or specificity as you'll get from a special vendor.)

If I thought we had any chance of doing the construction, I'd get it up front. An informed buyer/borrower is better buyer/borower. If it was in the SFHA and they reconsidered the deal, I'd want that done very early on.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

[This message has been edited by Andy Z (edited 05-18-2001).]

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AndyZ CRCM
My opinions are not necessarily my employers.
R+R-R=R+R
Rules and Regs minus Relationships equals Resentment and Rebellion. John Maxwell

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#1680 - 05/18/01 08:15 PM Re: Another Flood Question
Jan94 Offline
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Joined: Mar 2001
Posts: 828
USA
Shiela - you would do the determination even if you weren't positive you were going to do the permanent?

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#1681 - 05/21/01 01:09 PM Re: Another Flood Question
Sheila Steck Offline
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Joined: Oct 2000
Posts: 16
Winona, MN
No, if the loan was only for the lot purchase, then we wouldn't do a determination. However, we usually see a lot purchase/construction loan combined and then, yes, we'd do it up front.

It is something we would discuss with the customer, though, if the area they were buying the land in was known to be a flood area - sometimes the customers are not aware of those things and if it was a regular customer, we'd discuss it and order the flood before he bought the lot if he requested. That way he could make an informed decision on the lot purchase.


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