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#2798 - 07/10/01 01:23 AM Requirement for Flood Insurance
Jan94 Offline
Platinum Poster
Joined: Mar 2001
Posts: 828
USA
One of our senior officers posed a question to me today concerning the requirement for flood insurance. He doesn't understand why he has to require his borrower to get flood insurance. He stated that there are no "requirements" for hazard insurance, it's up to the bank to determine the risk it's willing to take, why isn't that the same with flood insurance? Can someone give me a brief explanation other than "because the government says so" that I share with him that may help him see the "big picture" (his words)? Thank you.

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General Discussion
#2799 - 07/10/01 01:46 AM Re: Requirement for Flood Insurance
Mary Beth Guard Offline
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Mary Beth Guard
Joined: Oct 2000
Posts: 797
Oklahoma City, OK
The simple answer is that the flood statutes and rules require it.

Why did Congress do it?
1) to attempt some behavior modification perhaps. If people bear an additional expense when their property is located in a flood hazard zone, maybe they'll think twice about building there;

2) to protect the safety and soundness of financial institutions. When a flood wipes out the lender's collateral and the loss is uninsured, the lender may suffer a loss. When it's lots of property and lots of losses, the very solvency of the institution can be threatened.

3) to protect the government and the taxpayers. In some respects, uninsured flood losses affect all our pocketbooks.

The loan officer's question may spark an interesting philosophical discussion about the merits of such governmental dictates, but the bottom line is like Nike says -- "Just do it!"


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#2800 - 07/10/01 01:25 PM Re: Requirement for Flood Insurance
Lucy Griffin Offline

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Lucy Griffin
Joined: Nov 2000
Posts: 1,544
You might also remind him that most loan contracts and mortgages include a clause in which the borrower agrees to maintain hazard insurance. If you look far enough, it is part of the loan conditions. But we are so used to it and do it so routinely that it goes un-noticed -- sort of like breathing. But you can bet your bottom dollar that if the industry didn't require hazard insurance, the government would seriously consider doing so!

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#2801 - 07/10/01 03:59 PM Re: Requirement for Flood Insurance
Jan94 Offline
Platinum Poster
Joined: Mar 2001
Posts: 828
USA
Thank you both for your comments. They were helpful.

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#2802 - 07/10/01 05:28 PM Re: Requirement for Flood Insurance
Princess Romeo Offline

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Princess Romeo
Joined: Jun 2001
Posts: 8,272
Where the heart is
I always have to laugh when a lender doesn't want to "impose" flood insurance. The question I always ask is - Will you also waive the fire & hazard insurance?

The loan officer usually looks at me with a shocked expression of "Of COURSE not!" I then tell them that if the property is located in a Specially Designated Flood Hazard area, the likelihood is GREATER that the property will be damaged/destroyed by a flood than it would be a fire.

What is it about floods that lenders think "Oh - that just won't happen?"

[This message has been edited by Bonnie M (edited 07-10-2001).]

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CRCM,CAMS
Regulations are a poor substitute for ethics.
Just sayin'

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#2803 - 07/11/01 12:43 AM Re: Requirement for Flood Insurance
David Dickinson Offline
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David Dickinson
Joined: Nov 2000
Posts: 18,762
Central City, NE
Here is a quote from paragraph 4 on page 25 of the Mandatory Purchase of Flood Insurance Guidelinbooklet: ". . . the purposes for which the purchase requirements of the 1994 Reform Act were adopted: to protect Lenders and Federal resources against potential losses resulting from uninsured secured loans, and to protect unwary borrowers against financial losses resulting from losses to uninsured buildings." Under paragraph 5 it states "By carrying coverage, the lender is also protecting the Federal government's interest by preserving the assets of agencies that insure the lender's deposits."
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David Dickinson
http://www.bankerscompliance.com

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#2804 - 07/11/01 12:43 AM Re: Requirement for Flood Insurance
David Dickinson Offline
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David Dickinson
Joined: Nov 2000
Posts: 18,762
Central City, NE
Deleted duplicate posting - sorry!

[This message has been edited by David Dickinson (edited 07-11-2001).]

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David Dickinson
http://www.bankerscompliance.com

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