I am going to propose to execs that we require flood insurance in the amount of the loan (up to the max), and eliminate the RCV/ACV option all together. This seems to be a much simpler way to determine flood insurance and would fully protect the Bank. Does anyone see anything wrong with this? I'm trying to anticipate management's questions and objections.

The only issue I can think of is if a loan is secured by multiple properties and only one is in a flood zone. Any other holes in my plan? Thanks.

What if loan amount exceeds property value? That is when insurable value comes up. That may not arise if you are only doing traditional consumer mortgage lending, but then it must arise if you have an issue.

What if competition does not require this and there is pushback?

We would make exceptions to policy on a case-by-case basis, and track those exceptions for fair lending purposes of course. Our lenders get so confused when there is a loan that requires flood insurance, so I'm hoping this way will make things simpler.

I don't know how it will help. The only time the value of the improvements comes into play is when the value of the improvements are less than the loan amount and less than the maximum insurance available. I'm really not sure what this new policy is going to do for you. You still have to determine which it is. If the value of the improvements is only $150,000 and the loan amount is $300,000, you requiring either $250,000 (max residential) or $300,000 (commercial) is going to put you in a UDAAP position because you are forcing the borrower to buy more insurance than the property is worth. I work in dozens of banks, it is not that hard to train the loan officers, unless of course they are just lazy and don't care. If that is the case, then you have bigger problems than just flood insurance.

Banks/CUs that have problems with this generally do best centralizing it as much as possible. Centralize telling the customer what is needed, centralize reviewing what is received (prior to closing), centralize tracking.

I agree, many of the banks that run successful flood program do this. Step one, pull the FHD. This is prior to ordering an appraisal or anything else. Step two - if not in a SFHA proceed as normal, or if in a SFHA, contact the centralized area prior to taking any addiitonal steps - including contacting the customer.

I like the centralizing idea. Thanks.

And those that have been fined (some more than once!) all pretty much have centralized the process. It is really the only way to actually have controls and have staff with expertise managing this complex process. It has so many moving parts and twists and turns.