Flood Insurance

We have a customer who was notified that their property was in a flood zone. They are refusing to purchase flood insurance. The lender says that they may consider releasing the collateral in order to avoid either the force placement or purchase of the insurance. What are the concerns (if any) with the lender doing this? Thank you.

If the collateral isn't needed and it is released, everyone is happy. If they release it to avoid confrontation, that is safety and soundness issue. I can't see the latter happening, but it could.

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

Andy - would there be any concerns from an examiner if they noticed it had been some time (say 6 months) from the time of the determination and notice to the customer up to the time the lender releases the collateral and the bank never attempted to force place the insurance?

If this loan has already been funded, you are already guilty. You can release the collateral if you want, but you already have a violation because you funded without the flood insurance in place. That can't be undone. If you don't want to force place and feel you don't need the collateral, that may be the best option. At least you don't continue to be wrong. Right now, you have a continuing issue.

I find that every exam (we have several types of banks, several regulators), the regulators are asking to see our flood procedures, and loan files to check for determinations and insurance.

The regulators can assess civil money penalties for violation of the flood hazard requirements -- and they have been doing so in record numbers. In talking to one of the lawyers from the FDIC Dallas Regional Office last week, I was surprised to learn the examiners are still seeing loan files where loan officers "waive" the flood insurance.

It's a good idea to send out a memo (or have an employee meeting) to go over the coverage rules for flood hazard and the timing requirements and to stress that flood insurance is not something that can be waived if you are making, extending, increasing or renewing a loan secured by improved real property or an affixed mobile home in a flood hazard zone in a participating community.

Thank you for your responses. Looks like we need to schedule a training class!

Angela,
I have a short summary of Flood Insurance requirements and procedures that I had prepared a while back.

I can e-mail it to you and you can make changes to procedures to fit your institution.

mizrahib@partnershipbanking.com

I was talking with a banker today who just underwent an FDIC exam. They bought some loans in 1994. The examiner saw that the flood insurance took effect a day after the funding. That was not his bank, but the originator. They wanted to cite his bank.

They are also looking closely at the vendors and the zones they ID compared to what is on the policy.

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

Don't fool with Mother Nature OR with flood insurance. The lender should never never waive the requirement for any reason. The result will be civil money penalties. Releasing the security could appear to solve the problem, but when your examiner sees that file and realizes what happened, you will find you are under an extremely intense exam! Flood is being taken very seriously. Don't fool with it!

If I may ask a related question, what is the bank's obligation to monitor flood insurance for the life of the loan in a non-escrow situation? Let's say we properly required a borrower to obtain flood insurance at loan inception. We assume that the flood insurance is in effect unless we receive notice of cancellation (as is typical with hazard insurance). We also have a standard lenders insurance policy that covers us for situations where we are not informed of a cancellation, the property is damaged or flooded, the borrower stops paying the loan and we have a loss upon foreclosure. Do we have an affirmative obligation to call the borrower or his insurance company every year to have current proof of flood insurance in file? Our examiners are suggesting this, yet I haven't seen any FEMA or regulator guidance addressing this. Any comments would be appreciated.

From a safety and soundness perspective (as well as imposed by FDPA) you must require and ensure that the policy is in and stays in effect. You can't Make, Increase, Renew or Extend the loan without it. And if it lapses, you have to force place coverage.

Remember who is partly insured here, the government. With adequate coverage there is less paid out when a disaster occurs. This goes beyond your relationship with your customer.

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

We have a loan that originated in 1989. The loan is now being renewed. Based on what I understand, the Reform Act of 1994 permits us to use a prior determination if it is not older than 7 years along with other conditions. The property was originally found to not be in a flood zone. The lender is going to get a new flood determination. However, here is my quandry...the senior division manager wants to assume that since the 94 Act did not exist in 89, the original determination would be "grandfathered" therefore a new determination really wasn't necessary. I can't find anything that agrees with that assumption. Would appreciate any thoughts. Thank you.

I have never heard of a grandfather clause, only that ye shall not make, increase, renew or extend without first doing a new determination, with few exceptions. Being an older loan isn't an exception.

I think this is wishful thinking, certainly not worth the risk. And speaking of risk, in addition to the regulatory risk, what if developments in the area have now put this is a flood zone? If you skip a step and the property floods, who can the homeless borrower blame/seek recourse? You got it. There are several risks here.

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

Keep in mind that prior to the 1994 amendments, there was no option to rely on a previous flood determination. So if your lender wants to go back to pre-1994, there's no question that a new one is required.

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

Lenders never cease to amaze me with the creative ways they think up to commit compliance violations! This is a really good one. Unfortunately for your lender, all the wishful thinking and previous non-compliance got washed away by the new flood act.

The lender should take into account the fact that Congress was seriously dissatisfied with the low level of compliance and enacted the new law to clear up the problems. So, assume no grandfathering. The new requirements set a standard which absolutely must be met.

[This message has been edited by Lucy Griffin (edited 04-04-2001).]

If I remember correctly, you can only rely on a previous determination IF two criteria are met:

1. The determination MUST on the NEW form, and that form did not exist in 1989.

2. The Lender must be aware that no changes have been made to the flood hazard maps that would include the property as being in a flood zone. Basically, the only way to ensure that is to have Life of Loan monitoring. (Or keep a full set of updated flood maps yourself!)

I don't understand the resistance to a procedure that costs about $10 - $20 (depending on the vendor and service requested) and only takes about 5 minutes (or less.)

You'd think we were asking the lending to eat a plate of broccoli!