While the Flood Disaster Protection Act’s compliance requirements have not changed significantly during the past few years, more than 30 institutions have already been assessed fines totaling $310,000 — a pace set to exceed 2011 fines levied that totaled more than $1 million. Noncompliance with some of the basic flood requirements clearly has regulators’ attention.
Standard Flood Hazard Determination Form
When originating a secured loan, determine whether the structure is located in a standard flood hazard area. While this is a routine practice in the loan origination process, surprisingly, not having a determination in the file is a common violation. Failure to match the flood zone or the address on the determination with the insurance declarations page and improper proof of flood insurance are also common violations that can be cured with proper procedures, training and controls.
Once it has been determined that the property securing the loan is or will be located in an SFHA, borrowers must be properly notified of their requirement to purchase adequate flood insurance. This special notice must be provided in a reasonable amount of time prior to completing the transaction. While “reasonable” in some cases may be less than 10 days, the 10-day standard seems to be holding its ground as an industry best practice. Well-documented internal procedures for providing the notice give lenders the opportunity to define what is reasonable for their businesses.
Providing the notice itself, however, is not the only requirement. Evidence of receipt of the notice by the borrower must accompany the notice. A signed and dated acknowledgement from the borrower prior to or at closing is sufficient to meet this requirement.
Mandatory Flood Insurance Coverage
Improper calculation of the required amount of flood insurance for a loan can often set off a chain of compliance violations. The maximum coverage caps in an NFIP participating community are $250,000 for a residential building and $500,000 for a nonresidential building. Because an NFIP policy will not pay a claim in excess of a property’s insurable value, it is important that this value is determined correctly. The agencies have recently provided additional guidance in the October 2011 Q&A to help answer some of the more difficult topics related to residential and commercial properties. A good calculation tool combined with proper training and controls will go a long way to establish a consistent approach to calculating and requiring proper coverage.
Once the loan is closed and becomes part of the serviced flood portfolio, monitoring triggers for insurance renewals and annual reconciliation of the flood vendor lists help maintain compliance.
Notice Requirements: 45-Day Notice and Force Placed Insurance Notice
If at any time during the term of the loan an institution determines that the collateral has less flood coverage than is required, it must notify the borrower to obtain additional coverage. These notices must have proper content and there are strict requirements around the timing of delivery to the borrower. The October 2011 guidance is clear that adequate coverage is expected, force placed or purchased by the borrower, on the 46th day.
Looking Ahead: UDAAP and Flood
Like many other consumer regulations, flood compliance will move beyond the basic technical compliance requirements and checklists. The flood process has always been highly operational, but policies and procedures should be re-evaluated to consider where borrower fairness can be measured or improved as necessary. Required coverage that only protects the lender’s interests (minimum amount of coverage) may need some further considerations down the road. Failure to obtain a flood determination or require adequate coverage may also leave you exposed to unwelcomed UDAAP (unfair, deceptive or abusive acts and practices) considerations.
A proactive flood file checkup today can help you build a technical, efficient and fair flood program that works tomorrow.
Mark J. Miller is a compliance consulting specialist at Wolters Kluwer Financial Services. Contact him at mark.miller(at)wolterskluwer.com and 612-852-7965, ext. 207965.
Copyright (c) September 2012 by BankNews Media