New York Banker December Edition
Profit Solutions Articles
Persistent Flood Compliance Violations – What Are They?
Did you know that among flood compliance violations by banks, six are the most persistent? And when you learn what these violations are, you may find that your bank could easily avoid them.
You’ve heard or read about regulated banks being cited for not complying with the mandatory purchase provisions of the Flood Act of 1973 and the Reform Act of 1994 published in FEMA’s Mandatory Purchase of Flood Insurance Guidelines.
You also know that there are money penalties for noncompliance. Did you know that in 2020, 17 banks were fined a total of $19.87 million for various flood compliance violations – an average of almost $1.2 million each! As of October 5, 2021, penalties amounting to $1.05 million have already been levied against 20 banks.
Clearly, it is not enough to be “fairly” certain of being compliant. You have to be “absolutely” sure – especially in today’s business environment and its sharper focus on regulatory enforcement.
So, what are these six persistent violations and what can you do to be “absolutely” sure your bank is compliant? Take a look:
- Not Having the Proper Documentation
Be Absolute: Always keep a paper or electronic copy of the Standard Flood Hazard Determination Form and a record of ALL other compliance actions you take in the loan file.
- Allowing Waivers ofInsurance Without Proper Justification
Be Absolute: Remember, if the borrower disputes the flood zone determination, ONLY flood map changes through FEMA’s letters of map amendment or revision can justify waiving the flood insurance requirement.
- Not Sending Notice to The Borrower
Be Absolute: You must send written notice to the borrower who is being required to obtain flood insurance and the borrower must sign or acknowledge the notice. You must also provide the borrower at least 10 days to obtain flood insurance for loan closing purposes or forty-five (45) days to submit proof of a renewal or endorsed flood policy.
- Not Requiring Sufficient Insurance
Be Absolute: Make sure you have specified procedures to require the least of the following amounts: (a) outstanding loan balance; (b) replacement cost value of the structure; or (c) the maximum amount of insurance available through the NFIP.
- No Proof of Insurance in Loan File
Be Absolute: This is a critical part of the documentation requirements so make sure your loan file has a copy of the insurance declarations or other acceptable proof of insurance. Again, you must document ALL your compliance actions in the loan file.
- Not Requiring Insurance on Condo Unit, Commercial Property, Building Under Construction, Second Mortgage and HELOC Loans
Be Absolute: Remember that even if only part of the association property is in an SFHA, you must require flood insurance for the condominium unit that secures your loan. The mandatory purchase requirements apply equally to commercial, construction, and second mortgage or HELOC loans. Additionally, you must consider all liens to ensure that there is sufficient insurance to restore the property or satisfy all liens in case of a loss.
We hope this information encourages you to review your flood compliance procedures – starting with flood zone determinations, borrower notifications, and if necessary, flood insurance that you can immediately place to protect your interests and also your borrowers’.
If you’d like more information or assistance in understanding the flood insurance requirements and your options, please contact your Tokio Marine Highland representative today, visit our website, or download our lender placed flood insurance product sheet here. We are ready to assist you.
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