Did you know that among flood compliance violations, seven are the most common? You may find that your institution can easily avoid these violations when you learn what they are.
You’ve heard or read about federally regulated financial institutions being cited for not complying with the mandatory purchase provisions¹ of the Flood Disaster Protection Act of 1973 and the National Flood Insurance Reform Act of 1994. You also know that there may be monetary penalties for noncompliance. In 2021, 28 financial institutions were fined a total of $5.26 million for various flood compliance violations² – an average of almost $188,000 each!
What are these seven common violations and what can you do to help ensure your institution is compliant?
1. Not having the proper documentation. 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.
2. Allowing waivers of insurance without proper justification. 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.
3. Not sending notice to the borrower. 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 reasonable time to obtain flood insurance for loan closing purposes. For existing loans, if proof of insurance is not provided or the coverage amount is insufficient, the borrower must be provided with 45 days’ notice to submit acceptable proof of insurance.
4. Not requiring sufficient insurance. Make sure you have documented procedures to require a coverage amount that is at least the lesser of the following amounts: (a) the outstanding principal balance of the loan; (b) the maximum amount of coverage available through the NFIP for the type of property; or (c) the insurable value of the property (i.e., 100% replacement cost value less the value of the land).
5. No proof of insurance in loan file. This is a critical part of 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.
6. Not purchasing required flood insurance If after the 45 days’ notice the borrower has not provided proof of acceptable insurance, you must purchase insurance.
7. Not requiring insurance on condo unit, commercial property, building under construction, second mortgage and HELOC loans. 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 program – starting with flood zone determinations, borrower notifications, and lender placement.
If you would like more information or assistance in understanding the flood insurance requirements, contact your Tokio Marine Highland representative, visit our website, or download our lender placed flood insurance product sheet. We are ready to assist you.