Specialty Property News

This year’s storm season has begun. What can we expect from June 1st through November 30th? NOAA (National Oceanic and Atmospheric Administration) predicts an average hurricane season this year, with a range of 12 to 17 total named storms, five to nine potential hurricanes, and one to four that develop into major hurricanes.

Especially for properties along the east and gulf coasts, how do you prepare for the next six months of heightened hurricane potential? If you’re a mortgage servicer, are you confident that your loan collaterals have the right kind and amount of insurance? Now’s a good time to check for any exposures.

Ask yourself:
• How do you monitor wind and flood insurance coverage?
• At any given time, do you know if any of your loans lack insurance?
• For uninsured or underinsured loans, can you obtain immediate coverage?

You may also want to let your borrowers know of their windstorm or flood risk so they can prepare well by obtaining adequate insurance coverage. History reminds us that a major storm or hurricane can result in catastrophic property and financial loss to uninsured or underinsured homeowners and mortgage servicers.

Each year, the National Hurricane Center (NHC) and Federal Emergency Management Agency (FEMA) strongly urge citizens to prepare and access helpful resources such as Ready.gov and Listo.gov, particularly if their properties are prone to coastal and inland flooding. Let’s learn from the past to best prepare for the future. As the saying goes, “sunny days give us happiness; stormy days give us wisdom.”

If you would like to learn more about storm and flood risks and the available solutions to manage such risks, please contact your Tokio Marine Highland representative or Sheri Kordsmeier, SVP National Sales at (404) 514-9458 or sheri.kordsmeier@tmhighland.com. You may also visit us at tokiomarinehighland.com.

Chances are a regulator or investor has reviewed your flood compliance program. They may have also asked to see documentation of your flood compliance procedures.

Based on provisions¹ of the Flood Disaster Protection Act of 1973 and the National Flood Insurance Reform Act of 1994, we hope you will find the following 10 flood compliance tips helpful:

1. Determine the property’s flood zone prior to loan closing, notify the applicant if flood insurance is required, and provide reasonable time (usually 10 days) to obtain a flood policy. There are three related actions here, but make sure that you always do them before you close the loan.

2. Document the loan file with the flood zone determination and ALL flood compliance activity, and use the required language for borrower notices found in the regulations. “Document” is the operative word. Keep a record of the flood zone and all other compliance actions you took in the loan file. Don’t forget to include any required wording in your notices.

3. Require proof of sufficient flood insurance coverage on each building located in an special flood hazard area (SFHA) to satisfy the minimum requirements of the regulation. Remember, you must 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).

4. Escrow flood insurance premiums if you escrow other items, such as hazard insurance, fees, and taxes. Review or revise your escrow procedures if needed, so you don’t overlook this.

5. Monitor flood zone changes for the life of the loan and require flood insurance when a property becomes part of an SFHA. You’re not actually required to monitor flood zone changes, but you know that you must require flood insurance if a property becomes part of an SFHA. Wouldn’t it be better to know about flood zone changes? (Hint: Life of loan monitoring is a good way.)

6. Notify the borrower in writing and provide 45 days for the borrower to submit acceptable proof of insurance if proof of insurance is not provided or the coverage amount is not sufficient. Just keep in mind the “45-day rule” and give your borrower 45 days to send proof of an acceptable flood policy.

7. Purchase flood insurance if after the 45 days’ notice the borrower has not provided proof of acceptable flood insurance. Remember to do #6 above before this.

8. In addition to residential properties and mobile homes, require proof of sufficient flood insurance on commercial property, condominium units, and buildings under construction if the improvement is or will be located in an SFHA. Because the mandatory purchase requirements apply to any improved real estate located in an SFHA of a participating community, don’t forget to require flood insurance on commercial properties, condominiums, and buildings under construction.

9. For subordinate liens, if the property is located in an SFHA, verify that sufficient flood insurance is in place to cover ALL liens; require additional flood insurance if necessary. This may be a little tougher to fulfill, but you can ask your borrower, especially if it is a condition of the loan that adequate flood insurance is required to cover all liens.

10. If the borrower disputes the flood zone determination, do not waive the flood insurance requirement unless you have a letter of map amendment (LOMA) or letter of map revision (LOMR) from FEMA. You may want to assist your borrower in asking FEMA for a LOMA or LOMR so you will have an acceptable basis to waive the flood insurance requirement.

If you have other questions about flood compliance and insurance, contact your Tokio Marine Highland representative today, view our Private Flood Insurance page, or download our lender placed flood insurance product sheet.

¹ 42 U.S.C § 4012a

The information provided above does not, and is not intended to, constitute legal advice; instead, all information provided is for general information purposes only.

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 provisions^¹ 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 violations^² – 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 Private Flood Insurance page, or download our lender placed flood insurance product sheet. We are ready to assist you.

¹ 42 U.S.C § 4012a

² https://www.bankersonline.com/penalty/penalty-type/flood-civil-money-penalties

The information provided above does not, and is not intended to, constitute legal advice; instead, all information provided is for general information purposes only.