Flood insurance: Sometimes enough is not enough

The recent devastation in the southeastern United States will likely result in heightened regulatory attention to flood regulation compliance. Flood insurance laws and regulations have been, and continue to be, a hot topic with regulators. Significant flood insurance violations can result in retroactive file searches, enforcement actions and the assessment of civil financial penalties by the federal regulators. The regulators have already increased the maximum civil money penalty for a significant flood insurance violation to $2,000 (previously $385) per violation and deleted the penalty cap per year (previously $135,000).

The challenges banks face to comply with the flood regulation pales in comparison to the loss felt in countless communities across the Southeast. According to recent statistics, more than 60,000 homes in Louisiana alone were damaged as a result of earlier flooding in August.1 In the wake of that flood, people took to social media, including blogs, to express their frustration:

This flood affected people from every walk of life. It did not discriminate between the good side of town, or the bad side of town. It was an equal opportunity offender…You can buy maximum value flood insurance, and it will not — repeat not — cover the cost of the average price of a home in East Baton Rouge Parish. Plus, notably, flood insurance must be purchased separately from regular homeowners/property insurance. Most homeowners’ insurance policies will cover you if you suffer any other form of natural disaster — by that I mean earthquakes, tornadoes and wildfires. But for some reason, not floods.2

What is the bank’s responsibility?

The frontline staff in a bank need to be able to have conversations about the importance and adequacy of flood insurance with their customers. Lenders should let customers know that a regular homeowner’s or business policy does not cover them in the event of a flood. In addition, bankers should inform customers that maximum coverage may not always cover the entire structure. The Flood Disaster Protection Act sets the maximum amount of flood insurance for a one- to four-family structure; it is still capped at $250,000 for the structure and $100,000 for its contents. This limit could leave some homeowners lacking adequate protection.

The back-end staff has even more responsibility. The bank should have procedures in place to ensure that a borrower has adequate flood insurance throughout the life of the loan. Someone in the bank should be responsible for monitoring covered loans to determine when a flood insurance policy lapses, if coverage amounts are not sufficient, or if coverage becomes required due to a map change. The bank is required to send notice to the borrower upon making a determination that the flood insurance coverage is deficient or newly required. The notice must state that if the borrower does not obtain the insurance within the 45-day period, the bank will purchase the insurance on their behalf and may charge them for the cost of premiums and fees to obtain the coverage. If the borrower does not provide evidence of adequate insurance within 45 days of notification, the lender/servicer must force-place flood insurance. Most loan contracts have verbiage built in which allows the bank to add those charges to the principal amount of the loan.

Responsibility for ensuring compliance with flood insurance regulations rests with the institution’s board of directors and management; so a top-down approach to compliance is imperative. Management and directors should ask tough questions about the bank’s policies, practices and results of compliance testing. If it’s clear that the board is concerned about the issue, compliance at the employee level is more likely to become a priority.

As frustrating as the flood regulations are, having a customer lose a home or business would be devastating. In many instances, especially in smaller communities, bank customers are also your bankers’ friends and neighbors. Take that community-focused service approach to heart when talking with employees and customers about flood insurance. Unhappy customers who don’t want to shoulder the expense associated with flood insurance will be a lot unhappier if they lose their home or business to a flood. And no bank wants to find their customers in that situation.

Further guidance on a bank’s responsibility can be found within the final flood rule, which is available online at the OCC website.3

1 http://abcnews.go.com/US/deadly-louisiana-flooding-claimed-13-lives-damaged-60000/story?id=41568812
2 http://ijr.com/2016/08/677887-baton-rouge-woman-writes-letter-to-the-media-saying-everything-conservatives-have-been-waiting-to-say/
3 http://www.occ.treas.gov/news-issuances/bulletins/2015/bulletin-2015-33.html
OCC, FDIC, CFPB, FTC, and NCUA, reference 12 CFR Parts 339, Section 3

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