Flood Insurance - Are you sure it's under control?
Flood insurance violations are frequently cited by regulators, and errors in this area can be costly. Failure to comply can mean not only enforcement actions and civil money penalties, but also lost collateral and unsatisfied loans. When flood waters rise, real estate collateral be washed away in the blink of an eye. Without a home or place of business, borrowers are more likely to default on loans, and the institution's chances of being repaid decrease dramatically in flood-stricken areas. The only way to avoid being caught off-guard and unprotected is to ensure that adequate flood insurance coverage is obtained and maintained throughout the life of the loan.
A Constant Challenge
If calculating proper insurance coverage were the only challenge, most institutions could handle flood compliance without outside help. But it's not. There's determining the flood hazard status of the property - a process so confusing and constantly changing that most financial institutions now outsource that task to third party service providers. Then there are the steps to notifying the prospective borrower that his or her property is located in a flood zone. Then there's the calculation itself, frequently modified by national programs and insurance availability. Last but not least, the task of monitoring the property's flood hazard status throughout the life of the loan, and ensuring continuous, adequate insurance coverage remains in place, is a recordkeeping burden. Regulations mandate that lenders force-place insurance if borrowers don't maintain it voluntarily, triggering a whole other set of notification, calculation, billing and accounting requirements. And don't forget that soon, escrowing for flood insurance premiums will become mandatory.
New Interagency rules affecting loans in flood hazard areas take effect October 1, 2015 and January 1, 2016. There are new requirements regarding detached buildings, mandatory escrow, and forced placement clarifications.
Specifically, the new rules that go into effect October 1, 2015 - among other things:
- Exempt from coverage detached structures that are not residences;
- Clarify that borrowers may be charged for force-placed insurance premiums as of the date insurance lapsed;
- Explains that force-placed insurance must terminate, and the borrower refunded premiums for any overlap periods, if the borrower obtains his or her own insurance; and
- Requires lenders to accept declarations pages when confirming adequate insurance has been obtained.
Starting January 1, 2016, lenders must establish escrow accounts for flood insurance premiums, unless they meet exemption criteria of having assets less than $1B and having no prior escrow accounts for any other purposes. Borrowers with loans outstanding as of January 1, 2016 must be notified of their option to establish an escrow account for payment of flood insurance premiums. New language becomes part of the model form for the Notice of Special Flood Hazards.
Steps To Take Now
The steps you'll need to take include:
- Educating your Board about the potential risks and decision points posed by the new requirements;
- Determining when, whether and how to escrow for flood insurance premiums;
- Identifying required policy changes and needed revisions to your operating procedures, such as how to:
- Properly determine whether flood insurance is required on a detached structure.
- Accept required evidence of coverage from borrowers.
- Force place and terminate flood insurance coverage.
- Recognize systems changes that might be needed and service providers who should be contacted.
The most critical step in updating your Compliance Management System is designing an implementation plan that ensures nothing is overlooked.
How Continuity Helps
In addition to getting these critical updates and free education on the requirements, Continuity clients enjoy:
- RegAdvisor Alerts detailing the action and implementation plans, and a RegAdvisor console that allows work to be assigned to the right people so progress can be monitored and tracked.
- Access to a Tools Library containing useful compliance tools such as insurance calculators, mortgage lending risk assessments, and tools to perform quality control and monitoring for originated and non-originated loans. The Tools Library provides "persistent compliance" - when rules change, our tools are automatically updated so you always have the most current version.
- Access to our team of experts in the Regulatory Operations Center (ROC) for support with all of your compliace questions and answers, plus a robust Support Center with access to research and guidance you can access self-service, 24x7x365.
Don't delay - let us show you how compliance can become worry-free today, with Continuity at your side.