Flood Insurance – Part 2
Laurie Jorgensen – Senior Compliance Auditor
This is part 2 of Laurie’s series on Flood Insurance Requirements. See Part 1, which gives a general overview of the requirements here.
For the second installment relating to flood insurance compliance, let’s go through a review of the Standard Flood Hazard Determination Form (SFHDF) and regulatory expectations.
The SFHDF is required to determine whether a building or mobile home securing a loan is in or will be in a flood zone where flood insurance is available under the Flood Disaster Protection Act (the Act). A hard copy of the completed SFHDF electronic form must be retained with the loan documentation for as long as the bank or credit union owns the loan.
A financial institution may, but is not required to, provide a copy of SFHDF to the borrower(s). Most financial institutions do not provide a copy of the form as borrowers are not familiar with the information contained in the form.
If your institution is increasing, extending, or renewing a loan (a triggering event), you may rely on a prior determination if:
• The prior determination was made within seven (7) years of the date of the new transaction;
• The SFHDF reflects the basis of the determination; AND
• FEMA has not revised or updated the map affecting the property since the original determination was made. If your financial institution uses a life-of-loan or flood map monitoring service and there have been no notifications of changes for this loan since the last time a SFHDF was pulled on the property, you may rely on that service.
This rule only applies to increasing, extending, or renewing a loan. All new loans, including loans on the same property, must have an SFHDF.
When a financial institution makes, increases, extends, or renews a loan secured by a building or mobile home located in a flood zone, the institution must mail or deliver a written notice to the borrower(s) and the service (if applicable) in every case – even if flood insurance is not available under the Act. The information that is required to be included in the notice is listed in Appendix A of the Act. You are not required to provide a notice to every borrower; one notice will meet the regulatory requirement. Keep in mind that a notice is required for every triggering event, even if you are relying on a prior determination form.
As discussed in the first installment of this series, timely notification is key. All of the regulatory agencies have stated that providing a 10-day notice before closing is reasonable. The financial institution must maintain a record of receipt (signed acknowledgement) for as long as they own the loan.
Failing to provide the required notice, whether for a new loan or after a triggering event and failing to provide notice in a timely manner are among the most common violations cited during an exam.
If your bank or credit union utilizes a life-of-loan or flood map monitoring service, it is important that the vendors are included in your third-party vendor management program to ensure appropriate oversight. Good oversight practices include:
• Performing a risk assessment of the activity that will be outsourced to determine if this outsourcing is consistent with your institution’s business strategy.
• Conducting and documenting due diligence to ensure a qualified vendor is selected.
• Establishing performance expectations.
• Monitoring the relationship to be sure the vendor is meeting your expectations.
Flood Disaster Protection Act compliance should be an integral part of the loan origination, modification, and servicing procedures at your bank or credit union. If you have any questions or would like to explore what a Flood Act Compliance Audit could do for your institution, please contact us.
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