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With thousands of dollars at stake per violation, banks need to be sure they have processes in place to insure flood compliance. This continues to be a hot topic with the examiners and we continue to find violations as we perform testing for community banks. With the National Flood Insurance Program (NFIP) lapsing and continuously being extended, and the option to accept private flood insurance policies, flood compliance will continue to be on the radar of the examiners.
Let’s evaluate several violations we continuously note in our testing, and offer a few best practices to help your bank comply with the flood rules.
Top three flood violations:
- Differing Flood Zone Language: The Flood Zone on the Standard Flood Hazard Form is not the same as the Flood Zone listed on the borrower’s insurance policy.
- Best practice solution: Designate someone in the bank to ensure the flood zones match every time a new flood insurance policy is received.
- Insufficient Coverage: The flood insurance coverage is not sufficient to cover the required amount. Most often we see the coverage is short by less than $1,000.
- Best practice solution: Create a worksheet to calculate the required amount of coverage and make sure adequate flood insurance is in place. This worksheet could also include documentation of the dates notices are sent to the applicant, and acknowledged.
- Documentation Needed Pre-Loan: The bank is not documenting the flood hazard determination on the Standard Flood Hazard Form prior to consummation of the loan.
- Best practice solution: Train your lenders that they must have this completed before any loan secured by property is closed. Also, retain a hard or electronic copy of the form throughout the term of the loan.
Additional Best Practices
Banks can get off the examiner radar by implementing these additional Flood best practices:
- Initiate Notices: Have a process in place to ensure appropriate and helpful notices are provided every time a loan is touched (new, increased, renewed, or extended).
- Send Reminders: Send a notice to borrowers prior to the expiration of their current flood insurance policy to remind them that the insurance is required, and they must provide a current policy.
- Flag Expiration Dates: Create a tickler system item for insurance expiration dates to assist in the force-placement process.
Flood regulations are clear, straightforward, and unforgiving. Violations can cost a bank up to $2,000 per violation. Creating checklists and putting processes in place will insure compliance with the Flood Disaster Protection Act (FDPA) and NFIP.