Federal Flood Insurance
Compliance - Update
Federal agencies that
regulate financial institutions have once again
clarified their guidelines regarding flood
insurance. The agencies are:
- The Office of the Comptroller of the
- The Federal Reserve System
- The Federal Deposit Insurance
- The Office of Thrift Supervision
- The Farm Credit Administration
- The National Credit Union Administration
The agencies have been updating their flood
insurance guidelines, by way of "Questions and
Answers" (Q&A) published in the Federal
Register. Two years ago, the six Federal
agencies issued five supplemental "Questions and
Answers", (July 21, 2009 - 74 FR 35914-947
Although not actual law, individual field
regulators use the latest guidelines in their bank
examinations. Unfortunately, some aspects
of the 2009 guidelines seemingly were in conflict
with existing Federal Law ((The National
Flood Insurance Act of 1968, and the
Flood Disaster Protection Act of 1973, as
revised by the Reform Act (codified at 42
U.S.C. 4001 et seq.).) The comment period
that followed was put to good use by commenters
(primarily lenders and insurance providers),
whose actions lead to a new revised "Questions
and Answers", published October 17, 2011.
At issue are:
a borrower can be charged by the lender
for the cost of flood insurance coverage,
with respect to the 45-day notice period.
soon after the end of the notice period a
lender should obtain flood insurance
coverage when the borrower has failed to
purchase an appropriate policy.
- When the (federally required) 45-day
notice period should begin.
Of the five Supplemental "Questions and
Answers" from 2009, three have been revised,
and are significant for lenders.
Checking for Insurance
While equity lending has been a boon for
lenders, the administration (servicing
equity loans - for insurance compliance - can
As a mortgage loan, insurance
coverage should be maintained at all times, in
order to protect the lender's interest.
But equity loans, with many lenders, are originated and
serviced in the installment loan department,
which are not set up for escrows, and other "1st
Thus, for insurance purposes, it's like
fitting a square peg into a round hole.
In addition to compliance, there is always the issue of cost.
have several options - with differing
complexities and costs - to
ensure proper due diligence and insurance compliance.
Equity Loans – What is the Actual Risk?
Consider that equity loans…
- Rarely, if ever, go to foreclosure
- Almost never result in loss, due to
uninsured physical damage (i.e. a fire) to the
- Have floating balances, making it hard to
monitor, or later force place, for the proper
amount of insurance
- Do not command the high level of insurance
documentation as do 1st mortgages (from
insurance carriers and agents).
- Might possibly be simultaneously tracked by
another lender - the first
mortgagee. A duplication of procedure
Equity loans do then present risk to the lender,
risk that is extremely low, and certainly not
equal to the average 1st