Academic journal article ABA Banking Journal

Flood Insurance Changes on the Way

Academic journal article ABA Banking Journal

Flood Insurance Changes on the Way

Article excerpt

Flood insurance changes on the way

Changes may be on the horizon for the federal flood insurance program. Congressional moves. Historically, the lender's duty has been to determine if a property resides in a flood zone and to require insurance for covered properties in participating communities before closing the loan. After that, so long as the lender holds or services the loan, it is responsible for making sure the borrower maintains coverage - something borrowers often don't do because of the extra cost. When they don't do so, lenders are empowered too "force-place" the renewal, which generally costs extra.

Now it appears that stiffened compliance requirements may be on the way. In late September the Senate Banking Committee subcommittee on housing and urban development wrapped up hearings on S. 1650 - the National Flood Insurance, Mitigation, and Erosion Management Act. The multi-faceted bill - and substantially similar legislation, H.R. 1236, that passed the full House in the spring - affects lenders in several ways. Among them:

* Lenders would have to review every real estate loan in their portfolios to make sure eligible properties are insured. This requirement would apply to those loans outstanding five years after enactment of the law and the institutions would have to demonstrate that they had performed the review at that time. The same provisions would apply to servicers, in the case of loans sold into the secondary mortgage market. In theory, institutions could charge borrowers part of the cost of determining if the loan is in compliance.

* Two exceptions apply to the previous requirement. The first covers lenders who conduct such reviews in the 18 months prior to enactment and who escrow for flood insurance on covered properties. The second would permit a lender, in the five years after enactment, to review a representative sampling of loans - probably 5%. The lender would be exempt from the broader requirement above if 95% of the sampled loans were correctly identified as covered or not covered when the loans were made, and 95% of the loans in the sample that require insurance are properly covered. …

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