Magazine article American Banker

Mandatory Flood Insurance Wins Bank Experts' Support

Magazine article American Banker

Mandatory Flood Insurance Wins Bank Experts' Support

Article excerpt

WASHINGTON -- Legislation likely to pass this summer will force banks to require that borrowers buy flood insurance.

While that sounds onerous, industry experts said the law will be good for banks.

A provision in the Community Development Banking and Financial Institutions Act for the first time would authorize banks to "force-place" flood insurance. That means banks could withhold borrower funds through escrow accounts.

Lawsuits by Borrowers

Since the 1970s, banks have had to require flood insurance in designated flood zones. But only 18% of bankers compiled with that requirement last year, according to Debbie Shannon, senior legislative representative at the American Bankers Association.

As a result, she said, many banks have been sued by borrowers who said the lender should have been more forceful.

Ms. Shannon said this law will force bankers to follow the rules, which will protect them from lawsuits.

"If you as a lender are following the law and following good business practices, this legislation will be easy for you to swallow," she said. "If you are very lax, you'll have to beef up your compliance standards."

The law would allow regulators to assess a $350 fine for each violation that showed a pattern of noncompliance, up to $100,000 per lender.

It would also extend flood insurance requirements to all lenders, including mortgage bankers and federal agency lenders.

Proposal Praised

Dori Gilman, senior legislative representative at the Independent Bankers Association of America, said the bill reduces the regulatory burden on lenders while fixing a flawed flood program. …

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