Sandals and Sunshine or Warm Slippers and Snow — Weather, Like Flooding, Can Change in an Instant

Cindy LeBlanc – Senior Compliance Advisor

The weather can change in the blink of an eye. Yesterday, it was 70 degrees, and I was raking leaves in my sandals, trying to avoid the wasps chasing me. Today, it is in the low teens, snowing, sleeting and bitterly cold. I am cozied up to the fireplace with hot chocolate and warm, fuzzy slippers — no sandals or annoying wasps for me this afternoon. This abrupt change in weather conditions can be confusing — one minute it is a balmy afternoon and the next a bitterly cold evening.

Something else that can occur as quickly as the weather changes is area flooding. Just as an abrupt weather pattern change can be confusing, flood rules can also be confusing at times. Financial institutions must be prepared by following mandatory flood requirements that protect their borrowers and their collateral. Understanding and following the requirements of the flood rules may not feel like “wearing fuzzy slippers and drinking hot chocolate in front of the fire,” but it can assist you in mitigating the risk of flood violations in your compliance program.

In discussing flood requirements, several points of confusion seem to arise on an occurring basis. One of those points relates to the force placement of flood insurance.

Some of the questions I see frequently pertain to force placing flood policies. Questions like when do you force place — day 1 or day 45? When do you charge? When do you send the 45-day letter?

As soon as you have knowledge of the lack of or inadequate coverage amount of flood insurance, you are required to send the 45-day notification letter. For example, if your institution becomes aware that a policy lapsed on November 9, 2019, then the 45-day letter should be sent on November 10, 2019. With the changes in Biggert Waters, you are allowed to force-place from day one of the lapse. You are also permitted to charge for the policy at that time; however, you are required to refund any overlapping coverage if the borrower obtained the required amount of flood insurance during the 45-day period. To avoid an accounting “nightmare,” some institutions choose to go ahead and force-place the same day as sending the letter, waiting to charge until the 45-day notification period has lapsed. Another point of confusion that arises is whether a financial institution may make a loan collateralized by property located within an SFHA when the community where the property is located does not participate in the National Flood Insurance Program (NFIP).

The 2009 Interagency Flood Q&As address this very question in Q&A No. 1. The Q&A begins by stating the flood rules are still applicable to this collateral. This means the financial institution must determine whether the structure is located within a SFHA. If so, the financial institution must notify the borrower that the structure is located within the SFHA and obtain proof that the borrower received the notification. If the community in which the property is located does not participate in the NFIP, the financial institution may still make a conventional loan, but it may not make government-guaranteed or insured loans, such as an SBA loan, VA or FHA loan, and neither Freddie nor Fannie will purchase loans in non-participating communities. The financial institution must also consider the risk involved in making a loan in a non-participating community. Consider a private insurance policy if it is available. One other thing to consider is the size of the portfolio of non-participating community loans. In the event your institution’s portfolio of non-participating community loans is of a sizeable amount, ensure you have implemented internal controls, policies and procedures to mitigate that risk.

Whether sunshine and sandals or snow, sleet and slippers, an area flood can happen at any time. Ensure you are prepared to mitigate the risk of flood violations by understanding the various components of the Flood Rules.

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Cindy LeBlanc – Senior Compliance Advisor