FLOOD INSURANCE
Protect Investments, Preserve Dreams
The FIA Administration Calls Upon The Lending Community
To Do A Better Job In Fulfilling Flood Insurance Requirements
BY JO ANN HOWARD
The reasons for flood insurance are obvious. It protects:
- property owners from financial disaster, since homeowners' policies don't offer flood coverage,
- the lender from uninsured losses while a mortgage is being paid off, and
- taxpayers who would otherwise provide disaster assistance to the uninsured flood victim.
In 1994, Congress passed legislation intended to strengthen the hand of lenders to make sure that certain borrowers - those exposed to the 1% annual chance of flood - would buy flood insurance as a prerequisite for their loan. The requirement to buy flood insurance wasn't new; that dates back to the Flood Disaster Protection Act of 1973. But the compliance tools of the 1994 law are.
The National Flood Insurance Reform Act of 1994 specifically requires federal regulators to have their lenders document their determinations of whether flood insurance should be required for each new mortgage loan, refinancing of existing loans, etc.
As part of this process, lenders must have on file the Standard Flood Hazard Determination Form (SFHDF) that contains information on:
- where the structure can be found on the current FEMA (Federal Emergency Management Agency) flood map,
- if the structure is in a special flood hazard area (SFHA, an area subject to the "one percent chance a year" flood), and
- whether flood insurance is required.
The law also lets the lender hire vendors or third parties to make these determinations, as long as the vendor guarantees the accuracy of its determination. If the determination indicates that the structure is located in a SFHA, then the lender requires the borrower to buy flood insurance on the structure.
That's the way it's supposed to work, and most of the time it does. But there are times when it's not working that way, and with so much riding on accurate determinations - lenders' investments and homeowners' dreams - all of us need to make certain that flood zone determinations are working for everyone's benefits.
(Some) lenders are lax
Unfortunately, we are seeing situations - and even one occurrence too many - where everyone involved in the loan transaction is simply going through the motions when it comes to flood insurance.
Our analyses after floods indicate that, there are too many people in SFHA whose lenders should have required flood insurance but didn't. The Federal Financial Institutions Examination Council (FFIEC) submitted a report to me in December 1998 listing the types of violations found during compliance examinations during a two-year period. The report points to a relatively high incidence of cases where borrowers should have been required to buy flood insurance as a condition of their loan, as required by law, but their lender failed to impose that requirement.
What may be missing in the loan application process is greater care about flood hazard
determinations and greater accountability. Yet these flood hazard determinations are major risk assessment decisions that involve hundreds of thousands of dollars of risk capital. With a shortage of time and a heavy case load, the lender's concern may be more about having a completed SFHDF in their loan file than an accurate determination about the flood risk.
Many flood hazard determination firms are doing a fine job. Many of these same companies are eager to develop industry standards to ensure quality and consistency in flood zone determinations. But there are some vendors who may not be as interested in quality as everyone deserves. Some vendors may be more interested in volume and profit than in accuracy.
As for homeowners, many are simply overwhelmed by the details at settlement. Often they must acknowledge 50 or more items and, regrettably, don't give flood insurance a second thought if they're told they're not in a SFHA and don't have to buy the insurance. To them, it's one less burden that the law says they don't have to carry. Of course, all this is understandable, but it's not acceptable.
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