Flood insurance compliance continues to be a hot button for the federal bank regulatory agencies, and the vast water damage and destruction caused by Hurricane Sandy and other storms will only guarantee that flood insurance requirements will stay in the regulatory spotlight.
Last July, President Obama signed into the law the Surface Transportation Bill. One provision of the law increased the civil money penalties for each flood insurance violation from $350 to $2,000 and eliminated an aggregate maximum penalty that can be imposed.
Whenever a financial institution makes, increases, extends or renews any loan secured by improved real property or a mobile home, it must use the Standard Flood Hazard Determination Form (SFHDF) developed by the Federal Emergency Management Agency. The SFHDF helps lenders determine whether the improved real property or mobile home securing the loan is in a special flood hazard area.
An institution may use a previous flood determination if both of the following conditions are met:
An institution may not rely on a previous determination if any one of the following applies:
An institution may only rely on a previous determination set forth on a SFHDF when it increases, extends, renews or purchases a loan—not when it makes a new loan. Subsequent transactions by the same institution with respect to the same property—such as assumptions, refinances and junior-lien loans—are to be treated as loan renewals. In those limited circumstances, a new determination is not required, assuming that the other requirements are met.
Most life-of-loan insurance coverage purchased from third-party vendors will only trigger a notification and alert the institution if a map revision causes a building to be located within a flood hazard area. But such coverage will not notify an institution if a flood map revision occurs after the date of the previous determination and the map revision does not cause the property to be located in a flood hazard area.
In recent years FEMA has remapped most of the United States. Does your community bank’s life-of-loan insurance provider notify you of FEMA map changes involving secured properties on which your bank has purchased life-of-loan coverage? Such notification would inform you whether the property was reviewed and that it is still outside a flood zone. The only change may be a revised National Flood Insurance Program Map Number or Community Panel Name and a NFIP Map Panel Effective Revised Date.
What should your community bank do if a determination over an original flood-zone determination has changed?
Review your bank’s contract with its life-of-loan insurance provider. If the coverage provider does not provide flood zone map-change notifications, establish other internal procedures to check for any map changes. One procedural option is to obtain a new determination with each loan renewal, modification or extension. Another is to obtain a recertification of an original flood determination, which would not affect the date of the determination but would provide the updated NFIP information.
The SFHDF number has been changed from FEMA Form 81-93 to the revised FEMA Form 086-0-32. The new form expires on May 30, 2015. Review it carefully. Banks can use the new form anytime before May 2015 while preparing their software systems for the new format.
The new form contains some small changes:
• Box 2 previously contained the property address; the new form states “Property Address and Parcel Number.” The form instructions make no mention of the parcel number. A statement was added to further identify the property (such as latitude/longitude).
• Box B3 on the previous edition was titled “LOMA/LOMR” with a location to check “yes” and a notation to enter the date. The form instructions for this box did not change and, if there is a LOMA/LOMR, require the user to mark “yes” and give a date, even though the form no longer includes this notation.
When the new SFHDF is released, your community bank can rely on a previously expired SFHDF when three conditions are met:
In most cases, the release of this new SFHDF should not jeopardize your community bank’s ability to rely on the FEMA’s previous flood hazard form.
Kris Welch is vice president of Chartwell Compliance, the compliance consulting service provider for ICBA Compliance & Risk Management.