Temperatures are rising. Rain is falling. Rivers are flooding, and hurricane season officially started June 1. Is your mortgage portfolio protected?
For decades, lenders have been required to determine whether a property is in a flood zone before approving a mortgage, and then ensure properties in flood zones are covered by insurance. That’s a bit trickier than making sure a consumer auto loan is covered with a collision or liability policy.
Flood zones can change, and a mortgaged property that did not need flood insurance at the loan origination date might need it five years later. It’s up to lenders to keep track of map revisions and any other Federal Emergency Management Agency (FEMA) changes regarding exclusions or exceptions.
After several years of record flooding, catastrophic hurricanes, and historic super storms, the Biggert-Waters Flood Insurance Report Act has raised its penalty from $350 per flood violation to a minimum of $2,000, and lifted its annual $10,000 cap.
So a credit union that fails to monitor flood zone revisions and require members to have flood insurance could end up owing the government a lot of money.
Some credit unions monitor flood zones and related certifications on their own, while others partner with a vendor. With FEMA issuing thousands of flood map updates every year, passing the risk and responsibility to a vendor can be prudent for credit unions lacking the staff or expertise to ensure flood zone certifications are accurate and mortgaged properties in flood zones are insured.
The higher fines should also prompt credit unions to periodically re-evaluate their current flood vendor.
Flood zone certifications
There are two types of flood zone certifications: basic and life-of-loan. A basic certification is a one-time read of flood maps, which leaves the burden of monitoring changes up to the lender.
For ongoing monitoring of any loan, the credit union would need a life-of-loan service, which tracks FEMA maps and provides notifications of any flood zone certification changes.
Advantages of the life-of-loan option are that credit unions do not need to monitor FEMA maps on their own, and the responsibility and risk belong to the flood vendor if mistakes are made.
Credit unions should recognize flood zone certification services are purchased per loan, not per portfolio. Thus, credit unions could have some mortgages that carry a life-of-loan flood zone determination service and some that do not.
Verify annually which coverage each mortgage carries to remain compliant with federal regulations. Your flood zone certification vendor should provide a report of all life-of-loan mortgages it monitors, which can then be cross-checked with the remainder of the portfolio.
Flood vendors should provide certificates for each member file as proof for auditors that current determinations have been made. Credit unions can be fined for not having a certificate even if a loan is monitored by a flood zone certification vendor and is adequately protected.
Good flood vendors will also assist with FEMA Letter of Map Amendments for lenders. A property may appear to be in a flood zone, but further review of the FEMA flood zone map could reveal the property is not exposed to flooding because of its elevation.
It’s never safe to assume a property’s flood zone status cannot change. As builders increasingly change the topography of construction sites, flood zones can evolve—sometimes much farther away than a credit union would suspect.
The right vendor stays abreast of all flood zone maps and letters, which will eliminate worries about portfolio protection and ongoing compliance. This enables credit unions to focus on serving their members, not on reading maps.