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