Monday, December 16, 2019

Is Flood Disaster Still on the Heat Map?

Posted by OnCourse Staff February 13, 2015 11:07am

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You bet it is!!!!  With all of the training banks have paid for and had their employees attend, why are banks still getting flood violations?  

There are many ways to violate the flood hazard requirements: you could fail to timely or properly complete the Standard Flood Hazard Determination Form on covered loans, not give the borrower the notice of flood hazards within the right timeframe, or incorrectly calculate the amount of insurance required. These and other facets of faulty compliance are continuing to serve as the basis for regulators to impose civil money penalties.

First let’s take a look at some recent flood violations, then let’s talk about ways these banks could have avoided them with additional or strengthening of internal controls.

Recent Violations

April 10, 2014 (FRB) – Uinta Bank in Mountain View Wyoming was issued an order of Assessment of a Civil Money Penalty in the amount of $9,985 directly to the National Flood Insurance Program. 

March 6, 2014 (FDIC) – Bancroft State Bank in Bancroft Wisconsin was issued an order to pay in the amount of $15,065.  Violations included failing to obtain flood insurance on a building securing a designated loan at the time of the origination (4 loans), failing to obtain adequate flood insurance at the time of the origination (6 loans), failing to follow force placement flood insurance procedures (2 loans), and failing to provide to borrowers a Notice of Special Flood Hazard and Availability of Federal Disaster Relief Assistance when making, increasing, extending or renewing a loan (9 loans).  

February 27, 2014 (FDIC) – Upper Peninsula Bank in Escanaba Michigan was issued an order to pay in the amount of $2,000.  The violation found was for failing to provide to borrowers a Notice of Special Flood Hazard and Availability of Federal Disaster Relief Assistance when making, increasing, extending or renewing a loan (8 loans).

February 24, 2014 (FDIC) – Pilot Grove Savings Bank in Pilot Grove Iowa was issued an order to pay in the amount of $3,960.  Violations were for making, increasing, extending or renewing loans secured by a building or mobile home located or to be located in a special flood hazard area without requiring that the collateral be covered by flood insurance; making, increasing, extending or renewing loans secured by a building or mobile home located or to be located in a special flood hazard area without requiring that the collateral be covered by sufficient flood insurance; making, increasing, extending or renewing a loan secured by a building or mobile home located or to be located in a special flood hazard area without notifying the borrower and/or the servicer whether flood insurance is available for the collateral; and failing to notify the borrower that the borrower should obtain flood insurance, at the borrower’s expense, upon determining that the collateral was not covered by flood insurance at some time during the term of the loan.

February 19, 2014 (FDIC) – Citizens State Bank in Lena Illinois was issued an order to pay in the amount of $5,470.  Violations included failing to obtain adequate flood insurance at the time of the origination (2 loans), failing to maintain flood insurance (3 loans), failing to provide to borrowers a Notice of Special Flood Hazard and Availability of Federal Disaster Relief Assistance when making, increasing, extending or renewing a loan (3 loans). 

In all of these cases, it seems like hefty monetary penalties related to the number of violations found. A few wise words I can give you are:

  1. Be proactive
  2. Documentation, documentation, documentation
  3.  Ensure timely monitoring is in place

And while you can have great controls in place, if the controls are not consistently followed, and you let one or two loans fall through the cracks, BAM, violation and monetary penalties will be knocking on your door should the regulators find them before you do.

While larger banks may outsource these functions to third parties, such as the monitoring of expiring flood insurance policies, sending required notices, enforcing force placed flood insurance, monitoring changes in flood maps, etc., the smaller community banks do not have the same volume of loans located within flood zones and usually resort to manual monitoring of these processes.  And we all know that when you have a manual process in place, you are more susceptible to human error or data entry mistakes.  Smaller banks, however, can avoid these mistakes with a robust compliance program, training, and regular internal audits.

Where did they go wrong?

Some suggestions for proper controls and monitoring:

  • Ensure that flood determinations are performed on a timely basis prior to loan closing
  • Read the determinations
  • If you see a loan is in a flood zone, request flood insurance information from the borrower
  • If they do not provide flood insurance information, do not close the loan
  •  If your system is able to track loan parameters for loans in a flood zone, use it
  • Ensure that upon new-loan set-up you have a secondary review function in place and that it includes all related fields to properly track loans located in a flood zone
  • If you have the ability to run a tickler report on loans with flood insurance that is soon to expire, use it
  • Monitor reports on, at least, a monthly basis and follow up in a timely manner with your customers to obtain updated flood insurance information
  • Ensure that disclosures are sent out to customers on a timely basis
  • Use underwriting checklists upon new loan set up that include information to document whether the loan is in a flood zone, flood insurance, flood insurance expiration dates, etc.  
  • Maintain a log to document all of your loans in a flood zone, including dates of issuance and expiration, loan date, maturity date, flood insurance amount
  • Monitor the log on a regular basis to make sure you stay ahead of expiration dates
  • Ensure that any employees involved in the loan underwriting and loan operations/servicing functions are provided with new hire training and periodic training thereafter

Stay on top of things and you’ll put yourself in a position to avoid costly violations

Also, did you know that if your bank uses a flood certification company, the examiners can contact the company and obtain a list of all the bank's loans that are in a flood zone? Next time examiners visit your bank they may come armed with that list to check your flood compliance. You may want to obtain a copy periodically for your auditors to use to check against your loans. You'll want to spot any flood compliance flaws - and fix them - before examiners arrive.

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