Photo Credit: Galina Peshkova
By Sharon Geiger, Senior Quality Control and Review Specialist
Flood certifications, coverage, insurance, and placement – these are common in any financial institution’s compliance vocabulary nowadays. It’s no secret that all regulatory agencies have had “flood” as a hot topic for the past few review cycles. Financial institutions have been reinforcing their knowledge and awareness of the issue. Yet, even with all of the training that banks and credit unions have paid for and had their employees attend, why are financial institutions still receiving flood violations?
Unfortunately, there are more than a few ways to violate the flood hazard requirements, such as:
- Failure to properly complete the Standard Flood Hazard Determination Form on covered loans.
- Completing the form in a “less than timely” fashion. (Usually, 10 days before the loan closes is the cutoff date. This gives the borrower and the financial institution sufficient time to rectify any coverage requirements that may arise.)
- Failure to provide the notice of flood hazards to the borrower within the appropriate timeframe.
- Incorrectly calculating the amount of insurance required.
These errors and other violations are continuing to serve as the basis for regulators to impose civil money penalties.
The following illustrates the continuing scrutiny regarding flood and its importance to the regulators. The Federal Deposit Insurance Corporation (“FDIC”) assessed civil money penalties against several banks for violating the Flood Disaster Protection Act (“FDPA”) and the National Flood Insurance Act (“NFIA”) over the course of 2018. The violations included the following:
- Failing to obtain flood insurance at origination and failing to maintain adequate flood insurance.
- Failing to properly force place flood insurance.
- Failing to provide notice to borrowers that the collateral for a loan is in a designated Special Flood Hazard Area.
- Failing to obtain flood insurance on a building securing a designated loan at the time of origination.
- Failing to provide borrowers with a Notice of Special Flood Hazard and Availability of Federal Disaster Relief Assistance in a timely manner.
The following is a short list of violation examples:
- May 1, 2018 - PNC Bank, NA – Penalty $207,245
- October 1, 2018 - Gibsland Bank & Trust Company, LA – Penalty $9,600
- July 16, 2018 - Southwest Capital Bank, NM – Penalty $10,800
The violations cited in the enforcement actions do not involve a great deal of loans. For example, Southwest Capital Bank in New Mexico had a total of 12 violations, even though one does not usually look for flood violations in the southwest region of the country. This reinforces the point that the FDIC, as well as other regulatory agencies, are closely monitoring compliance with the FDPA and the NFIA, and absolutely no financial institution in any state – even one that is mostly desert – is exempt from regulatory scrutiny.
In all of these cases, the monetary penalties are high when compared to the number of violations found. In order to avoid “the FDIC list,” there are a few simple things that you can do to provide low risk/high reward:
- Be proactive with your training – Do not assume that your staff is knowledgeable in this area, especially if you are a commercial lender. Ignorance, turnover, general apathy and lack of ownership by loan officers can lead to a critical lack of knowledge.
- Documentation, documentation, documentation – Document everything, even if it is not required. Date stamp everything. Make sure it is all located in one specific area marked “flood” within the loan file. The easier it is for the regulators to see and note, the easier it will be on you.
- Timely monitoring – Post closing is the wrong time to ensure that flood coverage has been obtained. Flood issues need to be both resolved and documented prior to closing or this can lead to a cascade of violations.
Although your financial institution may have adequate controls in place, if the controls are not consistently followed and one or two loans fall through the cracks, violations and monetary penalties will be assessed should the regulators identify them before you do.
While larger financial institutions may outsource these functions to third parties (e.g., monitoring of expiring flood insurance policies, sending required notices, enforcing force-placed flood insurance, monitoring changes in flood maps, etc.), 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, of course, when you have a manual process in place, you are more susceptible to human error and data entry mistakes. However, smaller financial institutions can avoid these mistakes through a robust compliance program, training, and regular internal audits.
13 Recommendations to Ensure Proper Controls and Monitoring for Your Bank:
- Confirm that flood determinations are performed on a timely basis prior to loan closing.
- Read the determinations.
- If you see that a loan is in a flood zone, request flood insurance information from the borrower.
- If the borrower does 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, utilize it.
- Upon new loan setup, ensure that 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, utilize it.
- Monitor reports on, at least, a monthly basis, and follow up with your customers in a timely manner to obtain updated flood insurance information.
- Ensure that disclosures are sent out to customers on a timely basis.
- Use underwriting checklists upon new loan setup 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, and flood insurance amount.
- Monitor the log on a regular basis to ensure that 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.
When the steps above are followed, your bank will be in a much better position to avoid costly violations.
To learn about acxell's Internal Audit and Risk Management Services and how we can help your institution, email WhatsYourRisk@acxellrms.com or call 877-651-1700.