Flood Insurance –
Dangerous Waters Ahead!
If you have spent any time at all in the compliance world,
you know one constant; flood insurance will be an area of risk. Flood insurance violations are consistently one
of the most common bank compliance violations cited by the regulatory
agencies. A strong compliance program
includes a significant level of resources dedicated to the administration of
the flood loan portfolio. Now, just when
you think that you might have a strong level of control over the portfolio,
along comes change!
Biggert Waters
Changes
The first of these changes comes from the Biggert Waters
Flood Insurance Reform Act of 2012.
Buildings that are classified as Other Residential are now insurable up
to $500,000 rather than the $250,000 maximum that applied previously.
Other residential Buildings are defined as non-condominium
residential buildings designed for use for five or more families. Because of this change as of June 1, 2014,
apartment buildings and residential/commercial buildings should be insured up
to the lessor of:
·
the outstanding principal balance of the
loan(s); or
·
the maximum amount of insurance available under
the NFIP, which is the lesser of:
·
the maximum limit available for the particular
type of structure; or
·
the “insurable value” of the structure
The change is that the maximum amount is now $500,000. The
interagency statement that announced this change also pointed out that he new
level of insurance is required immediately.
Therefore, if you have collateral that is a multifamily dwelling unit
that is in a flood zone; the time is now to make sure that you have
adequate insurance.
FDIC Interpretation
We have recently been made aware of an interpretation of
mortgages used to secured loans that can be a game changer! The following language is common in mortgage
instruments that are being used around the country;
THIS MORTGAGE, INCLUDING THE ASSIGNMENT OF RENTS AND THE
SECURITY INTERESTIN THE RENTS AND PERSONAL PROPERTY, IS GIVEN TO SECURE (A) PAYMENT OF THE
INDEBTEDNESS ANO (B) PERFORMANCE OF ANY AND ALL OBLIGATIONS UNDER THE NOTE, THE
RELATED DOCUMENTS, AND THIS MORTGAGE. THIS MORTGAGE IS GIVEN AND ACCEPTED ON
THE FOLLOWING TERMS:
This language has recently been interpreted to create on the
contents of the structure that is being pledged as collateral. If the property is in a flood zone, this
means that the borrower will be expected to obtain flood insurance on
the contents of the borrower.
The FDIC has held that flood content
insurance is required regardless of whether or not the bank filed a
UCC-1 financing statement. [1] In the 12th district, the FDIC
examination staff has taken the position that they will not require contents
insurance on residential properties.
There have been cases where an institution has been allowed
to demonstrate that they had no intention to take the contents as
collateral. In these cases, the requirements were:
·
The appraisal on the property could not mention
the contents
·
The loan write up did not mention the contents
The cases when this approach has
been allowed are limited. We recommend
that for commercial loans with collateral in a flood zone that you;
·
Review the mortgage document to determine
whether the language could possible create an inadvertent lien on contents ;
·
Prepare documentation that specifically states
your intentions with the contents. In
other words, if you truly do not want to
take the contents as collateral, prepare a document that specifically
waives the contents and get the customer to execute it
·
Ensure that all flood insurance is up to date
and in an amount that is sufficient,
Contents Insurance
Valuation
In the event the bank has taken contents as collateral
either intentionally or in the manner described above, we note that the regulators has required that
the bank establish the value of the collateral through independent means.
While the direction from the regulators has been somewhat
sparse, it is clear that the loan file should have some documentation of the
efforts that lending staff made to determine a value of the contents being
insured. Among the ways that might be
employed to determine value:
·
On site visits
·
Valuation services such as Kelly Blue Book
·
Customers financial statement if CPA prepared
·
Valuation used for loan funding
Just when you thought you had a handle on your flood loan
portfolio, change can bite you!
[1] At
the time of this posting, we were unaware of this interpretation being used by
the Federal Reserve , the CFPB or the OCC.
