Old data could have been used to determine demand

Published 12:00 am Saturday, July 25, 2009


Determining whether a homeowner needs to purchase flood insurance involves the financial institutions that collect mortgages and outside firms unseen to mortgage holders.

Under the National Flood Insurance Reform Act of 1994, banks are required to verify that homeowners have flood insurance if required before a loan is underwritten. Warren County has participated in the federal flood insurance program since the 1970s.

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In February 2008, the Office of the Comptroller of the Currency, part of the U.S. Treasury Department that regulates national banks, issued a bulletin detailing two concerns in flood hazard determination with the potential to expose national banks to compliance and operational risks.

One was that third-party entities assisting banks in determining the hazards were not using the most updated, FEMA-approved lists stating whether localities have had new flood insurance rate maps adopted. Another was that some of those entities were not updating SFHA forms for the newest information.

Within two days, one of the largest such entities, Texas-based First American Flood Data Services, issued a response saying its procedures conform to OCC regulations and no change was needed. The company also said flood determinations should be made prior to a loan closing and that initial dates and updates are recorded and retained on its SFHA forms.

While not specifying the firms used in helping them make flood hazard determinations for its clients, banks have stood by their vendor relationships.

“Contractually, our vendor is required to utilize all current maps and available community information when completing a flood determination,” said Barry Harvey, chief credit administrator with Trustmark National Bank, which maintains its vendor had complied with OCC requirements before the bulletin.

“Most banks obtain assistance from third-party providers to ensure compliance with federal flood regulations,” said Regions Financial spokesman Evelyn Mitchell, who declined to discuss the bank’s vendors in-depth.

Several federal agencies and financial institutions sign off on any potential revisions to guidelines that ascertain how much, if any, flood insurance borrowers must pay when structures are inside an SFHA. They include the U.S. Department of Treasury, the Federal Reserve System, Federal Deposit Insurance Corp., Farm Credit Administration and the National Credit Union Administration.

The criteria, collectively called the Interagency Questions and Answers Regarding Flood Insurance, states the amount of flood insurance required must be the lesser of the outstanding principal balance of the loan or the maximum limit of coverage available for certain properties under the act. For single-family, two-to-four family dwellings, most apartments and condominiums, that ceiling is $250,000. For small businesses, schools, churches, most hotels and other structures, the max is $500,000.