Compliance with the Flood Disaster Protection Act
How prepared is your institution for your next Flood Exam?
Flood insurance has been a hot topic in the banking industry for many years, and it's never been more relevant then today considering climate change and the effects we see daily of major floods occurring across the nation. In addition, Examiners are paying more scrutiny to the requirements of the act as evidenced by enforcement actions and civil money penalties becoming regular press releases by the Agencies (CFPB, FDIC, Federal Reserve, & NCUA). If an institution is found to have a pattern or practice of violations, the Agencies are required to assess civil money penalties. These amounts can add up quickly as up to $2,000 can be assessed per violation. These enforcement actions are also public information and can damage a banks reputation as well.
Flood compliance impacts many risks: regulatory, operational, reputational, and third party to name a few. Having an effective CMS for Flood is critical. However, tripwires are everywhere when it comes to flood violations and not just in the residential loan origination phase (which has its own numerous perils). Many violations occur during the servicing stage, from lapses in maintaining adequate coverage throughout the life of the loan to subsequent notification and forced placed issues and properly capturing map zone changes which could impact a loans flood requirement status.
In addition, many lenders don’t have a strong CMS in place to ensure compliance in the commercial lending area. CRE loans are a haven for violations and are also typically cited for CMS weaknesses for deficiencies in operating procedures and a lack of adequate regulatory knowledge to originate CRE loans in compliance with the act. These violations can have a major impact on an institution’s overall ratings as well. For example, the following are two frequent commercial loan issues:
CRE loans typically capture contents as collateral in the security instrument but fail to properly obtain adequate flood insurance and only cover the structure.
CRE loans many times entail multiple buildings/structures but fail to properly assess and calculate the proper coverage required for each structure in compliance with the act and don’t obtain a separate policy for each building.
Originating Condo loans and HELOC’s are also areas that have significant risk if not mitigated properly. On top of all that, it has never been more complicated to comply with the requirements considering the FDPA was significantly amended with the passage of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) and the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA).
Flood issues and violations are something that we could go on and on about for days but without a doubt, Flood compliance is a major issue. If you have any concerns about your own institutions Flood compliance management system, SCA’s team of compliance experts have a vast level of knowledge and experience in this domain and are ready to assist and prepare you for your next exam.
For a free consultation to discuss you current FDPA compliance and Flood CMS program or to perform a targeted assessment, contact Bill Dolan, Director at (617) 694-2617 or visit our website at: www.scapartnering.com to learn more about SCA’s consulting services.
