MADISON, Wis. (5/23/13)--With a wet U.S. spring causing the potential for flooding to increase, all credit unions need to make sure they know whether a property is in a flood zone before approving a mortgage, according to an article by Kriss Besch, CUNA Mutual Group product support manager.
"It's been the rule for decades," Besch wrote. "All lenders have to determine whether a property is in a flood zone before approving a mortgage. That lender also has to make sure that properties in flood zones are covered by insurance."
However, because of changing flood zones, "a mortgaged property that did not need flood insurance at the time of loan origination might need it five years later," Besch added. "It's up to lenders to keep track of map revisions and any other Federal Emergency Management Agency (FEMA) changes regarding exclusions or exceptions."
The Biggert-Waters Flood Insurance Report Act has increased its penalty to a minimum of $2,000 from $350 per flood violation, and lifted its annual $10,000 cap after several years of record flooding, catastrophic hurricanes and historic super storms.
"That means that a credit union that does not monitor flood zone revisions and require its members to have flood insurance could find itself in hot water--and with a big bill due to the government," Besch added.
Among additional tips for credit unions that Besch offers in the article on CUNA Mutual's website:
- There are two types of flood zone certifications: Basic and life-of-loan. A basic certification is a one-time read of flood maps, which leaves the burden of monitoring changes up to the lender. For ongoing monitoring of any loan, the credit union would need a life-of-loan service. That service would track FEMA maps and notify the credit union of any flood zone certification changes. The responsibility and risk belongs to the flood vendor if mistakes are made. That means credit unions don't need to monitor FEMA maps on their own. With life-of-loan plans, the vendor does the tracking.
- Credit unions must recognize that flood zone certification services are purchased per loan, not per portfolio. It is possible that credit unions have some mortgages that carry life-of-loan flood zone determination service and some that do not. They should verify annually what kind of coverage each mortgage carries to remain compliant with federal regulations.
- Flood vendors should provide certificates for member files as proof to auditors that current determinations have been made. A credit union can be fined for not having a certificate even if the loan is monitored by a flood zone certification vendor and is adequately protected. Good flood vendors will also assist with FEMA Letter of Map Amendments for lenders.
- It is never safe to assume that the flood zone status of a property cannot or will not change. As builders increasingly change the topography of construction sites by moving ground, flood zones can evolve--and sometimes much farther away than a credit union would suspect.