Compliance with Federal Flood Insurance
Requirements in Light of Recent Natural Disasters
With the recent spate of hurricanes causing severe flooding across the East Coast of the United States, and the potential for flooding from future natural disasters, the Federal Deposit Insurance Corporation (FDIC) is encouraging the institutions it supervises to take special care to meet all the requirements of the flood insurance regulations (12 CFR Part 339). In many areas of the Eastern United States, flooding has been so severe that it has inundated areas within a 100-year floodplain (defined by the Federal Emergency Management Agency [FEMA] as an area that has a 1 percent chance of being flooded in any given year), and exceeded the 500-year floodplain level (an area with only a .2 percent chance of being flooded in any given year). The current damage estimate in eastern North Carolina from Hurricane Floyd is already at least $1.3 billion.
To be legally compliant with the flood insurance regulations, financial institutions should:
Ensure that a flood hazard determination is performed for any improved real property or mobile home offered as collateral on a loan using the Standard Flood Hazard Determination Form provided by FEMA before granting the loan;
Provide notice to the borrower if it is determined that the improved real property or mobile home is located in a Special Flood Hazard Area, on whether flood insurance is available, and the availability of federal disaster relief assistance;
Require a borrower to obtain the legally required amount of flood insurance before closing a loan if it is determined that collateral improved real property is located in a Special Flood Hazard Area. The amount of the insurance should be equal to the lesser of the loan amount or the replacement value of the improved real property (up to the limit available from the National Flood Insurance Program);
"Force-place" flood insurance in those situations where a borrower either refuses to obtain coverage or allows coverage to lapse;
Escrow flood insurance premiums if escrow is required for taxes, insurance premiums, fees or any other charges for a loan secured by residential improved real estate; and
Provide notice to FEMA of the identity of the loan servicer.
If these steps are taken, financial institutions will not only be legally compliant, but will minimize risk to their loan portfolios from losses caused by flooding. The law requires these measures but they are also necessary from the perspective of safety and soundness. We believe that our supervised institutions will act to be in compliance with the requirements of the law. However, you should remember that the FDIC is required by the Flood Insurance Reform Act of 1994 to assess a civil money penalty against institutions that have a pattern or practice of violations of the flood insurance regulations. That penalty may be up to $350 per violation not to exceed $105,000 in any one calendar year.
For further information, please contact your FDIC Division of Compliance and Consumer Affairs (DCA) Regional Office on the attached list or:
Ken Baebel, DCA Senior Review Examiner, on (202) 942-3086, or e-mail (firstname.lastname@example.org); or
Mark Mellon, DCA Acting Senior Review Examiner, on (202) 942-3090, or e-mail (Mmellon@fdic.gov).
Distribution: FDIC-Supervised Banks (Commercial and Savings)
NOTE: Paper copies of FDIC financial institutions letters may be obtained through the FDIC's Public Information Center, 801 17th Street, NW, Room 100, Washington, DC 20434 (800-276-6003 or (703) 562-2200).