Temperatures are rising. Rain is falling. Rivers are flooding and hurricane season is just around the corner. Is your mortgage portfolio ready?
It’s been the rule for decades. 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. Only it’s a bit trickier than making sure a consumer auto loan is covered with a collision or liability policy. That’s because flood zones can change, and that means a mortgaged property that did not need flood insurance at the time of loan origination might need it five years later.
It’s up to lenders to keep track of map revisions and any other Federal Emergency Management Agency (FEMA) changes regarding exclusions or exceptions.
After several years of record flooding, catastrophic hurricanes, and historic super storms, the Biggert-Waters Flood Insurance Report Act has raised its penalty from $350 per flood violation to a minimum of $2,000, and lifted its annual $10,000 cap. 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).
Some credit unions monitor flood zones on their own while others partner with a flood vendor that handles flood zone certifications for them. With FEMA issuing tens of hundreds of flood map updates every year, passing the risk and responsibility along to a vendor can be a prudent choice for credit unions without the staff time or expertise to ensure that flood zone certifications are accurate and that mortgaged properties in flood zones are insured.
The fine changes should also prompt credit unions to evaluate their current flood vendor if they have not done so recently. 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. This 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 any mistakes are made. This means that credit unions do not need to monitor FEMA maps on their own. With life-of-loan plans, the vendor does the tracking.
Credit unions need to recognize that flood zone certification services are purchased per loan, not per portfolio. Thus, it is possible that credit unions have some mortgages that carry life-of-loan flood zone determination service and some that do not. Credit unions should verify annually what kind of coverage each mortgage carries in order to remain compliant with federal regulations. This should not be too daunting a task as the flood zone certification vendor should provide a report of all life-of-loan mortgages it monitors. Credit unions can then crosscheck that list with the remainder of their portfolio.
Flood zone determination services are provided by LPS National Flood. Flood vendors should provide certificates for member files as proof to auditors that current determinations have been made. A credit union can get 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 (LOMAs) for lenders. Sometimes it appears the property is a flood zone, but further review of the FEMA flood zone map could reveal that the property is far from the flood exposure because of the structure’s elevation.
Keep in mind that 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 Earth, flood zones can evolve—and sometimes much farther away than a credit union would suspect. The right vendor stays abreast of all flood zone maps and letters, which will eliminate worries about portfolio protection and ongoing compliance. This enables credit unions to focus on serving their members, not on reading maps.
Kriss Besch is a Product Support Manager at CUNA Mutual Group. For more information about flood zone determination services, contact Kriss at or 800.356.2644, ext. 665.6053.