Flood Insurance Managing Risks Associated With Lapses in Flood Insurance Coverage
FIL-114-2007 December 21, 2007
Flood insurance is required for the life of a loan that is secured by improved real estate located, or to be located, in a special flood hazard area of a community participating in the National Flood Insurance Program. Often, an insurance policy lapses because the borrower does not renew it. Therefore, it is important for institutions to have adequate internal controls to ensure that borrowers maintain appropriate levels of flood insurance coverage for the term of the loan.
Flood insurance is required by federal law and is a
common sense risk management tool for both lenders
and borrowers. Institutions are responsible for
ensuring that borrowers timely renew their policies.
Flood insurance premiums are not required to be
escrowed if an institution does not require the escrow
of other funds to cover other loan-related charges.
However, escrowing flood insurance premiums helps
ensure that borrowers are aware of the cost of flood
insurance, and that such insurance is maintained.
If flood insurance coverage lapses, both borrowers
and institutions are exposed to the risk of an
uninsured loss from flooding. That risk increases in
situations where flood insurance premiums are not
escrowed. Therefore, it is important for institutions
that do not escrow flood insurance premiums to have
internal controls in place to verify that borrowers are
maintaining adequate flood insurance coverage for
the life of the loan. Such controls include:
Monitoring notices from the insurance carrier about when a borrower's flood insurance is due for renewal, and following up if the policy renewal is not received from the borrower;
Commencing force placement procedures when the institution determines that required flood insurance coverage is deficient or lapsed; and
Checking flood insurance policies to confirm that they were written for the risk zone noted in the flood determination and, if not, resolving the difference.
FDIC-Supervised Banks (Commercial and Savings)