During one of our February 16, 2018 CMG meetings regarding Private Flood Insurance we received an interesting comment and an insightful question.
Comment – The comment, submitted privately, stated, ” I just wanted to let you all know that I just finished my compliance exam and we had to write memos for the loan files explaining that have reviewed and determined that our customers with higher flood deductibles are able to afford them.”
While I completely agree that you should not accept a flood policy that has a deductible that is higher than the borrower can reasonably afford, there is no regulatory requirement to write memos as described in this comment. I actually encourage you to be proactive and prescribe an acceptable deductible when explaining the requirement for flood insurance.
But you should not ignore a mandate from an examiner. Either provide the memos as suggested by the examiner or seek clarification from the examiner, in writing, regarding whether the memos are a best practice or a regulatory requirement.
Question – Another member submitted the following question, “Sometimes at closing we only have the application for FEMA coverage and proof of payment. To compare a private policy would you need the actual policy before closing instead of the FEMA application for flood insurance?”
In an ideal world the borrower asks if you will accept a private flood policy and assists in obtaining a copy for your review. In reality the private flood policy may be delivered and unless you are vigilant you may not notice that it is not a standard flood insurance policy (SFIP). When the policy is received it should receive a careful review. Is it a SFIP? If it is a private policy do your procedures allow you to accept it? Even if allowed to accept the private policy does it provide coverage comparable to a SFIP?
If the policy is unacceptable you provide the 45-day notice, contact the borrower regarding the need for acceptable insurance, and move to force placement, if necessary.
