As published in Scotsman Guide's Residential Edition, July 2011.
This past spring, heavy floods returned to the banks of the Mississippi River. The images of sunken homes and devastated towns reminded everyone of the dangers posed by life along the water. But the risk of flooding knows few bounds, and the water often rises where you least expect it. Mortgage brokers and loan originators can help. By staying abreast of flood regulations and insurance-requirement changes, you can build a financial levee between your clients and the rising waters of tomorrow.
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Although major flood events in large metropolitan areas make national headlines, communities from coast to coast face flood risks. According to the National Flood Insurance Program, people living outside of high-risk areas receive one-third of disaster assistance for flooding.
In some locales, giant storms previously thought to strike once a century now seem to occur once a decade. They inundate streets and sewer systems and leave a path of destruction and waste in their wake.
Awareness about the risks has grown as steadily as the rising water.
Mortgage brokers and loan originators should keep this in mind when taking loan applications. They also should know how Federal Emergency Management Agency (FEMA) changes affect flood-insurance requirements as well as mortgage underwriting and approval.
Here are some of the key things mortgage professionals should know about flood concerns and FEMA changes.
Mortgage lenders must comply with requirements that mandate the purchase of flood insurance in certain geographical areas. Federal regulators strictly monitor flood-insurance compliance and perform ongoing audits to ensure lenders have flood insurance in place when required — and that they keep appropriate flood-threat assessments on file.
It's the lending institution's responsibility to ensure that flood insurance is in place, although some mortgage brokers also handle this. Typically, the lender will inform borrowers of the insurance requirement and of a deadline for purchase. If borrowers haven't obtained coverage by the specified date, the lender will have the policy placed for them — called force-placed or lender-placed.
When mortgage professionals service a loan, they must notify the property owners when FEMA issues a change in flood-zone status that affects the property. Notification is ultimately the loan servicer's responsibility. This includes properties that are newly identified as being in or out of Special Flood Hazard Areas (SFHAs) as a result of FEMA's Flood Insurance Rate Maps.
Homeowners no longer in an SFHA benefit from this information because they can save money on flood insurance. On the other hand, owners whose properties are newly identified as being in SFHAs must be alerted so they can obtain the appropriate coverage.
Recently, regulators have become more stringent about enforcing the notification rule. Updated guidance can be accessed via the 2009 interagency questions and answers regarding flood insurance. Leading mortgage-information providers have developed tools that enable lenders to comply with published guidance and notification requirements.
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