Exam Procedures

Flood Insurance examination procedures include:

Prerequisites

Flood insurance is only applicable if the credit union has a real estate lending program.

People to Interview

The size of the credit union will determine who the examiner will need to interview.

  • For small credit unions with limited staff, the examiner may need to start with the CEO

  • For larger credit unions, the examiner may start with the chief lending officer or subordinate designated during the examination pre-planning process. This typically would be the real estate lending manager for the credit union

Documents to Review

  • Policies and procedures for the real estate lending program and any additional policies related to flood insurance

  • List of service providers completing flood determinations for the credit union

  • Contracts with or due diligence completed for third parties

  • Real estate loan sample to review flood documentation (flood determination, flood insurance, Notice to Borrower in Special Flood Hazard Area, borrower acknowledgment before loan closing, escrow, FEMA notifications)

Questions to Consider

Questions in the following areas can be used to guide the examiner in a comprehensive review of the Flood Acts compliance:

Policies and Procedures

Does the credit union have adequate policies and procedures to ensure compliance with the flood insurance regulations?

Secured Loans

Does the credit union offer or extend credit (consumer or commercial) that is secured by improved real estate or mobile homes as defined in the regulations? If yes, follow these exam procedures.

  1. If the credit union provides “table funding” to close loans originated by mortgage brokers or dealers, does it have procedures to ensure regulatory requirements are followed?

  2. If the credit union purchases servicing rights to loans covered by the regulation, do the documents between the parties specify the contractual obligations of the credit union with respect to flood insurance compliance?

  3. If the credit union uses third parties to service loans covered by the regulation, do the contractual documents between the parties require the servicer to meet the requirements of the regulation?

  4. If the credit union has loans with subject properties located in flood hazard areas, are adequate tracking systems in place to monitor flood insurance policy expiration dates?

Table funding is the process in which a loan originator engages a lender to provide the funds necessary for closing and then immediately takes an assignment of the loan.

Flood Zone Determinations

Does the credit union adequately prepare and document flood zone determinations?

  1. If the credit union uses a third party to prepare flood zone determinations, do the contractual documents between the parties:

    • Provide for the third party’s guarantee of work?

    • Contain provisions to resolve disputes relating to determinations, to allocate responsibility for compliance, and to address which party will be responsible for penalties incurred for noncompliance?

  2. Are the determinations prepared on the SFHDF developed and authorized by FEMA?

  3. Does the credit union maintain a record of the SFHDF either in hard copy or electronic form for as long as it owns the loan?

  4. When increasing, extending, renewing, or purchasing a loan (not making a loan), does the credit union rely on a prior determination only if it:

    • is made on the SFHDF

    • is no more than seven years old

    • the community has not been remapped and FEMA has not revised or updated the map affecting the property since the original determination was made

  5. Are flood zone determinations accurately recorded on the SFHDF?

Notification Requirements

Does the credit union meet notification requirements for special flood hazards, availability of federal disaster relief assistance, and options for escrow?

Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance

Are borrowers whose collateral is located in an SFHA provided written notice of special flood hazards within a reasonable time before loan closing?

The NCUA and other federal banking regulators generally regard ten calendar days as "reasonable."

Does the notice contain the following required information?

  • A warning that the building or mobile home is or will be located in an SFHA

  • A description of the flood insurance requirements

  • A statement that flood insurance coverage is available from private insurance companies that issue standard flood insurance policies on behalf of the NFIP or directly from the NFIP

  • A statement that flood insurance that provides the same level of coverage as a standard flood insurance policy under the NFIP may also be available from a private insurance company that issues policies on behalf of the company

  • A statement that the borrower is encouraged to compare flood insurance policies issued on behalf of the NFIP and policies issued on behalf of private insurance companies, and that the borrower should inquire about the availability, cost, and comparisons of flood insurance coverage to an insurance agent

  • A statement whether federal disaster relief assistance may be available in the event of damage to the property caused by flooding in a federally declared disaster, if applicable

If a credit union is required to escrow under the regulations, verify that the credit union provided a written notice with the notice of special flood hazards informing the borrower that the credit union is required to escrow all premiums and fees for flood insurance, similar to the model clause in NCUA regulation part 760, Appendix A, Sample Form of Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance.

If the credit union uses the process identified in NCUA regulation § 760.9(e), Alternate method of notice, in certain instances as permitted by the regulation, does it obtain the required satisfactory written assurance from the seller or lessor?

Does the credit union provide a copy of the notice of special flood hazards to the servicer of the loan within the required time frames?

Does the credit union retain a record of receipt of the notifications provided to the borrower and the servicer for as long as it owns the loan?

Flood Determination Fees

Does the credit union properly assess flood determination fees?

  1. a. Absent some other authority (such as contract language) does the credit union charge a fee to the borrower for a flood determination only when:

    • A loan is made, increased, renewed or extended

    • In response to a remapping by FEMA

    • The purchase of flood insurance results from force placement provisions, pursuant to NCUA regulation § 760.7, Force placement of flood insurance?

  2. If the credit union has other authority to charge fees for determinations in situations other than those noted above, is the practice followed consistently?

  3. For those loans subject to TILA, if the credit union requires the borrower to obtain life-of-loan monitoring and passes that charge along to the borrower, does it either:

    • Break out the original determination charge from the charge for life-of-loan monitoring, or

    • Include the full amount of the charge as a finance charge?

  4. Are the fees charged by the credit union for making a flood determination reasonable?

Special Flood Hazard Areas

Does the credit union meet flood insurance requirements for properties in SFHAs?

  1. If an improved property or mobile home is located in an SFHA and flood insurance is required, does the credit union have the borrower obtain a policy, with the credit union as loss payee, in the correct amount before closing?

  2. When multiple properties securing the loan are located in SFHAs, does the credit union have sufficient insurance, either through a single policy with a scheduled list of several buildings or multiple policies, to meet the minimum requirements of the regulation?

  3. If the credit union accepts a private flood insurance policy in accordance with the mandatory acceptance requirements set forth in the regulation, does the credit union verify that either:

    • The policy or an endorsement to the policy contains the compliance aid assurance clause exactly as follows: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation”

    • The policy meets the definition of “private flood insurance” as set forth in the regulation?

  4. If the credit union exercises its discretion to accept flood insurance issued by a private insurer that does not meet the statutory definition of private flood insurance, does the credit union comply with the regulation’s discretionary acceptance requirements?

  5. If the credit union accepts mutual aid plans, are the plans accepted in accordance with the regulation’s requirements?

Map Changes

Does the credit union, or a designated third party, conduct life of loan monitoring for map changes?

  1. If there are map changes during the life of the loan monitoring whereby the property was later found to be in a special flood hazard area, does the credit union ensure that flood insurance is obtained within 45 days?

Life-of-loan monitoring is not a regulatory requirement.

Escrow Requirements

Does the credit union meet flood insurance escrow requirements?

  1. Does the credit union require the escrow of premiums and fees for flood insurance on designated loans secured by residential improved real estate or a mobile home made, increased, extended, or renewed after January 1, 2016, unless the loan qualifies for one of the exceptions or the credit union qualifies for the small lender exception?

  2. If a designated loan secured by residential improved real estate or a mobile home no longer qualifies for the loan-related exception, does the lender establish an escrow as soon as reasonably practicable?

  3. If the credit union no longer qualifies for the small lender exception, did the lender begin requiring escrow on designated loans secured by residential improved real estate or a mobile home made, increased, extended, or renewed on or after July 1 of the first calendar year of changed status?

  4. Did the credit union (or its servicer) offer and make available to borrowers the option to escrow flood insurance premiums and fees for designated loans secured by residential improved real estate or a mobile home that are outstanding as of January 1, 2016? Also, did the credit union start escrowing as soon as reasonably practicable after receiving a borrower’s request to escrow?

  5. If the credit union no longer qualifies for the small lender exception, did the credit union mail, or deliver, for any loan covered by flood insurance and outstanding on July 1 of the first calendar year in which the credit union no longer qualifies for the small lender exception, the notice of the option to escrow by September 30 of that year? In addition, did the credit union start escrowing as soon as reasonably practicable after receiving a borrower’s request to escrow?

  6. Does the notice of the option to escrow contain a statement that the borrower has an option to escrow required flood insurance premiums and fees, and a statement about the method(s) the borrower may use to request the escrow?

  7. Does the credit union comply with the escrow provisions of CFPB regulation § 1024.17, Escrow accounts (Regulation X)?

If a credit union is $1 billion in total assets or greater for two consecutive years, it no longer qualifies for the small lender exception and needs to provide the option to escrow required flood insurance premiums and fees.

Force Placement Requirements

Does the credit union meet force-placement requirements?

  1. If at any time during the life of the loan, the credit union determines that a property securing a designated loan lacks adequate flood insurance coverage:

    • Does the credit union provide written notice to the borrower stating that the necessary coverage must be obtained, or the credit union will purchase it on the borrower’s behalf?

    • Does the credit union purchase the coverage on the borrower’s behalf if the borrower does not obtain the required policy 45 days after the notice to the borrower has been sent?

  2. If the credit union purchases required flood insurance on the borrower’s behalf and charges the borrower for premiums and fees incurred for coverage, verify that within 30 days of receiving confirmation of a borrower’s existing flood insurance coverage, the credit union:

    • Notifies the insurance provider to terminate the existing force-placed insurance

    • Refunds to the borrower all force-placed insurance premiums and any fees paid for by the borrower during any period of overlap between the borrower’s policy and the force-placed policy

  3. If the credit union uses a vendor to force-place insurance, does the credit union's vendor due diligence ensure there are:

    • Several vendors used

    • No conflicts of interest

    • No insiders benefiting from force-placed insurance

Notification of Loan Servicer

Does the credit union provide adequate notice about the loan servicer to the Administrator of FEMA?

  1. Does the credit union, or it’s designated third-party monitoring service, provide the appropriate notice to the carrier of the insurance policy (the FEMA Administrator’s designee) about the identity of the servicer of a designated loan?

  2. If the credit union sells or transfers the servicing of designated loans to another party, does it have procedures in place to provide the appropriate notice to the Administrator’s designee within 60 days of the effective date of the transfer of the servicing?

Lending Staff Training

Does compliance training on the Flood Acts exist for impacted or potentially impacted employees?

Has the credit union considered all potentially affected business lines and departments?

Intersections & Implications

When reviewing the real estate loan sample, examiners will verify the credit union’s flood insurance documentation practices comply with its flood insurance policies and procedures.

During the general ledger review, examiners may consider the accounting treatment for funds held in escrow. For more information, see the Real Estate Lending section of the Examiner’s Guide's Loans Chapter.

Last updated on December 01, 2022