Servicing Management, May 2007.
In 2006, every state in the country experienced flooding that affected homes and businesses, and a large majority of these floods occurred in the summer months. As we again approach the start of the hurricane and summer seasons, it is important to encourage your borrowers to financially prepare for a flood and insure against damage to their properties.
Your borrowers' flood risk may be increasing with the change in season, but it also may be affected by flood map updates in their communities or changes in the level of protection provided by levees in those areas. Understanding the flood risks in the communities you serve is the first step in securing the shared financial investment with your borrowers.
Americans typically associate June 1 with the start of hurricane season, when tropical systems can threaten to bring flooding to Eastern seaboard, Gulf Coast and even West Coast residents. Tropical storms can also move as far inland as the Ohio Valley and stall, dumping more rainfall than a major hurricane.
In addition, an afternoon rain storm can also threaten to cause floods throughout the country. In the summer of 2006, every region of the country suffered a flood-related, federally declared disaster. Severe storms, heavy rains and snow melt resulted in millions of dollars in flood damages from California to Maryland. One of the most significant and costly floods in 2006 occurred from severe storms and heavy rainfall across much of the Northeast in June 2006. The National Flood Insurance Program (NFIP) paid more than $213 million in flood claims for damages.
Borrowers' individual flood risks are identified on flood hazard maps, also known as Flood Insurance Rate Maps or FIRMs. They show the high-risk areas (Special Flood Hazard Areas or SFHAs) where there is at least a 1% chance of flooding in a given year and where flood insurance is required for mortgages from federally regulated lending institutions.
As the nation's flood maps are updated, through an effort called Flood Map Modernization, risk zone designations in many areas are being changed, and that means flood insurance requirements may change as well.
If a borrower's property is remapped into a high-risk area, you can ensure your loan portfolio remains compliant by notifying the borrower in writing of his new requirement to buy flood insurance. The newly revised maps will reflect the most current data about community floodplains, including areas behind levees.
The U.S. has thousands of miles of levees – usually earthen embankments constructed along rivers, lakes and coastlines to reduce damage from flooding. Most levees in urban areas are constructed to protect against a flood with a 1% chance of happening in any year (known as the 1%-annual-chance flood) and can be overtopped in larger flood events. Levees also decay over time. They require regular maintenance and periodic upgrades to retain their level of protection. For these reasons, servicers should take into account the unique flood risks associated with levees.
Lending institutions making and servicing loans in communities with levees should pay special attention to changing risk levels and related insurance requirements to help borrowers understand how the changes affect their properties. Doing so can protect institutions from civil monetary penalties that may be assessed by federal regulatory entities for noncompliant loans.
As the Federal Emergency Management Agency (FEMA) continues to update the nation's flood hazard data and maps, accurately identifying the flood risk behind levees is an important element. Before communities can adopt new flood maps, the current status of levees in the mapped areas must be assessed. There are several risk zone designations for areas landward of levees and flood insurance requirements worth noting.
First, the maps will accredit a levee as providing protection from the 1%-annual-chance flood if the levee owner can document that the levee meets all federal criteria. If so, the area will be mapped as a moderate-risk area – where flood insurance is not required, but is highly recommended. In this case, lenders may have the option of requiring borrowers to purchase a flood insurance policy even when there is no federal requirement to do so.
To provide additional protection to their portfolios, lenders may wish to inform their borrowers that they may qualify for low-cost flood insurance coverage to protect their homes, businesses and contents from potential flood damage for as low as $112 a year.
However, if a levee cannot provide protection from the 1%-annual-chance flood or a levee owner can no longer document that the levee meets federal criteria, the map will show the area as an SFHA. In these high-risk areas, flood insurance is required for structures with a mortgage loan from a federally regulated lending institution.
If the risk is changing from low or moderate to high risk, grandfathering can also save your borrowers money. Buildings covered by flood insurance prior to the effective date of new maps can be grandfathered in at lower insurance rates.
In some cases, owners of eligible levees are being allowed two years to provide the needed documentation to show that a levee FEMA previously credited with providing 1%-annual-chance protection on a flood map complies with the federal criteria.
During that time, the levee will be shown on the map as "Provisionally Accredited." After the two years, if the levee owner cannot show compliance with the federal criteria, FEMA will remap the area behind the levee as an SFHA. At that time, servicers will need to notify their borrowers of the requirement to purchase flood insurance coverage.
Some levees may temporarily be shown as not providing protection from the 1%-annual-chance flood while additional work on the structure is being completed. The map will show the area around the levees as high-risk, and flood insurance will be required for structures with a mortgage loan from a federally regulated lending institution.
Flood map changes and levees will be important issues for you and your borrowers over the long term. Educating yourself and your lending or servicing clientele is the first step in protecting your mortgage loan portfolio and maintaining compliant loans while protecting your borrowers' investment.
That said, FEMA has produced easily accessible resources focused on flood map changes and levees:
- FEMA's Insurance Outreach Toolkit for Flood Map Update: www.fema.gov/business/nfip/hillsbo1.shtm. This Web page has a toolkit designed for communities going through flood map updates. You can find easy-to-use templates and outreach materials to help you effectively communicate what map changes will mean to your borrowers as well as within your organization.
- FEMA's Levee Web Page: www.fema.gov/plan/prevent/fhm/lv_intro.shtm. Here, you can access fact sheets about living behind levees, the NFIP and frequently asked questions for the public, as well as levee-related information specific to the mortgage lending industry.
- FloodSmart: www.FloodSmart.gov. Visit this Web site to gain information regarding educating your borrowers about floods, how to purchase a flood insurance policy and what the benefits are of protecting properties against flooding.