By Perry Canet
It is the responsibility of financial service companies to manage their compliance burden as effectively as they manage other risks to their enterprise. The compliance burden related to the Nation Flood Insurance Program (NFIP) is an opportunity area for many companies that should not be ignored.
The NFIP has undergone radical changes in the last few years that have resulted in more risk for servicers. The Biggert-Waters Act of 2012 increased the civil monetary penalties (CMP) from $385 to $2,000 per violation and removed the annual cap on the amount of CMP’s that can be assessed against a financial institution. This has increased the potential exposure for mortgage servicers into the tens of millions of dollars if the Office of the Comptroller of the Currency (OCC) determines that a servicer has engaged in a pattern of violations of NFIP regulations.
This added risk is encouraging mortgage servicers to better understand Minimum Flood Insurance Requirements (MFIR) to ensure that they have the proper coverage on mortgage loans. Lender placed flood insurance valuation analysis is an increasingly important part of the servicing business.
Determining the correct amount of flood insurance coverage to assign to a property is not always straightforward. There have been many cases of inaccurately insured homes and failed OCC audits. These are indications that the servicing industry is not responding correctly to changes in NFIP regulation. An additional difficulty is that guidance from regulators has been vague and subject to interpretation.
An important thing to note is that flood insurance valuations must be performed on a cost value basis. Servicers are typically not well versed in the costs of repairing or replacing a damaged home. Therefore, servicers have historically defaulted to what they know, which is the appraised value of the asset. However, per federal guidelines, appraised value cannot be used as a proxy to determine the cost value of a home.
Given the numerous compliance risks involved, it makes sense for a servicer to engage a third party partner that specializes in flood insurance services. Mortgage servicers do not have the expertise to perform this job internally at a level that will effectively limit their risk. To learn more about how outsourcing MFIR analysis and insurance claims management can limit your compliance risk, download our free white paper, Compliance Doesn’t Have to Be a Burden for Servicers When It Comes to Hazard, Flood and Auto Insurance.