By the time the flood waters recede, it’ll be too late. That now-partially submerged home should’ve been covered by flood insurance.
But before it became the homeowner’s problem, it probably should’ve been his or her lender’s problem. And the Federal Deposit Insurance Corp. periodically makes it lenders’ problem by ordering them to pay a monetary penalty for violating the Flood Disaster Protection Act of 1973, which demands lenders require the escrow of flood insurance premiums for properties within “flood hazard” areas.
In other words, if a borrower wants to take out a loan on a property within a designated flood zone, he or she must be made aware they need flood insurance.
The monetary penalties are of the slap-on-the-wrist variety for banks, but try telling that to underwater – literally – homeowners.
This summer, Somerville-based Central Co-operative Bank agreed to pay $15,400 for its violations. Over the past four years, a handful of banks in Massachusetts have incurred penalties as small as the $3,940 Middlesex Savings Bank agreed to pay last year and as large as the aforementioned $15,400.
To some, the requirement is a perfect example of the government overstepping its bounds and saddling businesses with unnecessary burdens.
“It’s a sensitive thing today. It’s a hot button today,” said Richard Gavegnano, chairman and CEO of East Boston Savings Bank (EBSB).
In 2009, East Boston Savings Bank paid a $9,430 penalty to the FDIC for violating the flood act.
Gavegnano said for the most part, the FDIC is as helpful as it can be when flood insurance comes up.
It’s a complex and ever-changing part of the business, but the FDIC “gives us some guidance. It’s not adversarial, it’s just a cost of doing business,” Gavegnano said. “It’s like going to the dentist.”
John Migliozzi, EBSB executive vice president and senior lender, said a vendor provides the bank with updated flood insurance information and notifies the bank when the classification of bank client properties is changed.
The FDIC monitors the same data, Migliozzi said.
Still, that can’t completely prevent the bank from being surprised every now and then.
Flooded By Regulations
But perhaps the biggest challenge for bankers in all this is dealing with borrowers.
Flood insurance isn’t expensive, per se – a couple hundred dollars per year – but it could double the cost of a typical homeowner’s insurance policy. For bank customers wading through the time-consuming and expensive process of buying a home, being required to carry flood insurance is often unpopular.
“A lot of people resist,” said Gavegnano.
And even with all the tracking and updating, flood maps and regulations aren’t always as nuanced or accurate as they should be.
Some maps say properties “were supposed to be in ‘zone x’, but now it’s supposed to be ‘zone b,’ Migliozzi said.
Gavegnano said condo buyers become particularly frustrated when required to buy flood insurance for units “on the eighth floor” just because the building is within a flood zone.
“They don’t like seeing that letter, they don’t like buying it and they take it out on us,” Gavegnano said.
Recent flooding throughout New England, though, ought to help homeowners and bankers alike realize that flood insurance regulations are in place for a reason, said Neal Curtin, a banking attorney with Bingham McCutchen LLP in Boston.
“Bankers are feeling overwhelmed with all the things they’re required to do and all the pressure from Washington,” Curtin said. “But if they had problems before” running afoul of flood insurance regulations, he said, “it ought to be manifest” after this season’s floods.
Borrowers, too, should realize the value of flood insurance, Curtin said.
“It seems like an additional burden, but people keep building houses,” he said. “It’s too bad you have to do this stuff, but it’s because Mother Nature is not predictable.”
