Coming flood insurance rule spurs review of home loans.

Bankers are taking a second look at their mortgage portfolios before a new law takes effect requiring examiners to review loans for compliance with flood insurance regulations.

"Examiners will be zealous in this area," said Debbie Shannon, senior legislative representative for the American Bankers Association. "Banks should be prepared,"

Rood insurance provisions included in the community development bank law take effect on Sept. 23, 1995. In general, they require banks to be sure that loans against properties located in a flood plain carry flood insurance.

The law also gives banks tools to cope with borrowers who drop flood insurance after the loan is made, a frequent problem in the past. The law gives financial institutions the right to "force-place" insurance on borrowers who refuse to comply.

Lenders can pay the policy, then withhold borrower funds through escrow accounts or add to the balance of a loan to cover the premiums.

However, the law also provides penalties for lenders that fail to comply. Regulators can assess a $350 fine for each violation that shows a pattern of noncompliance, up to $100,000 per lender annually.

Ms. Shannon said the law will be easy to handle for those banks in compliance with current flood laws, but a nightmare for those that aren't.

"On the whole this is a good bill," Ms. Shannon said, because it finally gives banks clear authority to force-place the insurance. But, she said, it also shows that Congress wants to be tougher with lenders.

Since the 1970s, banks have been barred from making loans on improved property in flood areas unless the property is covered by flood insurance. But last year, only 17% of bankers complied, Ms. Shannon estimated.

Susan Horsfall, risk management officer for First Michigan Bank Corp., Holland, Mich., said large and small banks alike are struggling with implementing the requirement.

"Everybody's looking at it as a burdensome task," Ms. Horsfall said. "We all wonder how diligent we've been in complying with the Rood Act of 1978."

Ms. Horsfall plans to find a vendor to help her bank forceplace insurance and provide updates on changes in flood hazard areas. But under the law, only third parties that guarantee the accuracy of their work can be hired.

Another problem, she said, is deciding when to start mandating. the insurance. "If we are the first on the block to force-place insurance, someone might leave our bank and go to another one," Ms. Horsfall said.

Though compliance will be onerous for many banks, the law may end up helping some, said Ms. Shannon.

Because it forces banks to follow the rules, it will protect them from lawsuits, she said. Many bankers have been sued by borrowers who said the lender should have required the insurance.

"Now we have clear-cut authority," she said. "That's good for bankers."

Thomas P. Della Torre, president of Transamerica Flood Hazard Certification, Elmwood Park, N.J., said that because 80% of all natural disasters are a result of floods, banks should think of placing flood insurance as a good business decision. "I can't imagine why it's not good for any lending institution to protect its collateral," he said.

The law also requires the Federal Emergency Management Agency to give lenders a standard form for recording flood insurance information.

Bankers Get Ready

Key changes to flood-insurance legislation

* Requires lenders to "force-place" insurance on property when borrowers fail to buy policies

* Directs bank examiners to assess compliance with flood regulations

* Allows regulators to fine banks $350 for each violation that shows, a pattern of non-compliance;annual penalties may not exceed $100,000 per lender

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