Forcing banks to review their customers' flood insurance coverage would drive up costs without providing any benefits, the industry told regulators.
In comment letters to the four banking agencies, as well as the National Credit Union Administration and Farm Credit Administration, bankers spoke out against requiring institutions to review flood coverage either after a given period of time or whenever nearby flood zones are redrawn.
According to the proposal, published in the Oct. 18 Federal Register, the agencies feel it would be "appropriate to require either periodic reviews of flood insurance coverage or reviews triggered by a remapping of flood hazard areas that affects a lender's portfolio."
In comment letters, bankers disagreed and argued that requiring a flood hazard determination at loan origination and time of purchase was redundant and unnecessary.
Many bankers said adding more flood insurance reviews would force expensive outsourcing, and that banks would be forced to pass the cost to the consumer.
"If the proposed reform act requires financial institutions to conduct a review of their existing loan portfolio, this would be very costly to our industry," wrote Laurie M. Latham, vice president and loan review and compliance manager for CBT Corp., a $1 billion bank holding company based in Paducah, Ky. "I do not believe the exposure/risk offsets the costs."
In her letter to the Federal Deposit Insurance Corp., Wilma Smith, loan review officer at Bank of Evening Shade, estimated that hiring a third party to review the Arkansas institution's $7.2 million loan portfolio would cost about $3,000.
The geocoding and mapping firm would review government maps to make sure that all of Evening Shade's customers had proper flood insurance coverage. The bank's customers, Ms. Smith said, would be forced to pay an extra $25 per loan.
Ms. Smith added that the Bank of Evening Shade makes few loans in flood- prone areas. In their letters, industry leaders said banks such as hers should have fewer review requirements than institutions in high-risk areas.
"The more potential for loss based on the bank's location, the greater the guidance should be to protect the system and the taxpayer," wrote Richard L. Mount, president of the Independent Bankers Association of America.