The first federal flood insurance rules were approved Wednesday, after months of delay.
Effective Oct. 1, institutions will be able to charge customers for figuring out whether their home lies in a flood zone. The new rules also will allow banks, thrifts, and credit unions to buy coverage on behalf of borrowers who default on their policies.
The action taken Wednesday affects credit unions, but bank and thrift regulators are expected to adopt identical rules within 30 days.
"Flood insurance is good policy and good protection," National Credit Union Administration Chairman Norman D'Amours said immediately after the agency gave its approval.
The rule does not stray much from the original proposal, but it does clarify several points.
For example, institutions buying a loan will not be required to conduct a flood-hazard determination. Also, bankers aren't required to do periodic reviews of their entire portfolio to determine whether flood-hazard certifications are up to date. Many bankers had worried that the proposal would have required these expensive studies.
The main points of the original proposal remain intact. Institutions:
*Must escrow flood insurance premiums if they require escrowing for other items, like taxes or fire insurance payments.
*May force-place flood insurance at any time if a borrower located in a flood zone lets the policy lapse.
*May charge a fee for determining whether a house lies in a flood zone.
*Must notify borrowers if their property is reclassified as lying in a flood-hazard area.
*May exempt loans under $5,000 with repayment cycles of less than a year from the rules.
The rule also addresses several record keeping requirements. For example, it says banks may record a property's flood-hazard determination either electronically or on paper. It also requires bankers to keep a record of each notice regarding flood insurance given to borrowers in flood zones.
Regulators declined requests by several institutions to include an example of the type of notice they must send to the Federal Emergency Management Agency every time a borrower's flood insurer changes. But the rule does state that these forms must contain enough information so that FEMA's staff can identify the loan, the property, and the servicer.
The agencies also clarified the definition of various terms used throughout the rule. In most cases, the regulators adopted the same definitions used by FEMA. For example, the agencies said there is no difference between a manufactured home and a mobile home.
The National Flood Insurance Reform Act of 1994 requires that a property in a flood-hazard area be insured for the life of the loan before the transaction can be closed. These rules implement that law. Violations can cost $350 per loan, up to a maximum of $100,000 per year.
The rule will be published in the Federal Register once the bank and thrift regulators, Treasury Department, and the Farm Credit Administration approve it.