Mandatory flood insurance wins bank experts' support.

WASHINGTON -- Legislation likely to pass this summer will force banks to require that borrowers buy flood insurance.

While that sounds onerous, industry experts said the law will be good for banks.

A provision in the Community Development Banking and Financial Institutions Act for the first time would authorize banks to "force-place" flood insurance. That means banks could withhold borrower funds through escrow accounts.

Lawsuits by Borrowers

Since the 1970s, banks have had to require flood insurance in designated flood zones. But only 18% of bankers compiled with that requirement last year, according to Debbie Shannon, senior legislative representative at the American Bankers Association.

As a result, she said, many banks have been sued by borrowers who said the lender should have been more forceful.

Ms. Shannon said this law will force bankers to follow the rules, which will protect them from lawsuits.

"If you as a lender are following the law and following good business practices, this legislation will be easy for you to swallow," she said. "If you are very lax, you'll have to beef up your compliance standards."

The law would allow regulators to assess a $350 fine for each violation that showed a pattern of noncompliance, up to $100,000 per lender.

It would also extend flood insurance requirements to all lenders, including mortgage bankers and federal agency lenders.

Proposal Praised

Dori Gilman, senior legislative representative at the Independent Bankers Association of America, said the bill reduces the regulatory burden on lenders while fixing a flawed flood program.

"The problem was everybody was blaming everybody else," she said. "This is a good compromise."

H. Joseph Coughlin, the primary bank liaison at the Federal Emergency Management Agency, said his agency shouldn't be left holding the bag when there's a disaster. "We just can't keep giving the money away," he said.

The Midwest's flood last summer pushed the issue to the fore, he said, because only one in seven homes damaged had insurance.

Right now, if a customer doesn't want coverage, most bankers don't push the point, Mr. Coughlin said. "It's customer relations," he said. "But that's not a smart practice."

The law also will require FEMA to give banks new flood zone maps every six months.

Ms. Shannon said this will keep bankers better informed. "FEMA has to do a better job of giving us the map information," she said.

Mr. Coughlin warned that regulators are starting to think of flood insurance as a safety and soundness issue. He said if a lender has a large portfolio in a flood zone and the loans are not covered by insurance, there is a large potential for loss.

"Whether it's floods, fire, earthquakes, whatever, the regulatory agencies are concerned about the financial exposure to lending institutions," Mr. Coughlin said.

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