WASHINGTON -- In the wake of Mississippi River flooding, lawmakers are taking renewed interest in legislation intended to increase lender compliance with flood insurance laws.
Legislation introduced in the House by Rep. Doug Bereuter, R-Neb., would require flood insurance on all new mortgages on properties in a floodplain and would permit lenders to "forceplace" the insurance when borrowers let policies lapse.
It also would set fines of up to $100,000 a year for lenders with a "pattern and practice" of failing to require flood insurance.
Some Checking Required
The Bereuter bill does not require lenders to comb through their portfolios to ensure that all affected mortgages have policies in force, an approach included in a bill the Nebraska lawmaker sponsored last year.
But it does require lenders to check the policies on properties whose mortgages are sold, extended, or modified five years after origination.
File Search |Very Expensive'
Rep. Joseph Kennedy 2d, D-Mass., shares Rep. Bereuter's concerns and plans to consider legislation in his House Banking subcommittee on consumer credit and insurance. In the Senate, John Kerry, D-Mass., is working on legislation.
Bankers are particularly concerned about the prospect of being required to go back through their portfolios to check flood insurance coverage.
"Going back through files to retroactively determine who should have insurance is very expensive," said Edward L. Yingling, director of government relations for the American Bankers Association.
"The system for determining who must have it is incredibly complex. The maps are out of date, they change constantly, and they are difficult to read."
Could Leave Loophole
Other bank industry representatives complained that utilizing lenders to increase flood insurance use was shortsighted.
"Only 60% of all property is mortgaged, so at best it's a 60% solution," said Stephen J. Verdier, a lobbyist for the Independent Bankers Association of America.
The Bereuter bill might also leave a loophole that would make it possible for some property owners with mortgages to drop flood insurance after the loan closes. The bill would require lenders to set up a monthly escrow for flood insurance payments, but only if they escrow funds for another purpose.
However, about 22% of new mortgages do not require that funds be escrowed for insurance and taxes, according to Sharon Canavan, a lobbyist for the Mortgage Bankers Association.
|More Legislative Muscle'
Although mortgage brokers are not directly covered by the law, most of that industry is already in compliance, Ms. Canavan said.
All loans sold to U.S. government agencies such as the Federal National Mortgage Association must have flood insurance, she said, and virtually all the loans originated by brokers are sold to one of the secondary-market agencies.
Still, Ms. Canavan said, prospects for legislation may have improved. "There's a lot more legislative muscle because of the flood," she said.