To ensure that homes are accurately insured against floods, and to avoid failed audits in the flood industry by regulators, mortgage servicers must either establish internal measures to make knowledge of the Minimum Flood Insurance Requirements a priority, or engage with a third-party, specialty insurance provider.
A better understanding of MFIR increases accuracy in servicers' work and helps maintain compliance. With the proper education around MFIR, servicing organizations ensure accurate coverage on loans within their portfolios while avoiding regulatory scrutiny and major financial losses for their clients.
Recent expansion of the allowable limits under the National Flood Insurance Program has drastically impacted the flood insurance industry. For instance, the Biggert-Waters Act of 2012 increased the civil monetary penalties from $385 to $2,000 per violation, as well as removed the annual cap on the amount of CMPs that can be assessed against a financial institution. Unfortunately, many servicers are unaware of these changes and are literally paying the price for it.
Examples of this exist specifically within the flood insurance industry, where there has been a recent surge of inaccurately insured homes and failed audits. In one case, reported by Insurance Journal, a bank was charged with paying $31 million to settle a class-action lawsuit that claimed mortgage borrowers had been forced to maintain excessive flood insurance coverage. In order to prevent cases like this and ensure properly processed flood insurance claims, servicers in this industry need to gain a better understanding of MFIR analysis.
The biggest mistake that a better understanding of MFIR can prevent is using incorrect property values when processing claims on flood insurance. For instance, there is a significant difference between replacement cost value and actual cost value. RCV is used if the property is owner-occupied, and results in the insurance company paying the exact amount of money it costs to replace the structure. Alternatively, ACV is used if the property is tenant-occupied, and is calculated by subtracting depreciation from the purchase price.
Understanding the difference in these values is imperative in determining what is the appropriate amount of flood insurance coverage to place on a property, since the way to determine appropriate coverage results in using the lesser of three values; either the ACV or RCV, the unpaid balance of the loan or NFIP limits. If servicers are not aware of these values, or of the fact that the coverage requirements allow for the lowest of the three, they may be over spending on insurance or not in compliance.
In addition to using incorrect values, a lack of resources and education contribute to compliance errors when validating coverage amounts. Not only is an advanced knowledge of MFIR important for all servicers entering the flood industry, but there must be a system of continual education within the servicing organization to ensure that all employees are current on the latest industry rules and regulations.
Understanding these regulatory compliance issues should be a specific focus as flood insurance coverage is not usually a core competency of servicers. It is also imperative to provide servicers with the right resources to handle the process. Whether someone is hired to monitor the compliance and effectiveness of internal determinations or to track changing regulations in order to prevent regulatory scrutiny, servicers must be equipped with the proper knowledge and assistance.
However, sometimes servicers lack the resources to manage the nuances of MFIR internally. If that is the case, they should consider outsourcing compliance to a third-party, specialty insurance provider who is able to focus on understanding MFIR.
The correct specialty insurance provider will employ staff with extensive MFIR knowledge, and can customize a program specific to the bank or servicer, regardless of size and volume. The provider's top concern is compliance in order to protect both the servicer and the borrower. By taking compliance seriously and following these steps, servicers will reduce their errors, as well as their potential liability, brought on by thorough regulatory examinations.
Collin Harbour is the vice president of business development at DIMONT, a specialty insurance and loan administration service provider.