Is Your Bank in Compliance with the National Flood Insurance Act?

On May 16, 2007 the Federal Reserve Board assessed a civil monetary penalty against Orrstown Bank of Shippensburg, Pennsylvania for violating the National Flood Insurance Act, 42 U.S.C. §4012a(f).  Link.  The bank was fined $385 for each violation, for a total of $1,665.  The banking community should be on notice that federal bank examiners are looking for National Flood Insurance Act violations and that the Federal Reserve will assess civil penalties for violations. 

The National Flood Insurance Act basically states that a lender subject to federal regulation cannot make or extend any loan secured by either real estate or a mobile home located in an area identified as having special flood hazards and in which flood insurance is available unless the principal balance of the loan is covered by flood insurance for the term of the loan.  If the relevant area is identified as having special flood hazards after origination of the loan the lender must give the borrower notice that he or she should obtain flood insurance.  If the borrower fails to do so within 45 days, the lender is required to purchase flood insurance and may charge the borrower for the cost of the premium.  The Act also has provisions regarding escrow of flood insurance payments and the placement of flood insurance by the lender. For the complete text of the relevant statute see 42 U.S.C. 4012a.   

UPDATE:  Since this was originally posted, the Federal Reserve has assessed civil penalties against East West Bank (Link), and First Sentinel Bank (Link) for violations of the National Flood Insurance Act.

For further information contact Jeffrey J. Andersen.