|Article by: Ben Giumarra, Spillane Consulting Associates, Inc
Could you gain some efficiencies with how your making certain Flood disclosures? Let’s discuss what’s required (and not). So today we continue our war against disclosure packages bogged down with unnecessary stuff. One page, sometimes one sentence, at a time.
It might not seem like a lot – but #1) removing one disclosure might remove 2 hours of back-and-forth with a borrower getting an unnecessary signature, and #2) at least it starts to reverse the trend of over-including. “Should we get rid of this or keep it, Joe?” “I’m not really, sure Bob, let’s just keep it all in.” (Flash forward to 2017 and loan packages are 1,000 pages long.)
Seeing a lot of loan files, we’re making an educated guess that a good number of lenders are including Flood-related paperwork in loan files- sometimes getting borrower signatures- when they don’t need to.
Now, maybe over-including makes sense for your institution in this case – you won’t get much argument from me. But if you’re interested in knowing exactly what’s required here, read on.
Three Disclosures (including one Massachusetts-specific)
There are three disclosures that most lenders use for Flood insurance. Some prepare customized explanations to include in loan packages, but most of those have been carried over from a time before Flood disclosures adequately explained things to borrowers.
#1 – Flood Hazard Notice (aka “10-Day” Disclosure)
This is only required when the property is in a Flood zone. It does not have to be delivered for loans not in Flood zones. It’s formal name is “Notice of special flood hazards and availability of Federal disaster relief assistance.”
When required, it must be delivered a “reasonable time before” closing. Regulatory guidance tells us that 10 days beforehand is considered reasonable – which is why we all provide this then.
#2 – Massachusetts’ Notice of Flood Insurance Coverage
Delivered with the Federal Notice (#1 above), this Massachusetts-only requirement also only needs to be delivered for properties in Flood zones.
Here again, there are detailed formatting and contents required – so it is also recommended to use the model form provided. This law and the model form are included in guidance from the State here.
#3 – Flood Cert. (aka SFHDF)
Standard Flood Hazard Determination Form (aka SFHDF or “Flood Cert”)
This form, while often provided to borrowers, does not actually need to be. There is no requirement to provide this to the consumer at all, even if the property is in a Flood zone. This is clarified by the FDIC’s Flood Manual in FAQ #66:
66. May a lender provide the SFHDF to the borrower?
Answer: Yes. While not a statutory requirement, a lender may provide a copy of the flood determination to the borrower so the borrower can provide it to the insurance agent in order to minimize flood zone discrepancies between the lender’s determination and the borrower’s policy. A lender would also need to make the determination available to the borrower in case of a special flood hazard determination review, which must be requested jointly by the lender and the borrower. In the event a lender provides the SFHDF to the borrower, the signature of the borrower is not required to acknowledge receipt of the form.
So there you have it. Even if you choose to deliver to borrowers with Flood insurance, it still helps to know you don’t have to track and prove the borrower received it.
In Other News
On My Mind …
You try to look at other businesses for fresh ideas and perspective for your own company. When a mortgage lender looks around for such perspective – hospitals aren’t a bad starting point. Both involve heavily regulated industries, helping people during incredibly stressful times, and some strong personalities.
So with that in mind, I heard one story about a hospital patient in “The Power of Habit” by Charles Duhigg. What lesson can the mortgage industry take from it? Maybe it’s a statement on departmental silos, the importance of seemingly small events to overall customer service, or empathy in general. But here goes (paraphrased):
A young man named Travis received a call from his father – his mother had a serious infection. He needed to come right away. Travis immediately drove to the hospital, but his mother was unconscious by then and passed away a half an hour later, without waking.
A week later, Travis’s father was sent to the hospital with pneumonia when a lung collapsed. Travis went to the same hospital again, arriving at 8:02 – two minutes past visiting hours. A nurse roughly declined to admit Travis, “He’s not even awake, it’s after visiting hours, come back tomorrow.” Travis’s father died overnight.
Every year on the anniversary of his father’s death, Travis leaves for work an hour early, so that he will always arrive on time.
“The financial crisis came to a head in the fall of 2008. Fast forward eight years to the fall of 2016. Wells Fargo’s chairman and CEO resigned after regulators uncovered what appeared to be widespread fraud in the retail bank. Compensation, once again, seems to be at the center of a scandal. Neighborhood bankers were paid based on the volume of new accounts opened, apparently with utter disregard for whether customers wanted them or even knew about them. And, like mortgage brokers in the early 2000s, it appears that job security depended almost exclusively on meeting targets, regardless of how those targets were met. There was a serious mismatch between the values Wells Fargo espoused and the incentives that Wells Fargo employed.”
– William C. Dudley, N.Y. Fed. Reserve President (Full March 2017 speech available here )
(Start reading these in the blog on our new website, because it won’t be long before we start delivering these directly from there).
Thank you to Ben Giumarra, Spillane Consulting Associates, Inc., a member of our Education Committee, who with the support of other experts at SCA have put together this newsletter.