September 1999


A Report to the United States Congress
on Compliance with the
National Flood Insurance Program

A report by the Board of Governors of the Federal Reserve System

National Flood Insurance Program

The National Flood Insurance Program (National Flood Program) is administered under both the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973. 1 As provided by these two statutes, federally subsidized flood insurance is available to owners of improved real estate or mobile homes located in special flood hazard areas if their communities participate in the National Flood Program. The 1973 Act amended the National Flood Program by requiring each federal instrumentality responsible for the supervision, approval, regulation, or insuring of banks, savings and loan associations, or similar institutions to issue regulations to implement the statute's provisions. The Federal Reserve's implementing regulation, Regulation H (12 C.F.R. 208), prohibits regulated lending institutions from making, increasing, extending, or renewing a loan secured by improved real estate or a mobile home located, or to be located, in a special flood hazard area, in a participating community, unless the property securing the loan is covered by flood insurance.

In September 1994, the Congress passed the Riegle Community Development and Regulatory Improvement Act of 1994. Title V of this Act, known as the National Flood Insurance Reform Act of 1994 (the Reform Act), comprehensively revised then existing federal flood insurance statutes. 2 Section 529 of the Reform Act requires the Board and other federal banking regulatory agencies to report to the Congress, not later than one year after enactment of the Reform Act, and biennially thereafter for the following four years, regarding compliance with the National Flood Program by the institutions they supervise. This 1999 Report to the Congress is the final report required by the Reform Act.

The Reform Act requires the agencies to report on:

  1. the methods used to determine compliance;
  2. the number of institutions examined during the reporting year;
  3. the total number of institutions found not to be in compliance;
  4. actions taken to correct incidents of noncompliance;
  5. an analysis of compliance, including a discussion of any trends, patterns, problems; and
  6. recommendations regarding reasonable actions to improve the efficiency of the examination process.
This report addresses those requirements, as well as other supervisory activities conducted since the 1997 Report to the Congress to assess and improve overall compliance with flood program requirements.

Compliance with the National Flood Insurance Program

Methods used to determine compliance

Federal Reserve examiners utilize the Federal Financial Institutions Examination Council's Flood Insurance Examination Procedures and Checklist, which are maintained in the Board's Consumer Compliance Handbook (see Appendix A).

Number of institutions examined during the reporting period

The Federal Reserve System has supervisory responsibility for approximately 1,000 state member banks (SMBs). During the reporting period covered by this report -- July 1, 1997, to June 30, 1999 -- the Federal Reserve System conducted 697 examinations of SMBs for compliance with the flood insurance provisions of Regulation H. 3 Thirty-nine SMBs were examined twice during the reporting period. The frequency of examinations for compliance with consumer regulations, including the flood insurance requirements, is based on the size of an institution and its history of compliance. In September 1997, the Federal Reserve adopted a frequency schedule that allows for a 36-month interval between examinations for SMBs under $250 million in assets that have a satisfactory compliance history. The interval for SMBs with assets greater than $250 million that have a satisfactory compliance history is 24 months. For all banks with less than satisfactory compliance records, the interval between examinations is 12 months. In all cases, policies permit more frequent examinations when warranted.

Institutions found not to be in compliance

Of the SMBs examined during the 1997-99 reporting period, 223 had violations of at least one section of the flood insurance provisions of Regulation H. 4 Violations were reported at examinations conducted in each of the twelve Federal Reserve Districts. 5 For each District, the following chart shows the number of SMBs examined during the reporting period and the number of SMBs cited for violations of the flood insurance requirements.

State member banks with examinations starting
between 7/1/97 and 6/30/99
Federal Reserve
District		 Number of SMBs
examined
during period 6		 Number of SMBs
with flood violations
Boston     5     1
New York   25     6
Philadelphia   20     5
Cleveland   54   20
Richmond 105   22
Atlanta   57   11
Chicago 136   36
St. Louis   44   26
Minneapolis   77   32
Kansas City   95   45
Dallas   28   10
San Francisco   51     9
Total 697 223

The following chart shows the number of violations of specific flood insurance requirements and the number of SMBs with those violations.

Summary of examination findings for state member banks
with examinations starting between 7/1/97 and 6/30/99
Regulation H section 7 Requirement No. of violations No. of SMBs with violation
208.25(c)
(208.23(c))		 Requirement to purchase flood insurance where available   116     71
208.25(e)
(208.23(e))		 Escrow requirements       2       1
208.25(f)(1)
(208.23(f)(1))		 Requirement to use Standard Flood Hazard Determination Form -- use of form   696   143
208.25(f)(2)
(208.23(f)(2))		 Requirement to use Standard Flood Hazard Determination Form -- retention of form     46     21
208.25(g)
(208.23(g))		 Forced placement of flood insurance     24     14
208.25(h)
(208.23(h))		 Determination fee -- must be reasonable and may include fee for life-of-loan monitoring       0       0
208.25(i)
(208.23(i)(1))		 Requirement to send notice of special flood hazards and availability of federal disaster relief assistance     56     31
208.25(i)(1)
(208.23(i)(2))		 Notice of special flood hazards -- content of notice     43     20
208.25(i)(2)
(208.23(i)(3))		 Notice of special flood hazards -- timing of notice     45     26
208.25(i)(3)
(208.23(i)(4))		 Notice of special flood hazards -- record of receipt       3       3
208.25(j)
(208.23(j))		 Notice of servicer's identity       0       0
Total 1031 NA

A copy of the flood requirements of Regulation H is included in Appendix C. The following is a description of the three most commonly cited violations reported by Federal Reserve examiners.

  • Required use of Standard Flood Hazard Determination Form. The most frequently cited violation overall is under Section 208.25(f)(1) of Regulation H. This section of the regulation requires SMBs to use the Standard Flood Hazard Determination Form developed by the director of Federal Emergency Management Agency (FEMA). This form must be used when determining whether improved real estate or a mobile home used as collateral is located in an area identified as having special flood hazards and in which flood insurance may be available. The majority of the violations of this provision relate to errors or omissions of data, or completion of the form after the loan was originated. In cases where the SMB actually failed to conduct a flood hazard determination, subsequent determinations were made, and the secured properties generally were not found to be in flood hazard areas.
  • Requirement to purchase flood insurance where available. Section 208.25(c) of Regulation H provides that SMBs may not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. Violations of this provision include not only failure to obtain flood insurance, but also failure to obtain sufficient flood insurance and failure to obtain insurance until after origination of the loan. SMBs cited for violations of this provision generally had fewer than four violations. Thus, the violations represented isolated instances.
  • Notice of special flood hazards and availability of federal disaster relief assistance. Section 208.25(i) of Regulation H requires SMBs to provide certain notifications to borrowers and servicers. Specifically, the bank must mail or deliver a written notice to the borrower and to the servicer when a loan is secured by improved real estate or a mobile home located or to be located in a special flood hazard area, and to notify them whether flood insurance is available. Again, SMBs cited for violations of this provision generally had fewer than four violations. Thus, the violations represented isolated instances.

Actions taken to correct incidents of noncompliance

When examiners find violations of consumer regulations during examinations, the examiners discuss the findings with bank management. After the examination, the Reserve Bank staff review written responses from SMBs concerning actions taken to correct violations and, when necessary, follow up to ensure that appropriate action is taken. In addition, during subsequent examinations, examiners verify that corrective action was taken. In all situations where banks are found to be in noncompliance with consumer regulations, SMBs may be placed under an informal supervisory action, such as a memorandum of understanding, or more formal actions such as written agreements or cease and desist orders.

For the violations noted during the 1997-99 reporting period, SMBs cited for violations of Regulation H took immediate corrective action, and instituted measures to address prospectively any deficiencies in procedures, training, and internal controls. The actions taken by the banks typically included:

  • Obtaining insurance coverage on non- or under-insured accounts;
  • Assigning direct management responsibility for compliance with the flood insurance requirements;
  • Reviewing loan portfolios to update flood hazard renewals and ensure that policies are current;
  • Expanding and enhancing compliance procedures, internal controls, and audits; and
  • Implementing ongoing staff training on flood requirements.
Enforcement actions. Section 4012a(f) of the National Flood Insurance Act states that federal enforcement agencies shall impose civil money penalties when they find a "pattern or practice" of violations. During the 1997-99 reporting period, the Federal Reserve imposed civil money penalties in one case regarding violations of the flood insurance requirements. 8 On June 21, 1999, the Board announced the issuance of an Order of Assessment of a civil money penalty against Banco Popular de Puerto Rico, San Juan, Puerto Rico. 9 Banco Popular, without admitting to any violations, consented to the issuance of the Order in connection with alleged violations. The Order required Banco Popular to pay a civil money penalty of $10,000, which the Board received and remitted to the National Flood Mitigation Fund as required by statute. The Order (attached in Appendix D) noted that Banco Popular had acted diligently and taken prompt corrective action to seek compliance with the National Flood Insurance Act upon discovery of the violations.

An analysis of compliance, including trends, patterns, and problems identified

Generally, the violations of the flood insurance requirements of Regulation H appear to be isolated or technical and not indicative of any pervasive patterns of noncompliance. During the 1997-99 reporting period, the majority of banks examined (76 percent) had 5 or fewer violations; 13 percent had 6-10 violations; 0.08 percent had 11-20 violations; and 0.02 percent had more than 20 violations. Thus, the vast majority of SMBs appear to have strong compliance records with the flood insurance requirements.

While conclusions drawn from any trend analysis of violations between the 1997 and 1999 Reports to the Congress are limited due to the differences in the reporting periods and the number of banks examined, the following observations can be made. 10

The percentage of examinations where flood insurance violations were found remains approximately the same. Specifically, during the 1997-99 reporting period, 697 SMBs were examined and violations were found in 32 percent of the examinations (223). During the 1995-97 reporting period, 1073 SMBs were examined and violations were found in 33 percent of the examinations (359).

Over the two reporting periods, the number of SMBs cited for violating specific sections of Regulation H's flood insurance requirements remained high for two requirements. One was the requirement to purchase flood insurance. During the 1997-99 reporting period, 71 SMBs violated this provision, representing 10 percent of the examinations conducted. During the 1995-97 reporting period, 91 SMBs violated this provision, representing 8 percent of the examinations conducted. The second one was the requirement to use the Standard Flood Hazard Determination form. During the 1997-99 reporting period, 143 SMBs violated this provision, representing 21 percent of the examinations conducted. During the 1995-97 reporting period, 148 SMBs violated this provision, representing 14 percent of the examinations conducted.

As noted previously, violations of these two sections of Regulation H were primarily technical in nature and/or represented isolated violations by individual banks. Nevertheless, the violations indicate the need for continued oversight not only by the institutions themselves, but also by examiners.

Other activities related to flood compliance. During the 1997-99 reporting period, the Federal Reserve has undertaken the following measures to keep Reserve Bank examiners and SMBs informed of topics related to the flood insurance requirements:

  • In May 1999, a review examiner from the Board's Division of Consumer and Community Affairs participated in a lender roundtable workshop at FEMA's 1999 National Flood Conference in Denver, Colorado.
  • In March 1999, the Federal Reserve held a Consumer Affairs Examiner Forum in Dallas, Texas, to discuss current compliance topics with senior examiners. Speakers at the conference included the Regional Marketing Manager of the National Flood Insurance Program in Houston, Texas.
  • The following information was distributed to the twelve Reserve Banks for their information and/or distribution to SMBs:
    • In May 1999, FEMA's Proposed Rule on Inspection Procedure to ensure compliance with Community's Flood Plain Management Ordinance
    • In February 1999, FEMA's revised Standard Flood Hazard Determination Form
    • In October 1998, FEMA's call for issues on National Flood Insurance Program
    • In September 1998, FEMA's "Commonly Asked Questions About Flood Insurance Requirements in AR Zones"
    • In June 1998, FEMA's revised publication, "Answers to Questions about the National Flood Insurance Program"
    • In August 1997, FEMA's "Notification of Change of Servicer"

Recommendations to improve the efficiency of the examination process

In its 1997 Report to the Congress, the Federal Reserve noted that it was acquiring software that would enable examiners to quickly pinpoint loans within a bank's portfolio secured by property located in special flood hazard areas. The Board hoped that such a technological enhancement would greatly improve the efficiency of flood compliance examinations. Experience has shown, however, that use of the software is more cumbersome than had been anticipated and thus has not improved this aspect of the examination process. The Federal Reserve will continue to investigate software packages that could enhance the efficiency of examining for compliance with the flood insurance requirements of Regulation H.

1.  42 USC 4001 et seq. The Federal Insurance Administration, a department of the Federal Emergency Management Agency (FEMA), administers the National Flood Program. FEMA's regulations implementing the National Flood Program appear at 44 CFR Parts 59-77.

2.  Public Law 103-325, 108 Stat. 2160, 2255-87, enacted September 23, 1994.

3.  The numbers reflect completed examinations for which examination data had been received by the Board as of July 15, 1999. The Federal Reserve's previous Report to the Congress, dated September 1997, covered the period of September 1, 1995, to June 30, 1997.

4.  Some of these institutions had violations of more than one section of the flood provisions.

5.  A map detailing the makeup of the Federal Reserve Districts is included in Appendix B.

6.  Thirty-nine SMBs were examined twice during this two-year period.

7.  The section of Regulation H containing the flood insurance requirements was renumbered from "208.23" to "208.25," effective October 1, 1998, as a consequence of revisions made to other sections of Regulation H. Other than the renumbering, no changes were made to the section containing the flood insurance requirements.

8.  At the time of this report, the Federal Reserve was reviewing additional cases involving violations of the flood provisions of Regulation H to determine if the violations constituted a pattern or practice.

9.  While the civil money penalty was issued during the 1997-99 reporting period, the Federal Reserve examiners identified the flood violations at Banco Popular during an examination that took place prior to the reporting period of this 1999 Report to the Congress. As a result, data from the Banco Popular examination prompting the civil money penalties were not included in this report.

10.  The 1997 Report to the Congress covered 22 months (September 1, 1995, to June 30, 1997), during which the Federal Reserve conducted 1,073 examinations. The 1999 Report to the Congress covers 24 months (July 1, 1997, to June 30, 1999), during which the Federal Reserve conducted 697 examinations.

Appendix A--Flood Insurance: Examination Objectives and Procedures (67 KB PDF)

Appendix B--Federal Reserve Districts Map

Appendix C--Regulation H: Section 208.25 (25 KB PDF)

Appendix D--Press Release, June 21, 1999

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