Collateral protection

Don’t Let Severe Weather Rain on Your Loan Portfolio

Safeguard against calamity so your CU can help members recover from storm damage.

July 6, 2012

Severe weather can devastate any community, yet it doesn’t have to destroy your credit union’s loan portfolio.

There are reliable ways to safeguard against calamity so your credit union remains stable and secure enough to help members recover from storm damage and rebuild their lives once the skies clear.

The first line of defense is proper flood zone determination, and Federal Emergency Management Agency (FEMA) helps assess a property’s risk with flood zone ratings.

If a mortgaged property is in a flood zone according to FEMA maps, it must be protected by flood insurance according to the National Flood Reform Act of 1994.

This means credit unions need to correctly read FEMA maps and stay continually apprised of any changes. And the maps do change. As part of its Risk Mapping, Assessment and Planning (Risk MAP) program, FEMA is reviewing and updating its comprehensive flood hazard data.

As a result, FEMA issued new maps for 341 counties in 2011 and 164 more counties midway through 2012. FEMA has slated many more for updates.

Manually reviewing and maintaining FEMA maps may seem daunting. Fortunately, credit unions can bypass the headache by using a qualified flood zone determination provider to identify the flood zone of any property and monitor it throughout the duration of the loan.

Credit unions should look for a provider that will assume the risk and liability for errors in map interpretation. They should also find a provider that uses digitized maps.

Digital maps increase accuracy and facilitate faster implementation of changes. Determinations are more reliable and updated certifications arrive more quickly.

The second line of defense is requiring members to carry homeowners’ insurance. While borrowers show proof of insurance at closing, they don’t always maintain or increase coverage over time.

A 2008 survey by Marshall & Swift/Boeckh LLC found that 64% of U.S. houses were undervalued for insurance purposes, and the average homeowner had enough insurance to rebuild only about 81% of the home.

Insurance carriers will generally notify the mortgagee when a policy is canceled or if it lapses, but sometimes things slip through the cracks. Any combination of human or computer error could result in a credit union receiving no notification.

Unless you have a method of identifying uninsured property, your credit union could be at risk.

Credit unions have protection options. Blanket insurance is the most simple, member-friendly choice. It’s a no-worry insurance policy that provides coverage for hazard losses.

Premiums generally are low, and the credit union pays them. This choice is popular among small to mid-size credit unions that are especially member-sensitive.

Immediate-issue programs allow credit unions to track their own insurance but give them control over when to request or cancel coverage. Immediate-issue insurance is generally purchased in conjunction with blanket coverage to create an even stronger protection program.

Some providers offer full tracking programs that automatically force-place insurance after first notifying members. The mailings give members the opportunity to resolve any coverage errors or obtain their own insurance.

Full tracking programs offer great protection and they direct the cost to only those members who fail to carry their own coverage.

Ultimately, credit unions want to do more than protect their own assets during storm season. Most want to be resources for members affected by natural disasters.

Having adequate protections in place will allow you to tend to members’ needs rather than worry about the state of the loan portfolio.

KRISS BESCH is collateral protection product support manager with CUNA Mutual Group. Contact her at 800-356-2644, ext. 6656053.