Flood violations are often something that can creep up on banks, mainly because banks have a tendency to be lulled to sleep on underlying risks until a triggering event occurs that makes everyone pay attention — for example, a change in the flood maps or a change in regulation, such as the recent regulatory changes with respect to private flood insurance. However, a flood risk has recently surfaced after hiding beneath the waters for some time: cross-collateral clauses in mortgages and deeds of trust have recently been identified by examiners as causing loans to be underinsured as to flood insurance.

Cross-collateral agreements have been an insidious source of compliance risk in the past, but flood insurance has not been commonly recognized as a source of that risk. However, many of our clients are reporting that their examiners are questioning whether or not they have enough flood insurance for loans that are secured with deeds of trust or mortgages that contain "cross-collateral" or "dragnet" clauses. Continue reading >