Mortgage lenders are misinterpreting new FEMA maps to require homeowners to buy expensive, unwanted coverage.
Bank of America billed Evan Melloy and his wife, Terri Cook-Melloy, of Lindstrom $1,200 for flood insurance, even after a Chisago County zoning official confirmed that the house (blue, in the background) is 6 feet above the flood plain.
LINDSTROM, MINN. - Thousands of homeowners in Minnesota and across the country are being pressured to buy flood insurance by their mortgage lenders, despite evidence showing that many of these homes are well outside danger zones.
Though the federal government's new flood maps are more accurate than ever, state and local officials say lenders and their agents are making obvious mistakes in their interpretation of flood risk.
Chisago County officials said they have intervened this year on behalf of 20 property owners who were wrongly classified as living in high-risk zones where flood insurance would be mandatory. Officials in Stearns and Washington counties also have taken steps to correct the record for dozens of homeowners who face minimal, if any, risk of flooding.
"We're seeing too many problems," said Ceil Strauss, Minnesota's floodplain coordinator.
In many cases, lenders are giving homeowners just 45 days to buy flood insurance or threatening to obtain it for them, often at exorbitant prices. Some homeowners have been told their premiums could run as high as $6,400 a year.
Authorities expect the problem to get worse. Over the next two years, the Federal Emergency Management Agency will introduce new flood maps in more than two dozen counties in Minnesota, including Hennepin, the state's most populous. The maps will trigger more flood-risk reviews by mortgage lenders.
Often, lenders receive commissions for the new flood policies they impose on borrowers. Fees can amount to as much as 20 percent of the annual premium. In New York, officials are exploring whether to ban lenders from charging commissions on the forced placement of property insurance, calling such payments a "perverse incentive."
Lenders acknowledge some errors but defend their practices, saying they are looking out for homeowners by following laws that require all homes to carry adequate insurance.
"We are certainly not interested in requiring consumers to have coverages they don't want or need. It's not what we do," said Kevin McKechnie, executive director of the American Bankers Insurance Association, an industry trade group. "Somewhere there is a disconnect, and I believe it is between the data sets at FEMA and how it gets translated to the bank."
Regulators have long worried about homeowners in high-risk areas who don't have adequate flood coverage. But Strauss and other officials worry that the lending industry's recent push could result in thousands of Minnesotans obtaining flood insurance they don't want or need.
In Lindstrom, for instance, a homeowner whose basement is 25 feet above the highest point ever recorded at North Center Lake was told this spring that his property was at risk of flooding and required flood insurance.
The lender didn't back off its demands until the homeowner, Robert Benjamin, obtained a letter from Chisago County officials attesting to the property's safe elevation.
"Where's the common sense?" asked Benjamin, whose home is linked to the lake by a 55-step staircase built into a steep hill. "If we get flooded, the whole county is dead."
High and dry in Lindstrom
Despite being surrounded by a chain of lakes that once hosted 32 resorts, Lindstrom -- billed as "America's Little Sweden" -- hardly tops the list of flooding candidates in Minnesota.
The town hasn't flooded since 1986, when heavy rains caused the lakes to overflow, swamping 51 homes in Lindstrom and another 600 in surrounding towns. The event galvanized local leaders, who spent nearly $2 million on a flood control system featuring an emergency outlet that could be opened in times of high water. It hasn't been used since 2004.
"Our problem is low water levels," said Jerry Spetzman, the county's water resource manager.
The lake near Mike Kaiser's fourplex shrank so much over the past five years it is virtually unusable, Kaiser said.
Though the rental property sits on a hill about 200 feet from South Center Lake, Kaiser's mortgage lender, Bank of America, decided it was a high-risk property this spring after reviewing the new flood maps for Chisago County. If Kaiser didn't buy flood insurance within 45 days, the bank told him it would purchase the coverage and bill him $350 a month, or $4,200 for the year.
Bank of America gave Kaiser one other option -- request a map correction from FEMA. To do that, he would need an engineering study to prove his home is above the flood plain or at an elevation that has only a 1 percent chance of flooding in any given year.
"The thing that killed me was they said I had 45 days to get the insurance unless FEMA lets you off the hook," Kaiser said. "When you contact FEMA, they tell you it takes 60 days to process the paperwork."
Unable to meet the bank's deadline, Kaiser contacted Tara Guy, the county's assistant zoning director. After reviewing the flood maps, Guy determined Kaiser's building is "well outside" the flood plain. Kaiser forwarded the findings to Bank of America, which promptly reversed course.
Guy said she felt compelled to intercede. "I don't understand how they could have looked at the maps and made these determinations," she said.
Though all 20 homes Guy reviewed are on land that either borders a flood plain or extends partly into a high-risk area, none of the buildings is at elevations that face a risk of flooding, Guy said. Under federal law, flood insurance is required only if the structure itself is in a high-risk area.
"It was absolutely crystal clear that these homes are not in the flood zones," Guy said.
While lenders accepted the counties' verdict in many cases, some property owners had to file formal appeals with FEMA. Others got stuck with a new insurance policy they don't believe they need.
Terri Cook-Melloy of Lindstrom said Bank of America recently billed her $1,200 for flood insurance, even after Guy wrote a letter explaining that the home is 6 feet above the flood plain.
"It's totally ridiculous," Cook-Melloy said. "I think they're trying to get what they can out of consumers who don't know any better or who aren't confident enough to challenge them."
Nationwide, FEMA received 35,915 requests for individual map revisions in 2011, up 55 percent since 2008, when major lenders began stepping up their enforcement practices. In Minnesota, residents are on pace to submit 700 requests this year, up from 381 in 2008. Strauss said the vast majority of requests are approved.
Bank of America declined to comment on specific cases. But after the Star Tribune supplied the bank with copies of the letters Guy wrote on behalf of eight local homeowners, including Cook-Melloy, bank spokesman Rick Simon released a statement saying the bank accepted the findings and would drop its flood insurance demands.
"We are confident that the situations that you have brought to our attention were appropriately addressed within the provisions established by the Federal Emergency Management Agency," Simon said.
Big fees for insurance
Lenders said they have consistently enforced the government's mandatory flood insurance laws since they were enacted in the 1970s, but a 2006 Rand study showed that one out of four properties in the United States failed to have required flood insurance.
Under government pressure, banks stepped up their oversight. Legally, lenders could send borrowers in high-risk zones to the federal government's flood insurance program, where premiums are heavily discounted. Instead, banks began steering thousands of customers to private insurance companies where rates are usually two to three times higher, according to regulators.
The deals are fraught with conflicts of interest, critics say. Not only are many lenders charging hefty commissions for these transactions, they often have ties to the insurance companies that issue the policies.
Two major U.S. banks -- Bank of America and Wells Fargo -- told the Star Tribune they do not currently earn commissions on the force placement of insurance.
JP Morgan Chase discontinued the practice in 2010 after it was sued for allegedly "enriching itself" by taking such commissions and by demanding more flood insurance coverage than is required by law. Chase settled the class-action suit in February, agreeing to pay $10.1 million to about 49,000 borrowers and modify its insurance requirements to conform with the law.
Chase spokeswoman Amy Bonitatibus declined to discuss the lawsuit.
Meanwhile, more than three dozen other class-action lawsuits are pending against various lenders for alleged abuses tied to the force placement of insurance, according to Minneapolis attorney Kai Richter, who represented homeowners in the Chase suit.
Several banks contacted by the Star Tribune declined to provide data on the number of customers who have challenged the flood insurance designation, including U.S. Bank and Wells Fargo, institutions that dominate the Minnesota market.
Some property owners said it never occurred to them that their bank could be wrong. In Wyoming, a few miles from Lindstrom, Matthew Dick didn't suspect his house could be above the flood plain until an engineer recently visited the property. He is now spending $700 to reverse his high-risk designation and get out of the $1,400-a-year policy his lender forced on him.
"When your mortgage company tells you that you need to do something, you do it," Dick said.
Jeffrey Meitrodt • 612-673-4132