Flood Insurance
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Flood - History
• History of the Law
– National Flood Insurance Act of 1968
• Federally subsidized insurance became available
• Voluntary insurance
– Flood Disaster Protection Act of 1973
• Mandatory Insurance for federally regulated lenders
– National Flood Insurance Reform Act of 1994
• Force place insurance
• Mandatory escrow of payments
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Flood - Terms
• Basic Terms
• Participating Community
– Voluntarily elects to participate in the flood program by adopting
and enforcing floodplain management
– Emergency Program
• Phase one (FHBM map of community)
• Regular Program
– Comprehensive flood plain management
– FIRM (rate map) has been drawn
• Non-participating (no government insurance available)
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Flood Requirements
• What type of loans
are subject to flood
insurance?
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Flood - Requirements
• General Rule
– Flood insurance is required for loans
secured by buildings or mobile home
located is an area designated by FEMA as
having special flood hazards
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Flood - Requirements
• Statutory Tripwires
– Whenever a lender
•
•
•
•
Makes
Increases
Renews or
Extends a loan
– Secured by improved real property or
a mobile home
– The lender must check for flood
hazards
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Flood - Requirements
• Insurance must be carried for term of loan
• Policy usually written for 1-3 year terms
• Check older loans for insurance renewals
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Eligible Buildings
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Eligible Buildings
• Improved Real Estate
– Two or more outside rigid walls and a secured roof
affixed to a permanent site
• Manufactured homes
– Attached to a foundation support system
• Construction Loans
– Covers materials and supplies intended for use in the
construction contained within an enclosed building on
the premises or adjacent to the premises
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Eligible Buildings
• Condominiums
– Covered by a RCBAP policy (Residential
Condominium Association Policy) applies to
all high-rise and low-rise residential
condominium buildings
– Covers common areas
– Dwelling Policy available for individual unit if
RCBAP is not sufficient coverage
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Flood - Exceptions
• Any State-owned property covered under
a policy of self-insurance satisfactory to
the Director of FEMA, who publishes and
periodically revises the list of States falling
within this exemption; or
• Property securing any loan with an original
principal balance of $5,000 or less and a
repayment term of one year or less.
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Pre-closing Rules
What to do before closing the loan
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Find the Flood Zone
Complete Determination Form
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Flood Zone
• What is a flood zone?
– Your required to list it
on the “Determination
Form.”
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Flood Zone
• Flood Maps
– Flood Hazard Boundary Map (FHBM)
• Used for the initial review for communities in
the Emergency program
– Flood Insurance Rate Map (FIRM)
• Once developed communities can join the
regular program
• Zones A & V – require flood insurance
• Chance of flooding
– 1 % in any given year
– Based on the 100 year flood
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Flood Determination Form
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Flood Determination Form
• Official Form
– developed by FEMA
– can use previous determinations within 7 years
• Format
– paper or electronic (link)
– Copies can be obtained from FEMA
• Record retention
– Copy of the form in the bank’s file
– Copy kept for the time the lender owns the
loan
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Amount of Flood Insurance
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Flood Insurance Amounts
• Amount
– The lesser of:
• Outstanding Principal Loan Balance (less the value
of the land), or
• The maximum limit available under the Act
• Coverage
– Only includes the value of the improved
property (Can not insure dirt)
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Flood Insurance Amounts
Building
Coverage
Emergency
Program
Regular
Program
Single Family
$35,000
$250,000
2-4 Family
$35,000
$250,000
Other Res
$100,000
$250,000
Nonresidential
$100,000
$500,000
Residential
$10,000
$100,000
Nonresidential
$100,000
$500,000
Contents
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Customer Notice
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Customer Notice
• Flood Notice
– The borrower & servicer must be provided a
copy of the Flood Notice:
• When the bank makes, increases, extends, or
renews a loan secured by a building or a mobile
home located in a special flood hazard area
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Customer Notice
• Contents (Link)
– Warning that the building or mobile home is
located in a special flood hazard area
– Description of the flood insurance purchase
requirements
– Statement if flood insurance is available for NFIP
– Statement whether federal disaster relief
assistance is available if flooding occurs
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Customer Notice
• Timing of Notice
– Provided within reasonable time before
completion of the transaction
• Ten Days is considered reasonable by the
banking agencies
• Record of Receipt
– Bank shall retain a record of the receipt of
the notices by the borrower and the
servicer for the time it owns the loan
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Special Rules
Government Guaranteed
High Ground Areas
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Special Rules
• Government Guaranteed Loan
– A lender can not make a loan guaranteed by the
SBA, VA or FRA on improved property in a SFHA in a
non-participating community.
• Above the BFE (Natural Islands)
– Occasionally, a flood map will show property as
clearly being in an SFHA even though the building on
the property is actually above the Base Flood
Elevation (BFE).
• Until the map is physically revised, lenders are bound by the
information shown on FEMA maps unless a valid Letter of
Map Amendment (LOMA) or Letter of Map Revision (LOMR)
has been issued by FEMA.
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Special Rules
• Letter of Map Amendment (LOMA)
– Customer initiated, a property owner can
submit property and elevation materials to
FEMA in support of a request for LOMAR
removing the property from the SFHA
• Letter of Map Revision (LOMR)
– Must be initiated or approved by the
community
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Closing - Flood Insurance
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Escrow Requirements
• If bank regularly escrows taxes and
insurance,
– it must also escrow for flood insurance
premiums
– Subject to RESPA escrow rules
• Section 10 of RESPA & 3500.17 of HUD X
• Commercial loans not subject to rule
• Loans made after October 1, 1996
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Post Closing - Flood Insurance
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Forced Placement Provisions
• The act and regulation require a lender to
force place flood insurance if all of the
following circumstances occur:
– If the lender determines at any time during the life
of the loan that the property securing the loan is
located in an SFHA
– the community in which the property is located
participates in the NFIP
– flood insurance coverage is inadequate or does
not exist
– the borrower fails to purchase the appropriate
amount of coverage
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Forced Placement Provisions
• Notification of Force Placement
– A lender must notify the borrower of:
• the required amount of flood insurance that
must be obtained within 45 days after
notification.
• State that if the borrower does not obtain the
insurance within the 45-day period, the lender
will purchase the insurance on behalf of the
borrower and may charge the borrower the cost
of premiums and fees to obtain the coverage.
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Portfolio Monitoring
• Monitoring
– Banks are encouraged to monitor flood
insurance requirements through periodic
portfolio reviews
– While not required, failure to require
insurance increases risk of loss to the bank
• Common Errors
– Failure to ensure customer continue to
purchase insurance policies at renewal
– Failure to obtain sufficient insurance
amounts at closing
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Questions
Thanks for your Time
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