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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 AmountsBuilding 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

ContentsResidential $10,000 $100,000

Nonresidential $100,000 $500,000

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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

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