I. INTRODUCTION
The National Flood Insurance Program (NFIP) is administered by the Federal Insurance Administration (FIA) which is a part of the Federal Emergency Management Agency (FEMA). Since the enactment of the Flood Disaster Protection Act of 1973, lenders have been handed the major responsibility for notifying borrowers securing loans on improved real estate and manufactured (mobile) homes as to whether their property is located in a special flood hazard area. If so, borrowers must purchase flood insurance covering properties located in NFIP participating communities.
There are two stages of community participation in the NFIP:
1. Emergency Program community tenders application and agrees to adopt federal minimum standards. Once such standards are met, FEMA publishes a Flood Hazard Boundary Map (FHBM). Insurance is then available at subsidized rates, but limited to a small part of the “regular program.”
2. Regular Program FEMA completion of an on-site survey establishing flood levels for the community allows a community to enter the regular program. FEMA issues a Flood Insurance Rate Map (FIRM). New construction in flood hazard areas must comply with federal standards. Further flood insurance coverage is available.
Since March 2, 1974, the law has required the purchase of flood insurance on loans securing improved real estate or mobile manufactured homes located or to be located in a designated special flood hazard area of a participating community. Certain lender responsibilities apply regardless of whether or not the loan subject is located in a participating community.
The regulatory agencies have issued a joint final rule amending their flood insurance regulations, clarifying existing requirements and adding rules implementing flood law changes mandated by the National Flood Insurance Reform Act of 1994. The final rule became effective on October 1, 1996.
Further revisions to the National Flood Insurance Program were established by the Biggert-Waters Flood Insurance Reform and Modernization Act of 2012, and the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA). The statutory force-placed insurance provision took effect upon the enactment of the Biggert-Waters Act on July 6, 2012. The regulatory changes made by this final rule to incorporate these provisions are effective on October 1, 2015. The statutory and regulatory escrow-related provisions are effective on January 1, 2016, as required by the HFIAA.
II. COVERAGE
A. Lending Transactions
Transactions that come within the mandatory flood insurance purchase provisions include all loans made, increased, extended, or renewed which are secured by improved real property or a mobile home located or to be located in a special flood hazard area of a participating community. Transactions other than purchase money mortgage loans, construction loans or home improvement loans are covered (e.g., second mortgages or home equity loans). There are only two limited exemptions from the flood insurance requirements: (1) loans with an original outstanding principal balance of $5,000 or less and with a repayment term of one year or less; and (2) state-owned, self-insured property.
1. Loan Acquisitions Involving Table Funding Arrangements
The flood regulations also clarify that the purchase of a loan does not constitute the “making” of a loan that would trigger an obligation to make a flood hazard determination. However, the regulatory agencies have considered whether “table funded” loans should be considered to be loans made by the funding lender or loans purchased by the funding lender. In the typical table funding situation, the party providing the funding reviews and approves the credit standing of the borrower and issues a commitment to the broker or dealer to purchase the loan at the time the loan is originated. Frequently, all loan documentation and other statutorily mandated notices are supplied by the party providing the funding, rather than the broker or dealer. The funding party provides the original funding “at the table” when the broker or dealer and the borrower close the loan. Concurrent with the loan closing, the funding party acquires the loan from the broker or dealer. While the transaction is, in substance, a loan made by the funding party, it is structured as the purchase of a loan.
In determining that table funded loans are subject to the flood regulations, the agencies adopted the definition of “table funding” found in the Real Estate Settlement Procedures Act (RESPA). Under RESPA, table funding is defined as a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds. Whether or not a table funding transaction is treated as a loan purchase will depend upon the substance of the transaction. The typical table funded transaction should be considered a loan made, rather than purchased, by the entity that actually supplies the funds. That entity would then be subject to the flood requirements.
2. Construction Loans
How should a lender should handle a construction loan when it has been determined that flood insurance coverage is required. It is clear from the FFIEC’s “Interagency Questions and Answers Regarding Flood Insurance” (July 23, 1997) that an interim construction loan is covered under the regulation. There remains the question however, as to the amount of flood insurance coverage required. The answer to this question has been addressed by the Office of the Comptroller of the Currency in the Comptroller’s Handbook, “Flood Disaster Protection” (CCE-FDPA, May, 1999) (you can find a copy by going to www.occ.gov and searching for "Flood Disaster Protection") as follows:
The National Flood Insurance Program covers improved real property or mobile homes located or to be located in an area identified by FEMA as having special flood hazards, including:
Note that flood insurance may be purchased within 90 days after construction has commenced, but before the building is walled and roofed. Should a flood loss occur during this time, the deductible is doubled (deductible amount for each loss occurring prior to a building being walled and roofed is two times the deductible that is applicable after the building is walled and roofed). Coverage is provided before a building is walled and roofed if construction is in progress or, if construction is suspended, for up to 90 days thereafter, until construction resumes.
Note again of the exemption from coverage if both of the following conditions apply: the original principal balance of the loan is $5,000 or less and the original repayment term is one year or less.
B. Improved Real Property
Improved real property is property on which there is already standing, or in the course of construction, a “walled and roofed building” which is principally above ground, permanently affixed to sites and insurable under an NFIP policy. These improvements include:
Buildings are “walled and roofed” when they have more than two or more rigid external walls in place and roofed and adequately anchored so that they will resist flotation, collapse and lateral movement.
A mobile home is defined as a structure, transportable in one or more sections that is built on a permanent chassis and designed for use with or without a permanent foundation when attached to the required utilities. For purposes of the flood regulations, a mobile home does not include a recreational vehicle, or a mobile home which is not located on a permanent foundation, but does include a manufactured home set on a foundation. FEMA requires that a mobile home located in a special flood hazard area must be anchored to a permanent foundation to resist flotation by providing over the top or framed ties to ground anchors.
The fact that a “part” of the real property is in a special flood hazard area does not require flood insurance to be purchased for a building located on the property unless some portion of the building itself is located in the hazard area. NFIP does not insure land, but provides coverage only for buildings.
C. Detached Structures Exemption
The final rule provides that flood insurance is not required for any structure that is part of a residential property if it is detached from the primary residential structure and does not serve as a residence. A bank may choose, however, to require flood insurance on the detached structure to protect the collateral securing the mortgage. Please note that this exemption applies only to residential structures and not to structures detached from commercial buildings. In addition, the final rule clarifies that “a structure that is part of a residential property” is a structure used primarily for personal, family or household purposes and not used primarily for agricultural, commercial, industrial or other business purposes. This means that barns and commercial workshops, even though detached from a residential dwelling, will not apply to this exemption. “Detached” means not joined by any structural connection to the primary residential structure. Finally, “service as a residence” will be based on a good-faith interpretation by the lender that the structure is intended to be used as, or is actually used as, a residence. A residence is generally thought to include sleeping, bathroom, or kitchen quarters and facilities.
Although no single question is dispositive, lenders and servicers might consider and document some of the following considerations in their good-faith determinations of whether a detached structure serves as a residence:
D. Maximum and Minimum Amounts
The maximum amount of coverage available in participating communities in the regular phase of the program is: $250,000 for 1-to-2 family residential structures; $100,000 for residential contents; $500,000 for "Other Residential Buildings" (non-condominium residential buildings designed for use for five or more families); $500,000 for commercial structures; and $500,000 for commercial contents. The minimum amount is the lesser of the amount of the outstanding principal balance of the loan or the value of the improved property; limited, of course, to the maximum limit for coverage.
III. LENDER DUTIES
Whether a community is participating or non-participating, the lender must first determine if the property is located in a special flood hazard area as designated by FEMA. Second, the lender must determine if the property is in an NFIP participating community. In every case a property is located in a special flood hazard area, the appropriate “notice” must be given to the borrower in a timely manner (at least 10 days prior to closing or at the time of commitment) of: (a) flood hazard status of the property; (b) community participation status; and (c) community eligibility for disaster relief. Third, if flood insurance must be purchased, the lender must require the insurance to be bought and maintained for the life of the loan.
IV. FORCE PLACEMENT OF FLOOD INSURANCE BY LENDERS
A. Notice
If a lender or servicer determines at any time (whether at origination or anytime thereafter during the term of the loan), that the building or mobile home or any personal property securing the loan is not covered by flood insurance (or coverage is inadequate), the lender or servicer must notify the borrower that the borrower is required to obtain insurance for the term of the loan at the borrower’s expense.
B. Force Placement and Costs
In the event that the borrower fails to obtain the required insurance within 45 days of the notice, the lender or servicer must purchase the insurance on behalf of the borrower. This is known as “forced placement.” Note that the agencies do not interpret this provision as granting a borrower 45 days from the loan closing to arrange for flood insurance on the security property. Flood insurance is required to be in place at the time a loan is made.
Forced placement may also be required when a lender determines that existing coverage is insufficient. In such a case, the additional amount of insurance that would be required would be the difference between (1) the existing coverage and (2) the lesser of the outstanding principal balance of the loan or the maximum relevant statutory coverage. Upon forced placement, the borrower may be charged for the cost of premiums and fees incurred by the lender or servicer in procuring the required coverage. Forced placement applies to all existing and future loans.
While there is no requirement to review all existing loans to determine if coverage is adequate, upon discovery that an existing loan is uninsured or underinsured, the lender must provide the borrower with the required notice and forced placement may ultimately become necessary. The notice and forced placement provisions of this law became effective immediately upon its passage by Congress on September 23, 1994.
A lender is required to cancel forced placed flood insurance coverage within 30 days of receiving confirmation that a borrower has acceptable insurance in place and rebate the forced place insurance premium for any period that the borrower has provided insurance coverage.
Although a lender cannot force place flood insurance coverage until 45-days after notification of lapse, the lender may charge the borrower for the cost of premiums and fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide sufficient coverage amounts. A lender or servicer must accept a “insurance policy declarations page that includes the existing flood insurance policy number and the identity of, and contact information for, the insurance company or agent” as sufficient proof of insurance. In addition, a lender or servicer is required to refund all force-placed premiums or fees paid by the borrower during any period of overlap between the borrower’s policy and the force-placed policy. These provisions became effective on July 6, 2012.
C. Review of Determinations
The borrower and lender for a loan secured by improved real estate or a mobile home may jointly request that FEMA review a determination of whether a building or manufactured home is located in an identified special flood hazard area. This determination review process provides an opportunity for a borrower and lender to resolve disputes regarding a contested determination. A “FEMA Determination Review” must be submitted within 45 days of the lender’s notification to the borrower that a building or manufactured home is in the special flood hazard area and that flood insurance is required. There is an $80 fee for an appeal, payable to the National Flood Insurance Program. The request for FEMA’s review must be signed by both the borrower and the lender, accompanied by a copy of the lender’s notification that flood insurance is required, a completed Standard Flood Hazard Determination Form, a copy of all technical data used in making the determination, and a copy of the effective NFIP map or Flood Insurance Rate Map panel for the community in which the improved property is located, with the improved property location indicated.
Note that elevation data will not be considered – the appeal does not involve a LOMA or LOMR – since it is used for “close calls” in “vague areas” rather than a correction or map error. If FEMA fails to respond before the later of the expiration of the 45-day period after receiving the request or closing of the loan, then flood insurance is not required until such a letter is provided. If loan closing occurs prior to the 45 days after FEMA receives a request, then the flood insurance purchase requirement is not waived. Even if FEMA does not respond within 45 days, it is still a prudent business practice to require flood insurance purchase to protect the collateral. Flood insurance premiums can be refunded it FEMA determines that the improved property is not located in the special flood hazard area and the lender waives the flood insurance purchase requirement.
V. PORTFOLIO REVIEW
The final rule affirms that lenders are not required to conduct either a retroactive portfolio review or a prospective portfolio review. Lenders are only required to check the status of security property upon the making, increasing extending or renewing of a loan. Remapping does not constitute an event which requires lenders to check the status of security property and lenders are not required to monitor for map changes.
VI. FEES FOR DETERMINING APPLICABILITY OF FLOOD INSURANCE PURCHASE REQUIREMENT
A lender or servicer may charge a reasonable fee for the cost of determining whether the building or mobile home securing the loan is located in a special flood hazard area and may impose the fees upon the borrower if the determination (a) is made pursuant to the making, increasing, extending, or renewing of the loan initiated by the borrower; (b) is made pursuant to a revision or updating of the flood plain areas or flood risk zones; or (c) results in the purchase of flood insurance coverage by the lender or servicer, acting on behalf of the lender, by way of forced placement. The flood regulations also clarify that the lender may charge a determination fee for life-of-loan monitoring.
VII. ESCROW ACCOUNTS
A lender which requires the escrowing of taxes, insurance premiums, fees, or any other charges for a loan secured by residential improved real estate or a mobile home must escrow all premiums and fees for flood insurance for the building or mobile home. A lender is responsible for making payments from the escrow account to the provider of the flood insurance for any premiums owed upon receipt of a notice that the flood insurance premium is due.
Any escrow account established pursuant to the foregoing requirements will be subject to the provisions of RESPA relating to escrow accounts. The escrow account requirements under the Act became effective for any loan made, increased, extended, or renewed after September 23, 1995.
Under the Biggert-Waters Flood Insurance Reform and Modernization Act of 2012, a lender or servicer is required to collect the premiums along with the regular mortgage payments. Pursuant to the Homeowner Flood Insurance Affordability Act of 2014, these provisions apply only to loans originated, refinanced, increased, extended, or renewed on or after January 1, 2016. The Act also authorizes the federal banking agencies to provide for an exclusion from the escrow requirement for financial institutions with less than $1,000,000,000 in assets, if: (a) the financial institution was not otherwise required by state or federal law to escrow taxes, insurance premiums or fees, or any other charges in an escrow account for the entire term of the loan; and (b) the financial institution did not have a policy of requiring the escrow of taxes, insurance premiums or fees, or any other charges for loans secured by residential improved real estate or a mobile home.
If a bank no longer qualifies for the small lender exception, it is required to escrow flood insurance premiums and fees for loans that have a triggering event on or after July 1 of the first calendar year of changed status. Moreover, if a bank determines that an exception is no longer applicable to a loan, the bank must begin escrowing flood insurance premiums and fees as soon as reasonably practicable.
Banks subject to the escrow requirement must offer and make available to borrowers the option to escrow flood insurance premiums and fees for loans that are outstanding as of January 1, 2016. Banks must deliver information to borrowers on this escrow option by June 30, 2016, and implement the escrow as soon as reasonably practicable after receiving a borrower’s request to escrow.
The escrow requirement does not apply to loans that are secured by commercial properties.
The Act excludes several types of loans from the escrow requirements: (1) loans secured by subordinate liens, if at the time of origination of the subordinate lien the first lien is properly ensured; (2) loans secured by residential improved real estate or a mobile home that is part of a condominium, cooperative, or other project development, if the property is covered by a flood insurance policy provided by the condominium association, cooperative, homeowners association, or other applicable group; (3) business purpose loans secured by residential improved real estate or a mobile home; (4) home equity lines of credit; (5) nonperforming loans; and (6) loans with a term of less than 12 months.
VIII. NOTICE REQUIREMENTS
Federal bank regulatory agencies are required to establish regulations providing for notification to borrowers and loan servicers that a property is located in a special flood hazard area. The notices will be required to be in writing and provided a reasonable period in advance of the signing of the purchase agreement, lease, or other documents involved in the transaction. The regulations will also require the lender to retain a record of the receipt of the notices by the borrower and servicer for the period of time the bank owns the loan.
The contents of the written notification will be required to include (a) a warning that the building on the improved real estate securing the loan is located, or the mobile home securing the loan is or is to be located, in a special flood hazard area; (b) a description of the flood insurance purchase requirements; (c) a statement that flood insurance may be purchased under the National Flood Insurance Program and may also be available from private insurers; and (d) a statement whether Federal Disaster Relief Assistance may be available in the event of damage to the building or mobile home caused by flooding in a federally-declared disaster.
A. Notice to Borrower
The bank must provide notice to the borrower, “a reasonable time before the loan closing.” The supplementary materials published with the regulations state that the agencies presume ten days to be a reasonable time before closing. However, the agencies add that what constitutes reasonable notice could vary based upon the individual facts of a given transaction, so the regulation does not prescribe a specific time for providing the notice. Generally, to insure that notice has been provided within a reasonable amount of time, borrowers must have an opportunity to become aware of their responsibilities under the flood laws and must have the opportunity to purchase flood insurance before completion of the loan transaction.
1. Alternative Method of Notice
The new regulations allow an alternative option for notifying borrowers. In lieu of providing the required disclosure to the borrower, the bank may obtain satisfactory written assurance from a seller or lessor that, within a reasonable time before the completion of the sale or lease transaction, the seller or lessor has provided such notice to the purchaser or lessee. The bank should retain a record of the written assurance from the seller or lessor for the period of time the bank owns the loan. A situation in which the alternate method of notice may be employed is where the lender is providing financing through a developer for the purchase of condo units and is not dealing directly with the individual unit purchasers.
2. Mobile Home Loans
The agencies also clarified that, with respect to lending on security of mobile homes, the notice requirements will not apply until the lender learns where the mobile home will be permanently located. These are sometimes referred to as “home only” transactions, in which the purchaser of the mobile home buys and finances the home separately from the land on which it will ultimately be located. In such cases, where the lender may not know where the mobile home is to be located until just before, or perhaps even after, the time of closing, the lender is unable to make a flood zone determination and cannot timely comply with the notice requirements. Banks may meet the notice requirements of the regulations by promptly determining the flood zone status of the property after learning the mobile home’s location and by notifying the borrower as soon as practical after making the flood zone determination. Although not required by the regulations, it is suggested in cases where the bank does not know the mobile home’s location when the loan closes, that the borrower be notified at closing that flood insurance will be required if the borrower places the mobile home in a flood zone.
A bank will be considered to be in compliance with the requirement for notice to the borrower by providing written notice to the borrower containing the language presented in Appendix A to Subpart S of Part 614 (http://www.gpo.gov/fdsys/pkg/FR-2015-07-21/pdf/2015-15956.pdf#page=44), within a reasonable time before the completion of the transaction. The notification must be signed by all borrowers and a copy should be retained in the loan file.
B. Notice to Servicer
In addition to notifying the borrower, the flood regulations require a bank to provide loan servicers with notice that the loan is a designated loan. Since lenders often do not know the identity of the servicer until well after the transaction has closed, notice is required to be provided to the servicer “as promptly as practicable after notice to the borrower, but in any event no later than the time the bank gives the servicer information concerning hazard insurance and taxes.” The notice to servicer requirements may be satisfied by providing the servicer with a copy of the notice to the borrower or by transmitting the notice electronically.
The new regulations will also require lenders, in connection with the making, increasing, extending, renewing, selling, or transferring of any loan, to notify the director of FEMA (or the Directors designee) in writing, during the term of the loan, of the servicer of the loan. Lenders will also be required to notify the director of FEMA (or the Directors designee) of any change in the servicer of the loan not later than 60 days after the effective date of such change. With respect to loans subject to RESPA, sending a copy of the notice of transfer of servicing will suffice so long as there is enough information to permit identification of the loan and the security property. The Director of FEMA has designated the insurance provider to receive the bank’s notice of the servicer’s identity. Upon any change in the servicing of the loan, the duty to provide notification will be transferred to the transferee servicer of the loan.
The director of FEMA is responsible for notifying the owner of the property covered by the contract, the loan servicer and the lender by first class mail, not less than 45 days before the expiration of any contract for flood insurance, of such expiration date.
C. Private Flood Insurance – Notice Requirements
The new law clarifies that flood insurance underwritten by a private company meets the requirements of the Act if it meets the underwriting requirements of Fannie Mae and Freddie Mac. A financial institution must accept qualifying private flood insurance when flood insurance is required.
A financial institution needs to disclose to a borrower, whose property is required to have flood insurance:
IX. STANDARD HAZARD DETERMINATION FORM
Effective January 2, 1996, lenders were required to use a Standard Flood Hazard Determination form in determining whether improved real estate or a mobile home securing a loan is located in a special flood hazard area, whether flood insurance is required and whether federal flood insurance is available. The form is used for all loans where improved real estate or a mobile home is offered as collateral. The form may be reused by the lender when increasing, renewing, or extending a loan (not when making a new loan), but it may not be more than seven years old and the lender must verify that no new flood map has been issued since the form was last used.
FEMA removed the form from Appendix A of its regulations (44 C.F.R. pt. 65), effective May 21, 1998, thus allowing FEMA to amend or otherwise change this form outside of the normal rulemaking process. The form may be obtained from FEMA by: (1) written request; (2) FAX; or (3) Internet access (http://www.fema.gov/media-library/assets/documents/225). Camera-ready copies are available from the FEMA Warehouse at 800-480-2520. The Standard Flood Hazard Determination Form, FEMA Form 81-93, was last revised in June, 2012, and includes a revision date of April, 2012. The form has an expiration date of May 30, 2015, and may be used in a reprinted, computerized or electronic format. Information on completing the form and the Standard Flood Hazard Determination Form instructions can be found at http://www.fema.gov/media-library/assets/documents/225.
X. RELIANCE ON PREVIOUS DETERMINATIONS
When is it allowable for a lender to rely on a previous flood determination? When increasing, extending, renewing or purchasing a loan secured by improved real estate or an affixed mobile home, a lender may rely on a previous flood zone determination under the following conditions:
A lender may not rely on previous determinations when it is making a new loan, except in the case of a subsequent transaction by the same lender involving the same property – in that case, the loan is treated like a renewal, thus allowing reliance on a previous determination.
The foregoing rules regarding reliance on previous determinations are subject to the following two exceptions:
In other words, if a lender knows of flood map changes making a previous determination inaccurate, then the previous determination cannot be utilized.
XI. PENALTIES
In addition to other civil remedies or criminal penalties which may apply, if a lender is found to have a pattern or practice of committing violations relating to flood insurance, the lender will be assessed a civil money penalty of up to $2,000 for each violation. The violations for which these penalties may apply include (1) making, increasing, extending, or renewing loans in violation of the regulation; (2) making, increasing, extending, or renewing loans in violation of the escrow requirements; (3) making, increasing, extending, or renewing loans in violation of the notice requirements, or (4) failure to provide notice to the borrower of lack of coverage and/or failure to force place flood insurance as required by the regulation. The penalties that apply under this section may only be issued after notice and an opportunity for a hearing on the record and no penalty may be imposed following the expiration of a four year period beginning on the date of the occurrence of the violation for which the penalty is authorized.
XII. FLOOD INSURANCE QUESTIONS AND ANSWERS
The Federal Banking Agencies have issued revised interagency questions and answers regarding flood insurance that may be accessed at http://www.nebankers.org/uploads/1/3/5/8/135813889/federal_register_p32865-32895_flood_q_and_a.pdf.
XII. COMPLIANCE CHECKLIST
1. Use most current FEMA map at time of closing to find flood hazard status of property location.
Flood maps may always be revised or amended. In cases involving second mortgages or refinancing, remember that a map may have changed since the first loan was made or that a wrong determination was made initially.
There is case law in which a lender was held responsible for flood damage when an appraiser reported property “out” (using old maps) when the property was really “in.”
Some lenders ask appraisers to use tax maps in conjunction with flood maps to help find the exact location of potentially insurable property or double check any available engineering survey.
2. Make use of the Standard Flood Hazard Determination form to determine whether improved real estate or a mobile home securing a loan is located in a special flood hazard area, whether flood insurance is required and whether federal flood insurance is available.
Note that Flood Insurance regulations now recognize that banks have express authority to charge a reasonable fee for making flood insurance determinations. The fee provisions are triggered when a borrower initiates action that results in the making, increasing, renewing or extending of a covered loan, when responding to map changes, or when insurance is forced placed.
3. Stick with the FEMA map in effect unless FEMA approved Letter of Map Amendment (LOMA) or Letter of Map Revision (LOMR) is issued.
A revision is most often requested by the community and an amendment may be requested by the borrower. But unless a FEMA approved letter is issued, lenders must use the current map.
4. Document the flood hazard determination for the loan file by using the Standard Flood Hazard Determination Form and give notice to the borrower if property is “in.”
A lender must document the flood hazard determination for the loan file by using the Standard Flood Hazard Determination Form. In addition, the file should contain a signed and dated copy of the required “notice” to borrower if the property is “in” indicating community status and program eligibility. The notice must be signed by the borrower and delivered at least 10 days prior to closing or at the time of commitment. It would be helpful to include the identity of who sent the notice to the borrower.
5. Present the flood insurance policy at closing if the property is “in” and retain the policy or “Certificate of Proof” for the loan file.
In lieu of the policy or copy of policy, a “Certificate of Proof of Purchase of Flood Insurance” (FEMA Form No. 81-1 (10/79)) would appropriately document the loan file.
Be sure to check if the amount of flood insurance meets minimum requirements. FEMA issues a reference table regarding minimum amounts of insurance to flood zone classifications.
A reminder: if improvements to property are not taken as security for the loan, the flood insurance is not required. Often, lenders determine that some buildings are not worth the $500 deductible or will soon be torn down. Such improvements may be all that is “in” and are not taken as security.
6. Consider if forced placement of flood insurance is required.
If a lender or servicer determines at any time (whether at origination or anytime thereafter) during the term of the loan, that the building or mobile home or any personal property securing the loan is not covered by flood insurance (or coverage is inadequate), the lender or servicer must notify the borrower that the borrower is required to obtain insurance for the term of the loan at the borrower’s expense.
In the event that the borrower fails to obtain the required insurance within 45 days of the notice, the lender or servicer must purchase the insurance on behalf of the borrower. This is known as “forced placement.” Forced placement may also be required when a lender determines that existing coverage is insufficient. In such a case, the additional amount of insurance that would be required would be the difference between (1) the existing coverage and (2) the lesser of the outstanding principal balance of the loan or the maximum relevant statutory coverage. Upon forced placement, the borrower may be charged for the cost of premiums and fees incurred by the lender or servicer in procuring the required coverage. Forced placement applies to all existing and future loans.
In the event that there is a dispute over coverage, a borrower and lender may make a joint request to the Director of FEMA to review the determination. The Director must make a final decision within 45 days as to whether the secured property must be covered or not.
7. Be sure that flood insurance policies are maintained through the life of the loan.
Lenders are responsible to see that flood insurance renewals are maintained. Some lenders escrow flood insurance premiums while others give notice to delinquent borrowers and renew policies for an additional fee or premium. The Flood Insurance regulations provide that banks that require the escrow of taxes, property insurance, premiums, fees, or other charges for a loan secured by residential improved real estate must require the escrow of flood insurance premiums and fees as well, pursuant to § 10 of RESPA. If banks do not require escrow accounts for residential improved real estate loans, then flood insurance is not required to be escrowed. Note that loans secured by commercial property are not subject to the escrow requirement for flood insurance.
The FDIC issued Financial Institution Letter 98-99 (October 1999) that provides a summary of steps a bank should take to be in compliance with flood insurance regulations. According to the FDIC, financial institutions should:
The FDIC concludes that:
If these steps are taken, financial institutions will not only be legally compliant, but will minimize risk to their loan portfolios from losses caused by flooding. The law requires these measures but they are also necessary from the perspective of safety and soundness. We believe that our supervised institutions will act to be in compliance with the requirements of the law. However, you should remember that the FDIC is required by the Flood Insurance Reform Act of 1994 to assess a civil money penalty against institutions that have a pattern or practice of violations of the flood insurance regulations. That penalty may be up to $350 per violation not to exceed $105,000 in any one calendar year.