Articles
FAQs
Coverage
Question: We are making a loan to a Limited Liability Company (LLC). We are requiring the members of the LLC to provide secured guaranties for the loan. One of the guarantors is providing a mortgage interest in his farm as collateral for his guarantee. The farm has a variety of improvements on it. Are the flood rules triggered by this secured guarantee?
Answer: Yes. When a new loan is made, secured by a guarantee of a third party and that guarantee is further secured by improved real estate, the security interest is so closely tied to the making of the loan that it is considered a designated loan triggering the flood insurance rules. Therefore, a flood determination must be obtained for each property that contains improvements and secures the guarantee prior to consummation.
Question: If a lender makes a loan that is not secured by real estate, but is made on the condition of a personal guarantee by a third party who gives the lender a security interest in improved real estate owned by the third party that is located in an SFHA in which flood insurance is available to collateralize the guarantee, is the loan considered a designated loan that requires flood insurance?
Answer: Yes. The making of a loan on the condition of a personal guarantee by a third party secured by improved real estate, which is located in an SFHA, is so closely tied to the making of the loan that it is considered a designated loan that requires flood insurance. See 2022 Interagency Questions and Answers Regarding Flood Insurance, question 12 – Other Security Interests (on page 228), for more information on the flood rules and coverage.
Question: If we take a mortgage on a property as an abundance of caution but do not perfect our lien by filing the mortgage, do we still have to abide by the flood rules?
Answer: Yes. The flood insurance rules are triggered when a lender makes, increases, renews, or extends a loan secured by an insurable structure. The regulation does not address perfection of security interest. Even if you do not file your mortgage at closing, the lender could always elect to perfect its interest at a later date. By signing the mortgage, the borrower has pledged the property as security for the loan.
Question: We are making a loan to a customer to purchase a mobile home that will be placed in a mobile home park. We will have a security interest perfected by a certificate of title to the dwelling. Are the flood rules triggered by our security interest in this mobile home title?
Answer: Yes, and this is an area frequently violated by lenders. According to the National Flood Insurance Reform Act of 1994, the law now brings into its scope a loan securing a mobile home that is, or will be, located in a Special Flood Hazard Area (SFHA). The loan need not include security in the real estate underlying the mobile home for the mandatory purchase provisions to apply. NFIP coverage is available only with respect to a structure or mobile home and not the land on which the structure or mobile home sits.
Determinations
Question: Borrower has asked for a new loan to be secured by real property. The bank obtained a flood determination on this real property 12 months ago. In order to rely upon the previous flood determination, how does the bank determine that the flood map has not changed?
Answer: The bank may make multiple loans to the same borrower secured by the same improved real estate and rely on the previous determination if it is not more than seven years old, the determination was completed on the Standard Flood Hazard Determination Form (SFHDF), and there have been no map revisions or updates affecting the security property since the original determination was made. To verify there have been no map revisions, the bank can use the FEMA Flood Map Service Center website at https://msc.fema.gov/portal/home. Once the property address is entered, the flood map number and effective date will appear on the webpage above a picture of the map. Another option to confirm there have been no map revisions is to ask the bank’s flood determination vendor for a recertification. The recertification is often done at no cost.
Question: I completed a flood determination for a loan over 60 days ago – approximately two weeks before the scheduled closing date but the closing was delayed. I am still using the same loan number, but the loan date will now be over one month later than originally anticipated. Can you tell me how long my flood determination is deemed “valid?”
Answer: The flood rules do not prescribe a specific time frame a determination is considered “valid.” Rather, bank loan policy or investor policy, if this is a loan you are selling, will dictate your course of action. If this is a loan you are selling, check with your investor to establish if you need to recertify your determination after a set time frame.
If this is an in-house loan, as long as the flood maps have not changed since you obtained the determination and your collateral property and borrower remain the same, your determination is still valid. FEMA provides a mapping tool you can use to identify the date of the most recent map. Go online to https://msc.fema.gov/portal/home and input the collateral property address. The FEMA map center tool will populate a screen that shows the map area as well as the map number and map date. If you print this out and retain it with your original determination, it will support that your determination was still valid at the time of loan closing because the determination reflects the most recent map information.
Question: Does a lender need to reconcile a discrepancy between the flood zone designation on the flood determination form and the flood zone associated with a flood insurance policy?
Answer: No, a lender need not reconcile or otherwise be concerned with a flood zone discrepancy. For NFIP policies issued under FEMA’s Risk Rating 2.0 – Equity in Action (Risk Rating 2.0), premium rates are no longer determined by the flood zone in which the property is located. Moreover, the flood zone is no longer included on the declarations page for NFIP policies issued under Risk Rating 2.0.
Flood insurance policies issued by a private insurer may still include the flood zone on the declarations page. Further, NFIP policies that have not been issued or renewed under Risk Rating 2.0 will include the flood zone on the declarations page. In these cases, lenders also need not reconcile any discrepancy.
Question: I have a loan secured by two adjacent properties, both located in a county that has not yet been mapped by FEMA. The bank included both properties on one standard flood hazard determination form. Is this okay?
Answer: A separate Standard Flood Hazard Determination form (SFHDF) is required for buildings on adjacent properties. However, if a single property contains multiple buildings, a listing of buildings on the parcel can be attached to the SFHDF. It is critical to note, however, if the buildings are located in a special flood hazard area, only one building can be insured under each NFIP policy. So, each building securing the loan would need to be insured and covered by a separate policy.
Question: Our bank “re-uses” flood determinations on new extensions of credit secured by properties we already have a mortgage interest in. Can we rely on a previous Standard Flood Hazard Determination Form (SFHDF) if the form has expired?
Answer: The answer to your question depends upon several related issues. First, the previous determination must be less than seven years old. Second, there must be no revisions to the flood map on which the property is located since the previous determination. Finally, the previous determination must be completed on a SFHDF. This final condition only requires that the determination be on a SFHDF (not necessarily the most recent version). Thus, use of an expired SFHDF is okay, provided the other conditions for reuse are met.
Question: When we order a flood determination through our service provider, we order life-of-loan monitoring. We did a loan in 1997 and did a life-of-loan flood determination at that time. The loan officer renewed the loan in February and relied on the previous determination. My understanding is that we cannot rely on the previous determination since it is more than seven years old. Is that correct or are we able to reuse the determination because of the life-of-loan monitoring?
Answer: The fact you have life-of-loan monitoring does not permit the bank to reuse a determination that is over seven years old. The Interagency Flood Guidance is clear: a flood determination can only be reused if it is less than seven years old and the flood maps have not changed. The guidance does not provide an exception when life-of-loan monitoring services have been provided by the determination vendor.
Question: The common practice at our bank is to acquire life-of-loan monitoring with all flood determinations and then we reuse these determinations for renewals, modifications, and increases. Our loan officers are aware of and abide by the rules related to reuse of standard flood hazard determinations (SFHDF). However, recently we discovered our determination vendor only advises the bank of map updates IF the change results in the property being mapped into or out of a flood zone. For those properties that were not in a flood zone and the result of the map change is that the property still is not in a flood zone, the bank is NOT notified. This causes a problem for us because the reuse rules indicate that if a new flood map has been issued, a new determination must be made; the determination cannot be used. In your experience, is this common practice with vendors? Any ideas of alternatives we may have?
Answer: Actually, this practice is common. The flood vendor is contracting with the bank to monitor the flood zone for the ONE loan the bank paid for. Typically, the contract indicates the determination is only applicable to the loan for which it was ordered and if life of loan monitoring is purchased, the vendor will notify the bank should a flood map change result in an insurance requirement change change.
Lenders who are using the same SFHDF for future loans are possibly violating the contract they have with their vendor. If you want to use a previously acquired SFHDF, notify the vendor and ask for a recertification. They typically cost $1-5. This issue drives home the importance of carefully reviewing and understanding the terms of vendor contracts!
Question: Why is there a 7-year limit if the flood certification is Life of Loan?
Answer: The 7-year time limit can be found in Regulation H – Flood Protection and is therefore included in each of the agency’s exam procedures. Here is that section from the Federal Reserve’s flood manual:
Reliance on Prior Determination
An institution may rely on a prior flood determination, whether or not the security property is located in an SFHA, and it is exempt from liability for errors in the previous determination if:
- the previous determination is not more than seven years old, and
- the basis for the previous determination was recorded on the SFHDF. https://www.federalreserve.gov/boarddocs/supmanual/cch/flood.pdf
Question: If our Flood vendor provides life-of-loan (LOL) updates on our current flood determinations, do we still need to check the flood map changes when we reference an existing flood determination on a refinance?
Answer: Yes. Although you have contracted with your vendor to notify you if a flood map has changed, this notification may come 2-3 months after the actual map change. And there have been times when the bank did not receive such notification from their vendor because the LOL coverage was tied to previous loan that has been refinanced. So, the regulators expect you to know that the map has not changed prior to relying on a previous determination.
Insurance Requirements
Question: We have a loan in process in our commercial department that will be secured by five residential real estate properties used as rentals. One of the five properties is located in a special flood hazard area (SFHA) and requires flood insurance coverage. In determining the amount of flood insurance coverage that is required, can we pro-rate the total loan amount since the property in a special flood hazard area is only one of five collateral properties?
Answer: No, you cannot pro-rate the loan amount. The required minimum amount of flood insurance coverage is always the lesser of:
- Total Loan Amount;
- Insurable Value of the structure(s) located in the SFHA; or
- Maximum NFIP insurance available.
If there is only one loan secured by the real property located in the SFHA, the total loan amount is the entire principal balance of that loan. This does not change when there is more than one property securing the loan. If there are additional loans secured by that same property, then the principal balance of all those loans is added together to get the total loan amount. Once the bank has determined the value for each of the three (total loan(s), insurable value, and maximum NFIP insurance available), the minimum amount of flood insurance that is required is the lowest of the three values. (May 2019 Disclosure)
Question: A property securing a loan in our portfolio has three separate commercial buildings located on it, all are in a Special Flood Hazard Area (SFHA). Why is a separate Standard Flood Insurance Policy (SFIP) policy required for each building?
Answer: The “one structure per policy” rule is a National Flood Insurance Program (NFIP) feature. The FEMA Flood Insurance Manual states both the Dwelling Form and the General Property Form insure only one building per policy. However, the dwelling policy does include coverage for a detached garage at the same location for up to 10 percent of the limit of liability on the dwelling. Detached garages are not covered by the dwelling policy if the garage is used for residential, business or farming purposes.
It is important to note however, private flood insurance policies may permit more than one structure to be insured on a single policy. The Interagency Q&A on the flood insurance rules, Private Flood Compliance 1, states “…a lender may accept a private flood insurance policy covering multiple buildings regardless of whether any single building covered by the policy has an insurable value lower than the amount of the per occurrence deductible.”
Question: Our bank is originating a loan secured by a building in a special flood hazard area. The building owner (our borrower) has leased the building to a third party and the lease requires the tenant to purchase and carry the flood insurance coverage. Does the flood insurance policy have to be held in the name of the borrower (the building owner) or can it be in the name of the tenant?
Answer: The Flood Disaster Protection Act does not require the flood insurance policy be in the name of a specific person. Therefore, we need to look to the insurance rules to determine who is allowed to obtain coverage. For NFIP policies, the FEMA Flood Insurance Manual includes a chart detailing who can purchase different types of flood insurance policies. For the “General Property Form” it states the building owner or unit lessee has an option to purchase coverage when there is a lease requirement to purchase insurance coverage. The insurance agent writing the policy could confirm policy owner eligibility as well. Additionally, regardless of which party obtains the flood insurance coverage, it will be important for the bank to carefully review the policy to verify, at a minimum, the property address, the amount of coverage is adequate and the bank is listed as loss payee.
Question: Our bank is originating a loan secured by a dwelling on stilts that is located in a special flood hazard area. The loan officer was told the borrower’s insurance agent said flood insurance shouldn’t be required since the house is on stilts. We cannot find any information saying the dwelling is exempt when on stilts. Is flood insurance still required on this loan?
Answer: You are correct that the flood insurance rules do not have any special exceptions for a dwelling on stilts. If the flood determination shows the dwelling is located in a special flood hazard area, flood insurance will be required. However, if the dwelling is on stilts, it is possible that it is elevated enough that FEMA would be able to remove it from the special flood hazard area designation. The borrower may wish to go through the process of attempting to obtain a Letter of Map Amendment (LOMA) or Letter of Map Revision (LOMR) through FEMA to determine if the flood risk is removed by the structural changes. If FEMA would issue a LOMA or LOMR, the bank may rely on it and remove the flood insurance requirement.
Question: We do numerous construction loans. Are we required to have flood insurance in place before the construction loan closes, or can we wait until construction has actually begun?
Answer: When a structure is to be built in a special flood hazard area that, when completed, will be a walled and roofed structure that will be eligible for coverage, flood insurance must be purchased to provide coverage during the construction period. The only practical way of implementing the flood insurance coverage is to require the purchase of the policy at the time that the development loan is made, to become effective at the time the construction phase is commenced, and in an amount to meet the mandatory purchase requirement.
Question: We would like to do one loan and cite two separate mortgages on two separate properties as collateral. One of the properties (the one being purchased) is in a flood zone. In an effort to reduce our customer’s flood insurance premium, we would like to rely on the property not located in the flood zone as our primary collateral and not rely as heavily on property in the special flood hazard area. Can this be done somehow?
Answer. No. The National Flood Insurance Program Rules are very cut and dry. It does not matter if the property located in a special flood hazard area is the primary or secondary source of collateral or even if the mortgage interest is taken as “an abundance of caution.” If the collateral property is located in a special flood hazard, flood insurance must be in place prior to closing. The amount of flood insurance required is the lesser of the principal balance of the loan, the insurable value of the buildings located in the special flood hazard area or the maximum coverage available under the NFIP. In your case, the only way to avoid the requirement of flood insurance is to not take mortgage interest in the property being purchased and rely solely on the other property as collateral.
Question: Our bank is reviewing a new credit request secured by improved real estate. The improvements consist of two separate structures, both are walled and roofed, and are connected by a ground level walkway. There are about thirty feet between the buildings. The walkway also has walls and a roof. Both buildings and the walkway are located in a Special Flood Hazard Area and flood insurance is required. Since the buildings are connected by the walkway, are the structures considered to be one building and covered with one flood insurance policy or are the buildings insured separately? What about the walkway?
Answer: The National Flood Insurance Program (NFIP) Manual explains how a structure qualifies as a single building and how to insure additions and extensions. Single buildings are defined in two ways.
The first definition is for structures that are separated from other buildings by clear space. The buildings in this example are separated by clear space and fit this definition.
The second definition is for buildings that are one structure, but are divided by solid, vertical, load-bearing walls. These walls must divide the building from its lowest level to its highest ceiling and have no openings. If there are openings in these walls, there are additional criteria to consider. For example, one building could be divided into units and each unit has different owners. Each unit may be insured as a separate building.
If there is access through the division wall by a doorway or other opening, the structure must be insured as one building unless it meets all of the following criteria:
- It is a separately titled building contiguous to the ground; and
- It has a separate legal description; and
- It is regarded as a separate property for other real estate purposes, meaning that it has most of its own utilities and may be deeded, conveyed, and taxed separately.
In this example, the buildings have common ownership but are separated by clear space, so they would be insured separately. Additions and extensions attached to and in contact with the building by a rigid exterior wall, a solid load-bearing interior wall, a stairway, an elevated walkway, or a roof can be insured. The insured has the option to insure the addition or extension separately or include it with the building policy. If insured separately, the extension or addition must be clearly described. The walkway can be insured separately or included with the policy for one of the buildings.
Question: I am doing a flood compliance audit and found two loan files in which the flood zone on the insurance policy declaration (dec) page does not match the flood zone on our latest flood determination. In both cases the property was recently remapped and the properties were rezoned into higher risk zones. We contacted the borrowers after the remapping and told them they needed to obtain insurance. Both complied with our request but both policies have the old zone rating, not the new zone rating. The flood policy dec page indicates the policies are “preferred risk policies.” What does that mean and does that make a difference in how the policy is issued?
Answer: Buildings located in a moderate-to-low risk flood zone are eligible for a “Preferred Risk Policy” (PRP) from FEMA. PRP premiums are significantly lower than premiums for a structure in a higher-risk Special Flood Hazard Area (SFHA). If a building in a moderate-to-low-risk flood zone is remapped into a high-risk SFHA, lenders must require flood insurance. While the property owner may have been able to buy a lower-cost PRP before the new flood maps became effective, any policy purchased after the map revision would have to be rated at more expensive standard rates. Recognizing the financial burden this places on affected property owners and that updating flood maps is continuing with FEMA’s new Risk MAP (Mapping, Assessment and Planning) effort, FEMA has extended the eligibility of writing the lower-cost PRP for two years after a revised flood map’s effective date.
When PRPs are issued on newly remapped properties, the company that writes the flood insurance policies, not the lender, will be responsible for determining and validating PRP extended eligibility. The NFIP requires both flood zones (Current Flood Zone and Flood Risk/Rated Zone) be detailed on the PRP dec page. The Current Flood Zone should match the flood zone identified on the lender’s Standard Flood Hazard Determination Form (SFHDF). The lender should retain both SFHDFs in the loan file. The bank will want to monitor PRP policies to ensure at the expiration of the two-year period following the flood map’s revision date, the PRP policy is converted to a standard flood policy
Question: We have a business purpose loan that is secured by a Morten building in which inventory and equipment for the business is stored. The building is located in a special flood hazard area in a participating community. We have a collateral interest in the building as well as the inventory and equipment. We know we need to require flood insurance on the building, but do we also need to require insurance on the inventory and equipment? If so, how much insurance should we require on the building versus the inventory and equipment?
Answer: Yes, you must require flood insurance on both the building and the contents if you have a collateral interest in both, and they are located in a special flood hazard area in a participating community. The method of calculating the required insurance amount remains the same under the flood rules when multiple structures secure a loan or a structure and contents secure the loan. The lender must require insurance equal to the lesser of the loan amount; the maximum insurance available under the NFIP; and the insurable value of the structure and contents. Both the structure and contents must be insured but the lender and borrower may decide how to split the insurance coverage between the structure and contents. The Interagency FAQ on the flood insurance rules provides the following example to illustrate:
Example: Lender A makes a loan for $200,000 that is secured by a warehouse with an insurable value of $150,000 and inventory in the warehouse worth $100,000. The Act and Regulation require that flood insurance coverage be obtained for the lesser of the outstanding principal balance of the loan or the maximum amount of flood insurance that is available under the NFIP. The maximum amount of insurance that is available for both building and contents is $500,000 for each category. In this situation, Federal flood insurance requirements could be satisfied by placing $150,000 worth of flood insurance coverage on the warehouse, thus insuring it to its insurable value, and $50,000 worth of contents flood insurance coverage on the inventory, thus providing total coverage in the amount of the outstanding principal balance of the loan. Note that this holds true even though the inventory is worth $100,000.
It should be noted in this example, the flood insurance requirements could also be satisfied by placing $100,000 worth of flood insurance on the inventory and $100,000 on the building. Much flexibility is given to the lender and borrower as long as each piece of collateral has some amount of insurance on it and that the combined insurance amount is at least equal to the lesser of the loan amount, the insurable value of the structure/contents or maximum amount of insurance available through the NFIP.
DETACHED STRUCTURE EXEMPTION
Question: We are doing a loan for the purpose of purchasing an acreage and taking a collateral interest in the acreage. The house located on the collateral property is not in a special flood hazard area but the corner of another structure (a pole building) that will be used to store the borrower’s boat and camper is in the special flood hazard area. Do we have to require flood insurance on the pole building or can we use the detached structure exemption? We are questioning our ability to use the detached structure exemption because in this case, we will not have flood insurance on the house because it is not in the flood hazard area.
Answer: Use of the detached structure exemption is not dependent upon the house or any other structure on the collateral property being covered by flood insurance. Instead, the detached structure exemption can be used for “any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence.” FDIC rules, §339.4(c).
The criteria to use the exemption are threefold:
- First, the structure must be “part of a residential property.” That is it must be used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes.
- Second, the bank must verify the structure is “detached” from the primary residential structure – meaning, it is not joined by any structural connection to that structure.
- Finally, the bank must verify the structure does not “serve as a residence.” The FDIC rules say the bank must make a good faith determination that the structure is not intended for use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities.
If the pole building you are wising to exempt from flood insurance coverage meets each of these criteria, the detached structure exemption can be used and the flood insurance requirement can be waived by the bank. Note, we cite the FDIC rules here but the Federal Reserve and Office of Comptroller of the Currency have substantially similar rule provisions.
Question: Is the detached structure exemption to the mandatory flood insurance purchase requirement for collateral properties located in a special flood hazard area applicable to consumer and business-purpose loans or just consumer loans?
Answer: The detached structure exemption is available to both consumer and business-purpose loans if the loan is secured by a “residential property.”
Question: Is a detached structure located on a residential real estate property used for a business purpose eligible for the detached structure exemption? For instance, are barns or grain silos on acreage or building with an auto repair shop located on small acreage eligible?
Answer: While the detached structure exemption applies to business-purpose loans, the structure itself must be used for personal, family or household use. The preamble to the final rule states “the Agencies believe detached structures used for commercial, agricultural or other business purposes should be adequately protected by flood insurance as collateral given their value to the borrower and lender…” (See page 43222, FR 80-139)
Question: Is a mixed-use structure eligible for the detached structure exemption?
Answer: The preamble to the final rule indicates the Agencies were aware that certain structures may be used for both residential and business purposes but decided to limit the exemption to only to structures with a “primarily residential purpose” that are part of a residential property. Each creditor should, within its policies and procedures, outline how it will determine a structure’s “primary purpose” and adequately document its findings in the loan file. While the rule does not provide a “bright line” test for making this determination, the following factors could be taken into consideration when making a determination:
- Did the borrower indicate the structure will be used as a residence?
- Does the structure have bathroom, kitchen and sleeping facilities?
- Is the structure traditionally used as a residence? (E.g., a guest house versus a garden shed)
- Is the structure traditionally used for a purpose other than a residence? (E.g., a horse barn with small sleeping room and bathroom)
ESCROW REQUIREMENTS
Question: Are certain loans exempt from the requirement to escrow for flood insurance premiums?
Answer: Yes. Regardless of the creditor’s size or if the creditor currently escrows for other premiums, the following loans are exempt from the requirement to escrow for flood insurance premiums:
- Loans extended primarily for business, commercial, or agricultural purposes;
- Subordinate lien loans where a senior lien secured by the same residential improved real estate or mobile home has sufficient flood insurance in place;
- Condominium loans when adequate insurance is held and paid for by the condominium association;
- Loans secured by a single condominium when adequate insurance is held and paid for by the condominium association;
- Home equity lines of credit;
- Nonperforming loans that are 90 days or more past due; and,
- Loans with terms of no longer than 12 months.
Question: The small creditor exemption to the escrow requirement indicates the creditor has to be under the asset-size threshold AND as of July 6, 2012: (1) was not required under Federal or State law to deposit taxes, insurance premiums fees, or any other charges in an escrow account for the entire term of any loan secured by residential improved real estate or a mobile home; and (2) did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees or any other charges in an escrow account for any loans secured by residential improved real estate or a mobile home. If we only escrowed for HPMLs before July 6, 2012, and are under the threshold, can we use the small creditor exemption?
Answer: Yes. The regulatory agencies have indicated an institution could qualify as a “small creditor” if, in addition to meeting the other small creditor criteria, it:
- Escrowed only for HPML loans and the escrow could be cancelled in accordance with Reg. Z because it was the regulation (not the lender) requiring the escrow; and/or,
- Offered voluntary escrows, meaning the account was not required by the creditor as a condition of the loan and the escrow was within the control of the borrower (they could cancel it and obtain the funds or make additional voluntary deposits).
Question: We started requiring escrow accounts after July 6, 2012, and continue to require escrow accounts for HPML loans and loans with less than an 80 percent LTV, but are under the asset-size threshold. Can we use the small creditor exemption and not require borrowers to escrow for flood insurance premiums?
Answer: Technically, as long as you remain under the asset-size threshold, and you only required escrow accounts for your HPMLs and non-HPML, higher LTV loans after the July 6, 2012 deadline, you could still use the exemption. However, if your institution has the ability to escrow, you may want to rethink a decision not to require escrow accounts given the significant penalties that can be imposed should the borrower’s flood insurance lapse. Also, keep in mind the rule remains in place that you MUST escrow for flood insurance premiums if you escrow for other insurance premiums such as hazard insurance.
Question: The small creditor asset size exemption stipulates the creditor must have had assets of less than $1 billion as of Dec. 31 of either of the prior two calendar years. What if we are under $1 billion as of Dec. 31 of the previous year but go over $1 billion during the course of year and then dip back down just before Dec. 31st again?
Answer: The asset-size test is measured as of Dec. 31 of the prior two calendar years. The institution’s assets at any point during the year have no bearing on the determination.
Question: What happens if we exceed the $1 billion asset limit for two consecutive calendar years?
Answer: By July 1 of the first calendar year during which the lender has a change in status, it must begin to require an escrow account for flood insurance premiums for any MIRE event (making, increasing, renewing or extending credit secured by a residential property located in a special flood hazard area) that occurs. In addition, by September 30 of the first calendar year in which the lender has a change in status requiring it to escrow, the lender must provide existing covered borrowers whose residential properties are located in a special flood hazard area and for which the lender requires flood insurance, the option to begin escrowing for flood insurance premiums. It should be noted, however, the notice of option to escrow is not required for borrowers if the loan (not the lender) is subject to one of the loan exemptions detailed above.
Question: We are trying to determine if we qualify as a “small creditor” under the Interagency final rules implementing the Biggert-Waters Act and Homeowner Flood Insurance Affordability Act’s exemption from the mandatory requirement to escrow for flood insurance premiums. We are under the asset-size threshold and do not require or offer escrow accounts for our in-house mortgage loans. However, we do originate and sell secondary market loans, and, sometimes as a requirement for purchase by the secondary market investor, we will conduct an Initial Escrow Analysis and collect escrow deposit at consummation. We close the loan in our name and then post-closing, sell the loan and transfer the escrow deposit to the investor. We were involved in this activity prior to July 6, 2012. Does the fact we collected escrow deposits for these secondary market loans constitute having a “policy” of requiring escrow accounts and disqualify us as a “small creditor”?
Answer: This is a question that has been debated, and is one that up until just recently we have received mixed regulatory guidance. Thankfully, during the October 22nd, 2015 Compliance Outlook webinar, hosted by the Federal Reserve Board in participation with the FDIC and OCC, some clarity was provided. During the webinar, when asked this exact question, the speaker indicated that a creditor would NOT be disqualified as a “small creditor” if it otherwise met the small creditor criteria but on occasion it collected an escrow deposit at consummation on loans sold to secondary market investors because:
- The originating lender was only collecting the escrow deposit on the directive of the investor as a condition of the sale; and,
- The originating lender sells the loan and transfers the escrow deposits shortly after closing (thus, does not open or maintain the escrow account).
The speakers did caution lenders who, on or before July 6, 2012, originated secondary market loans and collected escrow deposits as a condition of the sale of the loan but maintained the servicing of the loan and escrow account would NOT qualify for the small lender exemption. The exemption is intended to grant relief to lenders that do not have the staff and operating systems to maintain escrow accounts. Lenders that service mortgage loans with escrow accounts are deemed to NOT need this relief.
Question: Regarding the effective date on the FEMA Flood Map Service Center, you stated that was the date you did the search. That is incorrect. It is the actual effective date of the flood map.
Answer: You are right, that statement is incorrect. The date reflected in the results is in fact the effective date of the flood map that covers that property. We apologize for the incorrect information.
Question: We received notice from our flood vendor that an area has been remapped and several collateral properties that were not previously located in a special flood hazard area, have now been remapped into a higher risk zone requiring flood insurance. We have notified our impacted borrowers and are working with them to ensure they have adequate flood insurance in place. Our question is, are we required to escrow for the flood insurance premiums when an area is remapped? We do not qualify as a small servicer and understand we must escrow for flood insurance when we make, increase, renew or extend credit secured by a residential property located in a special flood hazard area, but we are not sure if remapping also triggers the flood escrow requirement.
Answer: The preamble to the final rule (top of page 34) establishing the flood insurance escrow requirements addressed this very topic. It stated, “Another financial institution commenter requested that the Agencies clarify that a flood map change on or after Jan. 1, 2016, that causes a building, which had not previously been located in an SFHA, to be located in an SFHA would not impose a duty on a lender to begin escrowing flood insurance premiums and fees for a loan that is secured by such building. Section 102(d) of the FDPA, as amended, applies to loans that experience a triggering event on or after Jan. 1, 2016. Because a map change is not a triggering event, lenders would not be required to escrow flood insurance premiums and fees based solely on that change.”
Thus, the bank is NOT required to establish an escrow on an existing loan where flood insurance is now required due to a map change. However, once the bank makes a new loan secured by that property, or increases, renews, or extends the existing the loan secured by the property, you must establish an escrow account.
Private Flood Insurance
Question: We have a customer presenting a private flood insurance policy in fulfillment of the requirement to maintain flood insurance on their collateral property located in a special flood hazard area. The private policy does not contain the “compliance aid statement” so we need to evaluate the policy to determine if it meets the regulatory requirements to be deemed “private flood insurance.” In reading the rule, it says the private policy must provide coverage “at least as broad” as a Standard Flood Hazard Insurance Policy. How do we make that determination?
Answer: The rule indicates a private policy will be deemed to provide coverage “at least as broad” as a Standard Flood Insurance Policy if these five criteria are met:
- The policy must define “flood” to include events covered under SFIP, i.e. a general and temporary condition of partial or complete inundation of two or more acres of normally dry land area or of two or more properties (at least one of which is the policyholder’s property) from: overflow of inland or tidal waters; unusual and rapid accumulation or runoff of surface waters from any source; or mudflow or collapse or subsidence of land along the shore of a lake or similar body of water as a result of erosion or undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood.
- Policy coverage must include building property, personal property (if purchased) and increased cost of compliance
- Policy deductibles are not higher than max offered in Standard Flood Insurance Policy: $10,000 for single-family and 2-4 unit residential building and $50,000 for other residential, non-residential, or other non-residential
- Policy must provide coverage for direct loss caused by flood provided and may only exclude other causes of loss excluded in SFIP.
- Policy does not contain conditions that narrow coverage provided under SFIP other than exclusions provided in a Standard Flood Insurance Policy.
The IBA compliance team has developed a checklist to assist member banks in reviewing private flood insurance policies to determine if it meets the regulatory requirements. The Private Flood Insurance Review Worksheet can be found here under Loan Forms and Compliance Guides > Flood Disaster Protection Act.
Question: If a borrower is not using a local flood insurance carrier, then who is the suggested private carrier under this rule?
Answer: The rule does not make any recommendations regarding the use of a specific private insurance carrier. The rule requires the insurance company be licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located. This includes an insurance policy issued by a surplus line insurer recognized, or not disapproved, by the State insurance regulator of the State or jurisdiction where the insured property is located. And of course, the borrower retains the ability to obtain a flood policy issued thru the National Flood Insurance Program if they wish.
Question: The NFIP maximum coverage limit for a single family home is $250,000. I have a mortgage loan request of $300,000. If the customer brings in a private policy, must we require $300,000 in coverage?
Answer: No, the requirements for coverage did not change with this rule. When a property is taken as collateral that is located in a special flood hazard area, and the community in which the property resides participates in the NFIP, a regulated lending institution is required to ensure the property is covered by the lesser of the maximum insurance available for that structure under the NFIP, the outstanding amount of all loans secured by that structure, or the insurable value. Even though the borrower may be able to obtain insurance greater than the maximum under the NFIP from a private insurance carrier, the lender is only required to show evidence of insurance based on the lesser of these three values, using the maximum insurance available under the NFIP. From a safety and soundness perspective, your bank could always require more coverage.
Question: Should we review our policies or Declarations pages to determine if the policies were issued under the NFIP or are Standard policies issued by a private insurer? Then based on this review, make the decision on if we will accept the Standard Insurance based on what we find in the policy according to the rules?
Answer: If by “standard policy” you are referring to a flood insurance policy issued by an approved private insurance company not issued under the NFIP, the answer is yes. As stated above, if the policy is issued under the NFIP, these new rules do not apply. If it is a non-NFIP policy, you need to either look for the Compliance Aid Statement or perform the policy review as discussed in the webinar to determine if you must accept the private flood policy.
Question: Are we required to verify the specific flood zone covered by a private flood insurance policy the same as the NFIP to make sure it matches the SFHDF?
Answer: Yes. Regardless of whether the policy is an NFIP policy or private flood policy, the lender must still ensure that policy covers the correct property, the amount of insurance is sufficient, the policy includes the correct risk rating (flood zone) and the lender and borrower are listed as the mortgagor and mortgagee. These are flood program requirements regardless of the specific type of policy. If there is a discrepancy in flood zones, this should be resolved using the same process lenders use for NFIP policies.
Question: We have a customer who is not in a flood zone, but carries flood insurance as they have had flooding in the past. They currently have a private policy which the bank has in file. Would the bank need to monitor situations like this where they are not required by the rule to have the flood coverage in place?
Answer: No. Carrying flood insurance in this situation is optional for the borrower unless the lender has required it under safety and soundness concerns. Both the current and the new rule on private flood policies only apply to loans secured by a structure located in a special flood hazard area within a participating community. However, if the flood map were to change in a way that now includes this structure, a policy review would be required to ensure the policy is acceptable under the mandatory or discretionary requirements.
Question: Just to be clear, if we are originating a 1-4 family loan and the loan amount is greater than the NFIP maximum coverage amount of $250,000, the borrower will need to get private insurance to equal the loan amount including all liens. Correct?
Answer: No. As stated above, the requirement to have insurance for the lesser of the three (FEMA maximum, insurable value, and total loan amount) has not changed. Even though a private insurer has the ability to issue a policy for greater than the amount allowed under the NFIP, the lender is only required to insure coverage is the lesser of the three amounts. The lender may require the borrower to obtain more than $250,000 for safety and soundness reasons, but the flood rules base the insurance maximum on the maximum coverage available under the NFIP.
Question: How can a bank tell if a flood insurance policy is a National Flood Insurance Program (NFIP) policy?
Answer: There are three types of standard flood insurance policies issued under the NFIP – the Dwelling Form, the General Property Form, and the Residential Condominium Building Association Policy (or RCBAP) Form. The type depends upon the insured property. The Dwelling Form covers 1-4 family properties. The General Property Form covers residential properties with 5+ units and non-residential structures. The RCBAP Form is issued to a condominium association on behalf of the association and the unit owners. All three types of policies should state the form type (Dwelling, General Property or RCBAP), and may also include a notation that the policy is a standard flood insurance policy. The declarations page of a NFIP policy typically includes a NFIP number and NFIP policies typically include “federal policy service” fees and other NFIP charges.
Question: When the private flood insurance rules become effective on July 1, 2019, will banks be required to review private flood insurance policies that were in place prior to July 1, 2019 to determine if the policy meets either the mandatory acceptance, the discretionary acceptance, or the mutual aid society plan requirements?
Answer: During an interagency private flood insurance webinar held on June 18, 2019, the regulators stated there is no regulatory requirement to review existing private flood insurance policies. However, as of July 1, 2019, banks should review new private policies and private policies that renew for compliance with the private flood insurance rules. In addition, a review of private policies on existing loans should be completed if a MIRE (make, increase, renew or extend) event occurs involving the secured property.
Question: Regarding the mandatory acceptance provision of private flood insurance, must the compliance aid statement included on the private policy be the exact language provided in the rule or can the language be substantially the same, in order for a bank to rely upon the statement and not require further review of the private flood insurance policy?
Answer: This was also addressed in the interagency private flood insurance webinar held on June 18, 2019. The regulators said the language of the compliance aid statement must be exactly as stated in the rule for the bank to rely on the statement as proof the policy meets the statutory definition of private flood insurance without further review. The exact wording is as follows:
“This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”
Question: For the purpose of forced place flood insurance, our bank’s practice is to purchases a NFIP policy. We were recently alerted to the fact that if our loan customer provides a qualifying private flood insurance policy as proof of insurance, NFIP program rules prohibit us from canceling the force-placed NFIP policy. FEMA indicates they do not have a cancellation code that covers such situations. If this is the case, who is to cover the premium for the NFIP flood policy?
Answer: The FDIC has confirmed with FEMA that a NFIP policy cannot be cancelled mid-term if it is being replaced by a private flood insurance policy. FEMA can, however cancel a NFIP policy mid-term if replaced by another NFIP policy. It should be noted that this issue could also apply to MPPP policies as FEMA also issues them. While flood regulations allow the creditor to charge the borrower for the cost of the forced-placed policy on day one following the date of lapse (defined as the expiration date provided on the policy), the regulation also requires the creditor to, within 30 days of receiving evidence that the customer has obtained sufficient coverage, terminate any force-placed insurance policy and refund to the borrower any premium and related fees charged during the overlapping coverage.
If FEMA cannot cancel the force-placed NFIP policy because it was replaced with a private flood insurance policy, what is the creditor to do? First, the creditor should ensure the private flood insurance policy meets the mandatory acceptance provisions under the Private Flood Insurance Rule that went into effect July 1, 2019. If it does, the creditor must focus on potential consumer harm. This means the creditor, even if they cannot cancel the NFIP policy, must refund any premium charged to the borrower that constitutes a period of overlap with their private flood insurance policy. Although the creditor will still be responsible for the full cost of the force-placed NFIP policy, they cannot pass the cost on the customer for the amount of overlap.
The FFIEC continues to work with FEMA on fixing this issue but until that time, creditors may have a couple of options. First, consider purchasing a private flood insurance policy that may be cancelled mid-term instead of a NFIP policy issued by FEMA. Creditors may also wait to purchase the forced-placed NFIP policy until the 30-day grace period is about to expire to reduce the likelihood of an overlap period.
Notice Requirements
Question: Who gets the flood notice when the property securing the guarantee is determined to be in a special flood hazard area (SFHA), the borrower or the guarantor?
Answer: If any of the properties securing the guarantee are found to be in a SFHA, the Notice of Special Flood Hazards should be provided to the borrower and the guarantor. See the preamble to the July 21, 2009 Federal Register (74 FR 35930 July 21, 2009):
Proposed question and answer 66 (final question and answer 73), addressed whether the notice had to be provided to each borrower for each real estate related loan. The proposed answer explained that in a transaction involving multiple borrowers, the lender is only required to send notice to one borrower, but may provide multiple notices if the lender chooses. The Agencies received a comment on a related issue asking who should receive the notice if, at the time of increase, real estate collateral has been hypothecated by a guarantor as security on the borrower’s loan. If a lender takes a security interest in improved real estate owned by a guarantor (not simply pledged by a guarantor) located in an SFHA, then flood insurance is required and the notice should be sent to both the borrower and the guarantor.
Remapping Issues
Question: The Bank’s flood vendor just notified us of properties securing existing loans that are now considered to be located in a SFHA due to a map change. What are we required to do next?
Answer: The Act requires the lender or its servicer to provide to the borrower the Notice of Special Flood Hazards and require the borrower to purchase flood insurance when a lender learns that a property requires flood insurance coverage because it is in an SFHA as a result of a flood map change. If the borrower fails to purchase flood insurance on their own, the Bank is required to begin the force-placement process.
Question: Our market area has recently been re-mapped by FEMA. I understand the flood rules do not require us to monitor the collateral properties in our loan portfolio for changes in the flood maps unless we know or “have reason to know” there have map changes. How would I have “reason to know” of map changes?
Answer: The Bank becomes aware of the property’s flood status in several ways:
- The Bank has a MIRE event. MIRE means to Make, Increase, Renew or Extend the loan secured by a property located in SFHA. Due to the MIRE event, a new determination is obtained and the Bank discovers property’s status has changed due to information on the new determination.
- The Bank has obtained life of loan flood determinations from a flood vendor, and the flood vendor notifies the Bank of a map change. When this occurs, the Bank needs to investigate and determine if any existing loans are secured by properties now deemed to be in a SFHA. It is important that each flood vendor currently and previously used by the Bank have up to date contact information, so those notification emails are received by the Bank. The Bank may request from each flood vendor a list of loans they have identified in a SHFA as a way to periodically ensure that the Bank has all loans secured with improved property located in a SFHA properly insured.
Question: If our flood determination vendor provides life-of-loan updates on our current flood determinations, do we still need to check the flood map changes when we reference an existing flood determination on a refinance?
Answer: Yes. Although you have contracted with your vendor to notify you if a flood map has changed, this notification may come 2-3 months after the actual map change. And there have been times when the bank did not receive such notification from their vendor because the life of loan coverage was tied to previous loan that has been paid in full or refinanced. So even though you may have life of loan monitoring on the determination, regulatory expectations are the bank will verify the flood maps have not changed prior to reusing an existing determination.
Question: When the loan was made, the property securing the loan was NOT located in a Special Flood Hazard Area (SFHA). We were recently notified that the property was remapped into a SFHA. However, the community where the property is located does not participate in the National Flood Insurance Program (NFIP). Is flood insurance now required on this loan?
Answer: No. Flood insurance is required when a property is located in a SFHA, and the property is located in a community that participates in the NFIP. However, if the property securing the loan is located in a SFHA, but in a nonparticipating community, the creditor is not required by the flood insurance rules to require flood insurance on the property. Creditors are however, still required to obtain a flood determination, and must send the notice of special flood hazards to the borrower to notify the borrower that flood insurance coverage under the NFIP is not available because the community does not participate in the NFIP.
The FDIC Consumer Compliance Examination Manual states the following:
Although a lender may make, increase, extend, or renew a loan in a nonparticipating community, a lender is still required to determine whether the security property is located in an SFHA and if so, to notify the borrower. The lender must also notify the borrower that flood insurance coverage under the NFIP is not available because the community does not participate in the NFIP. If the nonparticipating community has been identified for at least one year as containing an SFHA, properties located in the community will not be eligible for federal disaster relief assistance in the event of a federally declared disaster.
Because of the lack of NFIP flood insurance coverage and limited federal disaster assistance available, a lender should carefully evaluate the risk involved in making such a loan. A lender making a loan in a nonparticipating community may want to require the purchase of private flood insurance, if available. Also, a lender with significant lending in nonparticipating communities should establish procedures to ensure that such loans do not constitute an unacceptably large portion of the financial institution’s loan portfolio.
Question: Our town had a flood map change. The bank has a new commercial loan request to finance a rental property for a long-time customer. The bank will be cross collateralizing this loan with 10 other properties we have as collateral on existing loans. Do we have to do a new flood determination on each of the properties we already have mortgages on if the flood determinations are less than 7 years old?
Answer: Yes, since there were updates or revisions to the flood maps, a new flood determination is required. Per the guidance in the Interagency Questions and Answers Regarding Flood Insurance:
SFHDF 4. May a lender rely on a previous determination for a refinancing or assumption of a loan or multiple loans to the same borrower secured by the same property?
It depends. The Act (42 U.S.C. 4104b(e)) permits a lender to rely on a previous flood determination using the SFHDF when it increases, extends, renews, or purchases a loan secured by a building or a mobile home. Under the Act, the “making” of a loan is not listed as a permissible event that permits a lender to rely on a previous determination. When the loan involves a refinancing or assumption by the same lender who obtained the original flood determination on the same property, the lender may rely on the previous determination only if the original determination was made not more than seven years before the date of the transaction, the basis for the determination was set forth on the SFHDF, and there were no map revisions or updates affecting the security property since the original determination was made. Further, if the same lender makes multiple loans to the same borrower secured by the same improved real estate, the lender may rely on its previous determination if the original determination was made not more than seven years before the date of the transaction, the basis for the determination was set forth on the SFHDF, and there were no map revisions or updates affecting the security property since the original determination was made. These loans are extended by the same lender, to the same borrower, and are secured by the same improved real estate, and, therefore, these types of transactions are the functional equivalent of an increase of a loan.
When the loan involves a refinancing or assumption made by a lender different from the one who obtained the original determination, this would constitute the making of a new loan, thereby requiring a new determination.
Question: We have recently had flood map revisions in our area resulting in properties that have not been in a Special Flood Hazard Area (SFHA) in the past, now located in a SFHA. Because of this remapping, we failed to have evidence in a loan file to confirm flood insurance was in place prior to closing a new loan because the FEMA flood policy details the “new business effective date” as of the date FEMA received the premium – which was well after loan consummation. What documentation can we include in our loan file to evidence that we did have flood insurance in place prior to consummation on this new purchase-money loan?
Answer: It is imperative the Bank be able to show documented evidence that flood insurance was in place prior to or the same day as consummation. Such evidence could include a completed NFIP policy application along with a dated, paid receipt to evidence the premium was paid prior to loan closing. With such documentation FEMA should have the ability to evidence an accurate “effective date” on the policy.
Tools
Detached Structure Exemption Worksheet
Flood – HPML Escrow Requirements
Flood Insurance Calculation Form
Flood Zone Worksheet (save to your desktop to work on)
Force-Placed Hazard & Flood Insurance Guide
Private Flood Insurance Mandatory vs Discretionary Acceptance Comparison Chart
Private Flood Insurance Policy Review Checklist
Standard Flood Hazard Determination Form – Sept. 30, 2023 expiration (Please download form and open with Adobe Acrobat Reader to view.)