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