Chances are a regulator or investor has reviewed your flood compliance program. They may have also asked to see documentation of your flood compliance procedures.
Based on provisions¹ of the Flood Disaster Protection Act of 1973 and the National Flood Insurance Reform Act of 1994, we hope you will find the following 10 flood compliance tips helpful:
1. Determine the property’s flood zone prior to loan closing, notify the applicant if flood insurance is required, and provide reasonable time (usually 10 days) to obtain a flood policy. There are three related actions here, but make sure that you always do them before you close the loan.
2. Document the loan file with the flood zone determination and ALL flood compliance activity, and use the required language for borrower notices found in the regulations. “Document” is the operative word. Keep a record of the flood zone and all other compliance actions you took in the loan file. Don’t forget to include any required wording in your notices.
3. Require proof of sufficient flood insurance coverage on each building located in an special flood hazard area (SFHA) to satisfy the minimum requirements of the regulation. Remember, you must require a coverage amount that is at least the lesser of the following amounts: (a) the outstanding principal balance of the loan; (b) the maximum amount of coverage available through the NFIP for the type of property; or (c) the insurable value of the property (i.e., 100% replacement cost value less the value of the land).
4. Escrow flood insurance premiums if you escrow other items, such as hazard insurance, fees, and taxes. Review or revise your escrow procedures if needed, so you don’t overlook this.
5. Monitor flood zone changes for the life of the loan and require flood insurance when a property becomes part of an SFHA. You’re not actually required to monitor flood zone changes, but you know that you must require flood insurance if a property becomes part of an SFHA. Wouldn’t it be better to know about flood zone changes? (Hint: Life of loan monitoring is a good way.)
6. Notify the borrower in writing and provide 45 days for the borrower to submit acceptable proof of insurance if proof of insurance is not provided or the coverage amount is not sufficient. Just keep in mind the “45-day rule” and give your borrower 45 days to send proof of an acceptable flood policy.
7. Purchase flood insurance if after the 45 days’ notice the borrower has not provided proof of acceptable flood insurance. Remember to do #6 above before this.
8. In addition to residential properties and mobile homes, require proof of sufficient flood insurance on commercial property, condominium units, and buildings under construction if the improvement is or will be located in an SFHA. Because the mandatory purchase requirements apply to any improved real estate located in an SFHA of a participating community, don’t forget to require flood insurance on commercial properties, condominiums, and buildings under construction.
9. For subordinate liens, if the property is located in an SFHA, verify that sufficient flood insurance is in place to cover ALL liens; require additional flood insurance if necessary. This may be a little tougher to fulfill, but you can ask your borrower, especially if it is a condition of the loan that adequate flood insurance is required to cover all liens.
10. If the borrower disputes the flood zone determination, do not waive the flood insurance requirement unless you have a letter of map amendment (LOMA) or letter of map revision (LOMR) from FEMA. You may want to assist your borrower in asking FEMA for a LOMA or LOMR so you will have an acceptable basis to waive the flood insurance requirement.
If you have other questions about flood compliance and insurance, contact your Tokio Marine Highland representative today, view our Private Flood Insurance page, or download our lender placed flood insurance product sheet.