We have a mortgage loan borrower whose outstanding loan balance is $8,000. Their property’s insurable value is $100,000, and the maximum National Flood Insurance Program (NFIP) coverage is $250,000. Can we require the borrower to obtain $250,000 in coverage rather than $8,000? Would there be any concerns if we force place flood insurance in the amount of $250,000?

We would caution against requiring the borrower to obtain $250,000 in coverage in this scenario, since it far exceeds the amount the borrower would recover in the event of a loss. Additionally, we believe you are prohibited from force placing insurance in an amount exceeding the minimum amount required under the NFIP.

The minimum amount of flood insurance required under the NFIP is the lesser of: (1) the outstanding principal balance of the loan, (2) the maximum amount of coverage available under the NFIP for the type of structure, or (3) the insurable value of the property. In your scenario, the minimum required insurance would be $8,000.

Although the law does not prohibit requiring a borrower to purchase additional insurance over the minimum amount required under the NFIP, the 2009 Interagency Q&As Regarding Flood Insurance state that “lenders should avoid creating situations where a building is ‘over-insured.’” The 2020 proposed updated flood insurance Q&As (which have not yet been finalized) also state that “although a lender has the responsibility to tailor its own flood insurance policies and procedures to suit its business needs and protect its ongoing interest in the collateral, it should consider the extent of recovery allowed under the NFIP or a private policy for the type of property being insured to assist the borrower in avoiding paying for coverage that exceeds the amount the insured would recover in the event of a loss.” Consequently, we would not recommend requiring the borrower to pay for coverage that exceeds the amount they would recover in the event of a loss, which would be $100,000 in this case.

Additionally, the OCC’s Flood Insurance Rules require national banks to notify borrowers that they should obtain flood insurance “in an amount at least equal to the minimum amount” required under the NFIP if their property is not adequately covered, and force place insurance if the borrower fails to obtain adequate coverage within 45 days after notification. The Comptroller’s Handbook also provides that “the amount that must be force placed is equal to the difference between the present amount of coverage, if any, and the lesser of the outstanding principal balance or the maximum coverage limit.” As such, we do not believe you would be able to force place flood insurance in an amount exceeding $8,000, which is the lesser of the outstanding principal balance and $250,000 maximum coverage limit.

For resources related to our guidance, please see:

OCC Flood Insurance Rules, 12 CFR 22.3(a) (“A national bank or Federal savings association shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the building or mobile home and any personal property that secures a loan and not the land itself.”)

Comptroller’s Handbook, Flood Disaster Protection Act, Page 5 (August 2019) (“The minimum amount of flood insurance required must be at least equal to the lesser of the outstanding principal balance of the loan, the maximum amount available under the NFIP for the type of structure, or the insurable value of the property. Flood insurance coverage under the NFIP is limited to the building or mobile home and any personal property that secures the loan and not the land itself.”)

Comptroller’s Handbook, Flood Disaster Protection Act, Page 5 (August 2019) (“The limits of coverage for flood policies are: . . . $250,000 for residential property structures and $100,000 for personal contents.”)

Interagency Q&As Regarding Flood Insurance, 74 Fed. Reg. 35913, 35936 (July 21, 2009) (“Can a lender require more flood insurance than the minimum required by the Regulation? Yes. Lenders are permitted to require more flood insurance coverage than required by the Regulation. The borrower or lender may have to seek such coverage outside the NFIP. Each lender has the responsibility to tailor its own flood insurance policies and procedures to suit its business needs and protect its ongoing interest in the collateral. However, lenders should avoid creating situations where a building is ‘over-insured.’”)

Proposed Rule, Interagency Q&As Regarding Flood Insurance, 85 Fed. Reg. 40442, 40463 (July 6, 2020) (“Can a lender require more flood insurance than the minimum required by the Regulation? Yes. Lenders are permitted to require more than the minimum amount of flood insurance required by the Regulation, taking into consideration applicable State and Federal law and safe and sound banking practices, as appropriate. However, the borrower or lender may have to seek such coverage outside the NFIP. Although a lender has the responsibility to tailor its own flood insurance policies and procedures to suit its business needs and protect its ongoing interest in the collateral, it should consider the extent of recovery allowed under the NFIP or a private policy for the type of property being insured to assist the borrower in avoiding paying for coverage that exceeds the amount the insured would recover in the event of a loss.”)

OCC Flood Insurance Rules, 12 CFR 22.7(a) (“If a national bank or Federal savings association, or a servicer acting on behalf of the bank or savings association, determines at any time during the term of a designated loan, that the building or mobile home and any personal property securing the designated loan is not covered by flood insurance or is covered by flood insurance in an amount less than the amount required under § 22.3, then the national bank or Federal savings association, or a servicer acting on its behalf, shall notify the borrower that the borrower should obtain flood insurance, at the borrower’s expense, in an amount at least equal to the amount required under § 22.3, for the remaining term of the loan. If the borrower fails to obtain flood insurance within 45 days after notification, then the national bank or Federal savings association, or its servicer, shall purchase insurance on the borrower’s behalf. The national bank or Federal savings association, or its servicer, may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance, including premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount.”)

Comptroller’s Handbook, Flood Disaster Protection Act, Page 15 (August 2019) (“Force placement authority is designed to be used if, over the term of the loan, the institution or its servicer determines that flood insurance coverage on the security property is deficient; that is, whenever the amount of coverage in place is not equal to the lesser of the outstanding principal balance of the loan or the maximum coverage available under the NFIP. If a borrower fails to obtain the required amount of flood insurance coverage upon notification by an institution or its servicer, the amount that must be force placed is equal to the difference between the present amount of coverage, if any, and the lesser of the outstanding principal balance or the maximum coverage limit.”)