IBA Compliance Connection

Your go to source for compliance!

We have a matured HELOC that we want to extend. We pulled a flood determination and discovered the property now is in a special flood hazard area, although it wasn’t when we originally made the HELOC. The community where the property is located does not participate in the National Flood Insurance Program (NFIP). We are exploring private insurance but cannot find a policy that covers the full amount of the loan. Is the borrower required to obtain flood insurance if their community doesn’t participate in the NFIP?

—

by

admin

No, the borrower is not required to obtain flood insurance when the home securing the loan is located in a special flood hazard area in a community that does not participate in the NFIP. Under the FDIC flood insurance regulations, a lender may not make, increase, extend, or renew any “designated loan” unless the building securing the loan is covered by flood insurance. A “designated loan” is a loan secured by a building or mobile home that is located in a special flood hazard area in which flood insurance is available under the National Flood Insurance Act of 1968 through the NFIP. In this case, the building is located in a community where flood insurance is not available through the NFIP. Consequently, the loan is not a “designated loan” requiring flood insurance. 

However, a loan secured by a building in a special flood hazard area in a community that does not participate in the NFIP may not be sold to Fannie Mae or Freddie Mac or guaranteed or insured by a government agency, such the Small Business Administration, Veterans Administration, or Federal Housing Administration. In addition, although flood insurance is not required, your bank still must make a flood determination, notify the borrower that the building is located in a special flood hazard area, and exercise sound risk management to ensure that the loan will not present an unacceptable risk. We also note that it may be worthwhile to reach out to the city officials in the community that does not participate in the NFIP to explain the impact of nonparticipation on consumers’ ability to obtain credit.

For resources related to our guidance, please see:

  • National Flood Insurance Act of 1968, 42 USC 4011(a) (“To carry out the purposes of this chapter, the Administrator of the Federal Emergency Management Agency is authorized to establish and carry out a national flood insurance program which will enable interested persons to purchase insurance against loss resulting from physical damage to or loss of real property or personal property related thereto arising from any flood occurring in the United States.”)

  • FDIC Flood Insurance Regulations, 12 CFR 339.3(a) (“Requirement to purchase flood insurance where available. . . . An FDIC-supervised institution 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. . . .”)

  • FDIC Flood Insurance Regulations, 12 CFR 339.2 (“Designated loan means a loan secured by a building or mobile home that is located or to be located in a special flood hazard area in which flood insurance is available under the Act.”)

  • Interagency Questions and Answers Regarding Flood Insurance, 74 Fed. Reg. 35913, 35934  (October 17, 2011) (“Question 1. Does the Regulation apply to a loan where the building or mobile home securing such loan is located in a community that does not participate in the National Flood Insurance Program (NFIP)? Answer: Yes. The Regulation does apply; however, a lender need not require borrowers to obtain flood insurance for a building or mobile home located in a community that does not participate in the NFIP, even if the building or mobile home securing the loan is located in a Special Flood Hazard Area (SFHA). Nonetheless, a lender, using the standard Special Flood Hazard Determination Form (SFHDF), must still determine whether the building or mobile home is located in an SFHA. If the building or mobile home is determined to be located in an SFHA, a lender is required to notify the borrower. In this case, a lender, generally, may make a conventional loan without requiring flood insurance, if it chooses to do so. However, a lender may not make a government-guaranteed or insured loan, such as a Small Business Administration, Veterans Administration, or Federal Housing Administration loan secured by a building or mobile home located in an SFHA in a community that does not participate in the NFIP. See 42 U.S.C. 4106(a). Also, a lender is responsible for exercising sound risk management practices to ensure that it does not make a loan secured by a building or mobile home located in an SFHA where no flood insurance is available, if doing so would be an unacceptable risk.”)

  • Flood Disaster Protection Act of 1973, 42 USC 4106(a)

  • Fannie Mae Selling Guide, B7-3-07,Flood Insurance Coverage Requirements

  • Freddie Mac Single-Family Seller/Servicer Guide, pages 8202–8 (March 3, 2016) (“If the insurable improvements on the Mortgaged Premises are located in an SFHA but the community does not participate in the NFIP (‘nonparticipating community’), the Mortgage is not eligible for sale to Freddie Mac.”)