We are considering a COVID-19 loan modification program for existing clients that would allow for skipped payments, no credit reporting for past due amounts, extended pay periods, etc. Will we still be required to obtain flood determinations due to the modifications? We are aware of the interagency guidance stating that such modifications will not automatically be categorized as troubled debt restructurings.

Whether such a modification would require you to a obtain a flood determination depends on the nature of the modification and whether you are able reuse a previous flood determination. This is the case regardless of whether the modification is categorized as a troubled debt restructuring. However, under recent FDIC guidance, you may be able to delay obtaining a flood determination and complying with certain other flood insurance requirements during the COVID-19 emergency.

Generally, the flood insurance regulations require a lender to deliver a written flood insurance notice to a borrower whenever a loan secured by a building or a mobile home in a special flood hazard area is made, increased, extended, or renewed (a “M.I.R.E event”). Consequently, if you are modifying a loan secured by a building or mobile home by increasing, extending or renewing the terms of the original loan, you would need a flood determination to determine if the property is located in a special flood hazard area.

Ordinarily, under the National Flood Insurance Act, a lender may rely on a previous flood determination in lieu of obtaining a new flood determination when a loan is increased, extended or renewed, if the determination is not more than seven years old, the basis for the determination is set forth on the required form, and the applicable flood maps have not been revised since the determination was obtained.

However, under the recent FDIC guidance, if providing a loan modification to a borrower affected by COVID-19 results in a M.I.R.E. event, a lender may: (1) temporarily rely on a previous flood determination that is more than seven years old (or where the flood map has been revised) during the COVID-19 emergency, (2) delay the establishment of an escrow account until after the COVID-19 emergency, and (3) delay providing a written flood insurance notice to a borrower until after the COVID-19 emergency. The guidance also provides that lenders should have a system in place to ensure that deferred flood insurance requirements are addressed as soon as reasonably practicable.

For resources related to our guidance, please see:

FDIC Flood Insurance Regulations, 12 CFR 339.9(a) (“Notice requirement. When an FDIC-supervised institution makes, increases, extends, or renews a loan secured by a building or a mobile home located or to be located in a special flood hazard area, the FDIC-supervised institution shall mail or deliver a written notice to the borrower and to the servicer in all cases whether or not flood insurance is available under the Act for the collateral securing the loan.”)

FDIC Flood Insurance Regulations, 12 CFR 339.6(a) (“An FDIC-supervised institution shall use the standard flood hazard determination form developed by the Administrator of FEMA when determining whether the building or mobile home offered as collateral security for a loan is or will be located in a special flood hazard area in which flood insurance is available under the Act. . . .”)

Interagency Q&As Regarding Flood Insurance (July 21, 2009), Question 5 (“5. Does the Regulation apply to loans that are being restructured or modified? Answer: It depends. If the loan otherwise meets the definition of a designated loan and if the lender increases the amount of the loan, or extends or renews the terms of the original loan, then the Regulation applies.”)

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.”)

National Flood Insurance Act, 42 USC 4104b(e) (“Any person increasing, extending, renewing, or purchasing a loan secured by improved real estate or a mobile home may rely on a previous determination of whether the building or mobile home is located in an area having special flood hazards (and shall not be liable for any error in such previous determination), if the previous determination was made not more than 7 years before the date of the transaction and the basis for the previous determination has been set forth on a form under this section, unless— (1) map revisions or updates pursuant to section 4101(f) of this title after such previous determination have resulted in the building or mobile home being located in an area having special flood hazards; or (2) the person contacts the Administrator to determine when the most recent map revisions or updates affecting such property occurred and such revisions and updates have occurred after such previous determination.”)

FDIC, FAQs for Financial Institutions Affected by COVID-19 (May 4, 2020) (“27. . . . As lenders work with borrowers to address their financial service needs, Federal flood insurance requirements may be triggered upon the making, increasing, renewing or extending (i.e., a MIRE or triggering event) of any designated loan. For example, if a lender modifies a loan by extending the loan term, the loan modification would constitute a triggering event under flood insurance law, and the lender would be required to comply with certain flood insurance requirements, such as making a new flood hazard determination and providing notice to the borrower. The FDIC recognizes that meeting these requirements as lenders work to accommodate borrowers during the COVID-19 emergency could pose challenges for lenders and delay relief for borrowers in need. Therefore, when working with borrowers impacted by the COVID-19 emergency triggers a MIRE event, lenders may, if applicable:

Rely temporarily on a loan’s previous flood hazard determination on file rather than obtain a new one during the COVID-19 emergency;

Delay the establishment of escrow accounts for applicable loans until after the COVID-19 emergency; and

Delay providing a written flood notice to a borrower until after the COVID-19 emergency if a property is located in a Special Flood Hazard Area (SFHA) and informing consumers about the availability for special disaster relief assistance in the event of a flood. Prior to providing written notice, the lender may, at its discretion, choose to use another method to inform the borrower of this information (e.g. by email or telephone).

Lenders should have a system in place to ensure deferred flood insurance requirements are addressed as soon as reasonably practicable. FDIC examiners, under the FDIC’s discretionary examination authority, will not criticize lenders’ good faith flood insurance compliance efforts to accommodate borrowers in a safe and sound manner during the COVID-19 emergency.”)

Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (March 22, 2020) (“The agencies will not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID19 related loan modifications as troubled debt restructurings (TDRs).”)