IBA Compliance Connection

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We purchase residential mortgage loans from other banks to sell on the secondary market. We make the credit decision, but the loan is closed in the other bank’s name, with that bank’s funds. We purchase the loan a few days later and then sell it on the secondary market. We retain the servicing rights after the sale. Which bank should be pulling the flood certification — the initial lender or us? If the initial lender pulls the flood certification, can that be assigned to our bank when we take the assignment of the mortgage and note?

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The initial lender, and not your bank, is required to make the initial flood determination under these circumstances.

The flood insurance rules require banks to ensure that flood insurance is in place only when “making, increasing, renewing or extending” a loan secured by property located in a flood zone. The Interagency Flood Insurance Q&As further clarify that purchasing a loan does not trigger the flood insurance requirements.

We should add that if your bank were to be table funding the loans (by simultaneously advancing the funds and purchasing the loans at their closings), your bank would be responsible for obtaining the flood certification. But since your bank does not purchase the loans until days after the closing, we would not treat these loans as table-funded.

We are not aware of any laws or rules that would prohibit the initial lender from assigning its flood certifications to your bank.

For resources related to our guidance, please see:

  • 12 CFR 339.3(a) (“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. . . .”)
  • Interagency Questions and Answers Regarding Flood Insurance, Question 3 (“A lender’s purchase of a loan, secured by a building or mobile home located in an SFHA in which flood insurance is available under the Act, alone, is not an event that triggers the Regulation’s requirements, such as making a new flood determination or requiring a borrower to purchase flood insurance. Requirements under the Regulation, generally, are triggered when a lender makes, increases, extends, or renews a designated loan. A lender’s purchase of a loan does not fall within any of those categories. However, if a lender becomes aware at any point during the life of a designated loan that flood insurance is required, the lender must comply with the Regulation, including force placing insurance, if necessary. Depending upon the circumstances, safety and soundness considerations may sometimes necessitate such due diligence upon purchase of a loan as to put the lender on notice of lack of adequate flood insurance. . . .”)
  • 12 CFR 339.2 (“Table funding means a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds.”)
  • Interagency Questions and Answers Regarding Flood Insurance, Question 6 (“Table funding. . . is a settlement at which a loan is funded by a contemporaneous advance of loan funds and the assignment of the loan to the person advancing the funds. A loan made through a table funding process is treated as though the party advancing the funds has originated the loan. The funding party is required to comply with the Regulation. . . .”)