We are extending a second mortgage secured by a property that is located in a flood plain. The first mortgagee did not require flood insurance because the borrower had obtained an elevation certificate for the property, but the borrower did not obtain a letter of map amendment (LOMA). Isn’t a LOMA necessary for the property to be exempted from the flood insurance requirement? Also, if flooding should occur, would we receive insurance proceeds as the only mortgagee named in the policy, or would the proceeds go to the first lienholder?

Yes, you are correct that if a property is in a FEMA-designated special flood hazard area (SFHA), a borrower must obtain a letter of map amendment (LOMA) for the property to be exempted from the flood insurance requirement. An elevation certificate may be necessary to support an application for a LOMA, but the certificate alone is not sufficient to waive the flood insurance requirement.

According to the Interagency Q&As on flood insurance, the National Flood Insurance Program (NFIP) structures its flood insurance policies such that the first lienholder will receive the insurance proceeds before the second lienholder, even if the first lienholder neglected or was not required to obtain flood insurance for its loan. Consequently, we recommend following the suggestion in the Q&As, which is to require the borrower to obtain flood insurance in an amount covering the combined total of the first and second mortgage loans (up to the applicable NFIP coverage limits).

For resources related to our guidance, please see:

FDIC Flood Insurance Regulations, 12 CFR 339.2 (“Special flood hazard area means the land in the flood plain within a community having at least a one percent chance of flooding in any given year, as designated by the Administrator of FEMA.”)

FEMA Regulations, 44 CFR 70.8 (“A Standard Flood Insurance Policyholder whose property has become the subject of a Letter of Map Amendment under this part may cancel the policy within the current policy year and receive a premium refund under the conditions set forth in § 62.5 of this subchapter.”)

FEMA website, National Flood Insurance Program Elevation Certificate and Instructions (“The National Flood Insurance Program (NFIP) Elevation Certificate (EC) is an administrative tool used by the NFIP. It is used to provide elevation information necessary to ensure compliance with community floodplain management ordinances; to determine the proper insurance premium rate; and or support a request for a Letter of Map Amendment (LOMA) to remove a building from the Special Flood Hazard Area.”)

FDIC Flood Insurance Regulations, 12 CFR 339.3 (“(a) . . . 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.”)

Interagency Q&As Regarding Flood Insurance, Question 36 (July 21, 2009) (“When a lender makes, increases, extends, or renews a second mortgage secured by a building or mobile home located in an SFHA, how much flood insurance must the lender require? The lender must ensure that adequate flood insurance is in place or require that additional flood insurance coverage be added to the flood insurance policy in the amount of the lesser of either the combined total outstanding principal balance of the first and second loan, the maximum amount available under the Act . . . , or the insurable value of the building or mobile home. . . . Given the provisions of NFIP policies, a lender cannot comply with the Act and Regulation by requiring the purchase of an NFIP flood insurance policy only in the amount of the outstanding principal balance of the second mortgage without regard to the amount of flood insurance coverage on a first mortgage.”)

Interagency Q&As Regarding Flood Insurance, Question 36 (July 21, 2009) (“Lender A, who is not directly covered by the Act or Regulation, makes a first mortgage with a principal balance of $100,000 and does not require flood insurance. Lender B, who is directly covered by the Act and Regulation, issues a second mortgage with a principal balance of $50,000. The insurable value of the residential building securing the loans is $200,000. Lender B must ensure that flood insurance in the amount of $150,000 is purchased and maintained. If Lender B were to require flood insurance only in an amount equal to the principal balance of the second mortgage ($50,000) through an NFIP policy, then its interest in the secured property would not be protected in the event of a flood loss because Lender A would have prior claim on the entire $50,000 loss payment towards its principal balance of $100,000.”)