We are extending a balloon mortgage loan secured by farmland that includes several grain bins and sheds. Our original flood zone determination had the property as Zone X, meaning that flood insurance was not required. But our new flood determination, prepared by a different vendor, found that one of the metal grain bins sits on the line of a special flood hazard area (SFHA) rated as “Zone AE,” meaning that flood insurance now is required. Other than obtaining a letter of map amendment (LOMA), is there any way remove the grain bin from the SFHA so that flood insurance is not required? The value of the grain bin is not necessary to support the loan amount.

Yes, there are alternative methods for obtaining a revised map to remove the grain bin from the SFHA. Additionally, your borrower may qualify for a reduced flood insurance premium under the “Grandfather Rule” described below, or your bank may choose to remove the grain bin from the collateral securing the loan to avoid the mandatory flood insurance requirement entirely.

Requesting a Vendor Review

First, your bank may wish to request that the vendor review its determination, particularly if you have additional documentation — such as a plat survey, tax map, or elevation certificate — that better identifies the location of the grain bin on the Flood Insurance Rate Map (FIRM). If your vendor revises its certification or provides a new Standard Flood Hazard Determination Form showing the grain bin is not in an SFHA, flood insurance will not be required.

Letter of Determination Review

If your vendor stands by its determination, your bank and the borrower may submit a Letter of Determination Review request to FEMA, which will verify whether the vendor correctly identified the grain bin’s location. You must submit this request to FEMA within 45 days of your bank sending notice to the borrower that the grain bin is partially located in an SFHA. FEMA will make its flood zone determination “within 45 days of receipt of all necessary data.”

Grandfather Rule

If the change in the flood zone determination for the grain bin was due to a change in the FIRM that occurred after the original loan was extended, your borrower may be eligible under the “Grandfather Rule” for lower-cost flood insurance based on the prior “Zone X” rating. The Grandfather Rule allows a property owner who built a structure in compliance with the FIRM in effect at the time of construction “to continue to benefit from the prior, more favorable rating for particular pieces of improved property.” Consequently, the borrower may qualify for a lower-cost rating if the FIRM in effect at the time of the grain bin’s construction had a “Zone X” (or other low- or moderate-risk) rating and the grain bin was built in compliance with that FIRM.

Exclusion of Grain Bin from Security Interest

If the methods discussed above prove ineffective or are unavailable, your bank may choose to “carve out” the subject grain bin from its security interest to avoid the flood insurance requirement. (If you already have executed the security agreement, this could be accomplished with an addendum.) Flood insurance will not be required if your security agreement excludes the grain bin from the property securing the loan.

However, there may be some risks to this approach. As noted in the Interagency Flood Q&As, when carving out a particular structure from the loan collateral, you should consider whether the carve-out will affect your ability to market the property in the event of a foreclosure. Also, your bank “should consider any local zoning issues or other issues that would affect its collateral.”

For resources related to our guidance, please see:

FEMA Memorandum, W-08021, Options Available to a Borrower for Appealing a Lender’s Determination of SFHA (April 16, 2008) (“The lender has the option of asking its flood zone determination company to review its determination, especially if the borrower has compelling information to show that the building is not in an SFHA. A plat survey, tax map, or elevation certificate may enable the lender’s determination company to better identify the location of building on a FIRM. If the lender’s flood zone determination company revises its certification or provides a new Standard Flood Hazard Determination Form (SFHDF) showing the building as out of the SFHA, the mandatory purchase requirement is waived.”)

FEMA Memorandum, W-08021 — Options Available to a Borrower for Appealing a Lender’s Determination of SFHA (April 16, 2008) (“Letter of Determination Review (LODR) request can be made to FEMA, at a current cost of $80, jointly by the lender and borrower within 45 days of notice of SFHA by the lender. The LODR review process enables FEMA to verify whether the building’s location was correctly identified on the applicable Flood Insurance Rate Map (FIRM). A successful LODR releases the lender from the obligation to require the purchase of flood insurance and identifies the building in a low-to-moderate flood risk area.”)

FEMA website, How To Request a Flood Hazard Determination Review from FEMA (“Borrowers who have reason to dispute the flood hazard determination presented by a lender may request, jointly with the lender, that FEMA review that determination. FEMA will make its determination within 45 days of receipt of all necessary data. If the request for review is related to a loan and the loan closing occurs before the end of the 45-day response time, the purchase of flood insurance is required. If it is determined through the review process that the structure is not located in a SFHA, and if the lender waives the flood insurance purchase requirement, a premium refund for the current policy term may be obtained if no claim on the policy has been made.”)

FEMA website, NFIP Grandfathering Rules for Agents (“When flood map changes occur, the National Flood Insurance Program (NFIP) provides a lower-cost flood insurance rating option known as ‘grandfathering.’ It is available for property owners who: . . . Have built in compliance with the FIRM in effect at the time of construction.”)

Interagency Q&As Regarding Flood Insurance, Question 71 (July 21, 2009) (“The Grandfather Rule allows policyholders who have maintained continuous coverage and/or who have built in compliance with the Flood Insurance Rate Map to continue to benefit from the prior, more favorable rating for particular pieces of improved property. A discrepancy resulting from application of the NFIP’s Grandfather Rule is reasonable and acceptable, but the lender should substantiate these findings.”)

NFIP Flood Insurance Manual, Appendix L: Definitions (April 1, 2019) (“Grandfathering: A rating procedure that enables policyholders to use a prior flood map for rating if the building was built in compliance or continuously insured.

Under NFIP administrative grandfathering, Post-FIRM buildings in the Regular Program built in compliance with the floodplain management regulations in effect at the start of construction will continue to have favorable rate treatment even though higher Base Flood Elevations (BFEs) or more restrictive, greater risk zone designations result from Flood Insurance Rate Map (FIRM) revisions. . . .”)

Interagency Q&As Regarding Flood Insurance, Question 24 (July 21, 2009) (“Under the Regulation, lenders must require flood insurance on real estate improvements when those improvements are part of the property securing the loan and are located in an SFHA and in a participating community. The lender may consider ‘carving out’ buildings from the security it takes on the loan. However, the lender should fully analyze the risks of this option. In particular, a lender should consider whether it would be able to market the property securing its loan in the event of foreclosure. Additionally, the lender should consider any local zoning issues or other issues that would affect its collateral.”)