We have a borrower located in an area covered by the National Flood Insurance Program (NFIP)’s Emergency Program. The NFIP coverage is $35,000, which we believe is the maximum coverage for a property in a nonparticipating community. The loan amount is $150,000, and the dwelling’s replacement cost is approximately $220,000. Do we have sufficient coverage for the loan, or must we require the borrower to purchase additional private flood insurance? In the event of a flood, would the bank be covered for the entire loan amount, or only $35,000?

We do not believe you are required to have the borrower obtain more than the maximum amount of flood insurance offered by the NFIP, which in this case is limited to $35,000. However, you may wish to require private flood insurance, if available, to provide additional coverage.

FEMA’s Emergency Program is the initial phase of a community’s participation in the NFIP. In this phase, a limited amount of coverage of up to $35,000 is available for single-family dwellings. Since this is the maximum amount of coverage available under the NFIP, we believe you are in compliance with the flood insurance rules. However, we do not believe the NFIP coverage would exceed the $35,000 policy amount in the event of flood damage. Whether your bank requires the borrower to purchase additional coverage is a business decision for your bank, based on safety and soundness and other considerations.

Additionally, we note that a community participating in the Emergency Program would not be considered a “nonparticipating community,” where no NFIP insurance is available. The Comptroller’s Handbook cautions that a lender should carefully evaluate the risk involved in making a loan in a nonparticipating community due to the lack of NFIP insurance and may want to require private flood insurance, if available.

For resources related to our guidance, please see:

OCC Flood Insurance Rules, 12 CFR 22.3(a) (“A national bank or Federal savings association 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. 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.”)

National Flood Insurance Program Manual, Appendix L: Definitions and Acronyms (April 2021) (“Emergency Program. The initial phase of a community’s participation in the NFIP, as prescribed by Section 1306 of the National Flood Insurance Act of 1968 (NFIA) (42 U.S.C. 4056). In this phase, limited amounts of coverage are available.”)

National Flood Insurance Program Manual, Maximum Amount of Insurance Available for the Emergency Program, Table 2. (“Single-Family Dwelling – $35,000; 2–4 Family Building – $35,000; Other Residential Building – $100,000”)

Interagency Questions and Answers Regarding Flood Insurance, 74 Fed. Reg. 35914, 35935 (July 21, 2009) (“‘The maximum limit of coverage available for the particular type of property under the Act’ depends on the value of the secured collateral. . . . In participating communities that are under the emergency program phase, the caps are $35,000 for single-family and two-to-four family dwellings and other residential structures, and $100,000 for nonresidential structures).

Comptroller’s Handbook, Flood Disaster Protection Act, Page 4 (August 2019) (“Because of the lack of NFIP flood insurance coverage and limited federal disaster assistance available, a lender should carefully evaluate the risk involved in making such a loan. A lender making a loan in a nonparticipating community may want to require the purchase of private flood insurance, if available. Also, a lender with significant lending in nonparticipating communities should establish procedures to ensure that such loans do not constitute an unacceptably large portion of the financial institution’s loan portfolio.”)