We received an opinion stating that it is acceptable to require a borrower to obtain more than the minimum amount of flood insurance required for a residential property under the National Flood Insurance Program (NFIP), provided that we disclose this requirement in the loan documents. Are the “loan documents” referred to in the opinion the loan origination documents or the 45-day notification letter? Also, for a property with an insurable value of $100,000, could we require $100,000 in flood insurance, even though the loan amount is $8,000?

We are not aware of any law or regulation governing how or where you would disclose the amount of flood insurance you are requiring the borrower to obtain, although we do recommend including your bank’s flood insurance requirements in your loan agreement.

We also believe it is acceptable to require flood insurance in excess of the minimum required — for example, by requiring flood insurance equal to the covered property’s insurable value, even when the loan amount is less than that amount. However, we do not recommend requiring flood insurance in an amount that exceeds the amount the borrower would recover in a loss.

The minimum amount of flood insurance required under the NFIP is “at least equal to the lesser of”: (1) the outstanding principal balance of the loan, (2) the maximum amount of coverage available under the NFIP for the type of structure, or (3) the insurable value of the property. In your scenario, the minimum required insurance would be $8,000.

The 2022 Interagency Q&As Regarding Flood Insurance state that lenders may “require more than the minimum amount of flood insurance required.” The Q&As go on to state that “[a]lthough a lender has the responsibility to tailor its own flood insurance policies and procedures to suit its business needs and protect its ongoing interest in the collateral, it should consider the extent of recovery allowed under the NFIP or a private policy for the type of property being insured to assist the borrower in avoiding paying for coverage that exceeds the amount the insured would recover in the event of a loss.”

Additionally, the Federal Emergency Management Agency (FEMA)’s Standard Flood Hazard Determination Form states that “[a] lender retains the prerogative to require flood insurance in excess of the minimum federal requirements not by the direction of FEMA.” However, “National Flood Insurance Program (NFIP) policies do not provide coverage in excess of the insured value of the building/mobile home/personal property.”

Consequently, we believe you may require that the borrower purchase flood insurance equal to the property’s insurable value, or in other amounts that exceed the minimum required flood insurance. However, we do not recommend requiring the borrower to pay for coverage that exceeds the amount the borrower would recover in the event of a loss, which likely would be $100,000 in the case of NFIP flood insurance.

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.”)

Comptroller’s Handbook, Flood Disaster Protection Act, Page 5 (August 2019) (“The limits of coverage for flood policies are: . . . $250,000 for residential property structures and $100,000 for personal contents.”)

Interagency Q&As Regarding Flood Insurance, 87 Fed. Reg. 32826, 32879–32880, Amount 8 (May 31, 2022) (“Can a lender require more flood insurance than the minimum required by the Regulation? Yes. Lenders are permitted to require more than the minimum amount of flood insurance required by the Regulation, taking into consideration applicable State and Federal law and safe and sound banking practices, as appropriate. However, the borrower or lender may have to seek such coverage outside the NFIP. Although a lender has the responsibility to tailor its own flood insurance policies and procedures to suit its business needs and protect its ongoing interest in the collateral, it should consider the extent of recovery allowed under the NFIP or a private policy for the type of property being insured to assist the borrower in avoiding paying for coverage that exceeds the amount the insured would recover in the event of a loss.”)

FEMA, Standard Flood Hazard Determination Form, Page 1 (“A lender retains the prerogative to require flood insurance in excess of the minimum federal requirements not by the direction of FEMA. National Flood Insurance Program (NFIP) policies do not provide coverage in excess of the insured value of the building/mobile home/personal property.”)