Topic: Flood Insurance
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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?
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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…
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Do National Flood Insurance Program (NFIP) policies provide a 30-day or 45-day grace period after the policy expiration date? Did the CARES Act extend the grace period to 120 days? We are trying to address the 45-day gap between notifying the borrower that their flood insurance has lapsed and force placement.
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Yes, we believe that NFIP policies typically have a thirty-day grace period and that the grace period was extended to one hundred twenty days for policies that expired between February 13, 2020, and June 15, 2020. Additionally, the newly released 2022 Interagency Q&As Regarding Flood Insurance state that lenders may address a gap in coverage…
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A loan customer with a residential property they are renting out provided us with a private flood insurance policy. The policy contains the “Compliance Aid for Mandatory Acceptance” statement, allowing us to conclude that the policy meets the statutory definition of private flood insurance, as well as a notice indicating that the insurance company is “approved to engage in the business of insurance” in Illinois. However, the policy also contains an “Illinois Surplus Lines Notice” providing that the contract is issued pursuant to Section 445 of the Illinois Insurance Code by a company that is not authorized and licensed to transact business in Illinois and, as such, is not covered by the Illinois Insurance Guaranty Fund. Are we required to accept a policy containing a Section 445 notice? Is this something we should be monitoring for safety and soundness?
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We believe you may be required to accept a private flood insurance policy with a Section 445 disclaimer if it meets the definition of “private flood insurance.” However, we recommend confirming that the insurer is approved to engage in the business of insurance in Illinois and that the policy meets the other requirements for mandatory…
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If a borrower’s flood insurance policy expires, are there any concerns if there is a gap between the expiration date of their previous policy and the effective date of their new policy? Are there any concerns if we force place flood insurance after sending a 45-day notice on the policy’s expiration date, which results in a gap between the expiration date of the previous policy and the effective date of the force-placed policy?
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Yes, we believe it is a violation of the flood insurance rules if at any time during the term of a designated loan, the property securing the loan is not covered by flood insurance, regardless of whether the new policy following the gap in coverage is obtained by the borrower or force-placed by your bank.…
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We have a mortgage loan borrower whose outstanding loan balance is $8,000. Their property’s insurable value is $100,000, and the maximum National Flood Insurance Program (NFIP) coverage is $250,000. Can we require the borrower to obtain $250,000 in coverage rather than $8,000? Would there be any concerns if we force place flood insurance in the amount of $250,000?
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We would caution against requiring the borrower to obtain $250,000 in coverage in this scenario, since it far exceeds the amount the borrower would recover in the event of a loss. Additionally, we believe you are prohibited from force placing insurance in an amount exceeding the minimum amount required under the NFIP. The minimum amount…
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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?
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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…
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Must a flood certificate always be pulled ten days before a loan closing? The OCC’s Comptroller’s Handbook states that “the agencies generally regard 10 days as a reasonable time interval.” Are there any exceptions to this rule for refinances or HELOCS when a flood certificate has already been pulled for a different loan? What about commercial loans that must generally close more quickly than other loans?
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No, we do not believe a flood certificate must always be pulled ten days before a loan closing. However, we are unaware of any specific exceptions to Regulation H’s requirement to deliver special flood hazard notices within a reasonable time. Regulation H requires that delivery of notice of special flood hazards be provided to borrowers…
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Are there any rules regarding the maximum deductible allowed for flood insurance, and may a customer pay for flood insurance in four installments rather than for the whole year if the insurance company allows it?
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The National Flood Insurance Program (NFIP) Flood Insurance Manual does contain maximum deductibles allowed for flood insurance. Deductible amounts for flood insurance vary based on the policy rating and the amount of coverage purchased, as described more thoroughly in Table 8B in the NFIP Flood Insurance Manual. Lenders may allow borrowers to use the maximum…
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We understand that the FDIC will approve mutual aid society flood plans (such as Amish aid policies) for flood insurance purposes on a case-by-case basis. The Illinois Department of Insurance does not regulate or recognize mutual aid society flood plans or Amish aid policies. Would the state’s lack of acceptance of mutual aid society flood plans prevent the FDIC from approving them?
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No, we believe that the FDIC may approve mutual aid society flood plans for flood insurance purposes if such plans are not expressly prohibited by the state in which the relevant FDIC-supervised institution operates. The FDIC rules for accepting mutual aid society plans establish four criteria for accepting mutual aid society flood plans, and the…
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We are extending a loan secured by property located in a flood plain. There is a “hoop building” on the property with an arched metal frame covered in fabric. The hoop building does not have a concrete foundation and is removable. Is flood insurance required, and if so, in what amount?
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No, flood insurance is not required for the hoop building since it is not a “building” according to the flood insurance regulations. Flood insurance is not necessary for a structure that is not a building or mobile home. The flood insurance regulations define a building as “a walled and roofed structure . . . that…