Topic: Flood Insurance
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Under Section 13 of the Homeowner Flood Insurance Affordability Act of 2014, do we have to obtain flood insurance for a property that has only one structure on it, if the structure is not attached to any residential structure?
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No, we believe the Section 13 exclusion would apply (meaning you would not have to obtain flood insurance) to a building that is part of a residential property but is detached from the primary residential structure and does not serve as a residence. The 2014 law that you referenced added this exemption, which became effective…
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Are we required to notify a borrower that the flood insurance coverage might not cover the cost to replace their house in the event of a flood?
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No, we are not aware of any law or rule that would require you to notify the borrower that the borrower’s flood insurance coverage might not cover the home’s replacement cost. For example, the flood insurance regulations include a model “Notice of special flood hazards,” which does not specifically mention the replacement cost of the…
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Under a recent FEMA remap, the buildings securing a commercial loan are now in a flood zone. Do we need cost or replacement coverage, or can we avoid the flood insurance requirement altogether?
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We believe that you must obtain flood insurance coverage on the buildings, as there is no exemption from the flood insurance requirements for commercial loans. You may not “make, increase, extend, or renew” any loan that is secured by a building located in a special flood hazard area. 12 CFR 339.3(a). Because you are aware…
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One of our borrowers has switched flood insurance providers and failed to pay the premium to the new provider in time to avoid a lapse in coverage. We received a declaration from the new provider stating that coverage would begin after a 22 day lapse in coverage. Will we be penalized for that lapse in coverage?
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The flood insurance requirements require you to maintain flood insurance for designated properties. 12 CFR 22.3(a). However, the Flood Disaster Protection Act’s civil money penalty provisions apply only if a financial institution is found to have a “pattern or practice of committing violations” of the flood insurance law and rules. 42 USC 4012a(f). While we…
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Can the flood insurance requirement be waived on a commercial real estate property if the borrower can show the ability to rebuild without the insurance?
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No, the flood insurance requirements do not permit waivers of flood insurance. If a loan is secured by a building located in a special flood hazard area, then the National Flood Insurance Program (NFIP) requirements apply and the property must be insured. 12 CFR 339.3(a). We are not aware of any exceptions to the flood…
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We made a loan to a country club, secured only by the club’s golf course – not the clubhouse. The golf course is in a flood zone, but it has no structures except for a small pump house. Do we need flood insurance?
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It may be possible to avoid the flood insurance requirements for this loan by structuring your security agreement for the loan to exclude the golf course pump-house from the property securing the loan. (If you already have executed the security agreement, this could be accomplished by an addendum.) We recommend consulting with bank counsel to…
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What is the extent to which equipment and inventory must be covered by flood insurance on a loan that is secured by improved real estate located in a flood zone?
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You may be required to obtain flood insurance on the equipment and inventory securing the loans that are also secured by the mortgage. Under the National Flood Insurance Act (NFIA), if a loan is secured by improved real estate located in a flood zone, the lender must ensure that the borrower obtains flood insurance that…