Is your institution relying on “Life of Loan” coverage for flood insurance compliance?

Could your institution be swimming and under water during your next exam?  

Flood insurance compliance continues to be a “hot button” for regulators. Quick question: Does your institution rely on a previous flood determination when it increases, extends or renews a loan secured by improved real property or a mobile home?

Whenever an institution makes, increases, extends, or renews any loan secured by improved real property or a mobile home, it must use the Standard Flood Hazard Determination Form (“SFHDF”) developed by the Federal Emergency Management Agency (“FEMA”). The SFHDF helps lenders determine whether the improved real property or mobile home securing the loan is located in a special flood hazard area.

An institution may utilize a previous flood determination if both of the following conditions are met:

An institution may not rely on a previous determination if:

An institution may not rely on a previous determination set forth on an SFHDF when it makes a new loan—only when it increases, extends, renews, or purchases a loan. Subsequent transactions by the same institution with respect to the same property, such as assumptions, refinances, and second-lien loans, are to be treated as loan renewals. In those limited circumstances, a new determination is not required, assuming that the other requirements are met.

Most “life of loan” coverage purchased from third-party vendors will only notify the institution if a map revision causes a building to be located within an Special Flood Hazard Area (“ SFHA”), but will not notify the institution if a flood map revision occurs after the date of the previous determination and the map revision does not cause the property to be located in a SFHA.

Over the previous years, FEMA has remapped most of the United States.  Does your third-party “life of loan” provider notify your institution of the FEMA map changes involving the secured properties on which you have purchased “life of loan” coverage?  This notification would inform the institution that the property was reviewed and it is still considered to not be in a flood zone.  The only change may be the revised National Flood Insurance Program (“NFIP”) Map Number or Community Panel Name and the NFIP Map Panel Effective Revised Date.

Has your institution relied on the original determination when increasing, extending, renewing or purchasing a loan without notification from your third-party “life of loan” provider?  What should a financial institution do?  First, it is recommended to review your contract with your current “life of loan” third-party vendor.  If the map change notification is not a service that your vendor provides, your financial institution must establish other internal procedures to validate if there have been any map changes since the previous determination was prepared.  The two most commonly used methods include obtaining a new determination with each renewal, modification or extension. Secondly, obtaining a recertification of the original flood determination which does not affect the date of the determination, but does provide the institution the updated NFIP Map Number or Community Panel Name and the NFIP Map Panel Effective Revised Date.

On a side note, the FEMA Form number for the SFHDF has been changed from FEMA Form 81-93 to FEMA Form 086-0-32 and the form has been revised.   The new form has an expiration date of May 30, 2015. FEMA indicated that compliance utilizing the new form is not mandatory for six months but FEMA neglected to provide when the six months begins.  Is it from the April 2012 date on the form, or the June 6, 2012 date the form was available?

The form contains some small changes:

When a new SFHDF is released, may your institution rely on a previous SFHDF if the form has expired?  This depends on if the following three conditions are met:

The release of this new SFHDF in most cases should not jeopardize your institution’s ability to rely on the previous SFHDF.

May I assist you with any flood or compliance matters?  Please contact me.

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