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May 31, 2023

Flood Insurance Requirements for Banks: Are You Following the Updated Guidelines?

To comply with flood insurance regulations, banks and other financial institutions should familiarize themselves with the expanded FAQs that were released in May 2022. The latest guidelines replace the previous FAQs that were originally issued in 1997 and aim to add more clarity for lenders surrounding several issues that have evolved over the years. A year after the revised and expanded guidelines were provided, have your flood insurance procedures been updated to reflect the interagency guidance?

Key Takeaways:

  • Several revisions and updates were made to the National Flood Insurance Program FAQs with input from several federal agencies, including the FDIC, Federal Reserve, OCC and NCUA  
  • Significant topics affected by revisions include the escrow of flood insurance premiums, force placement procedures, the acceptance of flood insurance policies issued by private insurers and the detached structure exemption
  • Keeping flood insurance policies up to date can help banking institutions remain in compliance with the interagency guidelines

To ensure you are properly following the updated guidelines pertaining to the flood insurance regulations, ask yourself the following questions:

Exemptions

Do your procedures require the review of the intended use of a detached structure upon a triggering event? Addressed in FAQ #5, the exemption states that a lender must examine the status of a detached structure upon a triggering event to confirm whether the exemption still applies.

Private Flood Insurance – Mandatory Acceptance

Do your procedures allow the rejection of a private policy solely because the policy does not contain the compliance aid statement?FAQ #4 states that a lender may not reject the policy solely because it does not include this statement if the policy otherwise meets the definition of private flood insurance and the amount of insurance required under the Regulation.

Escrow Loan Exceptions

Do your procedures require an escrow account to be established for the payment of force-placed flood insurance premiums? FAQ #3 states that lenders or their servicers are required to escrow flood insurance premiums for any residential designated loan which is made, increased, extended, or renewed, unless the lender or loan qualifies for an exception from the escrow requirement. There is no exception for force-placed flood insurance premiums.

Force Placement of Flood Insurance

Do your procedures require that the 45-day force-placement notice be sent upon expiration of an existing policy or upon determining that coverage is not adequate? FAQ #4 states that while a courtesy notice may be provided to the borrower prior to the expiration date of the policy, the 45-day force-placement notice must be sent upon determining that the collateral property securing the loan is either not covered or is covered by an inadequate amount of flood insurance.

Do your procedures allow you to add the flood insurance premium into the outstanding principal balance? If so, do you know whether that balance increase would trigger the applicability of flood insurance requirements?FAQ #10 (Force Placement) states that capitalizing the flood insurance premium to the outstanding balance is a triggering event if there is no explicit provision in the loan contract permitting this type of advancement of funds.

Anders Banking and Financial Institution team closely follows changes to the flood insurance rules and related guidance. Contact Anders below to discuss how your unique situation is impacted by compliance requirements as well as the associated fees. 

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