1. What is a flood?

The National Flood Insurance Program (NFIP) defines a flood as "a general and temporary condition of partial or complete inundation of normally dry land areas (at least 2 or more acres or 2 or more adjacent properties) from overflow of inland or tidal waters or from the unusual and rapid accumulation or runoff of surface waters from any source."

2. What is flood insurance? Isn't flood damage covered by homeowner's insurance?
Available in participating communities through the National Flood Insurance Program, federal flood insurance provides monetary protection against direct physical loss by or from a flood to an insured property. Furthermore, as a means of recovering from the aftereffects of flooding, it is a more dependable alternative to federal disaster assistance, which is only available during a Presidentially declared disaster and must be repaid as an interest-bearing loan. Flood insurance can be purchased to cover structural damage only, structural damage and personal property damage, or for renters it can be purchased to cover personal property only.

Standard homeowner's insurance does not cover property damage caused by a flood.

3. Why are banks, mortgage companies, loan servicers and other lending institutions involved in requiring flood insurance?
Prior to flood insurance being offered through the National Flood Insurance Program in 1968, federal disaster relief was the only financial assistance provided to flood victims as the private insurance industry did not offer flood damage coverage. The monetary drain on the U.S. Department of the Treasury and taxpayers from repeated flood disasters led to this federal intervention.

The cycle of flooding followed by federal disaster assistance continued as the federal government learned that property owners were not voluntarily purchasing flood insurance. To further shift financial responsibility from taxpayers to policyholders, the federal government first mandated flood insurance coverage for properties in designated flood hazard areas in 1973 by requiring federally regulated banks, mortgage companies, loan servicers and other lending institutions to make flood insurance coverage a condition of the loan.

4. What is the mandatory purchase of flood insurance requirement?
Federally regulated banks, mortgage companies, loan servicers and other lending institutions cannot make, extend, renew or increase a loan on improved real estate located or to be located within a Special Flood Hazard Area in a community that participates in the National Flood Insurance Program unless the improved real estate or personal property securing the loan has flood insurance coverage for the life of the loan.

5. What is the minimum amount of flood insurance coverage that must be required by the lending institution to be in compliance with the mandatory purchase provision?
For loans secured by improved real estate located in a Special Flood Hazard Area, lending institutions must require flood insurance in an amount at least equal to the outstanding principal balance of the loan up to the maximum limit of coverage available. Flood insurance coverage is limited to the value of the building; therefore, when calculating the minimum coverage, the lender should exclude the value of the land.

6. What major laws have been passed that involve federal flood insurance and the flood insurance requirement?
The National Flood Insurance Act of 1968 authorized the creation of the National Flood Insurance Program (NFIP). This made federally subsidized flood insurance available to property owners residing in communities that agreed to participate in the NFIP through the adoption of floodplain management guidelines.

The Flood Disaster Protection Act of 1973 mandated that federally regulated flood insurance be required as a condition of loans extended on improved real estate located within the designated Special Flood Hazard Area.

The National Flood Insurance Reform Act of 1994 (the "Reform Act") significantly strengthened the mandatory purchase requirement by instituting regulatory fines against lending institutions that failed to comply. It also required, in certain conditions, the escrow of flood insurance premiums and the lender-placement of flood insurance, and it developed a standard form and criteria for documenting lending institutions' compliance.

The Flood Insurance Reform Act of 2004 instituted requirements for additional agent training for insurance agents selling flood insurance, required FEMA to disseminate more informational material to policyholders, and attempted to mitigate the impact of repetitive loss properties on NFIP total claims by creating the Severe Repetitive Loss Pilot Program.

7. How are the banking regulators involved?
The 1994 Reform Act required that banking regulators issue and enforce the flood insurance regulations for the lending institutions subject to their jurisdiction. The regulators monitor compliance through examinations and assess civil penalties as applicable. The Federal Regulators have issued a "Questions and Answers" document which provides additional regulatory guidance to lending institutions and may also be involved with FEMA from time to time in revisions to the guidelines through releases in the Federal Register.

The banking regulators are the Federal Reserve Board, the Office of the Comptroller of Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, the National Credit Union Association and the Farm Credit Administration.

8. What do the Regulators consider to be violations of the flood insurance regulations and what are the penalties that can be imposed on lending institutions?
Violations under the federal regulations include making, increasing, renewing, or extending a loan on improved real estate in the Special Flood Hazard Area without (1) Placing flood insurance in the appropriate amount, (2) Escrowing premiums for flood insurance, when applicable, (3) Providing required notices to borrower, (4) Lender-placing flood insurance, when applicable, and (5) Providing notice of servicer and change of servicer, as applicable.

A regulated lending institution that is found to have a pattern or practice of committing violations shall be assessed a civil penalty of $385 per violation up to an aggregate annual amount of $125,000 against an institution. The per violation and aggregate amounts of civil penalties are adjusted by statute for inflation on a periodic basis. Additional actions that can be taken against an institution include unsatisfactory bank ratings and cease and desist orders in extreme cases.

9. How is the secondary market, such as Fannie Mae and Freddie Mac, involved in the flood insurance requirements?
Government-Sponsored Enterprises, including Fannie Mae and Freddie Mac, are required to implement procedures to ensure that flood insurance is obtained and maintained on designated loans. Fannie Mae and Freddie Mac accomplish this through the agreements they enter into with the lending institutions that sell loans to them. As a condition of Fannie Mae and Freddie Mac's agreement to purchase loans from a lending institution, the lender must adhere to the mandatory purchase of flood insurance regulations.

10. Are there special flood insurance requirements for loans sold to the secondary market, such as Fannie Mae and Freddie Mac?
Because Fannie Mae and Freddie Mac are privately owned corporations, they can protect themselves by establishing loan purchase guidelines that are more stringent than the federal regulations. For example, for a single family residence, Fannie Mae and Freddie Mac require that flood insurance be maintained in an amount at least equal to the lowest of the unpaid principle balance of the loan, the maximum amount of insurance available from the NFIP or the replacement cost of the insurable improvements. When the unpaid principle balance is the lowest option, it must be at least 80% of the structure replacement cost. However, if the unpaid principle balance is less than 80% of the replacement cost, the required insurance coverage amount must be at least 80% of the structure value.

Another special requirement to note is that while the regulations do not prohibit the making, extending, increasing, or renewing of loans on properties in the Special Flood Hazard Area located in non-participating communities, Fannie Mae and Freddie Mac will not purchase them.

Lending institutions that sell loans to the secondary market should familiarize themselves with the details of these guidelines which can be found at:

www.efanniemae.com

www.allregs.com/fhlmc

Back to Top