Flood Disaster Protection Act Flashcards
What is the Flood Insurance Program (NFIP)?
The NFIP program makes flood insurance
available to flood-prone areas at a reasonable cost through a joint program involving the private insurance
industry and the federal government.
As financiers of mortgages, commercial properties, and other properties secured by improved real estate, banks and other real estate lenders are in a key position to
require property owners to maintain adequate insurance.
What detached structures are not necessary to insure?
Flood insurance is not required on any structure on a residential property if it is detached from the primary residential structure and does not serve as a residence.
The exemption gives banks significant discretion to determine which structures require coverage. When detached structures are given as collateral, lenders, and servicers may require the structure be covered regardless. In this instance, the structures themselves—such as detached greenhouses—have value to the bank and the borrower, and accordingly do not meet the purpose of the exemption.
The detached structure exemption applies to loans made for business, commercial, or agricultural purposes if they are secured by a residence and part of the residence includes detached structures which meet the requirements of the exemption.
What if insurance is not available?
If the community is not participating and insurance is not available for the property, it is the bank’s decision whether or not to make the loan or whether or not to require private flood insurance.
Private flood insurance
Lenders are required to accept private flood insurance policies as satisfaction of the mandatory purchase requirement if the coverage provided by the private flood insurance satisfies certain specified standards. Additionally, regulated lenders are required to disclose to borrowers the following information:
Flood insurance under the NFIP is available from private insurance companies or from the NFIP directly
Flood insurance that provides the same level of coverage as an NFIP policy may be available from private insurance companies
Borrowers are encouraged to compare policies
What is the definition of private flood insurance?
(1) Is issued by an insurance company that is:
(i) Licensed, admitted, or otherwise approved to engage in the business of insurance by the jurisdiction regulator in which the property to be insured is located; or
(ii) Recognized, or not disapproved, as a surplus lines insurer by the regulator of the jurisdiction in which the property to be insured is located in the case of a policy of difference in conditions, multiple peril,all risk, or other blanket coverage insuring nonresidential commercial property;
How much flood insurance is required
At a minimum (you can always get more) the least of:
- 100% insurable value (replacement cost-RCV) of the structure (not land)
- The amount of the loan (senior liens also)
- $250,000 per 1-4 family residential structure; $500,000 per commercial structure or 5+ family residential structure
When to notify the borrower?
Bank must give the borrower notification if it knows that the structure is in a special flood hazard area it must provide WRITTEN notice, and in a reasonable amount of time to get insurance before closing
Triggering Events (to provide notice)
Determination must be made whenever a covered loan is Made, Increased, Renewed, or Extended (MIRE)
What information is required to be in the special flood hazard notice?
- Warning the structure could be in flood zone
- Description of flood insurance purchase requirements
- Federal disaster relief assistance may be available
- Availability of private flood insurance
- Escrow requirement
What is considered proof of flood insurance?
- A copy of the declarations page of the Flood Insurance policy
- A copy of the flood insurance application and premium payment
Usage of a previous determination on the same property
You can rely on a previous determination if on of the following are true:
- Previous one is not more than 7 years old
- Previous one was recorded on the standard form
- Flood zone has not changed since the original determination was done
Previous determination “Same lender/same property” rule
Original determination must have been performed by your bank
What if the borrower disagrees with the determination?
- Can get FEMA to do a final determination
- The maps always rule: FEMA must change the zone itself (you see this on the Letter of Map Amendment (LOMA) or Letter of Map Revision (LOMR) on the form.
Flood Insurance Monitoring Requirements
- Insurance policies should be monitored to make sure they are current (flood maps do not get monitored)
- Must force place a policy if a borrower refuses to renew
– borrower must be given a 45 day lapse and bank must send a warning letter
Bank can charge the borrower premiums
When do you insure the contents of a building?
Borrower must ensure the contents only if the buildings the are in and contents are taken as collateral
