Flood Insurance

Question 1

Which of the following types of collateral is EXEMPT from flood insurance regulations?

A. Individual condominium units
B. Agricultural land that includes gas or liquid storage tanks
C. Mobile homes attached to a foundation that is leased space
D. Commercial buildings under construction where the interior is unfinished

Answer 1

B. Agricultural land that includes gas or liquid storage tanks

The flood insurance regulations cover loans secured by insurable structures, meaning those with at least two load-bearing walls and a roof. This covers condo units, mobile homes that are attached to foundations, and commercial buildings under construction. Gas or liquid storage tanks do not have load-bearing walls or roofs, and thus are not insurable.

Question 2

To BEST reduce the risk of violations of Flood Insurance regulations, training of loan officers should include which of the following?

A. The Standard Flood Hazard Determination Form should be in every loan file where the property securing the loan is located in a Special Flood Hazard Area (SFHA)
B. The Notice of Special Flood Hazards should be provided to each applicant for a loan secured by property in a Special Flood Hazard Area (SFHA)
C. Federal flood insurance policies are not available in communities that do not participate in the National Flood Insurance Program (NFIP)
D. Flood maps must be continually monitored for changes that may move properties securing loans into Special Flood Hazard Areas (SFFAs)

Answer 2

B. The Notice of Special Flood Hazards should be provided to each applicant for a loan secured by property in a Special Flood Hazard Area (SFHA)

It is a requirement of the flood insurance regulations to provide a Notice of Special Flood Hazards to each applicant where the loan will be secured by structures in a Special Flood Hazard Area; thus, this is an important point to train. The Standard Flood Hazard Determination Form must be in the file of every loan secured by a structure, not just those located in a Special Flood Hazard Area. If the community does not participate in the National Flood Insurance Program, federal flood insurance policies are not available, but training this does not necessarily reduce the risk of violations. Monitoring flood maps is not required by the rules.

Question 3

A borrower, whose loan is subject to flood insurance because the collateral is located in a Special Flood Hazard Area as determined by the bank’s flood service provider, refuses to obtain and pay for flood insurance. The borrower claims that although the building is located in a SFHA, the building is above the base flood elevation and therefore, not subject to flood insurance. What should/could the bank do on this loan?

A. Let the borrower know that he could request a Letter of Map Amendment from FEMA to remove the property from the SFHA
B. Waive the flood insurance for the loan until the borrower obtains an exemption from FEMA for the property
C. Obtain a survey of the property and submit the information to the flood determination service and request a reconsideration of the determination
D. Submit a formal Letter of Map Amendment request to FEMA and waive the flood insurance until FEMA makes a final determination

Answer 3

A. Let the borrower know that he could request a Letter of Map Amendment from FEMA to remove the property from the SFHA

In any case, the bank may NOT make this loan without flood insurance, since the collateral structure is located in an SFHA. To do so would be a violation of the regulation. To have the property reassessed and possibly changed, the borrower may request a Letter of Map Amendment to FEMA; a survey provided to the determination provider is insufficient.

Question 4

What should the compliance professional consider a risk when monitoring for compliance with Flood Insurance laws and regulations?

A. The bank never requires flood insurance in an amount greater than the insurable value of the structure securing the loan
B. The bank does not require a flood determination to be performed when it does a cash-out refinance of a borrower’s mortgage loan, secured by his/her principal dwelling
C. The bank requires flood insurance on mobile homes that are on a foundation, attached to utilities, and tied down according to local requirements, when they are located in a Special Flood Hazard Area (SFHA)
D. The bank initiates force-placement proceedings when an existing flood policy has lapsed

Answer 4

B. The bank does not require a flood determination to be performed when it does a cash-out refinance of a borrower’s mortgage loan, secured by his/her principal dwelling

When new money is added to an existing loan secured by a structure, such as in a cash-out situation, a new flood determination is required; therefore, this is a risk. The other requirements are accurate statements of the requirements of the flood insurance regulations.

Question 5

What are the record retention requirements for flood insurance?

A. 7 years
B. 5 years
C. Term of the loan
D. Term of the loan plus 5 years

Answer 5

C. Term of the loan

The bank should retain sufficient records of compliance during the term of the loan.

Question 6

When is the mandatory flood insurance requirement?

A. Make, increase, renew, or extend
B. Mortgage, increase, renew, or extend
C. Make, increase, re-fi, or extend
D. Mortgage, increase, re-fi, or extend

Answer 6

A. MIRE: Make, increase, renew, or extend

Lender must require flood insurance when making, increasing, renewing or extending a designated loan.
*If a property is no longer in a SFHA due to a map change, the lender may drop the requirements.

Question 7

What must a lender have to prove there is insurance on a loan?

A. ACORD 28 “Evidence of Property Insurance”
B. Full insurance policy
C. Declarations page with property description & agent contact information
D. Insurance certificate with property description & agent contact information

Answer 7

C. Declarations page with property description & agent contact information

Question 8

Does the Notice of Flood Hazard have to be signed?

Answer 8

No.

However, it is one of the few regulations that require consumer / borrower acknowledgement. The bank must retain a record of the receipt of the notices by the borrower and the servicer for the period of time the bank owns the loan. This can be satisfied by maintaining a record of the signed notice.

Question 9

The compliance officer gets a call from the head of the mortgage department who informs the compliance officer that they are planning to make a second lien mortgage loan on a residence. The property is located in a Special Flood Hazard Area requiring flood insurance, but the customer objects to getting flood insurance. The customer says that the first lienholder didn’t require it and questions why our bank requires it. The compliance officer should tell the mortgage department head:

A. If the first lienholder didn’t require the flood insurance, we, the second lienholder, don’t have to either
B. We need to require the borrower to obtain flood insurance that fully covers the property including the first lien loan balance
C. We need to require the borrower to obtain flood insurance that covers our second lien loan amount
D. We cannot make the loan, because the first lienholder did not properly require flood insurance

Answer 9

B. We need to require the borrower to obtain flood insurance that fully covers the property including the first lien loan balance

Question 10

What are lenders’ monitoring responsibilities under the Flood Disaster Protection Act, or FDPA?

A. Flood maps
B. Policies
C. Flood maps and policies
D. Flood maps, policies, and credit scores

Answer 10

B. Policies

Question 11

Which of the following loans does NOT require flood insurance?

Loan A is a commercial loan that has been on the books for 2 years and has been renewed twice. Flood insurance was legally required on the loan at the time it was made. There was a flood insurance policy in effect at the loan’s inception, but it expired and was not renewed.

Loan B is a consumer loan secured by a mobile home that is located in a flood hazard area in which federal flood insurance is not available.

Loan C is a commercial loan that the bank would be willing to make on an unsecured basis, but the borrower has offered some commercial real estate property as collateral. The property being purchased has one vacant building on it, and it is in a flood hazard area in a community where federal flood insurance is available.

A. Loan A
B. Loan B
C. Loan C
D. None of the loans

Answer 11

B. Loan B.

The properties securing Loans A and C are located in SFHA and in communities where federal flood insurance is available; therefore, flood insurance is required. Loan A is required to have flood insurance for the entire term. The bank must check at each renewal to make sure the insurance is still in effect.

Question 12

For construction loans, if the flood insurance for the property isn’t purchased at the time of loan origination, when must the flood insurance be purchased? Select all that apply.

A. When the foundation slab has been poured
B. When the construction gets final permits
C. When an elevation certificate is issued
D. If the lowest floor is below the Base Floor Elevation, when it is walled and roofed

Answer 12

A, C, and D

The borrower may defer the purchase of flood insurance until a foundation slab has been poured, an elevation certificate has been issued, or in the case of a building where the lowest floor is below the BFE, when it is walled and roofed.

Controls must be in place to ensure that the borrower obtains insurance no later than when the triggering event occurred. The lender must also require flood insurance before disbursing funds to pay for building construction (except as necessary to pour the slab or perform preliminary site work such as laying utilities, clearing brush, or the purchase and/or delivery of building materials) on the property securing the loan.

Question 13

Assume that the properties involved in the following loans are located in SFHA. Which loans would NOT require flood insurance as a condition of the loan?

A. A mortgage loan made to a consumer secured by a residence in a community in which flood insurance is available
B. A commercial loan secured by residential real estate located in a community in which flood insurance is available.
C. A consumer loan secured by a lake house located in a community in which flood insurance is not available.
D. A loan for the purpose of making investments secured by commercial rental property located in a community in which flood insurance is available.

Answer 13

C. A consumer loan secured by a lake house located in a community in which flood insurance is not available.

Any loan secured by a building or mobile home located in a SFHA where flood insurance is available must have flood insurance as a condition of making the loan.

Question 14

Which of the following is acceptable proof of the purchase of flood hazard insurance?

A. Copy of the declarations page of the insurance policy
B. A certificate of insurance
C. Flood insurance binder
D. Letter signed by the borrower agreeing to purchase the insurance

Answer 14

A. Copy of the declarations page of the insurance policy

Although FEMA guidelines have been rescinded, they are still applicable and say that there are only two forms of proof of insurance. One is a copy of the declarations page of the policy. The other is the insurance application along with proof of payment. The NFIP does not recognize binders or certificates of insurance.

Question 15

State National Bank is making a loan to the ACME Corporation to be secured by ACME’s manufacturing plant. The bank’s loan is for $250,000. The appraised value of the plant is $750,000. The maximum amount of flood insurance available for a commercial building is $500,000. What is the least amount of flood insurance that the bank must require under the Flood Regulations?

A. $250,000
B. $750,000
C. $500,000
D. None of the above

Answer 15

A. $250,000

Question 16

Flood insurance lapsed on a loan at First Bank on June 1. The bank sent the borrower a notice stating that flood insurance was required and giving the borrower 45 days (until July 15) to reinstate the policy or purchase a new one. If the borrower does not reinstate the flood insurance and the bank force places a policy and charges the borrower for a premium, what date should the force placed insurance policy start coverage?

A. June 1
B. June 30
C. July 1
D. July 15

Answer 16

A. June 1

Question 17

What is the maximum amount of coverage on a condominium?

A. Either 100% of the replacement cost value of the building or the total number of units in the building times $250,000
B. 100% of the replacement cost value of the building
C. The total number of units in the building times $100,000
D. Either the total loan value or 100% of the replacement cost value of the building

Answer 17

A. Either 100% of the replacement cost value of the building or the total number of units in the building times $250,000

Question 18

What is MOST important to tell mortgage lenders when training them on the application process?

A. All mortgage loans require the use of the Standard Flood Hazard Determination Form to document whether or not the property is in a flood zone
B. Draws on home equity lines of credit after origination do not require any additional Special Flood Hazard Area determinations
C. Special Flood Hazard Area notices must state that insurance is available directly from the NFIP or an insurance company
D. Flood insurance is mandatory when renewing, increasing, or extending a covered loan, and the cost of flood insurance must be escrowed

Answer 18

A. All mortgage loans require the use of the Standard Flood Hazard Determination Form to document whether or not the property is in a flood zone

Under the Flood Insurance regulations and Interagency Questions and Answers, any loan or line of credit secured by a structure must include a flood hazard determination, which is evidenced by the Standard Flood Hazard Determination Form. Each of the other choices is correct in and of itself, but the MOST important concept, the one that would result in a violation of the regulation were it not to be followed, is the Standard Flood Hazard Determination Form.

Question 19

During a flood audit, it was discovered that commercial lending staff was not making flood determinations in collateralized loan transactions. What is the BEST step for the compliance professional to take?

A. Develop and implement a pre-closing monitoring plan, including a review item that requires flood determinations be made three days before closing
B. Develop and implement a pre-closing monitoring plan, including a review item that requires flood determinations be made 10 days before closing
C. Develop and implement a pre-closing monitoring plan, including a review item that requires flood determinations be made 15 days before closing
D. Develop and implement a post-closing monitoring plan, including a review item that requires flood determinations be made 10 days before closing

Answer 19

B. Develop and implement a pre-closing monitoring plan, including a review item that requires flood determinations be made 10 days before closing

Flood insurance determinations must be performed in any structure-secured transaction (commercial or otherwise) before loan closing. Anything done post-closing is insufficient. Ten days before closing is most appropriate since if the structure does lie in a Special Flood Hazard Area (SFHA), the applicant should be given a reasonable amount of time to acquire acceptable coverage, which the regulatory agencies have defined as 10 days.

The regs simply say “reasonable time” rather than a specified length. There used to be a hard 10-day rule, but that has been removed. Due to that history, many regulators and other industry people have adopted 10 days as the “reasonable time” before closing. So it’s not a strict reg, but it’s what your examiner will measure with.

Question 20

What is the MOST important concept for mortgage officers to understand during training?

A. A loan purchase or loan participation does not trigger any flood requirements
B. Real estate loans must include a Standard Flood Hazard Determination Form
C. Draws against an equity line do not require a Standard Flood Hazard Determination Form
D. Flood insurance is available through the NFIP or directly through an insurance company

Answer 20

B. Real estate loans must include a Standard Flood Hazard Determination Form

Under the Flood Insurance regulations and Interagency Questions and Answers, any loan or line of credit secured by a structure must include a flood hazard determination, which is evidenced by the Standard Flood Hazard Determination Form. Each of the other choices is correct in and of itself, but the MOST important concept, the one that would result in a violation of the regulation were it not to be followed, is the Standard Flood Hazard Determination Form.

Real estate loans is a very broad term and could include vacant land loans, which would not require a SFHDF.

Question 21

FEMA issued a bulletin announcing changes to flood policies, but regulatory agencies have not provided any guidance regarding implementation. Which course of action should the compliance professional take in this situation?

A. Determine if vendors are following FEMA changes.
B. Change policies and/or procedures to match the FEMA announcement.
C. Conduct due diligence review to determine if the changes affect any loans in the portfolio.
D. Monitor regulatory announcements, but without an interim or proposed rule, no changes should be made.

Answer 21

D. Monitor regulatory announcements, but without an interim or proposed rule, no changes should be made.

Question 22

Which of the below are requirements for determining if a mobile home is insurable under FDPA? Select all that apply.

A. On a foundation (weight is not resting on wheels) (can be dirt or concrete blocks)
B. First lien
C. Connected to utilities
D. Tied down

Answer 22

A, C, and D

Requirements:
– On a foundation (weight is not resting on wheels) (can be dirt or concrete blocks)
– Connected to utilities (essentially ready for occupancy)
– Tied down according to any local regulations

Question 23

What percentage of a building must be above ground to be an insurable structure under FDPA?

Answer 23

More than 50%

Question 24

At what point does a construction loan become insurable under FDPA?

Answer 24

Once the building rises above the slab stage.

Question 25

When can a bank rely on a previous flood determination performed for the same lender/same property when performing a re-fi?

A. If it is not more than 7 years old, is on the standard form (SFHDF), and you know the flood zone is still accurate
B. Never
C. If it is less than 1 year old
D. If it is not more than 5 years old, is on the standard form (SFHDF), and you know the flood zone is still accurate

Answer 25

A. If it is not more than 7 years old, is on the standard form (SFHDF), and you know the flood zone is still accurate

Question 26

Which of the below is TRUE regarding the Standard Flood Hazard Determination Form?

A. It must be stored electronically
B. The form must be included with the loan package if the loan is sold to another party
C. You must provide the borrower with 2 copies of the form
D. It must be signed by the borrower

Answer 26

B. You should include the form if you sell the loan to another party

The form evidences the fact that a flood determination was performed and what that flood zone is – essentially it determines whether flood insurance is required. The form is not a disclosure; it doesn’t need to be given to the borrower or signed (although it is not prohibited). The form can be stored electronically or in paper, and it has to be retained for as long as you own the loan. If you sell the loan to another party, the form must be given to the new owner along with the loan package.

Question 27

If a property is in a high-risk flood zone, when do you have to notify the borrower via a Notice of Special Flood Hazards?

A. A reasonable time (10 days is recommended) prior to the closing
B. 3 business days prior to the closing
C. 10 days prior to the closing
D. 7 business days prior to the closing, unless the waiting period is waived by the borrower

Answer 27

A. A reasonable time (10 days is recommended) prior to the closing

The 10-day rule is not hard and fast. You do not need to delay the closing.

Question 28

What is included in the Notice of Special Flood Hazards? Select all that apply.

A. Notification that flood insurance is required
B. A signature line for the borrower
C. The borrower must have proof of adequate insurance prior to obtaining the loan
D. If it’s a residential loan, the insurance premiums must be escrowed

Answer 28

A, B, C, and D

Note that while the notice contains a signature line, you do not necessarily need to obtain a signature and maintain a signed copy. You only need a record that the borrower received the notice.

Question 29

Can a bank make an exception and waive a flood insurance requirement?

Answer 29

No.

However, FEMA provides an optional process wherein a borrower and lender can jointly request FEMA make a final determination. FEMA may change the maps by a letter of map amendment (LOMA) or letter of map revision (LOMR) on the flood insurance rate map (FIRM).

Question 30

If a condo requires flood insurance, you should determine if the condo is included in a residential condominium building association policy (RCBAP). If so, what is your next step?

A. Waive the flood insurance requirement
B. Determine whether adequate coverage is provided by the RCBAP, or whether you need your borrower to obtain supplemental coverage to meet the minimum.
C. Require the condo board provide an affidavit of coverage
C. File a request with FEMA to officially waive individual coverage requirements

Answer 30

B. Determine whether adequate coverage is provided by the RCBAP, or whether you need your borrower to obtain supplemental coverage to meet the minimum.

Question 31

What are the federal NFIP coverage limits?

A. $500,000
B. $500,000 per 1-4 family residential structure; $750,000 per commercial structure or 5+ family residential structure
C. $100,000 per single family residential structure; $250,000 per 2-4 family residential structure; $750,000 per commercial structure or 5+ family residential structure
D. $250,000 per 1-4 family residential structure; $500,000 per commercial structure or 5+ family residential structure

Answer 31

D. $250,000 per 1-4 family residential structure; $500,000 per commercial structure or 5+ family residential structure

Question 32

What is the minimum insurance required?

A. Lesser of insurable value minus land, amount of the loan plus senior liens, or NFIP coverage limits
B. Lesser of insurable value, amount of the loan plus senior liens, or NFIP coverage limits
C. Average of insurable value minus land, amount of the loan, and NFIP coverage limits
D. Lesser of insurable value minus land, amount of the loan, or NFIP coverage limits

Answer 32

A. Lesser of insurable value minus land, amount of the loan plus senior liens, or NFIP coverage limits

Question 33

Are hotels with rentals of less than 6 months and nursing/elder care homes considered residential or nonresidential for purposes of determining coverage?

Answer 33

Nonresidential

The NFIP coverage limit for commercial structures is $500,000.

Question 34

When must flood insurance be obtained on both a building and its contents?

Answer 34

If you take both the building and the contents as collateral, and that building sits in the flood zone.

If you only take the contents, you do not need flood insurance.

Example: If a loan contemplates only grain as collateral, you do not need insurance on the silos in which they are stored, even if the silos are in high-risk flood areas.

Question 35

What must a bank monitor for flood insurance purposes? Select all that apply.

A. Map changes
B. Insurance policies
C. Loans

Answer 35

B. Insurance policies to ensure the insurance is current

Question 36

If a bank force places flood insurance due to a lapsed policy, and the borrower has already purchased a new policy, is the bank required to refund anything to the borrower?

Answer 36

Yes, an institution must refund to the borrower all premiums and fees for force-placed insurance paid by the borrower during any period of overlap between the borrower’s policy and the force-placed policy.

Question 37

What are exceptions for the flood insurance premium escrow requirements?

A. Small lenders with assets less than $1 billion that don’t escrow for anything else, HELOCs, loans with terms of 12 months or less, business/commercial purpose loans, nonperforming loans, and subordinate lien loans.
B. Business/commercial purpose loans, nonperforming loans, and subordinate lien loans.
C. Small lenders with assets less than $5 billion, HELOCs, loans with terms of 6 months or less, business/commercial purpose loans, nonperforming loans, and subordinate lien loans.
D. Small lenders with assets less than $1 billion that don’t escrow for anything else, loans with terms of 12 months or less, business/commercial purpose loans, and nonperforming loans.

Answer 37

A. Small lenders with assets less than $1 billion that don’t escrow for anything else, HELOCs, loans with terms of 12 months or less, business/commercial purpose loans, nonperforming loans, and subordinate lien loans.

Question 38

Which of the following is true about civil money penalties (CMP’s) for flood insurance violations? Select all that apply.

A. CMP’s of up to $2,000 are mandated if there is a pattern of practice of violations
B. Flood insurance violations are published
C. Liability for violations cannot be transferred to a subsequent purchaser of a loan
D. CMPs are paid into the FEMA National Flood Mitigation Fund
E. The statute of limitations is 4 years from the date of the violation

Answer 38

A, B, C, D, and E

Question 39

True/False: The FDPA provides penalties for violations of the following:
– Mandatory flood insurance purchase requirement
– Escrow requirement
– Notice requirement
– Force placement requirement

Answer 39

True

Question 40

True/False: The lender must give a borrower 30 days from the date of notice to obtain insurance before force posting.

Answer 40

False: 45 days

Question 41

The bank is participating in an exit meeting with the examiners. The examiners are announcing the assessment of a $250,000 civil money penalty for repeated violations of the flood insurance regulations. Bank management immediately dispute the validity of the penalty. What is the compliance officer’s BEST response?

A. The regulatory agencies have the authority to assess this penalty under the FIRREA civil money penalty provisions
B. The regulatory agencies have the authority to assess this penalty under the Bank Secrecy Act
C. This penalty may be assessed under the provisions of the flood insurance regulations, but not the FIRREA civil money penalty provisions
D. This penalty is not allowable to be assessed by the regulators under either the flood insurance regulations or the FIRREA civil money penalty provisions

Answer 41

A. The regulatory agencies have the authority to assess this penalty under the FIRREA civil money penalty provisions

FIRREA civil money penalties are able to be assessed by examiners for any violation of law or regulation, including flood insurance regulations. This authority is granted under FIRREA, not BSA. The flood insurance regulations do have penalty provisions, as well.