By C/A Staff
Hurricane Season is upon us once again, and as we settle in for another six months of watching the tropics it’s a good time to be reminded of the flood insurance requirements.
Flood insurance is required when there is a MIRE event (when a loan is made, increased, extended or renewed) 1) secured by improved real estate 2) that is located within a Special Flood Hazard Area and 3) the community participates in the National Flood Insurance Program (NFIP).
Flood insurance is generally required on all eligible structures. Eligible structures include residential, industrial, commercial and agricultural buildings that are walled and roofed structures that are principally above ground. The requirement further includes condominiums, co-operative buildings and mobile homes that are affixed to a permanent foundation, including mobile homes that are part of a dealer’s inventory and affixed to permanent foundations. Flood insurance is also required on eligible properties taken out of an abundance of caution.
The minimum amount of flood insurance required must be at least equal to the lesser amount of 1) the outstanding principal balance of the loan, 2) the insurable value of the property, or 3) the maximum amount available under the NFIP for the type of structure. The NFIP maximum amounts available are: $250,000 for residential ($100,000 contents), $500,000 non-residential ($500,000 contents) and $500,000 for non-condominium residential buildings of five units or more ($100,000 contents).
The bank is also required to escrow flood insurance premiums if flood insurance is obtained in connection with a MIRE event, unless an exemption applies. Business purpose loans, HELOCs, non-performing loans and loans with a term of 12 months or less are but a few examples of loans that are exempt from the flood-insurance escrow requirements. There is also a small lender exemption from escrow which is described in detail in the regulation at 12 CFR 339.5(c). The flood insurance escrow requirements are separate and distinct from any requirements to escrow for taxes and hazard insurance, and escrowing for flood insurance does not require the bank to escrow for taxes, hazard insurance or anything else.
Although lenders are not required to monitor for flood map changes, if at any point during the life of the loan the lender becomes aware that there is insufficient flood insurance coverage on the property the lender should begin their force placement procedures. These procedures generally begin with the sending of the 45-day notice. Giving notice to the borrower that they must obtain the required amount of flood insurance within 45 days or else the bank will purchase insurance on their behalf is the only notice required prior to force placing insurance.
The bank is free to send other notices in addition to the 45-day notice, but at a minimum, the bank must send the 45-day notice before being able to charge the borrower for force-placed insurance. Insurance may be force-placed by the bank on the day coverage is determined to be insufficient, but the bank is not required to force place at that time. Force placement is optional for the 45-day period described by the notice, but is required after the 45-day period, and the bank may charge the borrower for all force-placed insurance after the 45-day period runs.