“Took You Long Enough?!”: Flood Q&As

The five federal regulatory agencies announced September 1, 2020 that they would extend the comment period on a proposal to revise the Interagency Questions and Answers Regarding Flood Insurance until November 3, 2020.  These have not been updated since 2011.  The reason for this extension is because of the extent of the revisions proposed by the Agencies and the challenges associated with COVID-19. The proposed Interagency Questions and Answers, which were initially issued in July 2020, provide information addressing technical flood insurance-related compliance issues. 

The Q&As would be divided into 17 categories and address a myriad of topics.  One would tackle potential lapses in the authorization of the NFIP so that during a period NFIP coverage is not available, lenders can continue to make loans subject to the flood insurance requirements without requiring flood insurance.  Lenders would still need to make flood zone determinations, provide timely, complete, and accurate notices to borrowers, and comply with other applicable parts of the flood insurance requirements.

Another would list out what lenders would consider in reviewing a private flood insurance policy and whether it provides enough protection.  Items would include deductibles comparable to borrower’s financial condition, statement of adequate notice of cancellation, appropriate terms for payment per occurrence or per loss and aggregate limits, and whether the private insurance company has financial solvency, strength and ability to satisfy claims.

In regard to effective date of flood insurance, lenders would use the loan “closing date” to determine the date flood insurance must be in place for the designated loan. Since “wet funding” and “dry funding” differ by state, the bank would refer to when a mortgage is considered officially closed.  Additionally, an application and premium payment for NFIP insurance has to be provided at or prior to the closing date as it affects FEMA flood insurance effective date and any resulting 30-dya waiting period for new policies not made in connection to a triggering event.

Several questions are posed regarding detached structures.  Banks are still required to provide flood hazard determinations on detached structures even though coverage is not required.  The Q&As also would address when a lender must require flood insurance on a loan secured by a building under construction, what the expectation is regarding a lender’s obligation if there’s a discrepancy between a flood determination form and a flood insurance policy, and even address when the bank has a loan to a cooperative unit owner, secured by that owner’s share in the co-op, that it is not a designated loan subject to flood insurance requirements.

One of the biggest clarifications is regarding construction-to-permanent loans. The new proposed Q&A would state that construction-to-permanent loans with a construction phase before the loan converts into permanent financing would not qualify for the 12-month exemption from flood insurance premium escrow requirements, even if one phase of the loan is for 12 months or less.

Additionally, some other guidance on force placement would be mentioned.  Lenders can send force-placement notices to borrowers prior to the expiration date of the flood insurance policy as a courtesy, but they are still required to send notice upon determining that the flood insurance policy actually has lapsed or is insufficient.  Additionally, lenders may force place insurance and charge a borrower those costs of premiums and fees incurred in purchasing the flood insurance at any time starting from the date on which flood insurance coverage lapsed or was not sufficient. The lender would not have to wait the 45-days after providing the required notification to the borrower.

These changes are broad and will impact a lender’s compliance obligations and operations. Review the proposed Q&A here and get those comments in prior to November 3rd.