Flood Insurance – part 1
Happy New Year!!
Laurie Jorgensen – Senior Compliance Auditor
After the crazy weather events we experienced at the end of 2025, a refresher on some of the aspects of flood insurance compliance seems like a great way to kick off 2026.
Flood insurance requirements are multi-faceted and involve considering several circumstances, such as:
- Is the loan for consumer or commercial purposes?
- How many applicable structures are on the property?
- What if a portion of the property is in a flood zone but other portions are not?
The list goes on and on.
Let’s jump into the first of a series of recaps to ensure your institution’s compliance with the Flood Disaster Protection Act (FDPA).
The FDPA requires flood insurance for the duration of the loan on buildings or mobile homes, and – in some cases – the contents of the structure(s), if:
- The property securing the loan is in or will be in a Special Flood Hazard area (SFHA), as identified by the Federal Emergency (FEMA);
- A MIRE event (the lender makes, increases, extends, or renews a loan) occurs on any loan secured by improved real estate or a mobile home that is affixed to a permanent foundation; and
- The community participates in the National Flood Insurance Program (NFIP).
If this sounds complicated…it is! A strong flood insurance compliance program ensures that all loans involving improved real property are screened by obtaining a Standard Flood Hazard Determination Form (SFHDF) early in the loan application process.
While the regulations are not specific about when the form must be obtained, the regulatory agencies (FDIC, OCC, CFPB, NCUA) have determined that the screening must be conducted to allow at notification to the borrowers at least ten days prior to consummating the loan if flood insurance is required. Flood insurance is expensive and this time frame allows borrowers to shop for insurance prior to consummation. The earlier this notification can be provided to borrowers, the better. Additionally, having property in an area requiring flood insurance may be a surprise to the borrowers and they should be given sufficient time to determine their tolerance to flood risk.
One of the most common flood violations noted by the regulators during a flood insurance examination is not providing timely notice when flood insurance is required, not providing notice when a MIRE event triggers the requirement, and/or not having a clear date on record for when the notice was provided.
Timely notice can be difficult to determine when an institution has a decentralized process for pulling the SFHDF and providing notice to the borrowers. If providing notice is delayed after obtaining the SFHDF, an examiner may not be able to determine when the notice was mailed or provided. Delays can also occur when an institution calls the borrower to let them know flood insurance is required for their loan, and it is not clear when the written notice was provided. If there is not a consistent process in place to mail or deliver the notice, examiners typically rely on the record of receipt – which may be obtaining a signature on the notice at the time of closing. This can lead to fines and look-back requirements your institution will want to avoid.
Generally, flood insurance policies must be effective no later than the consummation date of the loan; usually the date the loan closes. Using the closing date clearly shows compliance with the regulations. It also ensures the borrowers have no further financial obligations that could require follow-up and/or affect the funding of the loan. Some states (including Oregon, Washington, Idaho and California) have “dry” signature provisions. This means flood insurance is not required until the date of property transfer. How your institution complies with these requirements should be established in your flood insurance policy/procedures and should be consistently applied throughout the loan portfolios. If your institution chooses to use the transfer date as the required effective date for flood insurance, strong procedures should be in place to ensure that insurance has been obtained. Your institution should also have a clearly established procedure that will be followed if flood insurance is not in place by the transfer date. Even in a “dry” state, your institution’s procedure may require flood insurance to be in place on the closing date. If your institution operates in both “wet” and “dry” signature states, it may be easier to ensure compliance by choosing the closing date as the required effective date for the flood insurance policy.
Watch for more information about developing a strong flood insurance compliance process in the next publication of the series. In the meantime, if you have questions or concerns about your institution’s program, contact us.
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