Relying on Existing Flood Determination

Issue/Inquiry

When the Bank grants an extension or modification to a loan, should it run a new flood search? When providing a Notice of Special Flood Hazard to the borrower for an extension, modification, or renewal, must it be provided within a “reasonable” time?

Response Summary

The Bank can rely upon an existing flood determination when a loan is increased, renewed, or extended if the determination was made using the Standard Flood Hazard Determination Form (“SFHDF”), is less than seven years old, and there have been no changes or updates to the flood map on which it was based. Regarding the last element, whether the Bank relies upon life-of-loan monitoring provided by the service provider, has a new search made, or checks with FEMA as to whether the flood map has been updated is a business decision for it to make. The requirement to provide the Notice of Special Flood Hazard will apply when a loan is increased, renewed, or extended.

Response Detail

Relying Upon Existing Flood Determinations

Under the Flood Rules, a lender shall not make, increase, extend, or renew a loan secured by improved real property (i.e., a building or mobile home) located in a Special Flood Hazard Area unless the real property and any related personal property in which a security interest has been taken is covered by flood insurance for the term of the loan. TSFHDF developed by FEMA must be used in determining whether the property is located in a Special Flood Hazard Area. 12 CFR §§339.3(a),6(a).

When a lender is increasing, extending, renewing, or purchasing a loan secured by a building or mobile home, or making multiple loans to the same borrower secured by the same improved real estate, Section 528 of the Flood Disaster Protection Act, 42 U.S.C. 4104(e) permits the lender to rely upon a previous flood determination under the following circumstances:

• The determination was made using the SFHDF
• The SFHDF is less than seven years old
• There were no map revisions or updates affecting the property since the original determination was made. Interagency Questions and Answers Regarding Flood Insurance (“Interagency Q&A”), Q. 68.

With respect to the last element, if a new Flood Insurance Rate Map (“FIRM”) or Flood Hazard Boundary Map (“FHBM”) had been issued during the interim and a lender relied on the original determination when increasing, extending, or renewing the loan, it would be in violation of the Flood Rules. Consequently, a bank must address this aspect before relying upon an existing SFHDF.

Life-of-loan monitoring is not a requirement of the Flood Rules and is not mentioned in such; it is simply a service that evolved from the Flood Rules. If the service provider providing the Bank’s flood determinations offers life-of-loan monitoring, the practical question is its reliability and the timeliness of any notification of flood map changes. The Bank’s previous experience with the service provider may answer these questions. For example, if the Bank ordered a new search and found that the flood map had been revised since an earlier search was obtained, and the Bank had not been notified of the change, this would reflect on the reliability of the life-of-loan monitoring provided by this service provider.

Alternatively, the Bank could obtain a new flood determination or check the FEMA Flood Map Service Center to see whether the flood map relied upon in the existing SFHDF had been updated. The web address of the FEMA site is as follows: https://msc.fema.gov/portal/home

Whether the Bank relies upon life-of-loan monitoring, orders a new search, or verifies the existing flood determination is a business decision for it to make.

Notice of Special Flood Hazard

When a lender makes, increases, extends, or renews a loan secured by a building or mobile home that will be located in a Special Flood Hazard Area, it must mail or deliver a written notice to the borrower that provides, among other things, a warning that the property securing the loan is located in a Special Flood Hazard Area, as well as a description of the flood insurance coverage requirements. 12 CFR §339.9(a),(b).

The notice must be provided within a reasonable time prior to the completion of the transaction. 12 CFR §339.9(c). What constitutes “reasonable” notice will essentially vary according to the circumstances of particular transactions. A borrower should receive notice with sufficient time to ensure that:

• The borrower has the opportunity to become aware of their responsibilities under the National Flood Insurance Program.
• When applicable, the borrower can purchase flood insurance prior to completion of the loan transaction.

Federal regulatory agencies generally continue to regard 10 days as a “reasonable” time interval. FDIC Compliance Examination Manual, V – 6.8.

The Flood Rules do not address when the requirement can be waived. This means that when a loan is increased, extended, or renewed, the lender must provide a new notice to the borrower, even when a new determination is not required. Interagency Q&A Q. 80.

This entry was posted on Monday, January 14th, 2019 at 6:00 am.