The Flood Rules and Multiple Properties, Multiple Loans

Issue/Inquiry

The Bank is looking for guidance on the following scenarios with respect to the force placement of flood insurance:

• One property secures two loans. The borrower has not provided evidence of insurance and the Bank is considering force placing flood insurance coverage.  Can the Bank obtain one insurance policy that will cover both loans, or will it need to obtain two separate policies for each loan?
• The Bank has a loan with three properties as collateral.  The borrower has not provided evidence of insurance for any of the properties and the Bank is considering force placing flood insurance coverage. The loan balance is low.  Is it appropriate for the Bank to divide the loan balance by three and then force place one-third of the balance on each of the three properties?

Response Summary

The National Flood Insurance Program (“NFIP”) Standard Flood Insurance Policy covers each qualifying building. As such, one policy would be required for a building securing more than one loan, while more than one policy would be required for a loan that is secured by more than one building. When determining the required coverage for one building securing more than one loan, the loans will be aggregated in establishing an amount for the loans secured. When determining the required coverage amount for a loan secured by more than one building, the insurable value of each building as well as the maximum NFIP coverage available for each building would be aggregated. Where the NFIP coverage amount is the lesser of the loan amount or insurable value, the lender can allocate the coverage any way it wants, so long as each building has some coverage.

Response Detail

NFIP Policy

For the Standard Flood Insurance Policy issued by the NFIP, a separate policy is required for each qualifying building, per the NFIP Flood Insurance Manual. So, if one building secures more than one loan, only one flood insurance policy is required. If there is more than one property securing a loan, each property will have its own policy.

Force Placement of Flood Insurance

Under the Flood Rules, if a lender, at any time during the term of a loan, determines that the collateral has less flood coverage than is required under the Rules, it must notify the borrower to obtain the required insurance. If the borrower has not purchased the required insurance within 45 days after the notice is sent, the lender must purchase insurance on the borrower’s behalf. The amount of insurance must be, at least, equal to the lesser of the outstanding principal balance of the loan, or the maximum limit of coverage available for the particular type of property under the NFIP.  12 CFR §339.7(a).

As per the rules implementing the amendments of the Biggert-Waters Flood Insurance Reform Act of 2012 (“Biggert-Waters Act”), the lender has the option of force placing flood insurance coverage from the day on which the flood insurance coverage lapsed or if the borrower did not provide coverage in a sufficient amount, provided that the following requirements are observed:

• Within 30 days of receiving confirmation regarding a borrower’s existing flood insurance coverage, the lender must terminate any force-placed insurance and refund all force-placed insurance premiums to the borrower as well as any related fees paid for by the borrower during any period of overlap between the borrower’s policy and the force-placed policy
• The lender must accept a declarations page as confirmation of the borrower’s existing flood insurance policy, which includes the policy number and contact information for the insurance company as an agent. 12 CFR §339.7.

Amount of Flood Insurance

One Property, Multiple Loans

The amount of flood insurance required by the Flood Rules for a loan secured by improved real property located in a Special Flood Hazard Area (“SFHA”) must be, at least, equal to the lesser of the loan’s outstanding principal balance, or the maximum amount of coverage available under the NFIP for the property type serving as collateral.

When there is more than one loan secured by a property, the outstanding loan balance for the purposes of determining flood insurance coverage is the combined total of the first and subordinate liens.

The maximum amount of coverage available under the NFIP is the lesser of:

• The maximum amount of coverage available under the NFIP for the property securing the loan
• The overall property value securing the loan minus the value of the land on which it is located (i.e., the insurable value).

The maximum amount of flood insurance available under the NFIP is:

• $250,000 ($100,000 contents) one-to-four family residential
• $500,000 ($100,000 contents) multi-family
• $500,000 ($500,000 contents) commercial

12 CFR §339.7(a); Loans in Areas Having Special Flood Hazards: Interagency Questions and Answers Regarding Flood Insurance (“Interagency Flood Q&A”), Q. 8.

One Loan, Multiple Properties

When a loan is secured by multiple buildings, the amount of flood insurance required must be, at least, equal to the lesser of the outstanding principal balance of the loan, or the maximum amount of insurance available under the NFIP. 12 CFR §339.3.

If the real estate security contains more than one building located in an SFHA in a participating community, the Bank must determine the amount of insurance required on each building and then add these individual amounts together. The total amount of required flood insurance is the lesser of the outstanding principal balance of the loan, or the maximum amount of insurance available under the NFIP, which is the lesser of the maximum amount available for the type of structures or the “insurable value” of the structures.

Interagency Questions and Answers Regarding Flood Insurance (“Interagency Q&A”), Q.14; FDIC Compliance Manual, V-6.4.

The interagency guidance provides the example of a lender making a loan in the principal amount of $150,000 that is secured by five non-residential buildings, three of which are located in SFHAs within participating communities. It breaks the problem down as follows:

• The outstanding loan principal is $150,000.
• The maximum amount of insurance under the NFIP:
  • The maximum limit available for the type of structure is $500,000 per building
  • The insurable value (for each non-residential building for which insurance is required) is $100,000 or $300,000 total.

The amount of insurance required for the three buildings is $150,000, which is the lesser of the outstanding loan balance and the maximum amount of insurance available under the NFIP. The amount of required flood insurance can be allocated between the buildings in varying amounts, so long as each building is covered by flood insurance. Interagency Q&A, Q.14.

In using this example in the present matter, the amount of the loan would be one factor in determining the amount of flood insurance coverage required. The Bank would also use the aggregate insurable value and the aggregate of the maximum NFIP available for each of the three buildings as other factors in its determination. However, the essential rule will be the same in that each building must have some coverage if the NFIP coverage limit is the lesser of the loan amount or the insurable value. The Bank may allocate this coverage as it deems appropriate.

This entry was posted on Monday, May 20th, 2019 at 6:00 am.