Flood Hazard Notice and Life of Loan Report

Issue/Inquiry

The Bank has life-of-loan coverage on its flood searches. When the flood search company notifies the Bank of changes in flood zones, it provides a letter for the Bank to send to the borrower notifying them that flood insurance is required. Is the borrower required to sign the letter in acknowledgement?

Response Summary

In this case, it is not necessary for the Bank to provide a written notice that the property is in a Special Flood Hazard Area. Since the Bank is not making, increasing, renewing, or extending the loan, the requirement of the Flood Rules that the borrower must sign a receipt for the Notice of Special Flood Hazard is not applicable. However, if the reported change indicates that the property is now in a Special Flood Hazard Area and flood insurance is required, then the Bank must initiate its force placement procedures. The Bank should examine the letter provided by the flood search company to determine whether it satisfies the requirements for a force placement notice.

Response Detail

When the Bank makes, increases, renews, or extends a loan secured by improved real property, it must obtain a determination as to whether the property is located in a Special Flood Hazard Area. If it is determined that the property is in a flood zone, then the Bank must provide written notification to the borrower (i.e., Notice of Special Flood Hazard) indicating such and that flood insurance must be obtained. A record of receipt of this notice must be signed in acknowledgement by the borrower. 12 CFR §339.3(a),9(a),(d).

With respect to life-of-loan flood coverage, the flood search company will notify the Bank of any changes made to the flood map on which the determination was based. However, since the change pertains to an existing loan, and the Bank is not making, increasing, renewing, or extending such loan, the Bank does not have to obtain a new determination or provide a Notice of Special Flood Hazard to the borrower.

Whether the Bank needs to do anything else depends upon the nature of the reported change. If the change is to the date of the flood map, but no substantive change has been made to the flood hazard determination, then nothing more needs to be done. However, if the change takes the property out of a Special Flood Hazard Area and flood insurance coverage is no longer required, then the Bank should notify the borrower of such change so that the borrower can terminate the coverage.

Under the Flood Rules, if the Bank determines at any time during the term of a loan that the building or mobile home and any personal property securing the designated loan is not covered by flood insurance, or is covered by flood insurance in an amount that is less than the amount required, then the Bank must notify the borrower that the borrower should obtain flood insurance, at the borrower’s expense, in an amount at least equal to the amount required for the remaining term of the loan.

In this case, since the change places the property in a Special Flood Hazard Area and the Bank has determined that flood hazard insurance is now required, it must initiate its force placement procedures. If the borrower fails to obtain flood insurance within 45 days after notification, then the Bank must purchase insurance on the borrower’s behalf. 12 CFR §339.7(a).

It is not necessary for the Bank to provide written notice that the property is in a Special Flood Hazard Area since it is not making, increasing, renewing, or extending the loan. However, since the Bank must notify the borrower that flood insurance is now required per its force placement procedures, the Bank should review the letter provided by the flood search company to determine whether it satisfies the requirements of the Flood Rules for a force placement notice. If it does, then the Bank may use the letter to fulfill the notification requirements for force placement, but there is no requirement to have such notice signed in receipt.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Monday, November 18th, 2019 at 6:00 am.