Flood Zone Discrepancy

Issue/Inquiry

The Bank has been running into problems with the flood zone listed on borrower’s insurance policy not matching the zone indicated on the Bank's flood determination. The Bank is receiving a ton of pushback from insurance agents. Must the Bank force place insurance with the proper flood zone in these situations?

Response Summary

Lenders need only address discrepancies between high-risk zones and moderate or low-risk zones. If a zone discrepancy is found to exist, the lender should determine whether it is the result of a legitimate reason, such as grandfathering, or whether it is a mistake. If the discrepancy is not resolved, the lender should send a letter to the insurance agent and the insurance company, reminding them of FEMA’s April 16, 2008 instruction that, in cases of determination discrepancies, the policy should be written to cover the higher risk zone. Beyond that, no further action is necessary, though the lender is permitted to force place flood insurance if it believes that this is appropriate.

Response Detail

A discrepancy between the flood zone shown on the Standard Flood Hazard Determination Form (“SFHDF”) and that shown on the flood insurance policy is a matter of concern only if the discrepancy is between a high-risk zone (A or V) and a low or moderate-risk zone (B, C, D, or X).  If the difference concerns a subcategory (as between A1 and AE, for example) this is not considered to be a discrepancy and a lender need not do anything further.

If the flood insurance policy shows a lower risk zone than the Standard Flood Hazard Determination Form, the lender should investigate the discrepancy. The NFIP’s “Grandfather Rule” provides for the continued use of a rating on an insured property when the initial flood insurance policy was issued prior to changes in the hazard rating for the particular flood zone where the property is located. If this rule applies, it may allow a borrower to benefit from a prior, more favorable rating.  A discrepancy resulting from the Grandfather Rule is reasonable and acceptable, but should be documented and substantiated by the lender.

A lender should also determine whether a zone discrepancy is the result of a mistake by asking its search provider to recheck its determination. If there still appears to be a discrepancy after the recheck, a lender and borrower may jointly request that FEMA review the determination obtained by the lender. FEMA will only conduct this review if the request is submitted within 45 days of the date when the lender notified the borrower that the building is in a SFHA.

If the discrepancy is not resolved or the borrower, insurance company, or insurance agent is uncooperative in assisting the lender, the lender should notify the insurance agent about the insurer’s duty pursuant to FEMA’s letter of April 16, 2008 (W–08021), to write a flood insurance policy that covers the most hazardous flood zone. When providing this notification, the lender should include its zone information and it should also notify the insurance company itself. The lender should substantiate these communications in its loan file. Loans in Areas Having Special Flood Hazards: Interagency Questions and Answers (“Interagency Q&A”), question 71

As noted in the commentary when the guidance regarding flood zone discrepancies was published, the federal regulatory agencies do not require any further action to be taken by the lender. If the lender believes, for its own purposes, that force placement of flood insurance coverage is appropriate, then it may do so in accordance with the force placement rules, but this is not a requirement.  74 Federal Register 35914, 35930 (July 21, 2009).

It should also be noted that the lender must be able to substantiate in its loan file that it made a bona fide effort to resolve the discrepancy, either by finding a legitimate reason for such discrepancy or by attempting to resolve the discrepancy. A pattern or practice of unresolved discrepancies may put the lender at risk of being found in violation of the mandatory purchase requirements. Interagency Q&A, question 72.

This entry was posted on Monday, March 27th, 2017 at 1:34 pm.