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From Banking and Finance Law Daily, June 2, 2014

Agencies outline expectations for increased maximum flood insurance coverage

By Lisa M. Goolik, J.D.

Due to the new National Flood Insurance Program (NFIP) maximum limit of flood insurance coverage available for non-condominium residential buildings designed for use for five or more families (Other Residential Buildings), lenders and servicers may receive, or may have already received, a notice of the new policy limits from insurers. If a lender receives such a notice, the federal financial regulators are directing lenders to take steps to ensure that the borrower obtains sufficient coverage or, if the borrower fails to obtain sufficient coverage within 45 days after notification, the lender may be required to purchase coverage on the borrower’s behalf (CA 14-3FIL-28-2014OCC Bulletin 2014-26; May 30, 2014).

Increased maximums. In accordance with the Biggert-Waters Flood Insurance Reform Act of 2012, the maximum limit of building coverage available for Other Residential Buildings has been increased from $250,000 per building to $500,000. The maximum contents coverage for all policies covering Other Residential Buildings will remain at $100,000 per policy. The new coverage limits are available for new policies, policy renewals, or existing policies with change endorsements effective on or after June 1, 2014.

The Federal Deposit Insurance Corporation, joined by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the National Credit Union Administration, and the Farm Credit Administration (collectively, the agencies) have issued flood insurance regulations requiring that, when a lender makes, increases, extends, or renews a loan secured by property located in a Special Flood Hazard Area, the property must be covered by flood insurance for the term of the loan, in an amount that 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 limit available for the particular type of structure or the “insurable value” of the structure.

As a result, the increase in the maximum amount of flood insurance coverage available under the NFIP could affect the minimum amount of flood insurance required for both existing and future loans secured by Other Residential Buildings.

FEMA notification. In December 2013, the Federal Emergency Management Agency (FEMA) directed insurers that issue NFIP policies to provide all Other Residential Buildings policyholders with a letter informing them prior to June 1, 2014, of the new policy limits. This letter is intended to notify building owners, but insurers may provide notification of the new policy limits to any lender named on the borrower’s flood insurance policy at the same time the policyholder is notified. Additionally, FEMA has instructed insurers to include a message on the Renewal Notice advising affected policyholders that higher limits are available.

Guidance for financial institutions. According to the agencies, if a supervised financial institution or its servicer receives a notification from an insurer, the financial institution should “take any steps necessary to determine whether the property will require increased flood insurance coverage.” While the agencies are not requiring that a lender perform an immediate full file search of its loan portfolio, the agencies suggest that, for safety and soundness purposes, a lender review its loan portfolio to determine whether additional flood insurance coverage is required for certain properties.

If the lender or its servicer makes a determination that a building securing a designated loan is now covered by flood insurance in an amount less than required, it should take steps to ensure that the borrower obtains sufficient coverage. If an affected borrower has not provided evidence of the increased flood insurance, the lender or its servicer must notify the borrower that the borrower should obtain additional flood insurance at the borrower’s expense for the remaining term of the loan.

In addition, if the borrower fails to obtain sufficient coverage within 45 days after notification, the lender or its servicer must purchase coverage on the borrower’s behalf. The lender or its servicer may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance, including premiums and fees incurred for coverage beginning on the date on which flood insurance coverage did not provide a sufficient coverage amount.

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