Flood Insurance 101

Answers to common questions about flood insurance regs.

June 24, 2011

All federally insured credit unions must comply with NCUA’s flood insurance regulations (Part 760). Part 760 implements the Flood Disaster Protection Act, as amended.

Federally insured credit unions cannot make, increase, extend, or renew a loan secured by improved real property or a mobile home located in a special flood hazard area (SFHA) where federal flood insurance is available unless the building or mobile home (on a permanent foundation) and any personal property securing the loan are covered by flood insurance for the term of the loan. This requirement will be satisfied by coverage obtained through the National Flood Insurance Program (NFIP).

The NFIP is administered by the Federal Emergency Management Agency (FEMA), which works with private insurance companies to offer flood insurance to property owners if their community participates in the program. To qualify for federal flood insurance, a community must join the NFIP and agree to enforce sound floodplain management standards. Participating communities agree to adopt and enforce ordinances that meet or exceed FEMA requirements to reduce the risk of flooding.

Flood determination and SFHA notices

First, a credit union must perform a flood hazard determination before closing a real estate-secured loan to determine whether property is located in a flood zone. The credit union (or a servicer acting on its behalf) must document the determination using the Standard Flood Hazard Determination Form, and the form must be retained for the life of the loan (in hard copy or electronic form).

The credit union may charge a “reasonable” fee for making a flood hazard determination. Such a fee also may include, but is not limited to, a fee for life-of-loan monitoring by the credit union, servicer, or third party. The portion of the cost for the life-of-loan monitoring must be disclosed as a finance charge in accordance with Regulation Z (Truth in Lending).

When the flood determination indicates the security property is located or will be located in an SFHA, the credit union must mail or deliver a written “Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance” to the borrower and to the servicer. This notice must be provided whether or not NFIP insurance is available for the collateral securing the loan. This notification includes a warning that the secured property is or will be located in an SFHA; a description of the flood insurance purchase requirements and that insurance may be purchased under the NFIP and from private insurers; and a statement that federal disaster relief assistance may be available in the event of damage to the property caused by flooding in a federally-declared disaster. (The sample notice can be found in the Appendix to Part 760.)

Mandatory purchase requirements

As previously mentioned, a federally-insured credit union cannot make, increase, extend, or renew a loan secured by a building or mobile home located in an SFHA where federal flood insurance is available unless the property securing the loan is covered by flood insurance for the term of the loan. If the security property is in an SFHA and NFIP insurance is available, the credit union must require the borrower to purchase insurance in an amount sufficient to cover the principal balance or the maximum limit of coverage for that property, whichever is less. The insurance must be purchased before the loan is closed. 

Here are some common questions from credit unions regarding the mandatory purchase requirement:

* What happens when the property is in a flood zone, but the community doesn’t participate in the NFIP? The credit union must still determine whether the property is located in an SFHA and notify the borrower. But, the borrower wouldn’t be required by law to purchase flood insurance. Nevertheless, the credit union still could require private flood insurance to protect its collateral. 

* Is a home equity loan covered by the mandatory purchase requirement? Yes, under these three circumstances:

1. The loan is secured by a building or mobile home;

2. The collateral is located in an SFHA; and

3. The community where the property is located participates in the NFIP.

* What happens when the NFIP lapses? If Congress doesn’t reauthorize funding for the NFIP, the authority of FEMA to issue new flood insurance policies, issue increased coverage on existing policies, and issue renewal policies expires. NCUA has clarified that credit unions may continue to make loans without federal flood insurance when NFIP insurance isn’t available. “This isn’t considered a violation of Part 760, but lenders must continue to make flood determinations, provide timely, complete, and accurate notices to borrowers, and comply with other parts of the flood insurance regulations,” according to NCUA’s Letter to Credit Unions 10-CU-08: Guidance for National Flood Insurance Program Authority Lapses. “In addition, they must evaluate safety and soundness and legal risks, and prudently manage those risks during the lapse period. Further, lenders need to have a system in place so policies are obtained as soon as available following reauthorization for properties subject to mandatory flood insurance coverage.”

The NFIP is authorized until Sept. 30, 2011, and legislation is pending to further extend the program another five years. 

* Is it true that privately insured credit unions don’t have to comply with the federal flood insurance requirements?It depends. Although a privately insured state-chartered credit union isn’t directly subject to federal flood insurance requirements, offering federally-guaranteed or federally-insured loans, or selling mortgages to the secondary market (e.g., Fannie Mae, Freddie Mac) will oblige the credit union to comply with these requirements. Even if the credit union escapes coverage, it should still consider requiring members to purchase flood insurance when necessary to protect its security interest in the property.

Escrowing and force placement of premiums

If the credit union requires an escrow for taxes, insurance premiums, fees or other charges, then it must also escrow for required flood insurance premiums. If the loan is covered by the Real Estate Settlement Procedures Act (RESPA), then the credit union must follow RESPA’s requirements on escrow account statements and limitations on the amount in the account.

If the credit union determines that the borrower allowed the flood insurance coverage to lapse, the credit union must notify the borrower that he must obtain the insurance. If the borrower doesn’t provide evidence of insurance coverage within 45 days of the notification, the credit union is required to force place (purchase) the insurance on the borrower’s behalf. The credit union may charge the borrower for the cost of the premiums and fees.

Notice to FEMA

The credit union must notify FEMA (via the insurance provider) of the identity of the loan servicer at the time the loan is made, increased, extended, renewed, sold, or transferred. If the servicing is transferred, notification must be made within 60 days of the transfer. The notice must be sent to the insurance carrier that issued the flood insurance policy so the mortgagee endorsement can be updated.

This article only scratches the surface. For additional information, visit CUNA’s e-Guide to Federal Laws and Regulations, available at cuna.org (select “regulations & compliance”).

VALERIE Y. MOSS is CUNA’s director of compliance information. Send compliance questions to cucomply@cuna.com.