V. Lending - Flood Disaster Protection

1 V. Lending - Flood Disaster Protection FDIC Consumer Compliance Examination Manual September 2019 V - Flood Disaster Protection Act The National Flood Insurance Program (NFIP) is admin is te red primaril y under th e National Flood Insurance Act of 1968 (1968 Act) and th e Flood Disaster Protection Act of 1973 (FDPA).1 The 1968 Act made federally subsid ized Flood insurance available to owners of improved real estate or mobile homes lo cated in special Flood hazard areas (SFHA) if th eir communit y participates in th e NFIP. The NFIP, administered by a department of the Federal Emergency Management Agency (FEMA) known as the Federal Insurance and Mitigation Administration (FIMA), makes federally backed Flood insurance available to consumers through NFIP Direct Program agents who deal directly with FEMA or through the Write Your Own Program (WYO), which allows consumers to purchase federal Flood insurance from private insurance carriers.

2 The NFIP aims to reduce the impact of flooding by providing affordable insurance to property owners and by encouraging communities to adopt and enforce floodplain management regulations. The FDPA requires federal financial regulat ory agencies to adopt regulations prohibiting th eir regulated le nding instit utions from making, in creasing, exte nding or renewing a lo an secured by improved real estate or a mobile home lo cated or to be lo cated in an SFHA in a communit y participati ng in th e NFIP unless th e property securin g th e lo an is covered by Flood insurance. Flood insurance may be provided through the NFIP or through a private insurance carrier. Title V of the Rie gle Community Development and Regulatory Improvement Act of 19942 which is called the National Flood Insurance Reform Act of 1994 ( 1994 Act), comprehensiv ely revis ed th e Federal Flood insurance stat ute s.

3 The purpose of the 1994 Act was to in crease complia nce with Flood insurance requirements and participati on in the NFIP in order to provid e additi onal in come to th e National Flood Insurance Fund and to decrease th e financial burden of floodin g on the Federal government, ta xpayers, and Flood The 1994 Act requir ed th e federal financial regulat ory agencies, the Board of Governors of the Federal Reserve System (FRB); the Federal Deposit Insurance Corporation (FDIC); the National Credit Union Administration (NCUA); and the Office of the Comptroller of the Currency (OCC) to revis e th eir current Flood insurance regulations and brought lenders regulated by the Farm Credit Admin is tr ati on (FCA) under the coverage of the Federal Flood insurance statutes. The federal financial regulatory agencies and the FCA (collectively, the Agencies) jointly issued regulations on August 29, 1996 (61 FR 45684).

4 4 The 1994 Act also made the Flood insurance requirements dir ectly applicable to th e loans purchased by th e Federal 1 These statutes are codified at 42 USC 4001-4129. FEMA administers the NFIP; its regulations implementing the NFIP appear at 44 CFR Parts 59-80. 2 Pub. , Title V, 108 Stat. 2160, 2255-87 (September 23, 1994 ). 3 Conf. Rep. No. 652, 103d Cong. 2d Sess. 195 ( 1994 ). (Confer ence National Mortgage Association (Fannie Mae) and th e Federal Home Loan Mortg age Corporati on (Freddie Mac) and to agencies that provid e government insurance or guarantees such as th e Small Busin ess Admin is tr ati on (SBA), Federal Housin g Admin is tr ati on (FHA), and th e Department of Veterans Affairs (VA). The mandatory Flood insurance purchase requirements of the FDPA were again significantly amended with the passage of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) and the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA).)

5 These statutes made changes to the provisions pertaining to force placement of Flood insurance; escrowing of Flood insurance premiums and fees; exemptions to the mandatory Flood insurance purchase requirement; and civil money penalties. Moreover, a new provision mandating the acceptance of a private Flood insurance policy meeting certain criteria as satisfaction of the mandatory purchase requirement was added to the FDPA. The Agencies jointly issued rules addressing force placement, escrow, and the exemption to the mandatory purchase requirement for detached structures on July 21, 2015 (80 FR 43215). The Agencies jointly issued rules implementing the private Flood insurance provisions of the Biggert-Waters Act on February 20, 2019 (84 FR 4953). Objectives of the FDPA: Provide Flood insurance to owners of improved real estate located in SFHAs of communities participating in the NFIP.

6 Require communities to enact measures designed to reduce or avoid future Flood losses as a condition for making federally subsidized Flood insurance available. Require federal financial regulatory agencies to adopt regulations prohibiting their regulated Lending institutions from making, increasing, extending, or renewing a loan secured by improved real estate or a mobile home located or to be located in an SFHA of a community participating in the NFIP, unless the property securing the loan is covered by Flood insurance. Require federal agencies, such as the FHA, SBA and the VA not to subsidize, insure, or guarantee any loan if the property securing the loan is in an SFHA of a community not participating in the NFIP. Structures Eli gib le for Flood Insurance Under the NFIP The NFIP covers improved real property or mobile homes lo cated or to be lo cated in an area id enti fie d by FEMA as havin g special flo od hazards.

7 Generally, each insurable str ucture requires a separate in surance policy. The foll owing Report). 4 Agency regulations are codified at 12 CFR 22 (OCC); 12 CFR 208 (FRB); 12 CFR 339 (FDIC); 12 CFR 614 (FCA); 12 CFR 760 (NCUA). V. Lending - Flood Disaster Protection V - FDIC Consumer Compliance Examination Manual September 2019 types of str uctures are eli gib le for coverage: Resid ential, industr ial, commercial, and agric ult ural buildings th at are walled and roofed str uctures th at are prin cipally above ground. Buil din gs under constr ucti on where a development lo an is made to constr uct insurable improvements on the la nd. Insurance can be purchased to keep pace with th e new constr ucti on. Mobile homes th at are affix ed to a permanent site, in cluding mobile homes th at are part of a dealer s in vento ry and affix ed to permanent foundati ons.

8 Condominiums. Co-operati ve buildings. Flood insurance coverage is also available for personal property and oth er insurable conte nts contai ned in real property or mobile homes lo cated in SFHAs. The property must be in sured in order for th e contents to be eli gib le. Structures Not Eli gible for Flood Insurance Under the NFIP Unimproved la nd, brid ges, dams, and roads. Mobile homes not affix ed to a permanent site. Travel tr ailers and campers. Converted buses or vans. Buil din gs enti rely in , on, or over water in to which boats are flo ated. Buil din gs newly constr ucted or substa ntially improved on or after October 1, 1983, in an area desig nated as an undeveloped coastal barrier with th e Coastal Barrier Resource Syste m esta bli shed by th e Coastal Barrier Resources Act (Public Law 97-348).

9 Flood Insurance Requirements for Lending Institutions Basic Requirement Flood insurance, either issued through the NFIP or from a private insurance provider, is required for the te rm of th e loan on buildings or mobile homes when an institution makes, increases, extends or renews a designated loan, meaning all th ree of the foll owing factors are present: The loan (commercial or consumer) is secured by improved real estate or a mobile home th at is affix ed to a permanent foundation (securit y property); The property securin g th e lo an is located or will be lo cated in an SFHA as id enti fied by FEMA; and The community in which the property is located participates in the NFIP. The FDPA provid es that a regulated le nding instit uti on may not make, in crease, exte nd, or renew any loan secured by improved real property that is lo cated in an SFHA unless th e improved real property is covered by th e min imum amount of Flood insurance requir ed by statute.

10 This includes situations where a securit y inte rest in improved real property is taken only out of an abundance of caution. Nonparticipating Communities Although a lender may make, increase, extend, or renew a loan in a nonparticipating community, a lender is still required to determine whether the security property is located in an SFHA and if so, to notify the borrower. The lender must also notify the borrower that Flood insurance coverage under the NFIP is not available because the community does not participate in the NFIP. If the nonparticipating community has been identified for at least one year as containing an SFHA, properties located in the community will not be eligible for federal Disaster relief assistance in the event of a federally declared Disaster . Because of the lack of NFIP Flood insurance coverage and limited federal Disaster assistance available, a lender should carefully evaluate the risk involved in making such a loan.