Have you ever found your financial institution falling short on flood insurance coverage? With our latest webinar, you’ll hear from the experts on how to calculate and factor your appraisal figures into the flood insurance calculation process.

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Appraisals & Flood Insurance
| a continued challenge for financial institutions
January Webinar:

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Why Do We Need to Address Flood Compliance?
As an examiner, you learn – and you communicate to the banks you regulate – that there are three statutes you
never want to violate: Regulation O, the Legal Lending Limit and Flood. We’ve had multiple flood statutes in
place for years. Though modifications and amendments have been made, the core remains the same, yet we
continue to see financial institutions falling short on coverage. In many cases, the shortage is due to a lack of
understanding of how to get to the right number while in other cases, they simply aren’t getting the right
numbers.
In this webinar, we will cover the criticality of factoring appraisal figures into the flood insurance calculation
process. We will address how to get to the right number and how to improve communications between
financial institutions and appraisers when it comes to determining the insurable value of a structure for flood
insurance purposes.
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Flood
Governing
Statutes
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Flood
Governing
Statutes
NFIA
1968
FDPA
1973
Title V
1994
BWA
2012
HFIAA
2014

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Flood Insurance Eligibility
Under the NFIP, flood insurance is available for improved real property of mobile
homes located or to be located in SFHAs in participating communities.
SFHAs = Darkly shaded areas that have a 1%
or greater chance of being flooded in any
given year.
Flood insurance is also available for
personal property and other
insurable contents contained in real
property or a mobile home located
in an SFHA.

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Community Participation
How Do I Know Whether a Community Participates in the NFIP?
STEP 1: FEMA conducts studies to determine flood hazard areas in the U.S.
STEP 2: FEMA issues Flood Hazard Boundary Maps and Flood Insurance Rate Maps
STEP 3: FEMA notifies identified communities
STEP 4: Communities establish their eligibility by adopting and enforcing floodplain management
ordinances

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Eligible Structures
● Residential, industrial, commercial and agricultural buildings
that are walled and roofed.
● Buildings under construction for which a development loan is
made to construct insurable improvements on the land.
● Mobile homes affixed to a permanent site, including mobile
homes that are part of a dealer’s inventory and affixed to
permanent foundations.
● Condominiums.
● Cooperative Buildings.
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Ineligible Structures
● Mobile homes not affixed to a permanent site.
● Buildings entirely in, on or over water into which boats are floated.
● Buildings newly constructed or substantially improved on or after October 1,
1982 located in an area designated as an undeveloped coastal barrier with the
Coastal Barrier Resource Systems established by the Coastal Barrier Resources
Act of 1982.
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Purchase Requirements
● Flood insurance is required for the term of the loan
when ALL of the following factors are present:
○ When an FI makes, increases, extends or renews any loan secured
by improved real estate or a mobile home that is or will be affixed
to a permanent foundation.
○ The improved property securing the loan is located or will be
located in a specially designated flood hazard area (SFHA).
○ The community in which the improved property is located or to be
located participates in the NFIP.
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Designated
Loans

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Exceptions to the Purchase Requirement
● Flood insurance is not required when the loan:
○ Is located on state-owned property covered by a policy of self-insurance satisfactory to the
Director of FEMA.
○ Has an original principal balance of $5,000 or less and an original repayment term of one
year or less.
○ Is secured by a structure that is part of a residential property, but is detached from the
primary residential structure and does not also serve as a residence. Note: For the detached
structure exemption, the primary residential structure must still be covered by flood
insurance if it is located in a flood zone.
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Required Form
● Standard Flood Hazard Determination Form must be used when an FI makes,
increases, extends or renews any commercial or consumer loan secured by
improved real estate or by a mobile home.
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Financial institutions must keep a
copy of this form, either in hard
copy or electronic form, for the
period of time they own a loan.

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Prior Determinations
● A financial institution may rely on a previous determination when it increases,
extends, renews or purchases a loan, assuming all the following conditions are
met:
○ The previous determination is not more than 7 years old.
○ No new or revised flood map has been issued in the interim.
○ The determination was recorded on the SFHDF.
A financial institution may NOT rely on a prior determination when it MAKES a loan.
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Timing of Determinations
● Why Should Flood Determinations be Obtained as soon as Possible?
○ The FI will be able to provide notice to the customer that the property is located within a flood
zone and communicate the requirement to obtain flood insurance prior to closing. If the loan is
located within a non-participating community, the FI can then weigh the risk of making the loan in
that community minus NFIP support (i.e. privately-issued flood insurance would need to be
sought).
○ The FI will be able to order its appraisal to ensure it includes the values the FI needs to accurately
calculate the amount of flood insurance required (replacement cost value or actual cash value).
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Fees
Permissible when:
● The borrower initiates a transaction (e.g. making, increasing, extending or renewing a loan) that triggers a
flood hazard determination
● FEMA has revised or updated the flood maps for an area
● The determination results in the purchase of flood insurance under the force placement provision
An FI may also charge the borrower a reasonable fee for life-of-loan monitoring services.
FIs must be cognizant of
proper disclosures of Flood
Determination and LOL Fees

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Notice Requirements
● Required Information
○ A warning that the building or mobile home is or will be located in a SFHA.
○ A description of the flood insurance purchase requirements.
○ A statement, where applicable, that flood insurance coverage is available under the NFIP and may also
be available from private insurers. A statement noting whether federal disaster relief assistance may
be available in the event of damage to the building or mobile home, caused by flooding in a federally
declared disaster.
The notice must be provided within a REASONABLE timeframe prior to closing
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Notice Requirements
● Notice Requirements
○ Flood insurance is available from private insurance companies that issue SFIPs on behalf of the NFIP or
directly from the NFIP.
○ Flood insurance that provides the same level of coverage as an SFIP under the NFIP may be available
from a private insurance company that issues policies on behalf of the company.
○ The borrower is encouraged to compare the flood insurance coverage, deductibles, exclusions,
conditions and premiums associated with flood insurance on behalf of the NFIP and policies issued on
behalf of private flood insurance companies. Inquiries regarding the availability, cost and comparisons
of flood insurance should be directed to an insurance agent.
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Minimum Amount Required
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Maximum Available
under the NFIP
Insurable Value
Outstanding Balance of
the Loan
The LESSER of

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NFIP Coverage Amounts
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Insurable Value
Replacement Cost Value
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● Primary residences
● Cost value less land value
● Secondary and vacation
homes
● Commercial structures
● Contents
● Cost value less land and
physical depreciation
(i.e. RCV less physical depreciation)
Actual Cash Value

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Multiple Structures
Each structure in an SFHA that secures a loan must be covered by flood insurance even though
the value of one structure may be sufficient to cover the loan amount.
Value: $50,000 Value: $10,000Value: $20,000
Total Loan Amount: $50,000
Max Available under NFIP: $250,000 per building
The amount of flood insurance required would be a total of $50,000 spread among the
three buildings. There are no guidelines for how to allocate the insurance amount - only
that each needs to be covered.

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Multiple Structures
What happens when there are greater dollar amounts involved?
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Total Loan Amount: $3,000,000
Max Available under NFIP: $500,000 per building
Value: $250,000Value: $500,000
The amount of flood insurance required would be a total of $750,000.

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Contents Coverage
● Required when an FI takes a lien on real estate in a flood zone and it also takes a
security interest in the contents (e.g. equipment, inventory, furniture or other
chattel property)
● If an FI takes a security interest in business assets only and not the real estate,
contents coverage is not required even if the contents are located in or on a
property that is located in a flood zone
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Blanket Insurance
● Blanket insurance policies typically do not protect a borrower’s interest and therefore,
in most instances, are not considered a suitable substitute for individual NFIP policies
● Can be used when NFIP and private insurance are unavailable or when a policy has
expired and the borrower has failed to renew the coverage
● Should not be confused with private insurance obtained by the borrower

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Construction Loans
● Coverage can be purchased when the loan is made even though construction has
not yet commenced
○ Option #1: Require the purchase of insurance at the time the development loan is made
○ Option #2: Require the purchase of insurance when a specified drawdown of the loan for actual
construction is made
Option #2 is more complicated and requires close monitoring of
the loan to determine when construction actually begins

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Second Mortgages
& Home Equity Loans
As a subordinate lienholder, the FI must coordinate coverage through the borrower and the
insurance agent of record.
The FI’s interest is established by an endorsement to the existing flood insurance policy.
If an FI determines that the first mortgagee has not required sufficient coverage, it must
protect its priority by requiring the borrower to purchase additional coverage.
The amount required should be the lesser of all outstanding loan amounts, the value of the
improved structure or the maximum amount available under the NFIP.

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HELOCs
Two Options, Only ONE Recommended
1) Review HELOC records periodically to ensure the amount of coverage is
consistent with draws on the line
2) Require flood insurance in the fully committed amount

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Detached Structures
● Detached structures are NOT exempt from mandatory purchase requirements if
the structures are for commercial, agricultural or business purposes
● Detached structures used for commercial, agricultural or other business purpose
should be protected by flood insurance (NOT covered by exemption)
● Detached = Standing Alone
(not joined by any structural connection to the residential structure)
● Structure may not serve as a residence
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Residential Condos
RCBAP
Residential Condominium Building Association Policy
● Entire building is covered under one policy
● Maximum amount of building coverage
that can be purchased is 80% of the
RCV or the total number of units times
$250,000, whichever is LESS
● Maximum allowable contents coverage is the ACV of the commonly owned
contents up to $100,000 per building

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Commercial Condos
● Unit owner may purchase only contents coverage
for that unit
● Building coverage may not be purchased in the
name of the unit owner
● In the event of loss, up to 10% of the stated
amount of contents coverage can be applied to
losses to interior condo walls, floors and ceilings

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Cooperatives & Timeshares
Cooperative Associations
● Coverage up to $250,000
● Cannot be insured under an RCBAP
Timeshares
● Coverage governed by jurisdiction
○ Fee or real estate ownership
○ Non-fee interest (i.e. right-to-use)
● Can be covered under an RCBAP

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LOAN AMOUNT: $250,000
STRUCTURE #1: 1-4 Family Residence
NFIP Max: $250,000
Insurable Value: $175,000
STRUCTURE #2: Multifamily Dwelling
NFIP Max: $500,000
Insurable Value: $275,000
No contents taken as collateral on either property.
Loan
Amount:
$250,000
Insurable
Value:
$450,000
NFIP Max:
$750,000
Minimum Amount of Insurance Required
$250,000
Spread among the 2 structures
Calculation
Example
#1

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LOAN AMOUNT: $1,200,000
STRUCTURE #1: Commercial
NFIP Max: $500,000
Insurable Value: $475,000
STRUCTURE #2: Commercial
NFIP Max: $500,000
Insurable Value: $500,000
Contents for Structure #1 taken as collateral. NFIP Max:
$500,000, Insurable Value: $350,000
Loan
Amount:
$1,200,000
Insurable
Value:
$975,000
$350,000
contents
NFIP Max:
$1,000,000
$500,000
contents
Minimum Amount of Insurance Required
$1,200,000
Spread among the 2 structures & contents
Calculation
Example
#2

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LOAN AMOUNT: $450,000
STRUCTURE #1: 1-4 Family Residence
NFIP Max: $250,000
Insurable Value: $280,000
STRUCTURE #2: 1-4 Family Residence
NFIP Max: $250,000
Insurable Value: $150,000
No contents taken as collateral on either property.
Loan
Amount:
$450,000
Insurable
Value:
$430,000
NFIP Max:
$500,000
Minimum Amount of Insurance Required
$430,000
Spread among the 2 structures
Calculation
Example
#3

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Other Real Estate Owned
Flood insurance is NOT required by regulation…
…but, as a prudent safety and soundness practice,
an FI should purchase flood insurance for OREO properties

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Private Flood Insurance
● The National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of
1973 govern the National Flood Insurance Program (NFIP).
○ This program has historically made federally subsidized flood insurance available to owners of real estate
or mobile homes located within flood zones and within NFIP-participating communities.
○ These statutes have also required the purchase of flood insurance in connection with any loan made by a
federally regulated lending institution when the real estate or mobile home securing the loan is located
within a designated flood zone in which flood insurance is available under the NFIP (i.e. a participating
community).
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Private Flood Insurance
● When the BWA was enacted in 2012, it required, among other things, the
Agencies:
○ To issue a rule addressing the escrow of premiums and fees for flood insurance.
○ Provide clarification of the requirement to force-place flood insurance.
○ To issue a rule to direct regulated lending institutions to accept private flood insurance as
defined by the Act and to notify borrowers of the availability of private flood insurance.
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Private Flood Insurance
● These requirements were addressed in 2013 when the Agencies jointly issued
proposed rules to implement the escrow, force-placement and private flood insurance
provisions.
● Further amendments were made in 2014 regarding escrow of flood insurance and fees
with enactment of the Homeowner Flood Insurance Affordability Act. These
amendments also created an exemption from the mandatory flood insurance purchase
requirements for certain detached structures.
● We saw the final rules issued in July 2015 to implement the new escrow and detached
structure provisions. At that time, we also saw changes to the content of flood
insurance notices addressing the availability of private flood insurance.
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Private Flood Insurance
An FI may accept private flood insurance policies, but it must ensure that private policies
include the six main elements outlined by FEMA:
1) Licensure
2) Surplus Lines Recognition
3) Requirement of 45-Day Cancellation/Non-Renewal Notice
4) Breadth of Policy Coverage
5) Strength of Mortgage Interest Clause
6) Legal Recourse

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What’s Proposed
● The rule now proposed would require the acceptance of private flood insurance
if it meets the definition of private flood insurance as outlined within the BWA,
but would also permit an FI to accept a private flood insurance policy that does
not meet the regulatory definition.
● This does not mean that all private flood insurance policies would be acceptable
carte blanche; there are standards with which private flood insurance policies
must adhere.
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Comment Period Ended January 6, 2017

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What’s Proposed
● Discretionary Acceptance: Flood insurance policies that do not meet the regulatory definition of private flood
insurance must still meet specific standards:
○ The flood insurance policy issued by a private insurer would be required to be issued by an insurer that is licensed, admitted, or otherwise
approved to engage in the business of insurance by the insurance regulator of the state in which the property to be insured is located or
issued by a surplus lines insurer recognized or not disapproved by the insurance regulator of the state where the property to be insured is
located.
○ The policy issued by the private insurer would be required to cover both the mortgagor(s) and the mortgagee(s) as loss payees (i.e. the policy
protects both the property owner and regulated lending institution).
○ The policy issued by the private insurer must provide for cancellation following reasonable notice to the borrower only for reasons
permitted by FEMA for an SFIP on the Flood Insurance Cancellation Request/Nullification Form, in any case of non-payment or when
cancellation is mandated pursuant to state law.
○ The policy issued by a private insurer must either be at least as broad as the coverage provided under an SFIP or provide coverage that is
similar to coverage provided under an SFIP including when considering deductibles, exclusions, and conditions.
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What’s Proposed
● Mutual Aid Societies: The proposed rule contains a provision that would permit
an FI to accept, at its discretion, policies issued by mutual aid societies:
○ The members must share a common religious, charitable, educational, or fraternal bond.
○ The organization must cover losses caused by damage to member’ property, including damage
caused by flooding, pursuant to an agreement in accordance with the common bond.
○ The organization must have a demonstrated history of fulfilling the terms of agreements to cover
losses to members’ property caused by flooding.
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Escrow Requirements
● Designed to improve compliance by ensuring insurance is obtained and
maintained for the life of the loan
● Used to be mandatory when an FI was also escrowing for hazard insurance, taxes
and other fees or charges
● Limited to loans secured by residential improved real estate

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Escrow Requirements
● Became effective January 1, 2015
● Applies to loans that experience a
triggering event (e.g. made, increased,
extended or renewed)
● A map change does NOT constitute a triggering event and an FI will not be
required to escrow flood insurance premiums and fees based solely on that
change.

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Escrow Requirements
EXCEPTIONS
● Institutions of less than $1B in assets, as of July 6, 2012 that were not required by Federal or State law to
escrow taxes or insurance for the term of a loan and did not have a policy of uniformly and consistently
escrowing taxes and insurance (i.e. Small Lender Exception)
● Loans in a subordinate lien position
● Loans secured by a condo, coop or other project development
● Loans primarily for a business, commercial or agricultural purpose
● HELOCs
● Non-performing loans
● Loans with terms not longer than 12 months
When an FI determines
that an exception no
longer applies, it must
require the escrow of
flood insurance
premiums and fees.

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Escrow Requirements
Option to Escrow
● New rules require FIs to offer and make available to a borrower the option to
escrow flood insurance premiums and fees for loans that were outstanding as of
January 1, 2016
● FIs had to provide customers the option to escrow by June 30, 2016

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Force Placement
● Upon identification of inadequate coverage or a lapse in coverage, an FI must provide
its borrower a 45-day notice
● An FI may force place flood insurance at the time of lapse
● An FI may charge the borrower for the cost of force placed coverage on the date on
which the borrower’s flood insurance coverage lapsed or did not provide a sufficient
amount

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Force Placement
● Within 30 days of receipt of confirmation of a borrower’s existing flood
insurance coverage, an FI is required to notify the insurer to terminate force
placed coverage and refund all premiums to the borrower
● Evidence = Declarations Page

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Penalties for Non-Compliance
A pattern or practice of violations of any of the following requirements triggers a mandatory civil
money penalty:
○ Purchase of flood insurance where available
○ Escrow of flood insurance premiums
○ Force-placement of flood insurance
○ Notice of special flood hazards and the availability of Federal disaster relief assistance
○ Notice of servicer and any change of servicer
● $2,000 per Violation
● No Maximum Limit for Systemic Violations

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Record Retention Requirements
An FI must retain:
● Copies of completed SFDH forms in hard copy or electronic form for as long as it
owns a loan AND
● Records of receipt of notices to borrowers and servicers for as long as an FI owns
the loan.

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404-800-5115
tortego@mountainseed.com
Still Have Questions? Reach Out Today for More Info
Angela Lucas
412-855-7740
alucas@sterlingcompliancellc.com