[jholzknecht]

We recently received the following question:

A community has been notified that they are no longer a participating community in the NFIP. Under this circumstance, is private flood insurance coverage available as an alternative to FEMA coverage?

As I read the borrower’s notice, I’m inclined to think that neither FEMA coverage nor a private policy can be issued under this circumstance. Your thoughts?

[jholzknecht]

Evelyn,

The lender can make a loan in a non-participating community. I have included a few sections from our Flood Insurance for Cancelled Communities manual.

More information about the manual and the recorded webinar is available at : https://mycomplianceresource.com/product/flood-insurance-for-cancelled-communities-webinar-recording/

Jack

Applicability of Regulation
Interagency Flood Insurance Questions and Answers #1

Does the Regulation apply to a loan where the building or mobile home securing such loan is located in a community that does not participate in the National Flood Insurance Program (NFIP)?

Yes. The Regulation does apply; however, a lender need not require borrowers to obtain flood insurance for a building or mobile home located in a community that does not participate in the NFIP, even if the building or mobile home securing the loan is located in a SFHA. Nonetheless, a lender, using the SFHDF, must still determine whether the building or mobile home is located in an SFHA. If the building or mobile home is determined to be located in an SFHA, a lender is required to notify the borrower. In this case, a lender, generally, may make a conventional loan without requiring flood insurance, if it chooses to do so. However, a lender may not make a government-guaranteed or insured loan, such as a Small Business Administration (SBA), Veterans Administration (VA), or Federal Housing Administration (FHA) loan secured by a building or mobile home located in an SFHA in a community that does not participate in the NFIP. See 42 U.S.C.4106(a). Also, a lender is responsible for exercising sound risk management practices to ensure that it does not make a loan secured by a building or mobile home located in an SFHA where no flood insurance is available, if doing so would be an unacceptable risk.

Non-Participating
Community
FDIC Exam Manual 4/2016 –
V – 6.2
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 a Special Flood Hazard Area (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.

Options Available in Non-
Participating Community
FDIC Exam Manual 4/2016 –
V – 6.2
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. A lender making a loan in a nonparticipating community may want to require the purchase of private flood insurance, if available. Also, a lender with significant lending in nonparticipating communities should establish procedures to ensure that such loans do not constitute an unacceptably large portion of the financial institution’s loan portfolio.

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