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We have a loan in process to construct a duplex on a lot where almost the entire lot is in a SFHA. There is a building on the property that will be destroyed after origination. Isn’t flood insurance required on the existing building until it is demolished? Would we be able to get flood insurance on the duplex prior to origination in this situation? Seems like on construction loans we are allowed to wait to get insurance until improvements have started if we have a process in place to monitor progress, but we really don’t have that and usually have them get the full amount at origination. What is required by FDPA in this situation?
Yes, I think flood insurance would be required if the loan is closed before demolition.
As for the building being constructed this FRB Consumer Compliance Outlook article is a good source: https://consumercomplianceoutlook.org/2015/third-fourth-quarter/flood-insurance-compliance-requirements/#:~:text=Construction%20Loans&text=If%20a%20loan%20is%20secured,a%20building%20or%20mobile%20home.
The Interagency Flood Q&As offer two compliance options for a lender making a loan secured by a building to be constructed. A lender may require the borrower to acquire a flood insurance policy at the time of origination. Alternatively, a lender may allow a borrower to defer the purchase of flood insurance until either 1) a foundation slab has been poured or an elevation certificate has been issued or 2) the building is walled and roofed, provided the building to be constructed will have its lowest floor below the BFE.53 But before the lender disburses funds for construction (except for pouring the slab or preliminary site work), it must require the borrower to have flood insurance in place.
A lender that elects to allow the borrower to defer the purchase of flood insurance until after origination must have adequate internal controls in place to detect whether either of the above two mandatory purchase triggers has occurred. When either of these triggering conditions occurs, the lender must require the borrower to purchase flood insurance or, if necessary, prepare to force place the insurance.
The new proposed flood FAQs address construction loans beginning on p. 25: https://www.occ.gov/news-issuances/federal-register/2020/nr-ia-2020-84a.pdf. Pay particular attention to question 5 & 6 that have had notable proposed updates.
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