Flood Insurance – timing of proof of insurance

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    I need some feedback on the timing of obtaining flood insurance.

    If you are originating a a purchase money loan that is secured by a property located in the flood zone, based my reading of the Flood laws, it is my opinion that you must have proof of flood insurance prior to making, increasing, renewing extending.

    I have recently been challenged by a lender regarding my position on this as they believe as long as they haven’t funded the loan then they aren’t required to have flood insurance in place. Here’s their example: you “close” (execute note, deed of trust, Final HUD, etc.) a loan on August 1st but don’t fund until August 8th.

    I believe this would be a flood violation. There is a provision for construction loans, however in the above described instance it was a purchase money loan.

    Your feedback is most appreciated.



    I believe this is what you are referencing:

    § 339.3 Requirement to purchase flood insurance where available.

    (a) In general. A bank shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the overall value of the property securing the designated loan minus the value of the land on which the property is located.

    I looked in the definition section of the regulation to see if make, increase, extend, or renew were defined and I didn’t find anything. I would agree with your interpretation, which is the most conservative. Waiting till after the note is signed (but not funded) to get insurance, will do nothing but get the bank in trouble, and if found to be a pattern or practice, could lead to CMP’s.

    I think you are making the right call on this one.


    I agree with JGo9 on this. In the NFIP’s Mandatory Purchase fo Flood Guidelines, it states on page 5; paragraph d, Insurance Required at Closing it states: A designated loan must have flood insurance as a condition of closing. Also: Closing a loan without the insuance is a violation. We know that the loan is closed when they sign the doc’s.


    I totally agree. Thank you for your feedback.


    I just joined the group and thought this was a good topic. I have had the push-back from the mortgage lending group on this subject. I was adding this practice as a violation in our last flood audit and management stated that this was a practice that they were comfortable with and were going to continue. The only group that pays for flood insurance at closing (actually on the HUD settlement statement) is the mortgage group on purchases.


    This is one of the best discussion strings I have seen in the Forum. This is the kind of give and take we have been waiting for. As a group you worked over the topic and reached the perfect conclusion. Thank you. Thank you. Thank you.

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