[TheBank]

We have a loan in process, on the consumer’s home, and it is located in a special flood hazard area. While the maximum NFIP policy is $250,000, we are asking for $500,000 in flood insurance due to the high value of the collateral. The borrower is getting an NFIP policy for $250,000, and a private policy for the additional amount of $250,00. Since we are meeting the minimum required by the regulation with the initial $250,000 with the NFIP policy, is a review of the private policy for the additional $250,000 required?

[rcooper]

Ҥ 339.3 Requirement to purchase flood insurance where available.

(a) In general. An FDIC-supervised institution 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 building or mobile home and any personal property that secures a loan and not the land itself…

(c) Private flood insurance–(1) Mandatory acceptance. An FDIC-supervised institution must accept private flood insurance, as defined in § 339.2,

in satisfaction of the flood insurance purchase requirement in paragraph (a) of this section

if the policy meets the requirements for coverage in paragraph (a) of this section.”

Because of the way this is worded, my understanding is that if it is to satisfy the flood insurance requirement in the regulations then the private flood rules would apply. Under the private flood rules, you are doing the private flood review to find out if you “must” accept a private flood policy because it is adequate compared to and NFIP policy. Since this policy is in addition to the policy you have for the required amount, it is isn’t required by the regulations to satisfy the minimum purchase amountso you are not needing to review to determine whether you “must” accept it. With that said, a review to determine it is adequate should be done and I’d suggest it may be the best decision for the bank to review the policy as you would a private policy for satisfying the requirements of the flood regulations (e.g. ensure adequate policy for safety and soundness, consistent process is less for staff, etc.).

[jholzknecht]

Make sure that the private policy covers losses that are in excess of those covered by the FEMA policy. There may be a $250,000 deductible on the private policy, so that only covers the excess losses.

[Author]

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