V. Lending — Flood Insurance Questions & Answers
V - 6.42 FDIC Consumer Compliance Examination Manual – November 2023
A junior lienholder should work with the senior
lienholder, the borrower, or with both of these parties, to
determine how much flood insurance is needed to cover
improved real estate collateral. A junior lienholder should
obtain the borrower’s consent in the loan agreement or
otherwise for the junior lienholder to obtain information
on balance and existing flood insurance coverage on
senior lien loans from the senior lienholder.
Junior lienholders also have the option of pulling a
borrower’s credit report and using the information from
that document to establish how much flood insurance is
necessary upon increasing, extending, or renewing a
junior lien, thus protecting the interests of the junior
lienholder, the senior lienholder(s), and the borrower. In
the limited situation in which a junior lienholder or its
servicer is unable to obtain the necessary information
about the amount of flood insurance in place on the
outstanding balance of a senior lien (for example, in the
context of a loan renewal), the lender may presume that
the amount of insurance coverage relating to the senior
lien in p lace at the time the junior lien was first
established (provided that the amount of flood insurance
relating to the senior lien was adequate at the time)
continues to be sufficient.
Example 1: Lender A makes a first mortgage with a
principal balance of $100,000, but improperly requires
only $75,000 of flood insurance coverage, which the
borrower satisfied by obtaining an NFIP policy. Lender B
issues a second mortgage with a p rincip al balance of
$50,000. The insurable value of the residential building
securing the loans is $200,000. Lender B must ensure that
flood insurance in the amount of $150,000 is purchased
and maintained. If Lender B were to require additional
flood insurance only in an amount equal to the principal
balance of the second mortgage ($50,000), its interest in
the secured property would not be fully protected in the
event of a flood loss because Lender A would have prior
claim on $100,000 of the loss payment towards its
principal balance of $100,000, while Lender B would
receive only $25,000 of the loss payment toward its
principal balance of $50,000.
Example 2: Lender A, who is not directly covered by the
Act or Regulation, makes a first mortgage with a principal
balance of $100,000 and does not require flood insurance.
Lender B, who is directly covered by the Act and
Regulation, issues a second mortgage with a principal
balance of $50,000. The insurable value of the residential
building securing the loans is $200,000. Lender B must
ensure that flood insurance in the amount of $150,000 is
purchased and maintained. If Lender B were to require
flood insurance only in an amount equal to the principal
balance of the second mortgage ($50,000) through an
NFIP policy, then its interest in the secured property
112
12 CFR 22.3(a), 22.6(a) (OCC); 12 CFR 208.25(c)(1) and (f)(1) (Board);
12 CFR 339.3(a), 339.6(a) (FDIC); 12 CFR 614.4930(a), 614.4940(a) (FCA);
and 12 CFR 760.3(a), 760.6(a) (NCUA).
would not be protected in the event of a flood loss
because Lender A would have prior claim on the entire
$50,000 loss payment towards its principal balance of
$100,000.
Example 3: Lender A made a first mortgage with a
principal balance of $100,000 on improved real estate
with a fair market value of $150,000. The insurable value
of the residential building 224 on the improved real estate
is $90,000; however, Lender A improperly required only
$70,000 of flood insurance coverage, which the borrower
satisfied by purchasing an NFIP policy. Lender B later
takes a second mortgage on the property with a principal
balance of $10,000. Lender B must ensure that flood
insurance in the amount of $90,000 (the insurable value)
is purchased and maintained on the secured property to
comply with the Act and Regulation. If Lender B were to
require flood insurance only in an amount equal to the
principal balance of the second mortgage ($10,000), its
interest in the secured property would not be protected in
the event of a flood loss because Lender A would have
prior claim on the entire $80,000 loss payment towards
the insurable value of $90,000.
93. OTHER SECURITY INTERESTS 5. If a borrower
requesting a loan secured by a junior lien provides
evidence that flood insurance coverage is in place, does
the lender have to make a new determination? Does the
lender have to adjust the insurance coverage?
Answer: It depends. Assuming the requirements in
Section 528 of the Act (42 U.S.C. 4104b) are met and the
same lender made the first mortgage, then a new
determination may not be necessary when the existing
determination is not more than seven years old, there have
been no map changes, and the determination was recorded
on an SFHDF. If, however, a lender other than the one
that made the first mortgage loan is making the junior lien
loan, a new determination would be required because this
lender would be deemed to be “making” a new loan.
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In
either situation, the lender will need to determine whether
the amount of insurance in effect is sufficient to cover the
lesser of the combined outstanding principal balance of all
loans (including the junior lien loan), the insurable value,
or the maximum amount of coverage available on the
improved real estate. This will hold true whether the
subordinate lien loan is a home equity loan or some other
type of junior lien loan.
94. OTHER SECURITY INTERESTS 6. If the loan request is
to finance inventory stored in a building located within an
SFHA, but the building is not security for the loan, is
flood insurance required?
Answer: No. The Act and the Regulation provide that a
lender shall not make, increase, extend, or renew a
designated loan, that is, a loan secured by a building or