On June 26, 2020, the FDIC, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the National Credit Union Administration, and the Farm Credit Administration (Agencies) issued proposed new and revised Interagency Questions and Answers Regarding Flood Insurance (Interagency Questions and Answers). The proposal seeks to incorporate amendments to federal flood insurance laws regarding the escrow of flood insurance premiums, the detached structure exemption, and force placement of insurance into the Interagency Questions and Answers. The document is intended to help lenders meet their responsibilities pursuant to the federal flood insurance laws that were last updated in 2011.
As a member of the Compliance Masters Group (CMG) through Jack’s Compliance Resource, I participated in a CMG session in which Jack Holzknecht reviewed the content of the proposed FAQs. After reading through the FAQs myself, and while strolling through LinkedIn, I came across a video that David Dickinson shared related to the following question in the Interagency Q & A covered during a training session he and Jerod Moyer conducted.
SFHDF 4. May a lender rely on a previous determination for a refinancing or assumption of a loan or multiple loans to the same borrower secured by the same property?
The answer to the question provided by the agencies is that they reference 42 U.S.C. 4104b(e) (see exact language below) is concerning because there is more to the story.
(e) Reliance on previous determination Any person increasing, extending, renewing, or purchasing a loan secured by improved real estate or a mobile home may rely on a previous determination of whether the building or mobile home is located in an area having special flood hazards (and shall not be liable for any error in such previous determination), if the previous determination was made not more than 7 years before the date of the transaction and the basis for the previous determination has been set forth on a form under this section, unless—
(1) map revisions or updates pursuant to section 4101(f) of this title after such previous determination have resulted in the building or mobile home being located in an area having special flood hazards; or
(2) the person contacts the Administrator to determine when the most recent map revisions or updates affecting such property occurred and such revisions and updates have occurred after such previous determination.
The problem is that even though the agencies cite 42 U.S.C. 4104b(e), as David mentions in his video, you need to read the entire section of 42 U.S.C. 4104b because under 42 U.S.C. 4104b(d) is states:
(d) Guarantees regarding information
In providing information regarding special flood hazards on the form developed under this section, any lender (or other person required to use the form) (emphasis added) who makes, increases, extends, or renews a loan secured by improved real estate or a mobile home may provide for the acquisition or determination of such information to be made by a person other than such lender (or other person), only to the extent such person guarantees (emphasis added) the accuracy of the information.
Now you have to pull your contract(s) and agreement(s) with your Standard Flood Hazard Determination Form (SFHDF) provider to determine if there are provision in your agreement(s) that allow for your bank to “transfer” a previous compliant SFHDF and not impair the guarantee, including the Life of Loan coverage (I.e., it is transferrable). One would think that most, if not all, providers would not allow the transfer of a SFHDF as that would cut into their income.
Additionally, it could be a tracking nightmare for your organization. Since the cost of the SFHDF is reasonable and is passed onto the customers, I would recommend you not allow for the transfer of the SFHDF from one borrower to another in a transaction in which your bank is financing the purchase of the same collateral within the parameters under the flood rules.
If you are interested in being a part of the Compliance Masters Group offered by Compliance Resources, here is a link to check them out.
If you are interested in New Flood Insurance Q & A Proposal training offered by Banker’s Compliance Consulting, here is the link to check it out.