Q & A - Required Flood Insurance

by Mary Beth Guard

Question: If the real estate which is the collateral on our loan is in a "nonparticipating" community, is flood insurance mandatory? The value of the land is greater than the improvements and would provide adequate coverage to the loan balance.

My confusion is between the FEMA and FDIC wording. Please advise.

Answer: Flood insurance is only required if three conditions are met:

you are making, increasing, extending or renewing a loan that will be insured by improved real property or an affixed mobile home; and
the property is in a flood hazard zone; and
the property is in a participating community.

If any one of the three requirements is not met, flood insurance is not mandatory.

I think the confusion may be arising because if the first two requirements are met, you must provide the borrower a flood notice, and that's what the first part of the FDIC's rule -- at 339.9 -- -- is talking about.

In terms of actually purchasing insurance, however, the FDIC rule refers back to the Act itself and it only makes insurance purchase mandatory when all three conditions are met. See Section 102(b) of the Act.

Originally appeared in the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 6/14/04