We are looking for guidance on the following:

1. We have borrowers who, upon renewal of their flood insurance, have an adequate amount of flood insurance, however the flood zone on the flood policy doesn’t agree to the flood zone on the SFHDF. We have determined that this is not due to grandfathering. We sent out notices to the borrower, insurance company and insurance agent, alerting them of the discrepancy, annually upon renewal, however the discrepancy continues to exist. Is there anything additional that we’re required to do?

2. What is the risk to the borrower and/or the bank, if there is a flood and the policy is not rated according to the SFHDF?

Any guidance that you can provide and/or guidance references will be greatly appreciated.

If you have not resolved the discrepancy either through obtaining a properly rated policy or force placing an adequate policy then you have violations subject to CMPs of $2,000 for each potential violation.

If the property is located in zone AE and the policy is written for zone X then the borrower has not paid the premium for adequate coverage.

The "adequate" amount you contend you have is most likely deficient. If the coverage is written for $250K in zone X at an annual premium of $500 then most likely the $500 premium only purchases $100K in zone AE (the figures are for illustrative purposes only and are not meant to be actual costs or coverage). In the case of a loss the coverage limit will be adjusted to the proper amount that the paid premium covers. So in my example if you need $250K in coverage you are $150K deficient. There is an avenue for the borrower to pay the premium differences in order to have the proper coverage in the case of the loss BUT until they pay that premium difference you are under insured therefore in violation of the flood insurance coverage requirements.

You need to determine why there is a discrepancy and get it corrected if there is not a valid reason for it.

As a follow-up and in relation to a Condominium, we are experiencing a similar map zone issue.

We have an applicant that wants to purchase a unit in a condominium with a flood policy. The property was located in a non-SFHA (“X” zone) at the time the flood policy was written but the property has since been re-mapped into a SFHA (“AE” zone). The insurance agent for the condominium has stated:

“The current policy does not reflect the new flood zone as the policy was issued prior to the flood zone changing.
According to what NFIP has told me the insured can keep the current policy until it’s next renewal then it will have to the correct zone.
Unfortunately, there is no way to list the new flood zone on the policy unless it is rewritten to a new policy with the new zone and an elevation certificate will be required for that.”

I believe that if the condominium association is not willing to have the policy rewritten now to the current SHFA “AE” zone that we, as lender, will need to require the applicant to obtain a separate flood policy written to the current re- mapped SFHA AE zone.

Thoughts?

I'm not following. If the HOA had a policy in effect before the property was mapped into a SFHA they should be eligible for a preferred risk grandfathered policy.

I agree...but they are not willing to get the policy changed until the end of the current policy. As the agent indicated, I believe they would also need to obtain an elevation certificate at the time a new policy is written.

Here's some info I found doing a Google search on grandfathering.

The agent should look at which method, grandfathering or new elevation, will benefit the policy holder.

http://www.bhs.idaho.gov/Pages/Plans/Ris...ring%20Rule.pdf

https://www.floodsmart.gov/floodsmart/pdfs/Grandfathering-for-Agents_April-2015.pdf

Going back to the original question in this post… what do you do, if despite your best efforts, you’re unable to resolve a discrepancy between the zones on your SFHDF and a renewal flood insurance policy? We have a couple of zone discrepancies where we’ve tried to resolve the discrepancy and gone as far as advising the insurance agent and the insurance company (and our borrower) of FEMA’s letter of 04.16.2008 - W-08021 (as outlined in Interagency Q & A #71) that instructs insurers to write a flood insurance policy that covers the most hazardous zone when presented with two different zones. We take a little comfort in Interagency Q & A #72 that says we won’t be cited for a violation because we’ve made and documented a good faith effort to resolve the discrepancy but we still have the issue that Dan Persfull notes above. If our borrower has a flood loss, the coverage limit will be adjusted based on the higher-risk flood zone and the amount of coverage will most likely be deficient.

What do you do if the insurance agent and insurance company just won’t cooperate?

What do you do if the insurance agent and insurance company just won’t cooperate?

If the discrepancy is not due to grandfathering or the preferred risk rating you send your borrower a force placement letter informing them the insurance you have is insufficient and they have 45 days to provide you an adequate policy. If they don't, you force place the proper coverage.

We place the burden on the borrower. It's their responsibility to deal with their agent, not ours.

We are also providing notices of flood zone discrepancies to the borrower, insurance company and insurance agent and essentially stopping there. Our rationale for stopping there is page 35930 of the Federal Register, dated July 21, 2009, Loans in Areas Having Special Flood Hazards; Interagency Questions and Answers Regarding Flood Insurance; Notice. On the left column of the page it explains that if there is a flood zone discrepancy, letters should be sent to the insurance company and agent. It specifically says "beyond that, no further action by the Lender is required". Further, it goes on to say, "if for its own purposes, the lender believes force placement, then it should consult the guidance on that topic...". This appears to not require force placement but rather it would be an option for the lender.

Also, I just want to be very specific in regards to our circumstance, we do not have flood zone discrepancies upon loan originations, but rather upon annual renewal of the policy.

Our interpretation of the above guidance is that the flood zone discrepancy notices that we provide to the borrower, insurance company and insurance agent upon realizing a discrepancy on the policy renewal are sufficient. Do you agree?

You need to read the last paragraph of that column and continuing to the top of the middle column. Also look at Q&A 71.

IMO you cannot leave a discrepancy unresolved.

Dan... When you force place, how do you determine how much insurance to force place? There's already a policy in place for an incorrect zone... how do we determine what the deficiency might be?


deyan123... our flood zone discrepancies occur only at policy renewal as well. The discrepancies that occur at origination are pretty easy to resolve.

We were also under the impression that since a policy is already in place, we would not force place (there can't be two policies on one property), as force placement does not apppear to be a requirement.

Again, these discrepancies only occur during the renewal process.

I would just follow the guidance on how to handle a discrepancy in the zones as Dan as already pointed out.

However, I would only do that on a primary residence that protected the consumer from foreclosure unless they are 120 days past due. All others? I would just be issuing a demand letter for default as the property is in violation of the loan contract as it is no longer properly insured.

There is no reason to be a willing participant in the games these people want to play. I have no patience with them. I give them money - they agree to abide by the contract - pretty simple.

If we have a policy that is a preferred risk policy (rated at a lower risk then the current risk)....is it our responsibility to ensure that the property qualified for the policy......same with a grandfathered policy....is it our responsibility to ensure that the property qualified for grandfathering.....

If a company has issued these policies.....I don't see how can we argue with them that they are wrong and must issue a standard policy.....

Never mind...after doing more research I found OCCs position on this.....

Customer has a Preferred Risk Policy. The Current Flood Zone is X and the Flood Risk/Rate Zone is X. If the flood determination shows the property in a zone A does the Current Flood Zone on the PRP have to be an A? We are in a second position behind another institution (we're doing a HELOC) and not sure if we can close without getting the current rate zone changed to A. Any help would be really appreciated.

DECLARATIONS PAGE REQUIREMENTS
EFFECTIVE APRIL 1, 2016

Flood Risk/Rated Zone
Provide the 1- to 3-character NFIP flood zone used to determine the premium rate.

Current Flood Zone
If the premium rate uses a Flood Risk/Rated Zone that is other than the NFIP flood zone determined on the current FIRM due to the application of the Grandfather rules, or the Preferred Risk Policy (PRP) Eligibility Extension, indicate the Current Flood Zone (the zone not used for rating).

If Grandfather rules and/or the PRP Eligibility Extension do not apply, the premium rate must be determined with the current flood zone.