As a matter of fact, I just asked our regulators, who are currently on site, the construction loan question and they told me that there is a new interpretation. It is currently only on some internal bulletin board of theirs, but this is thier written response to me:
"A question was raised about the necessity of obtaining flood insurance at closing for construction loans where all or part of the property is located in a flood zone as determined by FEMA.
We have recently received some updated interpretive guidance on this issue with respect to the “to be built” language in the regulation. The following is the guidance received:
“The NFIP explains when flood insurance coverage begins for buildings in the course of construction. Although NFIP statutes require coverage at the time of loan closing, they don’t address building construction loans specifically. Therefore, it becomes a matter of interpretation or guidance when the insurance coverage must be purchased. If a flood insurance policy were purchased at loan closing, there would be nothing to insure, or no insurable interest, the borrower would be purchasing a NFIP policy, but there would be no coverage, as there was no insurable interest, (i.e. a building or even building materials). NFIP rules do make limited exceptions for buildings in the course of construction, but again, typically at the time of the initial disbursement of funds on a construction loan there is nothing to insure under the NFIP, even though such a policy could be purchased. It is the OCC’s policy that a lender notify the borrower prior to closing, that the building to be financed and built is to be located in a Special Flood Hazard Area, and, as such, flood insurance will be required at some point during the life of the loan, such as during the second or third disbursement of funds, when actual construction begins (i.e., the structure first becomes walled and roofed)”.