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#686 - 02/16/01 05:35 AM Construction Loans and Flood Determinations
Jan94 Offline
Platinum Poster
Joined: Mar 2001
Posts: 828
USA
We are reviewing a consumer construction loan (12 month interim loan) w/o permanent financing, where the lender is taking a security interest in the new home as well as a security interest in the current home. The lender obtained a flood determination on the current home but not on the new property. Our understanding is that if the property (lot in this instance, is expected to be improved (that is a building put on it), then a determination should be obtained. Are we missing something? Also, does anyone have a specific citation as to obtaining a determination on a construction loan? Thank you for your help.

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#687 - 02/15/01 06:03 PM Re: Construction Loans and Flood Determinations
Andy_Z Offline
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Andy_Z
Joined: Oct 2000
Posts: 27,503
On the Net
If you anticipate financing the new construction, that is you are not just holding the dirt, a flood check should be done as that is collateral on your loan. The building will soon be eligable as per the Flood Insurance Manual.

A. Eligible Buildings
Insurance may be written only on
buildings that are walled and roofed
with two or more rigid exterior walls in
place. Buildings must resist flotation,
collapse, and lateral movement. At
least 51 percent of the actual cash
value of buildings, including machinery
and equipment, which are a part of the
buildings, must be above ground level.

------------------
Andy Zavoina
Opinions stated are not necessarily that of my employer.

_________________________
AndyZ CRCM
My opinions are not necessarily my employers.
R+R-R=R+R
Rules and Regs minus Relationships equals Resentment and Rebellion. John Maxwell

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#688 - 02/15/01 06:15 PM Re: Construction Loans and Flood Determinations
Andy_Z Offline
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Andy_Z
Joined: Oct 2000
Posts: 27,503
On the Net
Sorry, for citations as to requirements look to 12 CFR 22.3 and 42 USC 4012.

If you do not have your regs on CD, FindLaw is an excellent online resource, http://guide.lp.findlaw.com/casecode/cfr.html for CFRs and http://guide.lp.findlaw.com/casecode/ for easy search access to USC's as well.

------------------
Andy Zavoina
Opinions stated are not necessarily that of my employer.

_________________________
AndyZ CRCM
My opinions are not necessarily my employers.
R+R-R=R+R
Rules and Regs minus Relationships equals Resentment and Rebellion. John Maxwell

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#689 - 02/15/01 07:12 PM Re: Construction Loans and Flood Determinations
Lucy Griffin Offline

Diamond Poster
Lucy Griffin
Joined: Nov 2000
Posts: 1,544
Andy has it right. The check should be done before the loan is made. Flood insurance requirements click into place as the improvements go in, wall by wall.

Flood insurance is not something to take lightly. Many commercial lenders look for the lowest level of compliance -- the least they can do to comply. That's not a great idea with flood hazard insurance because the bottom line here is safety and soundness. Least may in fact be worst.


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#690 - 02/15/01 08:29 PM Re: Construction Loans and Flood Determinations
Andy_Z Offline
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Andy_Z
Joined: Oct 2000
Posts: 27,503
On the Net
To add to what Lucy pointed out, no matter how abbreviated a compliance exam can be, my experience is that flood is one thing that is never set aside. It is always reviewed and in detail.

MIRE is the key. Anytime you Make, Increase, Renew or Extend flood will apply.

------------------
Andy Zavoina
Opinions stated are not necessarily that of my employer.

_________________________
AndyZ CRCM
My opinions are not necessarily my employers.
R+R-R=R+R
Rules and Regs minus Relationships equals Resentment and Rebellion. John Maxwell

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#691 - 02/16/01 03:10 PM Re: Construction Loans and Flood Determinations
RVFlyboy Offline
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RVFlyboy
Joined: Oct 2000
Posts: 5,980
Soaring over Georgia
In FEMA's publication "Mandatory Purchase Of Flood Insurance Guidelines" available at http://www.fema.gov/nfip/mpurfi.htm it states on page 25 in a heading titled "Buildings in the Course of Construction" the following:

When a structure is to be built in an SFHA
that, when completed, will be a walled and
roofed building that will be eligible for
coverage, flood insurance must be
purchased to provide coverage during the
construction period. Therefore, when a
development or interim loan is made to
construct insurable improve-ments on land,
flood insurance coverage must be
purchased. The only practical way of
implementing the flood insurance coverage is
to require the purchase of the policy at the
time that the development loan is made, to
become effective at the time the construction
phase is commenced, and in an amount to
meet the mandatory purchase requirement.
Material to be used on a building in the
course of construction, but yet to be walled
and roofed, is eligible for flood insurance,
subject to certain underwriting restrictions.
The NFIP, to the extent possible, conforms
its practices with those of fire insurers by
providing insurance coverage that begins
during the period of time when construction
is taking place.
For new construction in Regular Program
communities, the Elevation Certificate and
the premium will be based on an elevation
figure derived from construction drawings.
However, the policy will not be renewed
until a new Elevation Certificate, based on
actual construction, has been submitted.
Coverage under the policy becomes
available immediately when the construction
starts, and is not delayed until the building
has reached a roofed and walled condition.

Hope this helps.

------------------
Opinions expressed are my own, and do not necessarily reflect those of my employer.

_________________________
Jim Bedsole, CRCM, CBA, CFSA, CAFP
My posts - my opinions

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#692 - 02/16/01 06:32 PM Re: Construction Loans and Flood Determinations
Jan94 Offline
Platinum Poster
Joined: Mar 2001
Posts: 828
USA
Thank you all for your help. This is what we also found and appreciate you confirming our understanding.

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#693 - 02/19/01 02:35 PM Re: Construction Loans and Flood Determinations
Sheila Steck Offline
New Poster
Joined: Oct 2000
Posts: 16
Winona, MN
Something that just came up during a FHLMC audit that I wasn't aware of was that FHLMC requires a higher amount of flood insurance than do the federal regulations. We are now in the process of going back through files to check for appropriate coverage - might be something you might want to check for. It took me by surprise.

FHLMC requires insurance limits at least equal to the HIGHER of the unpaid principal balance up to 100% of replacement cost OR 80% of the full replacement cost of the insurable improvements. Their deductible also may not exceed the higher of $1,000 or 1 percent of the policy's insurance limits.


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