We are running into the problem of allowing customers to get flood insurance on construction lns after closing (when the slab is poured/elev cert obtained) There is a 30 day waiting period once the policy is obtained. Mgmt says flood ins prem is higher when obtained at closing for construction lns. I'm wondering what others are doing....

2. No Waiting Period (Loan Transaction)
Flood insurance that is initially purchased in
connection with the making, increasing, extending,
or renewal of a loan shall be effective at the time
of loan closing, provided that the policy is applied
for at or before closing.

We work with hundreds of clients. From our observations, lenders require insurance before closing the construction loan, except in very limited cases. There's a couple of reasons:
1. As you stated, there's a 30 day wait.
2. You have to monitor the draws and make sure they don't go beyond foundation work before getting insurance.
3. PR reasons. Let me explain:
I'm going to bet the bank thinks they are the "good guys" by not requiring flood until the slab is poured, but I'll also bet the borrower and contractors don't see the lender in this same light when construction and all subcontractors are halted during the 30 day wait.

The bank doesn't set the premium and may not even care if the borrower has flood insurance, but management isn't the one that ultimately requires flood insurance. The government is the one that dictates this and the bank is merely the "enforcer".

I undertand (and can appreciate) management looking out for the borrower's costs. Flood insurance on buildings being constructed is higher than the policy for completed buildings - for legitimate reasons, but it's a short term policy (just during the construction phase). The "pain" of the things listed above typically sways management to requiring insurance before you close the loan.

Thanks David.

I began researching my bank's practices regarding flood insurance on construction loans after reading this post. We have been requiring the borrower to purchase the flood insurance as soon as the foundation slab is poured. At this time the borrower obtains a policy for the lessor of the loan amount, insurable value or maximum amount available. My reading of the interagency flood insurance questions and answers seems to indicate that a thirty day waiting period is not required for constructions loans (Q & A #23).

Bankersonline Tools Flood FAQ

Is there something that I am missing regarding the waiting period for construction loans?

There has been a change in the waiting periods since those FAQs were written. I don't have the source as I'm at home without resources. Maybe someone else can verify.

From Flood Ins Manual:

2. No Waiting Period (Loan Transaction)
Flood insurance that is initially purchased in
connection with the making, increasing, extending,
or renewal of a loan shall be effective at the time
of loan closing, provided that the policy is applied
for at or before closing.

And from further on in the manual:

C. Effective Date – New Policy
1. Standard 30-Day Waiting Period
The effective date of a new policy will be 12:01
a.m., local time, on the 30th calendar day after the
application date and the presentment of premium.
This includes new policies obtained when a lender
determines that flood insurance is required for an
existing loan on a building that does not have flood
insurance. (Example: a policy applied for on May
3 will become effective 12:01 a.m., local time,
on June 2.) The rules provided in subsection A.
Receipt Date must be used.

If you don't require flood insurance to be in place on the construction loan at the time of closing then any flood insurance or increase in coverage you place after closing is placing flood insurance on an existing loan and there will be the 30 day waiting period for each requested increase in the coverage.

If I recall correctly these 30 day waiting period changes became effective in 2013.

In a BCC blog today, the 30 day waiting period for flood on construction lns, if obtained after closing, is not mentioned. Has something changed?

From Flood Ins Manual:

2. No Waiting Period (Loan Transaction)
Flood insurance that is initially purchased in
connection with the making, increasing, extending,
or renewal of a loan shall be effective at the time
of loan closing, provided that the policy is applied
for at or before closing.

Nothing has changed. There has always been a 30-day wait period if the insurance was not purchased at or before closing of the loan. It would all depend on what your customer told the insurance agent when they purchased the insurance and which box the insurance agent checked on the insurance application.

If a loss happens in the first 30 days, the borrower will have to provide proof of closing date or they will be out of luck trying to collect (and so will the bank).

ahou is right and Randy's reply is also correct. Our blog didn't get into every scenario and flood insurance obtained after closing on a construction loan is one where there is a 30 day wait. This is another reason we advise banks against delaying the purchase of flood insurance on construction loans, in most cases.

We try to keep blogs short (vs. newsletter articles). Sorry for any confusion this may have caused.

Thank you David for clarifying. This is a sore spot with mgmt and if they read the blog, they will think I told them something wrong. Then I'll have to go through the process of proving it again. It is a hard and thankless job to be a CO.