CHANGES TO FLOOD

The ABA provided a webcast/phone briefing on July 15 about Mid-Year Update & Review of Key Compliance Issues. The speaker indicated that there would be some changes made to the flood timing requirements involving construction loans in a flood zone.
Currently a flood policy at closing is required and it is to change the policy timing requirement to when the construction actually begins for the structure. Have you heard anything about this change?

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)”.

This interpretation can differ by agency. The above is from the OCC who not only seems to be using the most common sense approach, IMHO, but also has imposed more fines this year than the others, combined.

FEMA and the agencies are working on this and hope to have a new Flood Insurance Guidelines (Yellow Book) by the year end. The construction loan issue and excessive costs for a policy without anything to cover, is one issue they hope to address. The OCC's opinion is what they're leaning toward, from what I've heard.

The FDIC's opinion is still that a policy be required up front at closing. I called our regional office today to ask that very question.

Yes, you obtain it before actual construction, but there is a 30 day waiting period after application for flood insurance if it is not obtained in conjuction with a loan closing. If a hurricane is floating around out there, the delay could be longer. I wonder if FEMA is addressing these issues as well?

Waldensouth, What FDIC region did you check with - sometimes it can vary with in the agency and just wanted to check.

Atlanta

I haven't spoken with the agencies myself, but I wouldn't be surprised if the OCC was the key in promoting this opinion. I think the FRB is with the FDIC, but I can't swear to that.

I thought until recently that the construction policy premium phased in with construction. I was told that wasn't the case and the full premium was in effect even though the collateral value isn't there. This is one reason they're looking for change.

They might have to get Congress to tweak the Act a little to waive the flood requirement when you "make" a loan. You can already set a future effective date on the policy for the construction period. Unless the NFIP is going to totally re-write their policy premium basis on this portion of the flood product, I'm not sure what this buys you except just another area to screw up and require additional documentation. Myself, I would like to see them keep this consistent.