Lenders need to know these ways to help their customers with the flood insurance map
Since Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012, lenders and borrowers have experienced increased flood insurance map changes. Unfortunately, flood insurance map changes are not a pleasant surprise for borrowers.
As a lender, you are the one who has to bring the bad news to your customer. This article will review the regulatory procedure lenders must follow and offer some advice to help borrowers obtain the proper flood insurance or challenge the map change with their local flood plain management officials.
Understanding How Flood Insurance Maps Change
FEMA updates its Flood Insurance Rate Maps (FIRM) every two weeks. These preliminary maps are published on the FEMA Map Service Center website about a year in advance to allow communities the opportunity to comment on the changes.
After public hearings, pending maps are published in the Federal Register 6 months before the effective date before becoming the official map.
There are 142 million flood zones in the US. This is definitely a case for more effective tracking.
When a property is in a flood zone that changes, NFIP Flood Insurance can become mandatory or voluntary.
Lender Flood Insurance Regulation for Map Changes
The lender's responsibility by regulation is to determine if adequate flood insurance coverage is in place for their loans secured by property in a Special Flood Hazard Area (SFHA). This coverage must be in place by the effective date of the map change, if the lender receives advanced notice.
Joint Agency regulation states:
"If the borrower does not purchase a flood insurance policy that begins on the effective date of the map change, the lender or its servicer must send the force-placement notice to the borrower to purchase adequate flood insurance."
If the borrower does not obtain flood insurance, the lender must force-place flood insurance on the effective date of the map change. The regulation allows lenders to send notice before the effective date of the map change as a courtesy.
The Top Five Best Ways Lenders Can Help Borrowers Remapped into an SFHA Flood Zone
Loan servicing agents can offer the following advice to borrowers being remapped into an SFHA zone (and avoid borrower noise in the process).
- Flood Insurance is separate from a homeowners policy. Your current insurance broker typically sells flood insurance policies.
- You may be required to purchase a Flood Elevation Certificate used to determine your property's base flood elevation. A surveyor or civil engineering company can provide these certificates.
- Inform them that private flood insurance is an option that may provide a more cost-effective solution than FEMA's NFIP flood insurance policy. Have a list of private flood insurers on hand to provide to your customer. You may obtain this list from the state insurance commissioner.
- Explain that the borrower cannot ignore this request. However, if they do, you as a loan servicer are required by federal law to force-place insurance that may be more expensive than the coverage they buy themselves.
- If the borrower wishes to dispute the flood zone remapping process, the procedure begins with filing a Letter of Map Amendment (LOMA) to FEMA. FEMA will review all submissions, but the property owner's responsibility is to prove that the structure in question is outside of the SFHA or the lowest ground elevation touching the structure is above the Base Flood Elevation (BFE).
Recommended Flood Insurance Map Change Procedures
No lender wants to be the bearer of bad news regarding SFHA Flood Zone remapping, but not giving the property owner sufficient notice to obtain flood insurance can result in force-placing insurance by regulation that only worsens the situation.
We at Miniter advise our clients to get their flood zone determination vendors to submit SFHA remapping notices as soon as the map status changes to "Pending Map Change ." Then, if the lender reacts with a flood insurance map change notification to the property owner, they will have six months to obtain flood insurance. This lead time should be sufficient to get the proper flood insurance, even if the property owner must purchase an Elevation Certificate before applying for flood insurance.