Jump to Content
ABA: The American Bankers Association
Skip Section Navigation

My bank requires borrowers to maintain adequate flood insurance. If the borrower does not secure insurance, the bank may obtain insurance on behalf of the borrower and require the borrower to pay for it. Is adding the amount of the flood insurance and fees considered an increase in the existing loan amount?

My bank’s loan documents provide that if the borrower fails to maintain adequate flood insurance, the bank may obtain such insurance and require the borrower to pay for it before any lien is released or the loan is considered paid off. Is adding the amount of the flood insurance and fees considered an increase in the existing loan amount that triggers compliance with requirements under applicable flood regulations (e.g., to determine amount of flood insurance required, send notice to borrower of flood hazard, and escrow for flood insurance premiums, if applicable)?

As indicated in a letter to the ABA from various banking regulators, whether an action constitutes an increase in the loan amount that triggers flood requirements “depends on the method the institution chooses for charging [flood insurance premiums and fees to] the borrower.” For example, if the bank’s loan contract permits the bank to pay for flood insurance, the flood insurance premiums would be considered “part of the loan”, and, as such, not an “increase” that triggers compliance with the flood regulations. It would, of course, be prudent to have legal counsel review loan documents and related items to ensure that the loan contract or note appropriately reflects how the amounts will be accounted. (December 2018)

Compliance Hotline

Have a compliance-related question? We're here to help. Members, reach us by phone or email.