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

May a bank close a loan to be secured by property located in a designated special flood hazard area if the borrower has applied for flood insurance and the premiums will be paid from the proceeds of the loan at the time of settlement?

It does not appear so. Federal flood regulations implementing the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973 state that banks shall not “make, increase, extend, or renew” any covered loan unless the applicable collateral securing the loan “is covered by flood insurance” (see 12 CFR §§22.3(a), 208.25(c)(1), and 339.3(a)). FEMA in its Mandatory Purchase of Flood Insurance Guidelines had stated that evidence of flood insurance could be confirmed by either: (1) receipt, provided by an insurer or insurance agent, of a copy of a flood insurance application and premium payment: or (2) a declarations page issued by the insurer.

While FEMA rescinded this guidance for various reasons and the regulatory agencies have not addressed the issue specifically, the agencies have generally tended to follow this standard.

Thus, it appears that the bank would not comply if proceeds of the loan are used to pay for flood insurance premiums as the bank may not make the loan absent evidence of flood insurance. In this situation, premiums are paid from the proceeds of the loan, which are disbursed after the loan is made. (December 2019)

Compliance Hotline

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