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

Does the bank need to obtain flood insurance at loan origination for a revolving line of credit secured by a property located in a designated flood zone?

I have a question about a revolving line of credit secured by a property located in a designated flood zone. It was my understanding that the bank must obtain flood insurance at loan origination for such loans. Is this the correct procedure to follow for a revolving line of credit?

Getting insurance at the time of closing is one approach, but it is not the only one. However, the banking agencies accept an alternative approach. If the borrower does not provide a flood policy at closing, the bank must at a minimum, require the borrower to obtain a policy prior to drawing on the line.

To accomplish this, the bank should either: (1) review its records periodically so that as draws are made against the line or repayments made to the account, the appropriate amount of insurance coverage can be maintained; or (2) upon origination, require the purchase of flood insurance for the total amount of the line, the value of the improved property, or the maximum amount of flood insurance coverage available, whichever is less.

Note that while a bank may choose not to require flood insurance on a line of credit at origination, it appears that the majority of banks do. If a bank chooses to wait and require flood insurance at the first draw, it must be diligent in ensuring the customer obtains flood insurance in an adequate amount prior to receipt of that first draw of funds. (November 2020)

Compliance Hotline

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