Flood Insurance Laws
Flood insurance has many regulations and is required by law for certain types of mortgages that are backed by the federal government. Lenders that provide loans or mortgages are required to have the recipient complete a determination form. If the property is determined to be in a Special Flood Hazard Area, the recipient must obtain a flood insurance policy before closing. A lender also has various requirements to follow if it belongs to the Federal Deposit Insurance Corporation.
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Mandatory Purchase
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There are two laws that exist that make purchasing a flood insurance policy a requirement if certain conditions exist. The Flood-Disaster Protection Act of 1973 and the National Flood Insurance Reform Act of 1994 made flood insurance mandatory for certain property. If the property is located in a Special Flood Hazard Area and a mortgage to purchase the property was federally backed, a flood insurance policy must be obtained.
Determinations
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A lender is required to perform a flood hazard determination before closing a loan. The determination form is supplied by the Federal Emergency Management Agency and must be retained by the lender until the loan in paid off. One exception to this rule is when a loan is for a mobile home and the final location of the unit is not yet known.
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Notices to Borrowers
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A lender must send a notice from the National Flood Insurance Program before making, modifying or renewing a loan for a building located in a Special Flood Hazard Area. The form is supplied by Federal Emergency Management Agency (FEMA) and needs to be sent to a borrower within at least ten days. The notice informs the borrower of the availability of flood insurance as well as assistance for federal disaster relief. A record of the notice will need to be kept by the lender.
Notices to FEMA
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A lender is required to send a notice to FEMA to notify the agency of the identity of the loan servicer. This needs to be done when a loan has been made, modified, sold or transferred to another party. A notice is also required to be sent if the servicer changes while the loan is still outstanding. The mortgagee or servicer must be changed by the insurance carrier that issued the policy or a registered agent of the company.
Forced Placement
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If a borrower fails to purchase flood insurance or the policy lapses for non-payment, the lender must purchase a policy. A lender has 45 days in which to purchase a policy after sending a notice to the borrower that a policy is needed. The lender can then charge the borrower the premium by adding it to the monthly mortgage payment.
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