Q: What action must a lender take if there is no RCBAP coverage?
A: If there is no RCBAP, either because the condominium association will not obtain a policy or because individual unit owners are responsible for obtaining their own insurance, then the lender must require the individual unit owner/borrower to obtain a dwelling policy in an amount sufficient to meet the requirements outlined in Question 28.
A dwelling policy is available for condominium unit owners’ purchase when there is no or inadequate RCBAP coverage. When coverage by an RCBAP is inadequate, the dwelling policy may provide individual unit owners with supplemental building coverage to the RCBAP. The RCBAP and the dwelling policy are coordinated such that the dwelling policy purchased by the unit owner responds to shortfalls on building coverage pertaining either to improvements owned by the insured unit owner or to assessments. However, the dwelling policy does not extend the RCBAP limits, nor does it enable the condominium association to fill in gaps in coverage.
Example: The lender makes a loan in the principal amount of $175,000 secured by a condominium unit in a 50-unit condominium building, which is located in an SFHA within a participating community, with a replacement cost value of $10 million; however, there is no RCBAP.
• Outstanding principal balance of loan is $175,000
• Maximum amount of coverage available under the NFIP, which is the lesser of:
o Maximum limit available for the residential condominium unit is $250,000; or
o Insurable value of the unit based on 100 percent of the building’s replacement cost value($10 million ÷ 50 = $200,000).
The lender must require the individual unit owner/borrower to purchase a flood insurance dwelling policy in the amount of at least $175,000, since there is no RCBAP, to satisfy the Regulation’s mandatory flood insurance requirement. (This is the lesser of the outstanding principal balance ($175,000), the maximum coverage available under the NFIP ($250,000), or the insurable value ($200,000).)
– This Q&A was included in the “Interagency Questions and Answers Regarding Flood Insurance.” For ease of collection, this has been obtained from the FDIC’s Compliance Examination Manual – April 2016, which may be found here: https://fdic.gov/regulations/compliance/manual/5/V-6.1.pdf