Q: We are a participant on a loan to which the borrower is pledging real estate that’s in a flood hazard area. The flood insurance we have on file has expired. We contacted the lead bank for a renewal certificate, but it does not have one. Exactly what is our responsibility as a participant in this scenario?
A: Question and Answer #4 speaks to mandatory purchase requirements in the case of loan participations. It states that each participating lender remains individually responsible for ensuring compliance with the act and regulation, even if there is an agreement that assigns compliance to a lead lender or agent. The answer further states,
“Therefore, the Agencies will examine whether the regulated institution/participating lender has performed upfront due diligence to ensure both that the lead lender or agent has undertaken the necessary activities to ensure that the borrower obtains appropriate flood insurance and that the lead lender or agent has adequate controls to monitor the loan(s) on an ongoing basis for compliance with the flood insurance requirements. Further, the Agencies expect the participating lender to have adequate controls to monitor the activities of the lead lender or agent to ensure compliance with flood insurance requirements over the term of the loan.”
In this case the lead bank does not have a renewal certification. The participating bank should confirm with the flood insurance company that the flood insurance policy is still in place. If the participating bank determines that flood insurance has lapsed or is inadequate, they should contact the lead bank to request adequate flood insurance be obtained and document the communication. If after such contact the lead bank fails to obtain flood insurance, the participant bank should force place flood insurance and notify the participating banks.
– This Q&A was included in the materials from the FDIC New York Region Regulatory Teleconference: “Flood Insurance – Flood Insurance Compliance and an Examiner’s Perspective” which took place on December 3, 2012. These materials may be found here: https://www.fdic.gov/news/conferences/NY/2012-12-03.html