Q: Flood Insurance. Are lenders still required to make a flood hazard determination, establish escrow accounts, and provide flood notices to borrowers when modifying loans for borrowers adversely affected by COVID-19?
A: The FDIC understands that the COVID-19 emergency could pose significant temporary business disruptions and challenges that affect banks, businesses, borrowers, and the U.S. economy. The FDIC will consider the unique circumstances resulting from the COVID-19 emergency as described in more detail below.
The FDIC encourages financial institutions to work prudently with borrowers adversely affected by the COVID-19 emergency. Such efforts serve the long-term interest of communities and the financial system when conducted with appropriate compliance management oversight, and are consistent with safe and sound banking practices and applicable laws, including the Federal flood insurance laws.
As lenders work with borrowers to address their financial service needs, Federal flood insurance requirements may be triggered upon the making, increasing, renewing or extending (i.e., a MIRE or triggering event) of any designated loan. For example, if a lender modifies a loan by extending the loan term, the loan modification would constitute a triggering event under flood insurance law, and the lender would be required to comply with certain flood insurance requirements, such as making a new flood hazard determination and providing notice to the borrower. The FDIC recognizes that meeting these requirements as lenders work to accommodate borrowers during the COVID-19 emergency could pose challenges for lenders and delay relief for borrowers in need.
Therefore, when working with borrowers impacted by the COVID-19 emergency triggers a MIRE event, lenders may, if applicable:
Rely temporarily on a loan’s previous flood hazard determination on file rather than obtain a new one during the COVID-19 emergency;
Delay the establishment of escrow accounts for applicable loans until after the COVID-19 emergency; and
Delay providing a written flood notice to a borrower until after the COVID-19 emergency if a property is located in a Special Flood Hazard Area (SFHA) and informing consumers about the availability for special disaster relief assistance in the event of a flood. Prior to providing written notice, the lender may, at their discretion, choose to use another method to inform the borrower of this information (e.g. by email or telephone).
Lenders should have a system in place to ensure deferred flood insurance requirements are addressed as soon as reasonably practicable. FDIC examiners, under the FDIC’s discretionary examination authority, will not criticize lenders’ good faith flood insurance compliance efforts to accommodate borrowers in a safe and sound manner during the COVID-19 emergency.
This Q&A was contained in the Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019 (Referred to as COVID-19) – As of March 3, 2021 (which may be updated from time to time). This may be found on the FDIC’s website here: https://www.fdic.gov/Coronavirus/faq-fi.pdf.