4000 - Advisory Opinions
Loans made by insured depository institutions for properties located in communities not participating in the National Flood Insurance Program
March 19, 1996
Mark A. Mellon, Counsel
This is in response to your letter of February 16, 1996 pertaining to federal flood insurance legislation. You state in your letter that your depository institution is located in an area where some communities participate in the program set up pursuant to federal flood insurance legislation to provide flood insurance, the National Flood Insurance Program (the "NFIP"), while other local communities do not participate in the NFIP. You ask the following questions to which I shall provide answers in turn.
1. Can your depository institution make a loan which is secured by property which is located in a community which does not participate in the NFIP?
The short answer is yes. Section 102(b) of the Flood Disaster Protection Act of 1973 (42 U.S.C. § 4012a(b)) provides that a loan shall not be made, increased, extended or renewed which is secured by improved real property located in a special flood hazard area in which flood insurance has been made available unless the improved real property is covered by an appropriate amount of flood insurance. Such insurance is only available if the improved real property is located in a community which participates in the NFIP. If the improved real property is not located in an NFIP-participating community, the test for application of section 102(b) is not satisfied and the lender may legally make a loan which is secured by such real property without requiring the borrower to obtain flood insurance. The lender would, however, have to comply with the requirement of section 1364 of the National Flood Insurance Act of 1968 (the "1968 Act") (42 U.S.C. 4104a), that a notice of special flood hazards must be provided to the borrower before entering into the loan. See also 12 C.F.R. § 339.6.
2. If your depository institution makes a loan which is secured by improved real property which is located in a special flood hazard area and in a community which does not participate in the NFIP, must the depository institution forgive the loan in the event of a flood or will the borrower continue to be obligated on the loan even if the flood causes damage to the collateral?
The borrower remains obligated to repay the loan. A borrower's obligation to repay a loan which is secured by improved real property exists as a result of a contract between the borrower and the lender and not by operation of federal statute. Flood damage to the collateral property will not extinguish this contractual obligation although it may affect the lender's chances of recovery on the loan.
3. Is it necessary to perform a new flood hazard determination when a loan is refinanced or is the original determination in the loan file sufficient?
Section 1365(e) of the 1968 Act (42 U.S.C. 4104b(e)) provides that a loan secured by improved real estate may not be increased, extended, renewed, or purchased without a new determination being made as to whether the improved real estate is located in a flood hazard area on the new standard flood hazard determination form devised by the Federal Emergency Management Agency. An exception is made, however, for determinations which were made within the last 7 years on the new standard flood hazard determination form (since this form has only just been devised, this exception is currently of limited utility).
The federal banking agencies, including the FDIC, have been at work on an interagency basis to revise their regulations to reflect the requirements of recently amended federal flood insurance legislation. The question of how to precisely interpret the requirements of section 1365(e) of the 1968 Act is being considered by that interagency group. When we finally resolve this issue, we shall apprise the institutions which are subject to our supervision of our resolution and what must be done to ensure compliance. In the interval, I would recommend that you make a flood hazard determination on the new standard flood hazard determination form in situations such as the one which you discuss. This will ensure that there are no questions about your institution's compliance with federal flood insurance requirements.
I hope that this letter is responsive to your inquiry. Please do not hesitate to contact me about this or about any other questions which you might have.