VIDEO: Flood Notice Timing

In this Compliance Clip (video), Adam explores an important question about the timing of the flood notice when a loan involves property located in a high-risk flood zone. He discusses what lenders should consider when determining how far in advance the notice should be provided and highlights guidance that can help lenders avoid potential compliance issues.

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Video Transcript

The following is the transcript of this video.

This Compliance Clip is going to talk about the timing of the flood notice. So, this is a flood insurance topic.

The question we have here is this: When must a flood notice be provided to an applicant when they have a building in a high-risk flood zone?

So, we have an applicant, we've done a flood determination, we determined that they're in a high-risk flood zone, and now we must send them the flood notice.

Well, our answer to this is going to come from the Flood Frequently Asked Questions. Specifically, it's going to come from the Notice category of the Frequently Asked Questions No. 2. And they tell us this here:

They say, "When should a lender provide the flood notice to the borrower? How does this requirement apply in situations regarding mobile homes?"

So, the answer in the abbreviated version is that a lender must provide the notice within a reasonable time before the completion of the transaction. So, what we have is a flood notice that must be provided before the completion of the transaction.

So, what's the completion of the transaction? Well, that's the signing of the note, right? That's the loan closing. It's when the loan is closed, and you have an official agreement.

So, it must be done a reasonable time before the completion of the transaction.

Now, we understand the completion of the transaction, that's the closing, but what's a reasonable time?

Well, one might think a reasonable time could be maybe three days, right? We have to provide a closing disclosure three days prior to closing. So, that could be considered a reasonable time, right? Wrong.

This has been a debate for decades. And so, the challenge is a reasonable time hasn't really been defined. And so, the regulators at one point in their flood rules years ago had essentially said that they defined a reasonable time, and then they realized, you know, this isn't law, it's not statute, so they backed off from it. But now they've kind of come full circle, and they're pretty adamant that they know what a reasonable time is. And so, it's not three days like the closing disclosure.

What they say is, "A reasonable notice will necessarily vary according to the circumstances of a particular transaction."

So, does that mean on a case-by-case basis, we can determine what a reasonable time is to provide the notice before closing? So, in some cases we can give it three days, some five, some 15? Well, they have said that the agencies generally regard, which in prior times meant that that was the law, they regard 10 calendar days as a reasonable time interval. So, a reasonable time is not three days in most cases. A reasonable time is 10 calendar days before the closing of the loan.

So, what you have to have is you have to have your flood determination pulled before the closing of the loan, then you have to give a flood notice at least 10 calendar days prior to closing.

Now, again, it is a case-by-case basis, but the best practice is to stick with the 10 calendar days because you don't want to go into that argument where the regulators are trying to have you prove certain circumstances required less than 10 days, or you could have had it done in 10 days. And so, as a best practice, it's best to stick with the long-standing 10 calendar days prior to loan closing.

So, that answers our question of when the lender should provide the flood notice to the borrower. Of course, there's more in the Frequently Asked Questions, but we don't need to cover that for this Compliance Clip.

Now, if you're interested in taking a deep dive, if you're making a splash with flood insurance in your organization, you might want to geek out and nerd out with me and go a little bit deeper into the flood insurance rules. The reality is, it's hard to keep our heads above water sometimes. Flood insurance rules can make us feel like we're drowning. Yes, I like flood puns, and I use flood puns in some of our training programs. We actually have three training programs on flood insurance.

If you're interested in taking a deeper dive, our Flood Compliance Foundations program is a four-hour program designed for compliance officers and those responsible for managing the flood program, and auditors who have to review the flood program. We go into a lot of the different nuances, the FAQs, and all the different pieces of flood insurance. It runs four hours long. So, that's our deep dive into flood insurance.

We also have Flood for Lenders. Lenders don't need a four-hour training program. In fact, some organizations think they need more and some think they need less. So, we have two options. Our Essentials version is 30 minutes, and our Advanced option is an hour and 15 minutes. And so, if you're interested in training your lending team more than just an online module where they don't retain it and they don't really, you're not confident in what they're doing, we've got a couple of options for you for lenders, both the Essentials and the Advanced version.

And finally, if you feel you need to train your board on flood, since they are the ones who are ultimately responsible for compliance, and you want to train them in a way that is not a two-hour webinar that gets into the weeds, but takes a high-level approach and presents from the perspective of how a director would want to receive the information, we've got our Flood for the Board program.

Now, any of these programs, if you'd like to preview them or demo them, we are happy to set them up on an honor code system that you will just preview them to see if they're a fit for you.

That’s all I have for this Compliance Clip. I hope I made a splash in your day.