VIDEO: Reusing a Flood Determination

In this Compliance Clip (video), Adam explores whether lenders can reuse a previous flood determination when refinancing or assuming a loan, or when multiple loans are secured by the same property. He discusses why the answer isn’t always as straightforward as it may seem and highlights the regulatory guidance lenders need to consider before relying on an existing determination.

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Video Transcript

The following is a transcript of this video.

This Compliance Clip is going to talk about reusing a flood determination. This is a flood insurance compliance topic.

The question we have here is this: May a lender rely on a previous determination for a refinancing or assumption of a loan or multiple loans to the same borrower secured by the same property?

In other words, can we reuse a flood determination that we pulled a while back on another loan having collateral of the same property used previously?

The answer would be easy to say “no”, but in reality, the guidance tells us that there are some situations where we can reuse a flood determination. These answers come from the Flood FAQs (Frequently Asked Questions), specifically from the section on the Standard Flood Hazard Determination Form, FAQ 4. The question asks: May a lender rely on a previous determination?

The answer is quite complex, but let's take a look at it.

The answer is: it depends. There are some instances where we can reuse a flood determination. In your organization, you may say, “Look, our risk is pretty high and we don’t want to re-use the determination because whenever we have something that says it depends, our staff just seem to get it wrong. And I don't know why, they're good people, but they just seem to get it wrong. And we can't risk that right now.” So, it is okay to say no, we’re not going to reuse a flood determinations and that maybe your institution’s polic and that’s completely fine.

However, there is some wiggle room if we follow what the regulators have said in FAQ 4 under the category of the Standard Flood Hazard Determination Form of the FAQs. The statute permits a lender to rely on a previous flood determination using the Standard Flood Hazard Determination Form when it increases, extends, renews, or purchases a loan secured by a building or mobile home.

However, they are very clear that the "making" of a loan is not listed as a permissible event that permits a lender to rely on a previous determination. So if we increase, extend, or renew, that would allow us to potentially reuse a flood determination, but the making of a loan. Now, the define what “making of a loan” is. Actually, they really don't define it. But to me, the way I understand it, the making of a loan is when you have a new loan to your organization. It would be: you don't have a flood determination on file. There might be a flood determination from somebody else if they're refinancing from another bank, but you can't use somebody else's determination. So, when you're making a loan, that's a new loan to you. So, the making is not listed now.

Now, when the loan involves a refinancing or assumption by the same lender, or if the same lender makes multiple loans to the same borrower, the lender may rely on the previous determination only if the original determination: 1) was made not more than seven years ago before the date of transaction; 2) the basis for the determination was set forth on the standard flood hazard determination form; and 3) there were no map revisions or updates affecting the security property. So, essentially, if we are increasing, renewing, or refinancing in-house, then we are permitted to reuse a determination if three boxes are checked:

One, it must not be more than seven years old. If it is 10 years old, we cannot use it. So, not more than seven years old.

Number two is the basis for the determination must be on the Standard Flood Hazard Determination Form, It has to be on the form. This was a big deal when the form was new. That's old news, so it should be on the form.

Number three is there’s no map revisions. And this is where a lot of financial institutions just say, “Look, we're not going to reuse it.” And so a map revision is difficult to determine because you have to get into flood maps. As a matter of best practice, what a lot of financial institutions do is they will recertify a prior flood determination with a flood vendor. So the the easiest way is to recertify a prior determination with your flood vendor that's not more than seven years old. A lot of flood vendors will do it for free or at a discounted rate. And if you recertify, you really get a new date, and then you know that there's been no map revisions. You're basically getting an updated flood determination form as part of the contract with your flood vendor. So that's the easiest way to do that.

Now, why are they allowing a refinance because the question is: isn't that making a loan? Well, these loans are extended by the same lender to the same borrower and are secured by the same improved real estate and therefore, these types of transactions are the functional equivalent of an increase of a loan. So they've said that we're permitted to do this because it's the functional equivalent of an increase of a loan.

Now, when the loan involves a refinancing or assumption made by a lender different from the one who obtained the original determination, this would constitute the making of a new loan, thereby requiring a new determination.

So, frequently asked question number four under the category Standard Flood Hazard Determination Form tells us when we can reuse a flood determination. Again, as a best practice, some people like to say no, others like to get a recertification from their flood vendor of the prior flood determination. So they essentially get a whole new flood determination back, and that's the best practice to ensure that the maps have not changed.

So, a lot of information there. I might have made a splash in your knowledge. I know it's hard to keep our heads above water when we are treading on thin ice with understanding these rules, but these rules are complex and very complicated. And this is the type of thing that we cover in our training programs. So, if you're looking to take a deeper dive into the flood compliance requirements for financial institutions, whether you're a bank, credit union, or mortgage company, or other financial institution, we do have a couple of programs available. So, if you're interested in our training, we've got that at compliancecohort.com/store.

That's all I have for today.