Flood Plain Compliance: What Lending Professionals Need to Know

For lending professionals, determining whether a property is located in a flood plain is more than a routine due diligence step. Flood-related property information can directly affect a lender’s obligations under federal flood insurance regulations, as well as loan closing and servicing procedures.

Accurate flood determinations provide the property-specific information lenders need to identify potential flood hazards and determine whether additional compliance requirements apply.

Understanding the Flood Plain and Special Flood Hazard Areas

Federal flood insurance requirements generally focus on whether a building securing a loan is located in a Special Flood Hazard Area (SFHA). SFHAs are areas identified on applicable Federal Emergency Management Agency (FEMA) flood maps as having a higher risk of flooding.

Flood zones are identified using FEMA's mapping system, including Flood Insurance Rate Maps (FIRMs). Depending on the zone and the property's location, a lender may need to take additional steps before completing a loan transaction.

Importantly, flood risk is structure-specific. A building’s proximity to a river, lake, coastline, or other water feature does not by itself establish whether federal flood insurance requirements apply. Likewise, being outside an SFHA does not mean a property has no risk of flooding.

Flood Determinations

A Standard Flood Hazard Determination (SFHD) is used to determine whether a building or mobile home securing a loan is located in an SFHA. The determination identifies the applicable flood zone and whether the property is located within an area covered by a designated flood hazard area.

For covered lending transactions, federal regulations require lenders to make a flood hazard determination before loan origination and to maintain appropriate documentation. If the determination indicates that a building securing the loan is located in an SFHA, additional requirements may apply, including requirements related to flood insurance and borrower notification.

This makes the accuracy and timeliness of flood-related property data an important component of a lender's compliance workflow. A flood determination should be viewed as one component of a lender's broader compliance process. The lender remains responsible for understanding and satisfying applicable regulatory requirements, including requirements concerning flood determinations, notifications, insurance, and recordkeeping.

Accurate data supports that process by giving lending professionals a documented basis for evaluating a property's flood hazard status. Because FEMA flood maps are periodically revised, lenders should also recognize that flood hazard information is not necessarily static. Map revisions, amendments, and updates can change the applicable flood zone or other relevant property information.

Why Flood Plain Expertise Matters

Flood mapping and property identification are not always straightforward. Properties can span multiple parcels or flood zones, structures may be positioned differently from the legal parcel boundaries, and FEMA map changes can affect a property's classification over time.

Certified floodplain managers and other experienced flood professionals understand the technical and regulatory considerations involved in evaluating flood hazard information. Their expertise can help lending organizations obtain consistent property data and identify situations that may warrant additional review.

For lenders handling transactions across multiple states and jurisdictions, working with professionals who understand floodplain mapping and federal requirements can also help standardize the flood determination process.

Achieving Consistent Compliance

For financial institutions, mortgage lenders, servicers, and investors managing properties across the country, consistency is critical. A standardized process for obtaining and reviewing flood determinations can help integrate floodplain information into existing loan origination, underwriting, closing, and servicing workflows.

Professional property data reports prepared by knowledgeable floodplain professionals can provide lenders with the information necessary to support their internal compliance procedures and document their flood hazard review.

Ultimately, understanding a property's position on the flood plain, and a structure’s flood status is not simply a matter of identifying geographic risk. For lending professionals, it is an important part of regulatory due diligence. Reliable flood determinations, current mapping information, and knowledgeable review can help lenders maintain an effective process for identifying properties subject to federal flood-related requirements. We can help you with all of the above. Contact us today to learn more.