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| #  NCUA LETTER TO CREDIT UNIONS                                       |
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**NATIONAL CREDIT UNION ADMINISTRATION**

**1775 Duke Street, Alexandria, VA 22314**

  ----------------------------------- -----------------------------------
  **DATE: December 2004**             **LETTER NO.: 04-CU-16**

  ----------------------------------- -----------------------------------

**TO: Federally Insured Credit Unions**

**SUBJ: Compliance with Federal Flood Insurance Requirements**

**ENCL:** **Flood Questionnaire**

Dear Board of Directors:

All federally insured credit unions are required to comply with the
requirements of the National Flood Insurance Program[^1], as created by
the National Flood Insurance Act of 1968. Part 760 of NCUA's Rules and
Regulations implements these laws (Flood Act).

Typically, flooding causes more than \$1 billion in damage each year in
the United States. The Federal Emergency Management Agency (FEMA)
reports that despite the likelihood of flood damage in Special Flood
Hazard Areas (SFHAs), less than half of the structures located in SFHAs
are insured against such loss. The risk of loss by flooding in those
areas is much higher than the risk of fire. Over the life of a 30-year
mortgage, a property located in a SFHA has a 26 percent chance of being
flooded compared to a 1 percent chance of loss by fire.

Compliance with the Flood Act protects credit unions and credit union
members against catastrophic losses.

NCUA reviewed a compilation of recent examination findings and learned
that some credit unions are not fully complying with the requirements of
Part 760. This letter serves as a reminder of key provisions and
provides references to public guidance, which may assist you in
strengthening your Flood Act compliance program.

Review of your Flood Act compliance program is a required part of the
Risk Focused Examination program. A copy of the AIRES questionnaire used
by NCUA examiners is enclosed. NCUA may assess civil money penalties for
failure to comply.

**SUMMARY OF KEY FLOOD INSURANCE REQUIREMENTS**

*Flood Hazard Determinations (NCUA Regulations, Part 760.3, 760.6)*

Subject to a few exceptions, a credit union cannot make, increase,
extend, or renew any loan secured by personal property, a building, or
mobile home on a permanent foundation, which is located in a special
flood hazard area unless the collateral is covered by flood insurance
for the term of the loan. Therefore, a flood hazard determination must
be performed before the closing of the loan. The credit union or a
servicer acting on its behalf must document the determination using the
Standard Flood Hazard Determination Form provided by the Federal
Emergency Management Agency. This form must be retained for the life of
the loan.

*Fees and Charges (NCUA Regulation, Part 760.8)*

The credit union may charge borrowers a reasonable fee for determining
whether the building or mobile home securing a loan is, or will be
located, in a SFHA. The portion of the cost for the life-of-loan
monitoring must be disclosed as a finance charge in accordance with the
Truth-in-Lending Regulations. (12 CFR §226.4(c)(7)).

*Notice to Borrowers (NCUA Regulation, Part 760.9)*

If the Standard Flood Hazard Determination shows the building or mobile
home securing the loan is in a SFHA, the credit union must mail or
deliver a written notice to the borrower within a reasonable time
(usually considered to be 10 days). The notice must inform the borrower
that the property is in a SFHA, the requirement for purchase of flood
insurance, whether flood insurance coverage is available from the
National Flood Insurance Program, and whether Federal disaster relief
assistance may be available in the event of flooding. A sample notice
form is provided as an appendix to Part 760 of NCUA's Rules and
Regulations.

*Purchase Requirements (NCUA Regulation, Part 760.3)*

If the building, mobile home, or personal property securing the loan is
in a SFHA and flood insurance is available, the credit union must
require the borrower to purchase insurance in an amount sufficient to
cover the principal balance or the maximum limit of coverage for that
property under the Flood Act, whichever is less. The insurance must be
purchased before the loan is closed.

If the credit union or the borrower has reason to believe that an area
has been improperly designated as a SFHA, the borrower may apply to FEMA
for a Letter of Map Amendment. Unless the map is revised or a Letter of
Map amendment is obtained, insurance must be purchased.

*Escrowing Flood Insurance Premiums (NCUA Regulation, Part 760.5)*

If the credit union requires an escrow for taxes, insurance premiums,
fees or other charges, then it must also escrow for required flood
insurance premiums.

*Notice to FEMA (NCUA Regulation, Part 760.10)*

The credit union must notify FEMA of the identity of the loan servicer
at the time the loan is made, increased, extended, renewed, sold, or
transferred. The notice must be sent to the insurance carrier that
issued the insurance policy so the mortgagee endorsement can be updated.
This also helps the credit union ensure the policy is maintained in
force.

*Forced Placement of Flood Insurance (NCUA Regulation, Part 760.7)*

If the credit union determines that the borrower allowed the flood
insurance coverage to lapse, the credit union must notify the borrower
that the borrower must obtain the insurance. If the borrower does not
provide evidence of insurance coverage within 45 days, the credit union
is required to purchase the insurance on the borrower's behalf. The
credit union may charge the borrower for the cost of the premiums and
fees.

The attached questionnaire has been developed for examiners to assess
the credit union's compliance with the flood insurance regulation. It
may also be helpful to you in evaluating your compliance program.

If you need additional information, the following resource listing may
help you.

*Flood Insurance Information Resources*

-   General Information about the National Flood Insurance Program:

> Federal Emergency Management Agency
>
> Federal Insurance Administration
>
> 500 C Street, S.W.
>
> Washington, D.C. 20472
>
> Fax: (202) 646-3362
>
> Website: [**http://www.fema.gov/nfip/**](http://www.fema.gov/nfip/)

-   Lender compliance information:
    [**http://www.fema.gov/nfip/infol.htm**](http://www.fema.gov/nfip/infol.htm)

-   nteragency Questions and Answers Regarding Flood Insurance:
    [**http://www.fdic.gov/news/news/financial/1997/fil9777.html**](http://www.fdic.gov/news/news/financial/1997/fil9777.html)

-   Library of publications:
    [**http://www.fema.gov/nfip/library.htm**](http://www.fema.gov/nfip/library.htm)

-   To order Flood Hazard Boundary Maps or Flood Insurance Rate Maps,
    call or write:

> Federal Emergency Management Agency
>
> Map Service Center
>
> PO Box 1038
>
> Jessup, Maryland 20794-1038
>
> Telephone: 1-800-358-9616
>
> Fax: 1-800-358-9620
>
> Or order maps online:
> [**http://www.fema.gov.msc**](http://www.fema.gov.msc/)

If you have questions concerning compliance with the flood insurance
regulations, please discuss them with your examiner, your NCUA regional
office, or, in the case of state chartered credit unions, your state
supervisory authority.

> Sincerely,
>
> /s/
>
> JoAnn Johnson
>
> Chairman

Enclosure

  ------------------------------------ ------------ --------------------------
  **FDPA - Flood Disaster Protection                
  Act**                                             

  **Loans - Real Estate and Mobile                  
  Homes**                                           

  **INTRODUCTION AND PURPOSE**                       

  **APPLICABILITY**                                  

  **PENALTIES**                                      

  **RECORD RETENTION REQUIREMENTS**                  

  **[ ]{.underline}**                  **Yes/No**   **Comments**

  1\. Does it appear the CU maintains                
  sufficient records to indicate the                
  method used to determine whether                  
  improved real estate or a mobile                  
  home offered as security for a loan               
  is located in a special flood hazard              
  area? (760.6)                                     

  2\. Is flood insurance required for                
  the building, mobile home, or                     
  personal property securing a loan if              
  located in an area identified as                  
  having special flood hazards and in               
  which flood insurance has been made               
  available? (760.3(a))                             

  3\. If the CU uses a third party                   
  vendor to prepare flood zone                      
  determinations, does the vendor                   
  guarantee the accuracy of the                     
  information as part of the contract?              
  (1994 Reform Act, 42 USC, Section                 
  4104b(d))                                         

  4\. Does the CU rely on previous                   
  flood zone determinations only when               
  all of the following conditions are               
  met? The loan is not a new loan, the              
  flood zone determination is less                  
  than 7 years old, no new flood maps               
  issued since the original flood zone              
  determination, and the original                   
  flood zone determination was                      
  recorded on the Special Flood Hazard              
  Determination Form. (1994 Reform                  
  Act, 42 USC, Section 1365(e))                     

  5\. Does it appear the CU provides                 
  the borrower with a Notice to                     
  Borrower in Special Flood Hazard                  
  Areas (SFHA) as least 10 days before              
  closing? (760.9)                                  

  6\. Does it appear the CU receives                 
  an acknowledgment from the borrower               
  before the loan closes? 760.9(d)                  

  7\. Does it appear the CU requires                 
  evidence that sufficient flood                    
  insurance was purchased by the time               
  the loan closes? (760.3(a))                       

  8\. Does it appear the CU requires                 
  and monitors flood insurance                      
  coverage for the life of the loan?                
  (760.3(a) and 760.7)                              

  9\. If the CU requires escrowing for               
  taxes, insurance premium fees or any              
  other charges on subject loans, does              
  it appear the CU established an                   
  escrow account for flood premiums as              
  well? (760.5)                                     

  10\. Does the CU notify the Federal                
  Emergency Management Agency (FEMA)                
  in writing of the identity of the                 
  servicer of each loan requiring                   
  flood insurance? (760.10)                         
  ------------------------------------ ------------ --------------------------

**Cell: A5**

**Comment:** The Flood Disaster Protection Act of 1973 (FDPA) requires
NCUA to ensure that federally insured credit unions do not make loans
secured by real estate or mobile homes located in special flood hazard
areas, unless adequate flood insurance is obtained. The exception is
loans less than \$5,000 with terms less than one year; for these loans,
flood insurance is not required.

The National Flood Insurance Reform Act of 2004, also called the
Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004, amends
the National Flood Insurance Act of 1968. This Act was previously
amended by the Flood Disaster Protection Act of 1973 and the National
Flood Insurance Reform Act of 1994. Sections of all of these Acts remain
relevant. Together, they create, reform, and reauthorize the National
Flood Insurance Program.

Because the 2004 amendment does not repeat the text of prior amendments,
this questionnaire provides pertinent guidance from applicable sections
of the various Acts.

**Cell: A6**

**Comment:** Flood insurance is required for the term of the loan on
buildings or mobile homes when all three of the following factors are
present:

1\. The institution makes, increases, extends, or renews any loan(s)
(commercial or consumer) secured by improved real estate or a mobile
home affixed to a permanent foundation ("security property");

2\. The property securing the loan is located or will be located in an
SFHA as identified by FEMA; and

3\. The community participates in the NFIP.

In the case of mobile homes, the criteria for coverage turns on whether
the mobile home is affixed to a permanent foundation. A permanent
foundation includes mobile home parks where a mobile home is connected
to utilities. An institution does not have to obtain a security interest
in their underlying real estate in order for the loan to be covered by
the requirements of the national flood insurance program.

Flood insurance requirements also apply to loans where a security
interest in improved real property is only taken "out of an abundance of
caution." A regulated lending institution may not make, increase,
extend, or renew any loan secured by improved real property located in a
special flood hazard area unless the improved real property is covered
by the minimum amount of flood insurance required by statute.

Flood insurance requirements do not apply to property securing a loan
with an original balance of \$5,000 or less and a term of one year or
less.

**Cell: A7**

**Comment:** NCUA can assess civil money penalties of \$385 per
violation and up to \$110,000 annually.

If a CU has not met all the requirements of the Act and the borrower
sustains a loss due to flooding, the CU may run the risk of being held
liable in a negligence suit.

**Cell: A8**

**Comment:** Credit unions must maintain sufficient records to indicate
the method used to determine whether improved real estate or a mobile
home is in a Special Flood Hazard Area. You should find in every loan
file subject to FDPA a Standard Flood Determination Form and the
acknowledgement from the borrower that they received the required flood
insurance notice.

Although not required, a credit union may wish to retain copies of any
other notices sent to the borrower and a copy of the flood insurance
policy.

**Cell: A10**

**Comment:** CUs must maintain sufficient records to indicate the method
used to determine whether loans require flood insurance. Effective
1/2/96, CUs are required to use and maintain the "Standard Flood Hazard
Determination Form" in determining whether property offered as
collateral on a loan is located in a SFHA. The most current Standard
Flood Hazard Determination Form can be found on the Federal Emergency
Management Agency's (FEMA) web site at
[http://www.fema.gov](http://www.fema.gov/)

The credit union is required to maintain a record of the Standard Flood
Hazard determination Form either in hard copy or electronic form for as
long as it owns the loan.

For loans made before 1/2/96, the records must include (a) copies of
official maps, including the date and complete panel number of the FEMA
map used to determine whether the collateral is located in or out of a
flood hazard zone; (b) written statements in each file indicating a
flood determination was performed and the result; and (c) copies of any
written contracts between the CU and the appraiser performing flood
assessments.

**Cell: A14**

**Comment:** When a loan is secured by property located in a SFHA, the
CU must mail or deliver a written notice to the borrower at least 10
days before closing. The notice must state (a) that the property is
located in a flood hazard area; and (b) whether federal disaster relief
assistance will be available for such property in the event of damage
caused by flooding in a federally declared disaster area.

**Cell: A15**

**Comment:** The CU must obtain a written acknowledgment from the
borrower that the property is located in an SFHA and the borrower has
received the mandatory notice regarding federal disaster relief
assistance.

**Cell: A16**

**Comment:** The borrower should present evidence of flood insurance at
least equal to the amount of the loan, or the maximum amount available
if the property is in a community insured under FEMA's National Flood
Insurance Program (NFIP), was purchased.

**Cell: A17**

**Comment:** Flood insurance is written annually. The CU is responsible
for ensuring coverage is renewed and maintained for the duration of the
loan. When designated as mortgagee, the CU should receive copies of the
policy and all renewal notices. If the borrower does not renew the
policy, the CU has the responsibility to force place it or call the
loan.

**Cell: A18**

**Comment:** Flood premium escrow accounts are only required when escrow
accounts are established for other items such as property taxes or fire
hazard insurance. The regulation does not require an institution
establish escrow accounts if it is not their policy to do so. This
requirement only applies to loan transactions after September 23, 1995.

**Cell: A19**

**Comment:** CUs are also required to notify FEMA of any change in the
servicer of a loan requiring flood insurance within 60 days of the
effective date of the change of the servicer.

[^1]: The National Flood Insurance Program was created by the National
    Flood Insurance Act of 1968. This Act was amended by the Flood
    Disaster Protection Act of 1973, which authorizes NCUA to enforce
    compliance at federally insured credit unions. Further amendments
    were made through the Flood Insurance Reform Act of 1994 and the
    Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004. (42
    U.S.C §4001 *et.seq*.)