Academic journal article ABA Banking Journal

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Academic journal article ABA Banking Journal

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Article excerpt

FLOOD COVERAGE ABOVE THE LIMIT

Q. What should a bank do when a borrower's loan amount exceeds the maximum amount of flood insurance that the Federal Emergency Management Agency (FEMA) will underwrite?

A.12 CFR 22.3 states that "the amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property ..."

Understand that flood insurance coverage is limited to the overall value of the property securing the designated loan, minus the value of the land on which the property is located. There is no legal requirement for a lender to require additional flood insurance if the amount of the credit exceeds the FEMA maximum.

However, there is the issue of safety and soundness. Because most lenders require fire insurance to protect the bank's investment, it is reasonable to require adequate flood insurance coverage. Additional insurance information can be obtained from Bankers' Insurance Center, 1-800-334-2242. …

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