Loan Denial for High Risk Flood Hazard Zone

Question: We have received a loan request from a developer to finance a development of 11 homes. When we did the flood hazard determination, we learned that the property on which the developer plans to build these homes is a high risk flood hazard zone. We are not eager to make this loan but the developer says that as long as he has flood hazard insurance, it is no problem. Can we deny the loan even if he gets insurance?

Answer: Yes. You can always refuse to make a loan for a good reason - one that is related to safety and soundness and not to any prohibited basis. The fact that flood insurance exists does not make a flood hazard zone a specially protected anything. You as a lender are free to decide that you do not want to provide financing for construction in a high risk flood hazard zone. In fact, the best thing to do with a high risk flood hazard zone is to stay out of it. Building in one is simply asking for trouble. Your reasons for adverse action should simply state that you are unwilling to make a loan secured by real estate - improved or not yet improved - that is located in a high risk flood hazard zone.

Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 9, 8/05