Due to a community’s participation status changing, our flood vendor has notified us that an improved property is now located in a SFHA in a participating community and has sent us a new flood determination along with the Notice to the Borrower. I realize that we must first notify the borrower of this community status change and of the need for them to obtain at their expense adequate flood insurance coverage that is not less than the amount required by law. My concern is how to determine the minimum coverage amount required by law from the bank’s perspective and how one would go about it. The loan was booked by the bank 4½ years ago and the appraisal in file is dated from that time period. In light of today’s declining market values associated with real property, should one use the existing appraisal to make that determination? The valuation now may or may not be higher. Or should one consider obtaining a more up to date valuation to make this determination? If one goes with an updated valuation, could any third-party expense cost be passed onto the borrower? I am looking for any thoughts or guidance on this issue.

If one goes with an updated valuation, could any third-party expense cost be passed onto the borrower?

That would be purely based on if your loan contract allows for it or not. What were the original numbers and how close a call (value verses current loan amount) is this going to be?

$200,000.00 Appraised Value 03-2004
$40,000.00 Land Value
$160,000.00 Value of Improvements

$160,000.00 Original Loan Amount
$151,000.00 Current Balance

Follow the rule that amount of required flood insurance is the lesser of these three $ values: Loan amount; replacement cost of insurable improvemeents; or max. coverage under NFIP.

This is true even when a loan was booked just a few months ago and borrower has since been able to substantially reduce their loan balance from sale of their former home. Yes, they can request a reduction in the amount of required flood insurance.