Based on my understanding banks are allowed to require more than the minimum amount of flood insurance required by regulation. However, the Flood Notice we deliver to our customers includes the following statement to summarize the general guideline about how much insurance would be required:

At a minimum, flood insurance purchased must cover the lesser of : 1) the outstanding principal balance of the loan or 2) the maximum amount of coverage allowed for the type of property under the NFIP.

Does this statement preclude the bank from requiring a higher amount of flood insurance than legally required?

For example, imagine a $600K residential real estate loan located in a flood zone. The required flood insurance based on the regulation would likely be $250 thousand. The bank provides a flood notice to the consumer that includes the italicized statement above, but subsequently informs the consumer that they are required to have flood insurance of $600K. This results in the consumer having to obtain a private flood insurance policy, which has a much higher premium.

My initial thought is that there is a UDAAP concern and that the bank should not continue this practice without revising its Notice. A reasonable consumer may assume that the bank is requiring flood insurance consistent with the guidelines outlined in the Flood Notice -- especially if there is no other official notice specifically instructing them on the amount of flood insurance to obtain. However, the phrasing – specifically “at a minimum” – seems to leave wiggle room for the bank to require a higher amount of flood insurance. I would appreciate any thoughts you have on this matter.


P.S. We haven't encountered this scenario before as its rare for us to have flood loans, let alone ones for this high of an amount. I'm also not certain how the lender is planning to inform the applicant of the required amount of flood insurance. At this point, I can't confidently say if he plans to inform the applicant via email or in a subsequent Notice. At this point, I just know that no specific amount was named on the Determination form or in the Flood Notice.

The notice is the standard required notice as set forth in the regulations. I do not think you need to change it. Your requirements should be fully explained in your security agreement. Your loan officers should also be informing the borrower of the closing requirements. Just make sure that if you are going to require that the borrowers be fully insured to include a private policy, that those policies are available and that you never waiver from that requirement unless you have fully documented mitigating circumstances.

Thanks for the response!