VIDEO: No Flood Zone on Declaration Page
In this 3rd annual Halloween version of our Compliance Clips (video), Adam discusses Flood Insurance Manual changes that affect the flood zone listed on the declaration page of a flood insurance policy. This video is sure to make a splash with your lending team, so let’s dive right in.
Video Transcript:
The following is a transcript of this video
“Welcome to our third annual Halloween Special. This year, of course, I'm going as a lifeguard so I thought it was fitting to do a flood insurance topic. The topic of this Compliance Clip, of course, is No Flood Zone on Declaration Page. I'm recording this at the end of October of 2021. The question I've seen a few times is this: we've started to see declaration pages that no longer list a flood zone, is this a problem? Now, of course, the answer to this is going to come from FEMA.
In the past, FEMA issued a Flood Booklet that was a guidance for financial institutions. A little blue booklet you probably remember from the early two thousands if you were in compliance and banking back at that time. Well in that booklet, it said that you should not have a declaration page that has a flood zone that is different from your determination form.
The idea is if your determination says you're in a high risk zone, your declaration page ,that represents the insurance coverage, should have a zone that relates to the same zone that the customer is actually in. The idea is the customer needed to pay for coverage that was sufficient to cover what zone they were actually in because flood insurance was priced based on zones.
What has happened in October of 2021, FEMA actually issued new guidance. And what they did at this time is they issued their new October 2021 Risk Rating 2.0 National Flood Insurance Program Flood Insurance Manual. They're calling this “Risk Rating 2.0”. What is Risk Rating 2.0? Well, it's a change in how they price flood insurance for individuals who have a home in a high risk flood zone. And what it says on page one in the updates of what they've done, it says they've updated guidance on flood zones since zones no longer drive NFIP ratings.
To expand on this, we can actually take a look at this Flood Insurance Manual introduction, where they clearly spelled this out for us. What they say in the introduction is that NFIP is moving away from pricing based primarily on a building's elevation and its location inside or outside of a high risk flood zone. The legacy rating methodology at times created disparities at the edge of flood zones, giving neighboring property owners markedly different flood insurance costs. FEMA's new rating methodology leverages catastrophe modeling, geospatial technology, and NFIP mapping data to estimate risk and determine the cost of flood insurance for each individual building.
In essence, we're moving away from pricing based on zones but pricing now based on a specific property and the unique aspects of that property - the property’s location, the property's flood zone, the property’s structure, replacement cost value, all those types of things. So they've made some significant changes in how they price.
So the question is does it matter if the flood zone is listed on the determination form? What has actually happened is you will see on the new flood determination forms that took effect in October of 2021 and these are FEMA policies, the NFIP policies, not private policies, but FEMA policies from the NFIP. They actually are going away at taking the determination off of the declaration page. So going forward, you may not see the flood zone on the declaration page. So is that a problem? No, it's not.
In fact, the frequently asked questions that were proposed in 2020 that are not yet final actually say this: if a lender receives a policy declaration page that has a flood zone designation that is different from the flood zone shown on the Standard Flood Hazard Determination Form, it should consider documenting the discrepancy in the loan file. Huh? That's what it says. It says you should consider just documenting it in the file. It says, if the SFHD indicates that the building securing the loan is outside a Special Flood Hazard Area, the lender must require the appropriate amount of insurance coverage in accordance with the Act and Regulation, but the lender is not otherwise required to resolve the discrepancy between the flood zone designation on the Standard Flood Hazard Determination Form, so the flood determination, and the designation on the flood insurance policy declaration page provided by the borrower.
What they're saying here in this proposed frequently asked question is discrepancies are okay. And in fact, what we know from the changes in October of 2021 in the Flood Insurance Manual is that the declaration page from NFIP policies will no longer have the flood zone listed on the declaration page. Private policies will, but the NFIP policies will not. Some vendors may not have updated their systems yet so it may take a while to get there. But the bottom line is you're going to start to see declaration pages that don't have a flood zone and that is not a problem because there have been some significant changes to the flood program, at least as far as zone rating in October of 2021.
That's it, that's all I have for this Compliance Clip.”