Flood Notice for Detached Structure Exemption
In this Compliance Clip (video), Adam explains how the flood notice applies to the detached structure exemption. In other words, he answers the question of: does a financial institution need to deliver a flood notice when the detached structure exemption applies?
Video Transcript
The following is a transcript of this video.
This Compliance cCip is going to talk about the flood notice for the detached structure exemption.
What has happened is I've received several questions over the years on how the flood notice applies when you're utilizing the detached structure exemption. Specifically, what if you have a home that is not in a flood zone? So you have a residence that's not in a flood zone, but you have a detached structure. Maybe let's just say a barn that's used for consumer purposes and is not a residence, but it's down the hill and it's actually in a flood zone. It’s not used for ag purposes, it is used for consumer purposes. It qualifies for the detached structure exemption. So the question is, since the home is not even collateral, let's say the home's not even collateral, the home's not in a flood zone, but the barn is collateral, so generally need flood assurance, but since it's a detached structure, we can use the detached structure exemption. The question becomes, do we still have to give the flood notice because we're not requiring, and not required by law, to require flood insurance?
So the question boils down to this here. It says, “Is the flood notice required if we have a detached structure that will qualify for the detached structure exemption?” The way this question really works is we're not taking the residence as collateral, or the residence is not in a flood zone. So all that we're worried about is the structure. Just the structure is in a flood zone, this detached structure. Meaning we're not getting flood insurance for anything. Do we need to still send the notice? The answer is absolutely yes.
The interesting thing about the detached structure exemption is that it only excludes the requirement for purchasing flood insurance. You still have to do a determination and you still, number two, have to provide the notice. And while that may seem odd, it may seem ridiculous because they don't have to get flood insurance, keep in mind that when these rules changed and permitted this detached structure exemption, they also updated the flood notice. The flood notice now has language that specifically addresses this. It was updated to address that a bank may or may not be requiring flood insurance at the time the loan closes. And what the notice now says is although you may not be required to maintain flood insurance on all structures, you may still wish to do so and your mortgage lender may still require you to do so to protect the collateral securing the mortgage.
It goes on here and it says, “If you choose not to maintain flood insurance on a structure and it floods, you're responsible for all flood losses relating to that structure.” So this is language that applies to detached structures and is a disclosure that the consumer gets and that's why this notice is imperative that they receive this so that they understand that they could have a loss in the event of a flood.
That's all I have for you in this Compliance Clip.