The FDIC has spoken…well, sort of. In June, the FDIC issued non-public flood insurance guidance to their banks. My first question was, why wasn’t this made public via a Financial Institution Letter (FIL)? Anyway, the document, “Flood Insurance Contents Coverage and General Best Practices” includes a two-sentence paragraph regarding the detached structures exemptions included in the Homeowner Flood Insurance Affordability Act of 2014.
“Certain detached structures are excluded from the mandatory flood insurance purchase requirements. Flood insurance is not required for any structure that is part of a residential property but is detached from the primary residence and does not serve as a residence.”
That’s it! This seems way outside the box for the typically ultra-conservative FDIC. Especially considering no one is harder on banks with respect to flood insurance requirements than the FDIC.
Back to the guidance; there’s no argument that the law is the law as of March 21, 2014. However, as stated in a previous blog, there are some unanswered questions. The FDIC guidance mentions nothing of the notice requirement (below). If banks followed this memo and knew nothing more, they would be in violation of the law!
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. If you choose to not maintain flood insurance on a structure, and it floods, you are responsible for all flood losses relating to that structure.
Another big question is, what’s a residence? Is it an acreage with a residence that has outbuildings or does it mean a farm with outbuildings that also includes a residence? Also, what’s a residential structure? If you have an acreage (non-farm) with a residence does it include a storage shed from Home Depot or an old barn? What about a structure where there isn’t a residence to be “detached” from? So many scenarios and no guidance!
It’s still our recommendation that banks take a wait and see approach and delay implementing this new detached residential structures flood insurance exemption until further clear-cut guidance is provided.