Flood Disaster Protection Act: Lender Compliance, Insurance Requirements, and Regulatory Oversight

Introduction to the Flood Disaster Protection Act (FDPA)

The Flood Disaster Protection Act (FDPA) was enacted in 1973 to address the growing financial risks posed by floods to property owners, lenders, and the federal government.^1,2 The FDPA’s core purpose is to require flood insurance for properties in Special Flood Hazard Areas (SFHAs) when those properties secure loans from federally regulated lenders.^1,2 This mandate helps reduce taxpayer exposure to disaster relief costs and encourages participation in the National Flood Insurance Program (NFIP).^1,2,3

The FDPA has evolved through key legislative updates, most notably the National Flood Insurance Reform Act of 1994, which increased lender compliance obligations and expanded the scope of required insurance.^1,2 These changes have made the FDPA a central pillar in the nation’s flood risk management strategy, minimizing economic losses and promoting community resilience.^1,2,3

Enacted: 1973, to close insurance gaps and reduce disaster costs.^1,2
Major update: National Flood Insurance Reform Act of 1994.^1,2
Primary goal: Ensure flood insurance coverage for at-risk properties and reduce federal disaster aid reliance.^1,2,3

How NETBankAudit Helps You Stay Compliant with FDPA

NETBankAudit supports financial institutions in meeting Flood Disaster Protection Act requirements by evaluating flood determination processes, borrower notification procedures, and insurance tracking controls. Our audits ensure your policies align with federal expectations, helping you reduce risk, maintain compliance, and protect both your institution and your customers.

Scope and Applicability of Regulation H

The FDPA’s requirements are implemented through Regulation H (and similar rules for other agencies), which defines the types of loans and properties subject to mandatory flood insurance.^1,2,3 The law applies to all federally regulated lending institutions—including banks, credit unions, and savings associations—when they make, increase, extend, or renew loans secured by improved real estate or mobile homes in SFHAs within NFIP-participating communities.^1,2,3

Covered: Loans secured by improved real estate or mobile homes in SFHAs.^1,2,3
Excluded: Loans under $5,000 with terms under one year, state-owned properties with adequate state insurance, and detached non-residential structures.^1,2,3

Lenders must determine whether a property is in an SFHA using the Standard Flood Hazard Determination Form (SFHDF) and ensure compliance with all insurance requirements before closing and throughout the loan term.^1,2,3

Core Lender Responsibilities Under the FDPA

To comply with the FDPA, lenders must fulfill several core responsibilities:^1,2,3

Flood Hazard Determination: Use the SFHDF to identify if collateral is in an SFHA.^1,2,3
Mandatory Insurance: Require and verify adequate flood insurance before loan closing and monitor coverage throughout the loan’s life.^1,2,3
Notifications: Inform borrowers of flood insurance requirements and coverage lapses.^1,2,3
Force Placement: Initiate force-placed insurance if coverage lapses, following regulatory notice and timing rules.^1,2,6
Escrow Management: Escrow flood insurance premiums for most residential loans, unless exempt.^1,2,3
Private Policy Review: Accept private flood insurance policies that meet regulatory standards, as required by the 2019 Final Rule (implementing the Biggert-Waters Flood Insurance Reform Act of 2012).^1,2,3
Recordkeeping: Maintain documentation of determinations, notifications, insurance policies, and compliance actions for regulatory review.^1,2,3

Mandatory Flood Insurance Purchase Requirements

Flood insurance is required for any property securing a loan if that property is located in an SFHA within a community participating in the NFIP.^1,2,3 The lender must ensure that the insurance amount is the lesser of:

The outstanding principal balance of the loan
The insurable value of the structure (excluding land)
The maximum coverage available under the NFIP for the property type

The SFHDF is the official tool for determining flood zone status and must be retained in the loan file.^1,2,3 Lenders must verify insurance coverage at origination and monitor it for the life of the loan.^1,2,3

Structures Eligible and Ineligible for Flood Insurance Coverage

Not all structures are eligible for NFIP coverage. Lenders must distinguish between eligible and ineligible properties to ensure compliance:^1,2,3

Eligible: Residential, commercial, industrial, and agricultural buildings; condominiums; cooperatives; permanently affixed mobile homes.^1,2,3
Ineligible: Unimproved land, mobile homes not permanently affixed, bridges, dams, roads, and structures built entirely over water (e.g., piers, docks).^1,2,3

Flood Insurance Requirements for Construction Loans

Stage	Coverage Required
Loan Closing	Initial coverage based on stage of construction
Midpoint Build	Updated coverage reflecting structural value
Project Completion	Full coverage at finished value

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Construction loans require special attention under the FDPA. Insurance coverage must be in place from the start of construction and must increase as the value of the structure rises.^1,2 Lenders should:

Obtain initial coverage based on the expected completed value or current stage of construction.^1,2
Monitor construction progress and adjust coverage as needed.^1,2
Document insurance updates at each construction milestone.^1,2

Coverage must remain adequate throughout the construction period and upon project completion.^1,2

Force Placement of Flood Insurance

If a borrower’s flood insurance lapses or is found insufficient, the FDPA requires lenders to follow a specific force-placement procedure:^1,2,6

Notify the borrower of the deficiency and provide a 45-day window to obtain adequate coverage.^1,2,6
If the borrower fails to act, the lender must purchase insurance on the borrower’s behalf, effective from the date of lapse or insufficiency.^1,2,6
Refund any overlapping premiums if the borrower later provides proof of adequate insurance.^1,2,6

The FEMA Mortgage Portfolio Protection Program (MPPP) supports lenders by providing a streamlined process for obtaining force-placed insurance.^1,2,6 The MPPP allows lenders to secure coverage quickly for properties at risk, ensuring compliance and minimizing uninsured exposure. FEMA’s role is to administer the NFIP and provide the insurance infrastructure, while lenders are responsible for monitoring and enforcing coverage on their loan portfolios.^1,2,6

Escrow Requirements for Flood Insurance Premiums

The FDPA requires lenders to escrow flood insurance premiums for most loans secured by residential improved real estate.^1,2,3 This ensures timely payment and continuous coverage. Key points include:

Escrow is mandatory unless the lender qualifies as a small lender or the loan is for business, commercial, or agricultural purposes.^1,2,3
Escrow accounts must comply with RESPA (Real Estate Settlement Procedures Act) regulations.^1,2,3
Exemptions may apply for certain loans or lenders, but clear disclosures are required.^1,2,3

Lenders must provide borrowers with information about escrow requirements and manage accounts in accordance with federal guidelines.^1,2,3

Acceptance of Private Flood Insurance: 2019 Final Rule and Biggert-Waters Act

A significant regulatory change came with the 2019 Final Rule, which implemented provisions of the Biggert-Waters Flood Insurance Reform Act of 2012.^1,2,3 Lenders are now required to accept private flood insurance policies that meet FDPA standards, in addition to NFIP policies.^1,2,3

Private policies must provide coverage at least as broad as the NFIP policy for the same property type.^1,2,3
Policies must meet regulatory requirements for deductibles, exclusions, and cancellation provisions.^1,2,3
Lenders must review and document private policy acceptance before closing.^1,2,3
Borrowers are encouraged to compare private and NFIP policies for coverage, exclusions, and premiums.^1,2,3

This change increases consumer choice and may lower insurance costs, but places additional review and documentation responsibilities on lenders.^1,2,3

Visual Aid: Flood Insurance Requirement Table

Requirement Type	Trigger	Timeframe	Responsible Party
Mandatory Purchase	Property in SFHA securing a loan	Before closing	Lender
Force Placement	Lapse in required flood insurance	45 days	Lender
Escrow Requirement	Residential improved real estate loan	Ongoing	Lender
Private Policy Acceptance	Borrower submits qualifying private policy	Review before closing	Lender

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Compliance Examination and Enforcement Procedures

FDPA compliance is overseen by several federal agencies, including the Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), and Farm Credit Administration (FCA).^1,2,3 These agencies conduct regular examinations to ensure institutions are meeting all flood insurance requirements.^1,2,3

Review of flood hazard determinations and use of the SFHDF^1,2,3
Verification of insurance coverage adequacy and force-placement actions^1,2,3
Assessment of escrow management and private policy acceptance^1,2,3
Evaluation of borrower notifications and documentation practices^1,2,3
Inspection of recordkeeping for all compliance actions^1,2,3

Institutions must be prepared to demonstrate compliance through detailed records and responsive internal controls.^1,2,3

Consequences and Penalties for Non-Compliance

Non-compliance with the FDPA can result in significant penalties and regulatory action. Under current enforcement guidelines:^1,2,3

Civil monetary penalties: Up to $2,000 per violation, assessed by the relevant agency.^1,2,3
Assessment period: Penalties must be assessed within four years of the violation.^1,2,3
Additional consequences: Increased regulatory scrutiny, reputational harm, and potential restrictions on lending activities.^1,2,3

For example, in 2022, the FDIC issued over $450,000 in civil money penalties related to flood insurance violations, underscoring the financial and reputational risks of non-compliance.²

Distinguishing FEMA and Lender Roles in Flood Insurance Compliance

The Federal Emergency Management Agency (FEMA) administers the NFIP, sets insurance standards, and provides the infrastructure for both standard and force-placed flood insurance.^1,2,3 Lenders, on the other hand, are responsible for determining flood zone status, ensuring adequate coverage, managing escrow, and enforcing compliance through force placement and borrower notifications.^1,2,3 The FEMA Mortgage Portfolio Protection Program (MPPP) specifically assists lenders by offering a streamlined process for obtaining force-placed insurance, ensuring that properties remain protected even when borrowers fail to maintain coverage.^1,2,6

FEMA vs. Lender Responsibilities in Flood Insurance Compliance

Actionable Steps for Financial Institutions: Achieving and Maintaining FDPA Compliance

To ensure robust compliance with the FDPA, financial institutions should:^1,2,3

Implement robust policies and procedures for flood hazard determination and insurance verification.^1,2,3
Train staff on FDPA requirements, including force placement, escrow, and private policy review.^1,2,3
Maintain accurate and up-to-date records of all flood insurance determinations, borrower notifications, and insurance policies.^1,2,3
Regularly review and update compliance programs in response to regulatory changes and examination findings.^1,2,3
Engage with legal and compliance experts to address complex or ambiguous situations.^1,2,3

By prioritizing these steps, lenders can reduce regulatory risk, protect borrowers, and contribute to the broader goal of minimizing flood-related financial losses.^1,2,3

Ensure FDPA Compliance with NETBankAudit

Compliance with the Flood Disaster Protection Act requires institutions to maintain accurate procedures for determining flood hazard status, notifying borrowers, and verifying appropriate insurance coverage. NETBankAudit’s General Compliance Audit includes a focused review of your institution’s flood compliance program, ensuring timely and accurate flood hazard determinations, proper borrower notifications, and complete documentation of insurance coverage.

We assess internal controls, policy execution, and training effectiveness to ensure your institution meets all FDPA requirements. Our team identifies gaps, evaluates compliance with notice timing and content, and verifies that flood insurance is obtained and maintained as required by law.

Partner with NETBankAudit to strengthen your flood compliance program, avoid costly penalties, and ensure your institution is prepared for regulatory scrutiny.

Sources

Comptroller of the Currency. (2024). 12 CFR Part 22 – Loans in Areas Having Special Flood Hazards.
Federal Deposit Insurance Corporation. (2022). FDIC Consumer Compliance Examination Manual – Flood Disaster Protection.
Board of Governors of the Federal Reserve System. (2022). Federal Reserve Consumer Compliance Handbook – Flood Disaster Protection.
U.S. Congress. (2014). Flood Disaster Protection Act of 1973, as Amended through Public Law 113-89. U.S. Government Publishing Office.
Office of the Comptroller of the Currency. (2019). OCC Flood Disaster Protection Act Examination Procedures.
Federal Financial Institutions Examination Council. (2022). Interagency Questions and Answers Regarding Flood Insurance. Federal Register, Vol. 87, No. 90.

 
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