One element of flood compliance that is confusing for many lenders is how to allocate the fee for basic flood determination and life of loan service. The law is very specific on this topic and is summarized below:

  The 1994 Flood Reform act gives a lender or servicer authority to pass on a "reasonable fee" to borrowers when a determination is made in conjunction with, among other things, the making, increasing, or renewing a loan initiated by the borrower, the revision or updating of a flood map, or prior to force placing flood insurance.

  The commentary that accompanied the regulations states that the determination fee may include the life-of-loan charge assessed to monitor the loan for its term.

  The Truth in Lending statute provides that a flood zone determination charge is excludable as a finance charge only if it is imposed in connection with the initial decision to grant credit. Therefore, a flood zone search fee that does not contain a charge for life of loan monitoring need not be included in the finance charge. The actual fee charged MUST however be disclosed on the HUD-1 Settlement statement.

  Services to be performed periodically during the loan term (Life- of-Loan service) may not be excluded in the calculation of the finance charge regardless of when paid.

  If a consolidated flood determination fee includes a life-of-loan component which cannot be apportioned between an initial credit decision or future services, the entire fee is to be considered a finance charge.

As you can see,  you must disclose the fee for basic flood zone determination on the HUD-1 Settlement statement and include the life of loan fee in your calculation of the finance charge. Make sure your flood determination vendor provides you with the proper breakdown – in writing!

We hope you found this short summary helpful. If you would like to find out more information, of if you’d like a free copy of the most recent FEMA publication "Mandatory Purchase of Flood Insurance Guidelines" please call 1-800-933-5663 ext. 100.

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