Flood zone notification – Part 4 – The Bank

Before any federally regulated lending institution may issue a loan to an individual for the purchase of property, federal law requires that it first conduct a flood search and issue a document called a flood certification. This is a condition that must be satisfied before any lending institution can make, increase, extend or renew a loan secured by real estate or a mobile home. If the bank or lending institution in conducting the required flood search determines that the physical structure is located within a FEMA standard flood hazard area, the institution must also then provide notice to the purchaser of the property prior to closing. In fact, the law's exact language requires that the notice be given to the potential buyer "a reasonable period in advance of the signing of the purchase agreement, lease, or other documents involved in the transaction."

The notice to the potential buyer must including the following:

A) a warning, in a form to be established by the Director, stating that the building on the improved real estate securing the loan is located, or the mobile home securing the loan is or is to be located, in an area having special flood hazards;

(B) a description of the flood insurance purchase requirements under section 102(b) of the Flood Disaster Protection Act of 1973 [42 U.S.C.A. § 4012a(b) ];

(C) a statement that flood insurance coverage may be purchased under the national flood insurance program and is also available from private insurers; and

(D) any other information that the Director considers necessary to carry out the purposes of the national flood insurance program.

The bank or lending institution is then required to keep within its records a copy of the notification in it's records for the period of time that the bank owns the loan.

While the lending institution may hire an outside company to conduct the flood search or determination, the institution must still vouch for and take responsibility for the accuracy of the information provided by way of the flood certification.

It is important to note that unlike the seller disclosure and appraisal report previously discussed, the search conducted by the lending institution is only concerned with the actual structure's location within a flood zone or FEMA flood hazard area. This is because it is the structure or house's location withing the flood hazard area that triggers the corresponding federal requirement that the home be covered by flood insurance before the loan can legally be issued. The rest of the properties location in the flood hazard area is of no consequence as far as the lending institution is concerned.

Many lending institutions have attempted to avoid liability for their failure to perform a flood search or for conducting below standard flood searches by claiming that they owe no legal duty to the home buyer to provide accurate information or to even conduct these flood searches in the first place. While these arguments have had some success in federal court under the federal laws, they have left it open for State's to make their own determinations. Under Iowa law, the cause of action would be both for negligence and for misrepresentation and should be sufficient to get the case to the jury.