When the Waters Rise: Navigating Flood Compliance in 2025

Have you reviewed your flood compliance program lately? If not, you’re taking a big risk.

Flood insurance violations are regularly among the most frequently cited issues in enforcement actions. So far in 2025, there have already been 11.

That’s why it’s critical for lenders to understand flood insurance requirements and stay on top of enforcement trends. Common compliance gaps—like missed requirements, insufficient coverage, and outdated processes—underscore the need for ongoing oversight, not a one-time checklist. Institutions must continuously identify and monitor properties in Special Flood Hazard Areas (SFHAs) that require coverage throughout the loan lifecycle.

What does a solid flood compliance plan look like, and how can you keep it on track? Let’s break it down.

Related: Flood Insurance: Compliance Tips for Avoiding Costly Penalties

Core requirements of flood compliance

To manage flood insurance compliance obligations effectively, it is essential to understand the core requirements.

Flood zone determination

FIs must perform a flood hazard determination before making, increasing, extending, or renewing any loan secured by improved real estate or a mobile home. This determination must be completed before loan closing to assess whether the property is located in a Special Flood Hazard Area (SFHA), as required under the National Flood Insurance Act of 1968 and its amendments, including the Flood Disaster Protection Act of 1973

Mandatory flood insurance coverage

Flood insurance must be obtained before closing any loan secured by a building or mobile home in a Special Flood Hazard Area (SFHA), where such insurance is available under the National Flood Insurance Program (NFIP).

Under the National Flood Insurance Program (NFIP), the maximum coverage limits are:

• $250,000 for building coverage for residential properties
• $100,000 for contents (personal property) coverage for residential properties
• $500,000 for building property coverage for commercial real estate
• $500,000 for contents (personal property) for commercial real estate

Notice to borrowers 

Lenders are required to provide a written notice to the borrower and the loan servicer if the property is located in an SFHA. This notice must be delivered in a timely manner — ideally at least 10 days before closing — to ensure the borrower is aware of the flood insurance requirements.

Escrow requirements

Some mortgage lenders are required to escrow flood insurance premiums for loans secured by residential improved real estate or mobile homes located in Special Flood Hazard Areas (SFHAs).

Force-placement insurance

If a borrower fails to maintain the required flood insurance, the lender must obtain coverage on the borrower’s behalf and may charge the borrower for the cost. This step ensures the property remains protected and the loan stays compliant with federal flood insurance regulations.

Life-of-loan monitoring

FIs are required to monitor flood zone status for the life of a loan to ensure that properties remain adequately insured if flood zone designations change. This ongoing monitoring helps maintain compliance with federal flood insurance regulations and protects both the lender and borrower from potential flood risks.

Examples of flood insurance enforcement actions

Recent enforcement actions have revealed frequent deficiencies among lenders, resulting in financial penalties and reputational impacts.

The most common violations cited in 2025 included:  

• Failing to obtain flood insurance or adequate flood insurance before making, increasing, extending, or renewing any loan
• Failure to provide the required notice to the borrower
• Failure to force-place flood insurance or obtain adequate coverage when force-placing flood insurance

Understanding flood compliance requirements and implementing robust flood compliance controls is essential for institutions.

Best practices to ensure flood compliance

A sustainable flood compliance program requires ongoing attention to regulations, industry best practices, and technological advancements. Effective FIs take a proactive approach, anticipating challenges and strengthening their compliance.

To prevent enforcement actions and protect your reputation, ensure your FI regularly reviews its flood compliance program and takes the necessary steps to ensure they meet all regulatory requirements.

• Review policies and procedures. Strong policies and procedures must address the entire flood compliance process, from initial determination through loan payoff. They should specify who is responsible for each step, establish clear timeframes for completion, and include robust quality control (QC) measures. Update your policy and procedures updates regularly to reflect regulatory changes and lessons learned from internal audits or examinations.
• Perform quality control and audits: Robust QC and audit processes are essential for identifying and correcting compliance deficiencies before they become regulatory violations. Ensure your program includes automated system checks and manual review processes covering all aspects of flood compliance.
• Practice ongoing monitoring. Effective monitoring requires comprehensive tracking systems capable of identifying imminent policy renewals, highlighting coverage deficiencies, and generating timely follow-up actions. Manual processes are frequently insufficient for managing sizable portfolios, rendering automated solutions indispensable for most institutions.
• Provide training. Training programs should be role-specific, with different curricula for loan officers, processors, compliance staff, and senior management. Regular refresher training is necessary to address regulatory updates and reinforce key concepts. Document training completion and assessing skills to help demonstrate your FI’s commitment to compliance.
• Perform dynamic risk assessments. Revisit your flood insurance compliance risk assessments as needed based on changes in the regulatory requirements, when reviewing enforcement actions, or when there are changes in your control environment.

Final thoughts

Adhering to flood compliance regulations is critical for both regulatory compliance and sound risk management. With heightened scrutiny and enforcement, FIs should proactively assess and strengthen their flood compliance programs.

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