A place to start would be the Interagency Q&A for Loans in Areas Having Special Flood Hazards. Question 64 addresses the circumstances under which a bank may rely on a private insurance policy that does not meet the criteria established by FEMA in Mandatory Purchase of Flood Insurance Guidelines.
In addition, if the bank determines that the policy does not meet those circumstances, also consider:
- The amount of risk involved with allowing the policy to stand;
- Is the risk in alignment with the bank’s established policies and procedures, strategic plan and risk management;
- Is the risk acceptable to the bank;
- What would be required to ensure that the loan is adequately covered e.g., another policy
Also consider, ensuring that the bank’s lending policies, underwriting, and personnel understand the requirements of the regulation and FEMA, and that training reinforces the requirements.
Reference: Interagency Q&A on Loans in Areas Having Special Flood Hazards, Questions 63 and 64, July 2009.