12.10 HAZARD IDENTIFICATION (05/17/17)

© RHS HB-1-3555 SFH Guaranteed Loan Program Technical Handbook

A. Due Diligence

Lenders are required to utilize due diligence with regard to potential environmental hazards to ensure the property is decent, safe and sanitary, and has sufficient value to adequately secure the loan. The property must be free of known hazards that may have adverse effects on the health and safety of the occupants. The structural soundness of the dwelling must ensure customary use and enjoyment of the property by the occupants.

While the Agency does not specify how the lender’s due diligence must be conducted, the level of review must be equivalent to the standards established by Fannie Mae, Freddie Mac, the Federal Housing Authority (FHA), or the United States Veterans Administration (VA).

Appraisers play an important role in identifying potential environmental hazards by notifying the lender of concerns identified during their visit to the property. The appraiser is required to note readily observable conditions. If the lender knows or is informed by another party of a potential hazard, the information must be disclosed to the appraiser. Lenders must follow up on all potential environmental hazards identified by an appraiser to determine the nature and scope of the problem, and the impact the problem is likely to have on the property’s value. If potential environmental hazards are noted, the lender must carefully document the suspected problem and the findings of its investigation.

If the lender’s investigation reveals an environmental hazard does exist, the lender must ensure the hazard is mitigated before requesting the loan guarantee.

B.  Flood Hazards

The lender must complete, or arrange for a contractor to complete, FEMA Form 086-0-32, “Standard Flood Hazard Determination Form (SFHDF)” to determine whether the dwelling is located in a Special Flood Hazard Area (SFHA) in accordance with the National Flood Insurance Reform Act of 1994.

Existing dwellings are eligible under the SFHGLP only if flood insurance, through FEMA’s National Flood Insurance Program (NFIP), is available for the community and flood insurance whether NFIP, “write your own”, or private flood insurance, as approved by the lender, is purchased by the borrower. Lenders are required to accept private flood insurance policies that meet the requirements of 42 USC 4012a (b)(1)(A). Insurance must be obtained as a condition of closing and maintained for the life of the loan for existing residential structures when any portion of the structure is determined to be located in a SFHA, including decks and carports, etc. However, according to the Homeowner Flood Insurance Affordability Act (HFIAA) of 2014, flood insurance is not required for any additional structures that are located on the property but are detached from the primary residential structure and do not serve as a residence, such as sheds, garages, or other ancillary structures. Existing dwellings financed through the SFHGLP are not subject to the requirement within 7 CFR 1940 Subpart G Exhibit C which requires a search for practicable off-site alternatives to purchasing an existing dwelling within the SFHA.

New or proposed construction in an SFHA is ineligible for a loan guarantee unless:

A final Letter of Map Amendment (LOMA) or final Letter of Map Revision (LOMR) removes the property for the SFHA is obtained from FEMA, or;

The lender obtains a FEMA National Flood Insurance Program Elevation Certificate (FEMA Form 086-0-33). The flood elevation certificate must document that the lowest floor (including the basement) of the residential building, and all related improvements/equipment essential to the value of the property, are built at or above the 100-year flood elevation in compliance with National Flood Insurance Program (NFIP) criteria. The flood elevation certificate must be prepared by a licensed engineer or surveyor.

Documentation is included in the file in accordance with 7 CFR 1940 Subpart G Exhibit C, that there is a demonstrated need for the SFHGLP and there are no practicable alternatives to new construction within the SFHA.

Note: Part of the site may be located in the SFHA without triggering these requirements, as long as no part of the dwelling is located in the SFHA. At the lender’s discretion they may require flood insurance even if the residential building and related improvements to the property are not located within the SFHA, but the lender has reason to believe that the building and related improvements to the property may be vulnerable to damage from flooding.

Flood insurance must cover the lesser of the outstanding principal balance of the loan or the maximum amount of coverage allowed under FEMA’s National Flood Insurance Program (NFIP). Unless a higher amount is required by state or federal law, the maximum deductible clause for a flood insurance policy should not exceed the greater of $1,000 or 1 percent of the face amount of the policy.

Existing dwellings and newly constructed dwellings located within the SFHA which are not served by public sewer systems and have on- site septic or sewage treatment systems must have a drinking water supply which is protected from cross contamination from the onsite septic/sewage treatment during flooding. A property serviced by an on-site septic or sewage treatment system is eligible under this Section, provided one of the following can be met:

The property is served by a publically provided water supply.

The property is serviced by a private drinking water well/supply with a fitted sanitary well cap which prevents backflow floodwater from entering the drinking supply well.

The property is served by a private drinking water well/supply whose opening is located above the base flood elevation of the SFHA. Additional documentation, such as an elevation certificate, will be required to verify this type of property.