Final answer:
A bank can indeed require flood insurance for properties outside the SFHA; this is not against federal regulations. Banks must protect their financial interests against risks, including floods and must do so in line with consumer protection laws, ensuring transparent and non-discriminatory practices.
Step-by-step explanation:
Can a bank require flood insurance for a property outside the Special Flood Hazard Area (SFHA) as shown on the latest Flood Insurance Rate Map (FIRM)? Yes, it is possible for a bank to require flood insurance for such properties. While properties in the SFHA are required to have flood insurance if they carry a mortgage from a federally regulated or insured lender, banks may still determine that properties outside this area carry a flood risk. Considering these factors, banks have the discretion to require flood insurance to protect their financial interest in the loan's collateral, especially if the property is in an area that could still be affected by flooding, despite not being within the SFHA.
Moreover, the Federal Reserve, as part of its regulation of banks, ensures they comply with consumer protection laws, which includes transparent disclosure about home loans. This could include stipulations about flood insurance requirements to protect both the bank's and the borrower's interest. In accordance with these regulations, banks must operate without discrimination and with full disclosure of their lending practices. Therefore, while it is not against federal regulations for a bank to require flood insurance outside the SFHA, they must ensure that all practices comply with federal discrimination laws and transparent disclosure requirements.