Loans in Areas Having Special Flood Hazards; Interagency Questions and Answers Regarding Flood Insurance

Federal RegisterJul 6, 2020

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 22

[Docket ID OCC-2020-0008]

FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Docket No. OP-1720]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 339

RIN 3064-ZA16

FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052-AD42

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 760

RIN 3133-AF14

Loans in Areas Having Special Flood Hazards; Interagency Questions and Answers Regarding Flood Insurance

AGENCY:

Office of the Comptroller of the Currency (OCC), Treasury; Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); Farm Credit Administration (FCA); National Credit Union Administration (NCUA).

ACTION:

Notification and request for comment.

SUMMARY:

The OCC, Board, FDIC, FCA, and NCUA (collectively, the Agencies) propose to reorganize, revise, and expand the Interagency Questions and Answers Regarding Flood Insurance and solicit comment on all aspects of the amendments. To help lenders meet their responsibilities under Federal flood insurance law and to increase public understanding of their flood insurance regulations, the Agencies have prepared proposed new and revised guidance addressing the most frequently asked questions and answers about flood insurance. Significant topics addressed by the proposed revisions include the effect of major amendments to flood insurance laws with regard to the escrow of flood insurance premiums, the detached structure exemption, and force-placement procedures.

DATES:

Comments on the proposed questions and answers must be submitted on or before September 4, 2020.

ADDRESSES:

Interested parties are invited to submit written comments to:

OCC:

Commenters are encouraged to submit comments through the Federal eRulemaking Portal or email, if possible. Please use the title “Loans in Areas Having Special Flood Hazards; Interagency Questions and Answers Regarding Flood Insurance” to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods:

•

Federal eRulemaking Portal—Regulations.gov Classic or Regulations.gov Beta:

Regulations.gov Classic:

Go to

https://www.regulations.gov/.

Enter “Docket ID OCC-2020-0008” in the Search Box and click “Search.” Click on “Comment Now” to submit public comments. For help with submitting effective comments please click on “View Commenter's Checklist.” Click on the “Help” tab on the

Regulations.gov

home page to get information on using

Regulations.gov,

including instructions for submitting public comments.

Regulations.gov Beta:

Go to

https://beta.regulations.gov/

or click “Visit New

Regulations.gov Site”

from the

Regulations.gov

Classic homepage. Enter “Docket ID OCC-2020-0008” in the Search Box and click “Search.” Public comments can be submitted via the “Comment” box below the displayed document information or by clicking on the document title and then clicking the “Comment” box on the top-left side of the screen. For help with submitting effective comments please click on “Commenter's Checklist.” For assistance with the

Regulations.gov

Beta site, please call (877) 378-5457 (toll free) or (703) 454-9859 Monday-Friday, 9 a.m.-5 p.m. ET or email

regulations@erulemakinghelpdesk.com.

•

Email: regs.comments@occ.treas.gov.

•

Mail:

Chief Counsel's Office, Attention: Comment Processing, Office of the Comptroller of the Currency, 400 7th Street SW, Suite 3E-218, Washington, DC 20219.

•

Hand Delivery/Courier:

400 7th Street SW, Suite 3E-218, Washington, DC 20219.

•

Fax:

(571) 465-4326.

Instructions:

You must include “OCC” as the agency name and “Docket ID OCC-2020-0008” in your comment. In general, the OCC will enter all comments received into the docket and publish the comments on the

Regulations.gov

website without change, including any business or personal information provided such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not include any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.

You may review comments and other related materials that pertain to this action by any of the following methods:

•

Viewing Comments Electronically—Regulations.gov Classic or Regulations.gov Beta:

Regulations.gov Classic:

Go to

https://www.regulations.gov/.

Enter “Docket ID OCC-2020-0008” in the Search box and click “Search.” Click on “Open Docket Folder” on the right side of the screen. Comments and supporting materials can be viewed and filtered by clicking on “View all documents and comments in this docket” and then using the filtering tools on the left side of the screen. Click on the “Help” tab on the

Regulations.gov

home page to get information on using

Regulations.gov.

The docket may be viewed after the close of the comment period in the same manner as during the comment period.

Regulations.gov Beta:

Go to

https://beta.regulations.gov/

or click “Visit New

Regulations.gov Site”

from the

Regulations.gov

Classic homepage. Enter “Docket ID OCC-2020-0008” in the Search Box and click “Search.” Click on the “Comments” tab. Comments can be viewed and filtered by clicking on the “Sort By” drop-down on the right side of the screen or the “Refine Results” options on the left side of the screen. Supporting materials can be viewed by clicking on the “Documents” tab and filtered by clicking on the “Sort By” drop-down on the right side of the screen or the “Refine Results” options on the left side of the screen.” For assistance with the

Regulations.gov

Beta site, please call (877) 378-5457 (toll free) or (703) 454-9859 Monday-Friday, 9 a.m. -5 p.m. ET or email

regulations@erulemakinghelpdesk.com.

The docket may be viewed after the close of the comment period in the same manner as during the comment period.

•

Viewing Comments Personally:

You may personally inspect comments at the OCC, 400 7th Street SW, Washington, DC 20219. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 649-6700 or, for persons who are deaf or hearing impaired, TTY, (202) 649-5597. Upon arrival, visitors will be required to present valid government-issued photo

identification and submit to security screening in order to inspect comments.

Board:

You may submit comments, identified by Docket No. OP-1720, by any of the following methods:

•

Agency website: http://www.federalreserve.gov.

Follow the instructions for submitting comments at

http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

•

Email: regs.comments@federalreserve.gov.

Include the docket number in the subject line of the message.

•

Fax:

(202) 452-3819 or (202) 452-3102.

•

Mail:

Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551.

All public comments will be made available on the Board's website at

http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm

as submitted, unless modified for technical reasons. Accordingly, your comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper form in Room 146, 1709 New York Avenue NW, Washington, DC 20006, between 9:00 a.m. and 5:00 p.m. on weekdays.

FDIC:

You may submit comments, identified by RIN 3064-ZA16, by any of the following methods:

•

Federal eRulemaking Portal:

http://www.regulations.gov.

Follow the instructions for submitting comments.

•

Agency Website:

https://www.fdic.gov/regulations/laws/federal/.

Follow the instructions for submitting comments.

•

Email: comments@fdic.gov.

Include RIN 3064-ZA16 in the subject line of the message.

•

Mail:

Robert E. Feldman, Executive Secretary, Attention: Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

•

Hand Delivery/Courier:

Comments may be hand-delivered to the guard station at the rear of the 550 17th Street building (located on F Street) on business days between 7:00 a.m. and 5:00 p.m.

Instructions:

All submissions must include the agency name and RIN 3064-ZA16 for this rulemaking

Comments received will be posted without change to

https://www.fdic.gov/regulations/laws/federal/,

including any personal information provided. For detailed instructions on sending comments and additional information on the rulemaking process, see the “Public Participation” heading of the

SUPPLEMENTARY INFORMATION

section of this document.

FCA:

We offer a variety of methods for you to submit your comments. For accuracy and efficiency reasons, commenters are encouraged to submit comments by email or through the FCA's website. As facsimiles (fax) are difficult for us to process and achieve compliance with section 508 of the Rehabilitation Act, we are no longer accepting comments submitted by fax. Regardless of the method you use, please do not submit your comment multiple times via different methods. You may submit comments by any of the following methods:

•

Email:

Send us an email at

reg-comm@fca.gov.

•

FCA Website: http://www.fca.gov.

Click inside the “I want to . . . ” field near the top of the page; select “comment on a pending regulation ” from the dropdown menu; and click “Go.” This takes you to an electronic public comment form.

•

Mail:

David P. Grahn, Director, Office of Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.

You may review copies of all comments we receive at our office in McLean, Virginia, or from our website at

http://www.fca.gov.

Once you are in the website, click inside the “I want to . . . ” field near the top of the page; select “find comments on a pending regulation” from the dropdown menu; and click “Go.” This will take you to the Comment Letters page where you can select the regulation for which you would like to read the public comments. We will show your comments as submitted, including any supporting data provided, but for technical reasons, we may omit items such as logos and special characters. Identifying information that you provide, such as phone numbers and addresses, will be publicly available. However, we will attempt to remove email addresses to help reduce internet spam.

NCUA:

You may submit comments identified by RIN 3133-AF14 by any of the following methods (please send comments by one method only).

Please note that the NCUA is now accepting electronic comments only through the Federal eRulemaking portal, Regulations.gov:

•

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

•

Fax:

(703) 518-6319. Use the subject line “[Your name] Comments on Flood Insurance, Interagency Questions & Answers” on the transmission cover sheet.

•

Mail:

Address to Gerard S. Poliquin, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.

•

Hand Delivery/Courier:

Same as mail address.

Public Inspection:

You can view all public comments on the agency's website at

http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx

as submitted, except for those we cannot post for technical reasons. The NCUA will not edit or remove any identifying or contact information from the public comments. You may inspect paper copies of comments in the NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by appointment weekdays between 9:00 a.m. and 3:00 p.m. To make an appointment, call (703) 518-6540 or send an email to

OGCMail@ncua.gov.

FOR FURTHER INFORMATION CONTACT:

OCC:

Rhonda L. Daniels, Compliance Specialist, Compliance Risk Policy Division, (202) 649-5405; or Sadia A. Chaudhary, Counsel, Chief Counsel's Office, (202) 649-6350, or, for persons who are deaf or hearing impaired, TTY, (202) 649-5597.

Board:

Lanette Meister, Senior Supervisory Consumer Financial Services Analyst (202) 452-2705 or Vivian W. Wong, Senior Counsel (202) 452- 3667, Division of Consumer and Community Affairs; Daniel Ericson, Senior Counsel (202) 452-3359, Legal Division; for users of Telecommunications Device for the Deaf (TDD) only, contact (202) 263-4869.

FDIC:

Navid Choudhury, Counsel, Consumer Compliance Unit, Legal Division, (202) 898-6526,

nchoudhury@FDIC.gov;

or Simin Ho, Senior Policy Analyst, Division of Depositor and Consumer Protection, (202) 898-6907,

sho@FDIC.gov.

FCA:

Ira D. Marshall, Senior Policy, Analyst, Office of Regulatory Policy, (703) 883-4379, TTY (703) 883-4056; or Jennifer Cohn, Senior Counsel, Office of General Counsel, (703) 883- 4020, TTY (703) 883-4056.

NCUA:

Sarah Chung, Senior Staff Attorney, Office of General Counsel, (703) 518-6540, or Lou Pham, Senior Credit Specialist, Office of Examination and Insurance, (703) 518-6360.

SUPPLEMENTARY INFORMATION:

Background

The National Flood Insurance Act of 1968 created the National Flood Insurance Program (NFIP), which is administered by the Federal Emergency

Management Agency (FEMA).

The NFIP enables property owners in participating communities to purchase flood insurance if the community has adopted floodplain management ordinances and minimum standards for new and substantially damaged or improved construction. Thus, in participating communities, Federally-backed flood insurance is available for property owners in flood risk areas.

Public Law 90-448, 82 Stat. 572 (1968).

Congress expanded the NFIP by enacting the Flood Disaster Protection Act of 1973 (FDPA).

The FDPA made the purchase of flood insurance mandatory in connection with loans made by Federally-regulated lending institutions when the loans are secured by improved real estate or mobile homes located in a special flood hazard area (SFHA). The National Flood Insurance Reform Act of 1994 (the Reform Act) (Title V of the Riegle Community Development and Regulatory Improvement Act of 1994) comprehensively revised the Federal flood insurance statutes.

The Reform Act required the OCC, Board, FDIC, Office of Thrift Supervision (OTS), and NCUA to revise their flood insurance regulations, and required the FCA to promulgate a flood insurance regulation for the first time.

The OCC, Board, FDIC, OTS, NCUA, and FCA

fulfilled these requirements by issuing a joint final rule in the summer of 1996.

Public Law 93-234, 87 Stat. 975 (1973).

Title V of Public Law 103-325, 108 Stat. 2255 (1994).

Throughout this document “the Agencies” includes the OTS with respect to events that occurred prior to July 21, 2011, but does not include OTS with respect to events thereafter. Sections 311 and 312 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) transferred OTS's functions to other agencies on July 21, 2011. The OTS's supervisory functions relating to Federal savings associations were transferred to the OCC, while those relating to state savings associations were transferred to the FDIC.

See also

76 FR 39246 (Jul. 6, 2011).

61 FR 45684 (August 29, 1996).

In connection with the 1996 joint rulemaking process, commenters asked the Agencies to clarify specific issues covering a wide spectrum of the proposed rule's provisions. The Agencies addressed many of these requests in the preamble to the joint final rule. The Agencies concluded, however, that given the number, level of detail, and diversity of the requests, guidance addressing technical compliance issues would be helpful and appropriate. The Federal Financial Institutions Examination Council (FFIEC) fulfilled that objective through the initial release of the Interagency Questions and Answers in 1997 (1997 Interagency Questions and Answers).

62 FR 39523 (July 23, 1997). Throughout this document, “Questions and Answers” refers to the Interagency Questions and Answers Regarding Flood Insurance in its entirety; “Q&A” refers to an individual question and answer within the Questions and Answers.

After notice and comment, the Agencies comprehensively updated the 1997 Interagency Questions and Answers in July 2009 (2009 Interagency Questions and Answers) through significant revision and reorganization. As part of the 2009 effort, the Agencies also proposed five new Q&As for comment relating to insurable value and force placement of flood insurance.

As a result, the 2009 Interagency Questions and Answers included a total of 77 final Q&As, which superseded the 1997 Interagency Questions and Answers.

74 FR 35914 (July 21, 2009).

On October 17, 2011, the Agencies finalized two of the five new proposed Q&As from 2009, one relating to insurable value and one relating to force placement, and withdrew one Q&A regarding insurable value.

The two finalized Q&As (2011 Interagency Questions and Answers) supplemented the 2009 Interagency Questions and Answers. As part of the same

Federal Register

notice, based on comments received, the Agencies proposed to significantly revise the remaining two Q&As regarding force placement of flood insurance that were initially proposed in 2009, and proposed revisions to a previously finalized Q&A on force placement for consistency with the re-proposed Q&As. These three revised Q&As were re-proposed for comment in the October 17, 2011,

Federal Register

notice.

76 FR 64175. The Agencies finalized Q&As 9 (insurable value) and 61 (force placement) and withdrew Q&A 10 (insurable value).

Before the Agencies could finalize the three re-proposed Q&As, the Federal flood insurance statutes were amended by two major pieces of legislation, the Biggert-Waters Flood Insurance Reform Act of 2012 (the Biggert-Waters Act) and the 2014 Homeowner Flood Insurance Affordability Act (HFIAA). The Biggert-Waters Act amended the requirements that the Agencies have authority to implement and enforce.

Among other things, the Biggert-Waters Act: (1) Required the Agencies to issue a rule regarding the escrow of premiums and fees for flood insurance; (2) clarified the requirement to force place insurance; and (3) required the Agencies to issue a rule to direct regulated lending institutions to accept “private flood insurance,” as defined by the Biggert-Waters Act, and to notify borrowers of the availability of private flood insurance.

Public Law 112-141, 126 Stat. 916 (2012).

In October 2013, the Agencies jointly issued proposed rules to implement the escrow, force placement, and private flood insurance provisions of the Biggert-Waters Act.

In March 2014, the HFIAA was enacted, which, among other things, amended the Biggert-Waters Act requirements regarding the escrow of flood insurance premiums and fees and created a new exemption from the mandatory flood insurance purchase requirements for certain detached structures.

The Agencies finalized the regulations to implement provisions in the Biggert-Waters Act and HFIAA under the Agencies' jurisdiction, except for the provisions related to private flood insurance, with a final rule issued in July 2015.

In February 2019, the Agencies finalized regulations that implement the private flood insurance related provisions of the Biggert-Waters Act.

78 FR 65108 (Oct. 30, 2013).

Public Law 113-89, 128 Stat. 1020 (2014).

80 FR 43216 (July 21, 2015). Subsequently, on November 7, 2016, the Agencies re-proposed the private flood insurance provisions through a joint notice of proposed rulemaking (81 FR 78063).

84 FR 4953 (Feb. 20, 2019).

The Agencies are releasing for public comment proposed revisions and new Interagency Q&As in light of the significant changes to flood insurance requirements pursuant to the Biggert-Waters Act and HFIAA as well as regulations issued to implement these laws. Further, over the years, the lending industry has requested that the Agencies provide additional guidance on flood insurance compliance issues on many occasions, including at conferences and through interagency webinars. Finally, pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA), certain Agencies are directed to conduct a joint review of their regulations every 10 years and consider whether any of those regulations are outdated, unnecessary, or unduly burdensome.

As part of the joint

review, the Board, FDIC, OCC and NCUA received comments on the Agencies' flood insurance rules. Several commenters asked for more guidance to the industry on flood insurance requirements, particularly with respect to renewal notices for force-placed insurance policies, the required amount of flood insurance, and flood insurance requirements for tenant-owned buildings and detached structures. One commenter specifically requested that the Interagency Flood Questions and Answers be updated. In the FFIEC's EGRPRA Joint Report to Congress, the Board, FDIC, and OCC indicated that they:

Public Law 104-208, 110 Stat. 3001 (1996) (codified at 12 U.S.C. 3311). The most recent report to Congress required by EGRPRA was published by the Board, FDIC, OCC, and NCUA under the FFIEC in March 2017. The NCUA, although an FFIEC member, is not a “federal banking agency” within the meaning of EGRPRA and so is not required to participate in the review process. Nevertheless, NCUA elected to participate in the EGRPRA review and conducted its own parallel review of its regulations. The FCA is not subject to EGRPRA; however, it is directed by the Farm Credit System Reform Act of 1996 to conduct a regulatory review (

see

12 U.S.C. 2252 note) and conducts such review every four years. The CFPB, although an FFIEC member, is not a “federal banking agency” within

the meaning of EGRPRA and so is not required to participate in the review process.

“agree with these EGRPRA commenters that additional agency guidance on flood insurance requirements would be helpful to the banking industry and that the Interagency Flood Q&As should be updated to address recent amendments to the flood insurance statutes. In fact, the agencies have begun work on revising the Interagency Flood Q&As to reflect the agencies' recently issued final rules implementing the Biggert-Waters Act and HFIAA requirements and to address other issues that have arisen since the last update in 2011. As part of this revision, the agencies also plan to address many of the flood insurance issues raised by EGRPRA commenters.”

https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.

Accordingly, the Agencies, in proposing these Interagency Questions and Answers for public comment, are addressing the commitment made in the EGRPRA Joint Report to Congress.

This 2020 proposal to reorganize, revise, and introduce new Interagency Q&As includes the introduction of new Q&As on escrow of flood insurance premiums, force placement of flood insurance, and the detached structures exemption. The Agencies are also proposing to revise and reorganize the existing Q&As into new categories by subject to enhance clarity and understanding for users, and improve efficiencies by making it easier to find information related to technical flood insurance topics. Once finalized, the new Interagency Questions and Answers will supersede the 2009 and the 2011 Interagency Questions and Answers and supplement other guidance or interpretations issued by the Agencies relative to loans in areas having special flood hazards. Along with the finalized new Interagency Questions and Answers, the Agencies plan to issue separately for notice and comment another set of proposed Q&As relating to the private flood insurance rule. In the interim, the Agencies have provided information regarding the private flood insurance rule that may serve as a resource in a webinar dated June 18, 2019.

In addition to guidance and interpretations issued by the Agencies, lenders should be aware of information related to the NFIP provided by FEMA that may address questions pertaining to NFIP requirements.

https://consumercomplianceoutlook.org/outlook-live/2019/interagency-flood-insurance-regulation-update/.

Public Comments

The Agencies invite specific public comment on the proposed new and revised Interagency Questions and Answers. If lenders, community groups, or other parties have unanswered questions or comments about the Agencies' flood insurance regulations, they should submit them to the Agencies. The Agencies will consider including these Q&As in future guidance. Comments are also invited on whether the proposed Q&As are stated clearly and how they might be revised to be easier to read.

Reorganization of Interagency Questions and Answers

For ease of reference and in light of the increased number of subjects covered that address complex issues, the Agencies propose to reorganize the Interagency Questions and Answers to provide a more logical flow of questions through the flood insurance process for lenders, servicers, regulators, and policyholders. The table below sets forth the current categories and the corresponding new, reorganized categories for purposes of comparison:

Table of Contents

Category from current table

(from 2009 Q&A)

Reorganized category

I. Determining When Certain Loans Are Designated Loans for Which Flood Insurance Is Required Under the Act and Regulation

Determining the Applicability of Flood Insurance Requirements for Certain Loans [Applicability].

II. Determining the Appropriate Amount of Flood Insurance Required Under the Act and Regulation

Exemptions From the Mandatory Flood Insurance Purchase Requirements [Exemptions].

III. Exemptions From the Mandatory Flood Insurance Requirements

Coverage -NFIP/Private Flood Insurance [Coverage].

IV. Flood Insurance Requirements for Construction Loans

Required Use of Standard Flood Hazard Determination Form [SFHDF].

V. Flood Insurance Requirements for Nonresidential Buildings

Flood Insurance Determination Fees [Fees].

VI. Flood Insurance Requirements for Residential Condominiums

Flood Zone Discrepancies [Zone].

VII. Flood Insurance Requirements for Home Equity Loans, Lines of Credit, Subordinate Liens, and Other Security Interests in Collateral Located in an SHFA

Notice of Special Flood Hazards and Availability of Federal Disaster Relief [Notice].

VIII. Flood Insurance Requirements in the Event of the Sale or Transfer of a Designated Loan and/or Its Servicing Rights

Determining the Appropriate Amount of Flood Insurance Required [Amount].

IX. Escrow Requirements

Flood Insurance Requirements for Construction Loans [Construction].

X. Force Placement

Flood Insurance Requirements for Residential Condominiums and Co-Ops [Condo and Co-Op ].

XI. Private Flood Insurance

Flood Insurance Requirements for Home Equity Loans, Lines of Credit, Subordinate Liens, and Other Security Interests in Collateral Located in an SFHA [Other Security Interests].

XII. Required Use of Standard Flood Hazard Determination Form (SFHDF)

Requirement to Escrow Flood Insurance Premiums and Fees—General [Escrow].

XIII. Flood Determination Fees

Requirement to Escrow Flood Insurance Premiums and Fees—Small Lender Exception [Small Lender Exception].

XIV. Flood Zone Discrepancies

Requirement to Escrow Flood Insurance Premiums and Fees—Loan Exceptions [Loan Exceptions].

XV. Notice of Special Flood Hazards and Availability of Federal Disaster Relief

Force Placement of Flood Insurance [Force Placement].

XVI. Mandatory Civil Money Penalties

Flood Insurance Requirements in the Event of the Sale or Transfer of a Designated Loan and/or Its Servicing Rights [Servicing].

XVII.

Mandatory Civil Money Penalties [Penalty].

Moreover, the Agencies also propose a new system of designation for the Q&As. Rather than numbering the Q&As successively through all the categories, each Q&A will be designated by the category to which it belongs and then designated in numerical order for that particular category. For example, Q&As in the first category,

Determining the Applicability of Flood Insurance Requirements for Certain Loans,

would be re-designated as Applicability 1, Applicability 2, etc. This numbering system would enable the Agencies to add or delete Q&As in the future without needing to significantly renumber or reorganize all of the Q&As. The Agencies specifically solicit comment as to the proposed re-designations, whether they would promote ease of reference and whether some other designation system might be more preferable.

For ease of reference, the following terms are used throughout this document: “Act” refers to the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as revised by the National Flood Insurance Reform Act of 1994, Biggert-Waters Flood Insurance Reform Act of 2012 and Homeowner Flood Insurance Affordability Act (codified at 42 U.S.C. 4001

et seq

). “Regulation” refers to each agency's current final rule.

The Agencies' rules are codified at 12 CFR part 22 (OCC), 12 CFR part 208 (Board), 12 CFR part 339 (FDIC), 12 CFR part 614 (FCA), and 12 CFR part 760 (NCUA).

Section-by-Section Analysis

Section I. Determining the Applicability of Flood Insurance Requirements for Certain Loans

The heading to proposed section I has been streamlined to provide greater clarity with no intended change in substance or meaning. This new proposed general applicability section would include current Q&As 1-7 relating to residential buildings and, for organizational purposes, would incorporate current section V's Q&As 24 and 25, which address flood insurance requirements for nonresidential buildings. The Agencies propose to re-designate current Q&A 1 as proposed Q&A Applicability 1 with only minor language modifications, with no intended change in substance or meaning. Current Q&A 24 would be re-designated as proposed Q&A Applicability 2 and revised so that the proposed answer depends on whether buildings with limited utility meet the detached structure exemption for purposes of mandating flood insurance for such buildings. Current Q&A 25 would be re-designated as proposed Q&A Applicability 3 and current Q&As 2, 3, 5-7 would be re-designated as proposed Q&As Applicability 4, 5, 6-8, respectively. Current Q&A 4 would be re-designated as proposed Q&A Applicability 9.

The Agencies are proposing revisions to proposed Q&A Applicability 3 to include an example to provide greater clarity and to improve readability, with no intended change in substance or meaning. Proposed Q&A Applicability 4 would be revised from current Q&A 2 to also address a lender's responsibility if a building or mobile home that secures a loan is not located within an SFHA. The proposed answer would be expanded to state that a lender may, at its discretion and subject to applicable State law, require flood insurance for property outside of SFHAs for risk management purposes as a condition of a loan being made. Proposed Q&As Applicability 5, 7, 8, and 9 would have only minor language modifications for greater clarity, with no intended change in substance or meaning. Proposed Q&A Applicability 6 would remain unchanged from current Q&A 5.

Lastly, the Agencies propose to add three new Q&As, Applicability 10, 11, and 12. Proposed new Q&A Applicability 10 would address a lender's obligations when participating in a multi-tranche credit facility, specifically whether a lender is expected to consider any triggering event and any cashless roll of which it becomes aware in any tranche. The proposed answer would provide that a multi-tranche credit facility is analogous to a loan syndication or participation and that the Agencies do not expect a lender participating in one tranche in a multi-tranche credit facility to be responsible for taking action to comply with flood insurance requirements in connection with a triggering event or cashless roll that occurs in a tranche in which the lender does not participate. Furthermore, the proposed answer clarifies that the Agencies expect a lender participating in a multi-tranche credit facility to perform upfront due diligence to determine whether the lead lender has adequate controls to monitor the loan on an ongoing basis for compliance with flood insurance requirements. Proposed new Q&A Applicability 11 would clarify that an automatic extension of a credit facility agreed upon by the borrower and lender in the original loan agreement would not constitute a triggering event for purposes of the federal flood insurance requirements. Proposed new Q&A Applicability 12, which would be based on guidance previously issued by the Agencies,

would address the applicability of the mandatory purchase requirement during a period of time when coverage under the NFIP is unavailable, such as due to a lapse in authorization or in appropriations. The proposed answer would clarify that during a period when NFIP coverage is not available, lenders may continue to make loans subject to the Regulation without flood insurance coverage, but must continue to make flood determinations, provide timely, complete and accurate notices to borrowers, and comply with other aspects of the Regulation. Lenders also should evaluate the safety and soundness and legal risks, and prudently manage those risks, during such periods when the NFIP is unavailable.

See

Guidance Regarding Lapse and Extension of FEMA's Authority to Issue Flood Insurance Contracts, OCC Bulletin 2010-20 (OCC); Informal Guidance on the Lapse of FEMA's Authority to Issue Flood Insurance Contracts, CA Letter 10-3 (Board); Lapse of FEMA Authority to Issue Flood Insurance Policies, FIL-23-2010 (FDIC); Lapse and Extension of FEMA's Authority to Issue Flood Insurance Contracts, Informational Memorandum June 3, 2010 (FCA), and Guidance on the Lapse of FEMA's Authority to Issue Flood Insurance Contracts, Letter No. 10-CU-08 (NCUA).

Section II. Exemptions From the Mandatory Flood Insurance Purchase Requirements

Current section III would be moved to proposed section II and significantly expanded with the addition of six new

proposed Q&As pertaining to the exemption from the mandatory flood insurance purchase requirements for certain detached structures created by HFIAA. The heading to proposed section II has been revised to provide greater clarity with no intended change in substance or meaning. Current Q&A 18 would be included in this section, re-designated as proposed Q&A Exemptions 1, and would be revised to include the detached structure exemption in addition to the exemptions for State-owned property, and loans with a principal balance of less than $5,000 and an original repayment term of one year or less. The revised Q&A also would note that although an exemption may apply, a borrower may still elect to purchase flood insurance or a lender may still require flood insurance as a condition of making the loan for purposes of safety and soundness, depending on its risk analysis.

As stated above, the Agencies propose to add six new Q&As to address the application of the detached structure exemption and related lender obligations. The new proposed Q&As would be designated as Exemptions 2-7. This set of Q&As on the detached structure exemption responds to a request for more guidance related to this exemption in the EGRPRA report. Proposed new Q&A Exemptions 2 would be added to address whether a lender must take a security interest in the primary residential structure for a detached structure to be eligible for the detached structure exemption. The proposed answer would provide that although a lender does not have to take a security interest in the primary residential structure, it would need to evaluate the uses of the detached structures to confirm each is eligible for the exemption. Proposed new Q&A Exemptions 3 would clarify that a flood hazard determination is required for a detached structure even though flood insurance coverage is not required on such structure because it is used to identify the number and type of structures present on the property. Proposed new Q&A Exemptions 4 would provide that a lender or its servicer may cancel its flood insurance requirement on an eligible detached structure that is currently insured, but that a lender alternatively may want to continue to require flood insurance coverage for detached structures of relatively high value if such coverage would be beneficial to the borrower and the lender. Proposed new Q&A Exemptions 5 would address whether a property being re-mapped into an SFHA triggers a review of the intended use of each detached structure. Specifically, the proposed answer states that although there is no duty to monitor the status of a detached structure following the lender's initial determination, sound risk management practices may lead a lender to conduct scheduled periodic reviews that track the need for flood insurance on properties securing loans in its portfolio.

Proposed new Q&A Exemptions 6 would discuss whether a lender, following a review of its loan portfolio, may determine it would no longer require flood insurance on a detached structure in an SFHA if the structure does not provide contributory value. The Agencies propose to clarify that, while a lender or servicer could initiate such a review, the Regulation does not permit the exemption of structures from the mandatory flood insurance purchase requirement based solely on their contributory value, but instead on whether a specific exemption applies. Lastly, proposed new Q&A Exemptions 7 would address whether a building would qualify as a detached structure if it is joined to another building by a stairway or covered walkway. The proposed answer would provide that for purposes of the detached structure exemption, a structure is “detached” from the primary residential structure if it is not joined by any structural connection to that structure.

Section III. Coverage (NFIP/Private Flood Insurance)

For organizational purposes, current section XI would be moved to proposed section III, logically following the discussions of applicability and exemptions from flood insurance requirements. The heading to proposed section III would be expanded to cover the various types of flood insurance policies available to borrowers. Proposed section III would cover questions related to flood insurance policy coverage issues under the NFIP and private flood insurance. Current Q&A 63 would be deleted because it is inconsistent with the Agencies' final rule implementing the private flood insurance provision of the Biggert-Waters Act.

A new proposed Q&A Coverage 1 would be included to assist lenders in complying with the discretionary acceptance provision and mutual aid societies provision in the Agencies' final rule implementing the private flood insurance provision of the Biggert-Waters Act. Current Q&A 64, addressing the use of private flood insurance for portfolio-wide coverage, would be re-designated as proposed Coverage 2 and revised given that FEMA withdrew the

Mandatory Purchase of Flood Insurance Guidelines,

which is cross-referenced in current Q&A 64, with no intended change in substance or meaning. Additionally, a new proposed Q&A Coverage 3 would address when mandatory flood insurance is required to be in place.

84 FR 4953 (Feb. 20, 2019).

Specifically, proposed new Coverage 1 would list several factors a lender may consider in determining whether a flood insurance policy issued by a private insurer or mutual aid plan provides sufficient protection of the loan. These factors may include whether: (1) A policy's deductibles are reasonable based on the borrower's financial condition; (2) the insurer provides adequate notice of cancellation to the mortgagor and mortgagee to allow for timely force placement of flood insurance, if necessary; (3) the terms and conditions of the policy with respect to payment per occurrence or per loss and aggregate limits are adequate to protect the regulated lending institution's interest in the collateral; (4) the flood insurance policy complies with applicable State insurance laws; and (5) the private insurance company has the financial solvency, strength, and ability to satisfy claims. A lender may include its analysis of such factors in documenting its conclusion of sufficient protection of the loan when accepting flood insurance coverage issued by a private insurer or mutual aid society in satisfaction of the mandatory purchase requirement.

Proposed Q&A Coverage 2 would be slightly revised to address when a lender may rely on a private insurance policy providing portfolio-wide coverage. The proposed answer would be revised by removing the reference to criteria set forth by FEMA and including language addressing a lender's reliance on a policy that provides portfolio-wide coverage. Lastly, proposed new Q&A Coverage 3 would explain when mandatory flood insurance on a designated loan needs to be in place during the closing process. The proposed answer would clarify that a lender should use the loan “closing date” to determine the date by which flood insurance should be in place for a designated loan. FEMA deems the “closing date” as the date the ownership of the property transfers to the new owner based on State law. The proposed answer further explains the difference between “wet funding” and “dry funding” States and how it impacts the “closing date” for purposes of flood insurance.

IV. Required Use of Standard Flood Hazard Determination Form (SFHDF)

For organizational purposes, current section XII would be moved to proposed section IV. Accordingly, current Q&As 65-68 would be re-designated as proposed Q&As SFHDF 1-4, respectively, with only minor language modifications and no intended change in substance or meaning.

V. Flood Insurance Determination Fees

For organizational purposes, current section XIII would be moved to proposed section V. Current Q&As 69 and 70 would be re-designated as proposed Q&As Fees 1 and 2 with only minor changes and no intended change in substance or meaning.

VI. Flood Zone Discrepancies

For organizational purposes, current section XIV would be moved to proposed section VI. Current Q&As 71 and 72 would be re-designated as proposed Q&As Zone 1 and 2. The Agencies propose to revise current Q&A 71, re-designated as proposed Q&A Zone 1, to reflect a change in the Agencies' expectations regarding a lender's obligation when there is a discrepancy between the flood determination form and the flood insurance policy. A lender no longer would be required to attempt to resolve the discrepancy, but the lender should consider documenting the discrepancy in the loan file. If the flood determination form indicates that the building securing the loan is in an SFHA, the lender must require the appropriate amount of insurance coverage and would not otherwise be required to attempt to resolve the discrepancy as previously indicated in current Q&A 71. The Agencies note in the proposed answer that the issue of flood zone discrepancies is an insurance rating issue, not a coverage issue. Proposed Q&A Zone 2 would clarify that a lender is not in violation of the Regulation if there is a discrepancy between the flood zone on the flood determination form and the flood zone on the policy declarations page. Lastly, proposed new Q&A Zone 3 would explain what a lender should do when a borrower disputes the lender's flood zone determination that a building securing the loan is located in an SFHA requiring mandatory flood insurance coverage.

VII. Notice of Special Flood Hazards and Availability of Federal Disaster Relief

For organizational purposes, current section XV would be moved to proposed section VII. This section would include current Q&As 73-76 and 78-80 and would be re-designated as proposed Q&As Notice 1-7, respectively. Proposed Q&A Notice 1 would have minor language modifications for purposes of clarity with no change in meaning or substance. Proposed Q&A Notice 2 would be amended to conform more closely to the Regulation. As modified, the answer to proposed Q&A Notice 2 would state that a lender must provide the Notice of Special Flood Hazards to the borrower within a reasonable time before the completion of the transaction, even if the lender only learns where the mobile home will be located just prior to closing and delivery of the Notice of Special Flood Hazards would delay closing. Proposed Q&A Notice 3 would remain unchanged from current Q&A 75. For organizational purposes, current Q&As 76 and 77 would be consolidated, with no substantive changes, into proposed Q&A Notice 4 in this section. Current Q&A 78 would be re-designated as Notice 5 and revised to list examples of what constitutes an acceptable record of receipt. Current Q&As 79 and 80 would be re-designated as Q&As Notice 6 and 7, respectively, and would be revised nonsubstantively to provide additional clarity.

Section VIII. Determining the Appropriate Amount of Flood Insurance Required

The Agencies propose to move current section II to proposed section VIII. The heading to proposed section VIII would be amended for streamlining purposes. Current Q&As 8, 9, and 11-17 would be re-designated as Amount 1, Amount 2, and Amount 3-9 respectively. Proposed Q&A Amount 1 would discuss NFIP coverage limits more fully to include coverage for condominiums and contents coverage. The proposed answer would provide that for single-family and two-to-four family or individually-owned condominium units insured under the Dwelling Form policy, the maximum limit is $250,000. For a residential condominium building insured under the Residential Condominium Building Association Policy (RCBAP) form, the maximum amount of insurance available is $250,000 multiplied by the number of units. For all other buildings insured under the General Property Form, the maximum limit of building coverage available is $500,000. The maximum limit for contents insured under the Dwelling Form and RCBAP is $100,000 total (not per unit) and $500,000 for contents insured under the General Property Form. Proposed Q&A Amount 2, which defines “insurable value,” would be revised to remove references to the rescinded FEMA

Mandatory Purchase of Flood Insurance Guidelines

and to provide greater clarity with no intended change in substance or meaning.

Proposed Q&A Amount 3 would be revised to include more detailed definitions from the NFIP

Flood Insurance Manual

of the terms: Single family dwelling, 2-4 family residential building, and other residential building. Proposed Q&A Amount 4 would similarly be revised to provide a more detailed definition of nonresidential building as defined in the NFIP

Flood Insurance Manual.

Proposed Q&As Amount 5-9 would be revised to provide greater clarity with no intended change in substance or meaning.

IX. Flood Insurance Requirements for Construction Loans

Current section IV would be moved to proposed section IX and would include current Q&As 19-23, which would be re-designated as proposed Q&As Construction 1-5, respectively. The Agencies propose minor changes to proposed Q&As Construction 1 and Construction 2 for purposes of clarification. The Agencies would revise proposed Q&A Construction 3 to accurately cite to the NFIP

Flood Insurance Manual.

Proposed Q&A Construction 4 would address when a lender must require flood insurance in connection with a loan secured by a building in the course of construction and would be revised to incorporate the NFIP's change in policy regarding the 30-day waiting period. In particular, the Agencies propose that if a lender requires a borrower to have flood insurance in place at the time of loan origination, a borrower should obtain a provisional rating based on the construction designs and intended use of the building to enable the placement of coverage prior to receipt of the Elevation Certificate (EC), based on FEMA guidance. The proposed Q&A would state that in accordance with the NFIP requirement, it is expected that an EC will be secured and a full-risk rating completed within 60 days of the policy effective date. Under the proposed Q&A, failure to obtain the EC could result in reduced coverage limits at the time of loss. Alternatively, if the lender requires the borrower to have flood insurance in place before the lender disburses funds to pay for building construction, the lender should have adequate controls in place to ensure the borrower obtains flood insurance no later than 30 days prior to disbursement of funds to the borrower due to FEMA's removal of the 30-day waiting period waiver. Proposed

Q&A Construction 5, addressing the 30-day waiting period in connection with a construction loan, also would be revised to reflect this change. Proposed new Q&A Construction 6 would explain that if a lender allows a borrower to defer the purchase of flood insurance until either the foundation slab has been poured and/or an EC has been issued, or if the building to be constructed will have its lowest floor below Base Flood Elevation when the building is walled and roofed, the lender will need to begin escrowing flood insurance premiums and fees at the time of purchase of the flood insurance.

X. Flood Insurance Requirements for Residential Condominiums and Co-Ops

The heading to proposed section X would be expanded to include other multi-family dwellings such as cooperatives. This section would include current Q&As 26-33, which would be re-designated as proposed Q&As Condo and Co-Op 1-8, respectively. Proposed Q&As Condo and Co-Op 1, Condo and Co-Op 2, and Condo and Co-Op 7 would remain generally unchanged. Proposed Q&As Condo and Co-Op 3, 4, 5, 6, and 8 would have minor revisions to provide greater clarity or accurate references with no intended changes in substance or meaning. A new proposed Q&A Condo and Co-Op 9 would be added to proposed section X to address flood insurance requirements for loans secured by a unit in a cooperative building located in an SFHA. The proposed answer provides that a loan to a cooperative unit owner is not a designated loan subject to the Act or Regulation because the unit owner does not own a title to the building but simply the right to occupy a particular unit based on the cooperative ownership structure.

XI. Flood Insurance Requirements for Home Equity Loans, Lines of Credit, Subordinate Liens, and Other Security Interests in Collateral (Contents) Located in an SFHA

The heading to section XI would be amended for purposes of clarity. This section would include current Q&As 34, 35 and 36-43, which would be re-designated as Other Security Interests 1, Other Security Interests 2, and Other Security Interests 4-9 and 11-12, respectively. Proposed Q&As Other Security Interests 1, 2, 5, 6, 8, 11, and 12 would remain substantively unchanged. A new proposed Q&A Other Security Interests 3 would be added to address flood insurance coverage requirements for a line of credit secured by improved real property located in an SFHA. The proposed answer would provide alternative approaches depending on when the lender requires flood insurance to be in place. Proposed Q&A Other Security Interests 4 would be amended slightly with no intended changes in substance or meaning. Proposed Q&A Other Security Interests 7 would be revised to clarify the application of Federal flood insurance requirements when both a building and its contents secure a loan. Proposed Q&A Other Security Interests 9 would be revised to clarify the impact of including language regarding contents taken as security for a loan in the loan agreement. Proposed new Q&A Other Security Interests 10 would indicate that flood insurance is required if the lender takes a security interest in contents regardless of whether that security interest is perfected.

XII. Requirement to Escrow Flood Insurance Premiums and Fees—General

With the passage of HFIAA, the escrow requirements for flood insurance premiums have been significantly revised through the introduction of new escrow requirements that are not dependent on whether other insurance or taxes are escrowed, lender and loan-related exceptions to those requirements, and the requirement for an escrow notice. Accordingly, the Agencies propose to revise the discussion of escrow requirements by designating four sections to address escrow considerations. The first section, proposed section XII, would include Q&As covering the general escrow requirement for flood insurance premiums and fees. The second section, proposed section XIII, would include Q&As related to the small lender exception to flood insurance escrow requirements. Proposed section XIV, the third section, would include Q&As related to loan-related exceptions to the requirement to escrow flood insurance premiums and fees. These sets of Q&As on the escrow of flood insurance premiums and fees respond to a request for more guidance related to the escrow requirement in the EGRPRA report.

Proposed new section XII would contain two Q&As from current section IX and five new proposed Q&As. Specifically, current Q&As 51 and 52 would be included in proposed section XII and re-designated as Escrow 5 and Escrow 1, respectively. Proposed Q&A Escrow 1 would be significantly revised from current Q&A 52 to address the general question of when escrow accounts for flood insurance premiums and fees must be established. The proposed revised answer would explain that the new escrow requirement applies only upon a triggering event and would not apply if either the small lender exception or any of the loan-related exceptions apply. The proposed revised answer also would address a lender's escrow obligations if the lender no longer qualifies for the small lender exception. Proposed new Q&A Escrow 2 would clarify that a lender must escrow flood insurance premium payments even if it does not escrow for taxes or homeowner's insurance. Proposed new Q&A Escrow 3 would state that a lender must escrow force-placed flood insurance premium payments because there is no exception for force-placed insurance under the Act or Regulation. Proposed new Q&A Escrow 4 would discuss whether flood insurance premium payments must be escrowed when a loan has not experienced a triggering event (a making, increase, renewal, or extension) but the loan has experienced a non-triggering event, such as a loan modification, a FEMA remapping, or the assumption of the loan by a new borrower. The Agencies explain in the proposed answer that, subject to certain exceptions, until a loan experiences a triggering event, the lender is not required to escrow flood insurance premiums and fees unless: (i) A borrower requests the escrow in connection with the requirement that the lender provide an option to escrow for outstanding loans; or (ii) the lender determines that a loan exception to the escrow requirement no longer applies.

The Agencies propose revisions to current Q&A 51, which has been re-designated as proposed Q&A Escrow 5, to reflect updates to clarify that multi-family buildings or mixed-use properties are included in the definition of “residential improved real estate” and therefore are subject to the escrow requirement unless an exception applies. New proposed Q&A Escrow 6 would address the situation in which a junior lienholder determines that the primary lienholder does not have sufficient flood insurance coverage in place and is also not escrowing for flood insurance. The proposed answer would clarify that if the primary lienholder has not obtained adequate flood insurance, the junior lienholder would need to ensure adequate flood insurance is in place and also would need to escrow for that flood insurance. The proposed answer also would indicate that the escrow requirements would not apply to a junior lien that is a home equity line of credit (HELOC), since HELOCs have a separate escrow exception under the Act and Regulation. New proposed Q&A Escrow 7 addresses whether a lender or its servicer must escrow when real

property securing the loan is not located in an SFHA, but the borrower chooses to buy flood insurance, by clarifying that a lender or its servicer is not required to escrow premium payments but may choose to do so. Current Q&As 53 and 54 would be removed because they are no longer applicable.

XIII. Requirement to Escrow Flood Insurance Premiums and Fees—Small Lender Exception

As previously discussed, new section XIII would include seven new proposed Q&As related to the small lender exception to the requirement to escrow flood insurance premiums. New proposed Q&A Small Lender Exception 1 would specify that the $1 billion threshold for the small lender exception would be based on assets held at the regulated financial institution level and not at the holding company level. New proposed Q&A Small Lender Exception 2 would discuss whether a qualifying lender must escrow flood insurance premiums if it was previously required to escrow only under the Higher-Priced Mortgage Loan (HPML) rules

or under specific Federal housing programs prior to July 6, 2012. The proposed answer would clarify that the applicability of the first criterion of the small lender exception is dependent on whether the Federal or State law requirement to escrow was for the entire term of the loan. New proposed Q&A Small Lender Exception 3 would address whether a lender would be disqualified from the exemption if it escrowed funds on behalf of a third party. The Agencies' proposed answer would draw a distinction based on whether the lender established an individual escrow account for the loan. Specifically, the proposed answer would provide that if a lender collected escrow funds at closing and servicing of the loan was maintained by the lender, the lender would not qualify for the small lender exception because the lender would have had a policy of consistently and uniformly requiring the deposit of funds in an escrow account by establishing escrow accounts that the lender would service. However, if the lender collected the escrow funds at closing at the behest of a third party and then transferred those funds to the third party servicing that loan, the lender would qualify for the small lender exception under the proposed answer, provided the lender did not establish an individual escrow account and the lender transferred the escrow funds to the third party as soon as reasonably practicable. New proposed Q&A Small Lender Exception 4 would cover whether a lender would be eligible for the exception if it only escrows upon a borrower's request. As noted in the preamble to the 2015 Final Rule, the proposed answer would reiterate that a lender maintaining escrow accounts only on a borrower's request does not constitute a consistent or uniform policy of requiring escrow and therefore a lender could be eligible for the small lender exception if the other requirements are met.

Pursuant to the Dodd-Frank Act, an HPML loan is one where the Annual Percentage Rate exceeds certain specified thresholds with the result that certain consumer protections must be observed, such as the escrow of property taxes and insurance premiums.

See

section 129D of the Truth in Lending Act as amended by section 1461(a) of the Dodd-Frank Act, 15 U.S.C. 1639D.

See also

HPML escrow rules at 12 CFR 226.35(b)(3) (Board) and 12 CFR 1026.35(b) (Bureau of Consumer Financial Protection).

New proposed Q&A Small Lender Exception 5 would discuss whether the option to escrow is required for: (1) All outstanding loans not excepted from the escrow requirement and secured by residential real estate and (2) outstanding loans not secured by buildings located in an SHFA. The proposed answer would clarify that the option to escrow notice requirement only applies to lenders who have a change in status and no longer qualify for the small lender exception. Such lenders will be required to provide the option to escrow notice by September 30 of the first calendar year in which the lender has had a change in status for all outstanding designated loans secured by residential improved real estate or a mobile home as of July 1 of the first calendar year in which the lender no longer qualifies for the small lender exception. The proposed answer would also clarify that the option to escrow requirement does not apply to loans or lenders that are excepted by the Regulation from the escrow requirement nor does the notice requirement apply to loans not subject to the mandatory flood insurance purchase requirement. New proposed Q&A Small Lender Exception 6 would explain that a lender must send to a borrower a notice of the option to escrow flood insurance premium payments when the borrower has previously waived escrow for flood insurance because it is possible the borrower's circumstances have changed and, if offered another chance to escrow, the borrower may desire to do so. Lastly, new proposed Q&A Small Lender Exception 7 would make clear that lenders who qualify for the small lender exception are not required to provide borrowers with either the escrow notice or the option to escrow notice.

XIV. Requirement to Escrow Flood Insurance Premiums and Fees—Loan Exceptions

New section XIV would include five Q&As regarding the loan-related exceptions to the escrow requirement. Current Q&A 55 would be re-designated as proposed Q&A Loan Exceptions 1 and revised to address whether escrow accounts must be set up for commercial loans secured by residential buildings based on the new loan-related exceptions. Specifically, the proposed answer would clarify that extensions of credit primarily for business, commercial, or agricultural purposes are not subject to the escrow requirement even if such loans are secured by residential improved real estate or a mobile home. New proposed Q&A Loan Exceptions 2 would indicate that construction-permanent loans that have a construction phase before the loan converts into permanent financing do not qualify for the 12-month exception from escrow even if one phase of the loan is for 12 months or less. New proposed Q&A Loan Exceptions 3 would clarify that a subordinate lienholder must begin to escrow as soon as reasonably practicable after it becomes aware that it has moved into the primary lien position on a designated loan subject to the escrow requirement. Current Q&A 56 would be re-designated as proposed Q&A Loan Exceptions 4 and revised to address an escrow account for insured real property covered by an RCBAP. The proposed answer would note that while escrow is not required for property covered by an RCBAP, if the RCBAP coverage is inadequate and the borrower obtains a separate dwelling policy, escrow would be required for such a policy unless an escrow exception applies. Lastly, new proposed Q&A Loan Exceptions 5 would discuss whether there is an exception to the escrow requirement for loans secured by multi-family buildings. The Agencies would make clear in the proposed answer that escrow requirements do not apply to a loan that is an extension of credit primarily for business, commercial, or agricultural purposes, even if the loan is secured by residential real estate such as a multi-family building, nor would it apply to a loan secured by a particular unit in a multi-family residential building if a condominium association, cooperative, homeowners association, or other applicable group provides an adequate policy and pays for the insurance as a common expense. Otherwise, under the proposed answer, the escrow requirements generally would apply to

loans for units in multi-family residential buildings.

XV. Force Placement of Flood Insurance

For organizational purposes, the Agencies propose to move current section X to proposed section XV. This section would include current Q&As 57-62 and add ten new Q&As. This set of Q&As responds to a request for more guidance related to force placement of flood insurance from commenters through the EGRPRA process. Current Q&A 57, re-proposed in 2011 but not finalized, would be re-designated as proposed Q&A Force Placement 1 and would discuss the requirements that must be fulfilled before force placement can occur, as well as the notice requirements a lender must follow prior to force placing flood insurance. The Agencies explain in the proposed answer that if a lender, or a servicer acting on its behalf, determines at any time during the term of a designated loan, that the building or mobile home and any personal property securing the designated loan is not covered by flood insurance or is covered by flood insurance in an amount less than the amount required, then the lender or its servicer must notify the borrower that the borrower should obtain flood insurance, at the borrower's expense, in an amount at least equal to the amount required. The proposed answer further provides that before the lender or service must force place insurance, if the lender or servicer is aware that a borrower has obtained insurance that otherwise satisfies the flood insurance requirements but in an insufficient amount, the lender or servicer should inform the borrower an additional amount of insurance is needed in order to comply with the Regulation. Finally, the proposed answer would specify that if the borrower fails to obtain flood insurance within 45 days after notification, then the lender or its servicer must purchase insurance on the borrower's behalf at that time. The proposed answer explains that the lender must force place flood insurance for the full amount required under the Regulation, or if the borrower purchases flood insurance that otherwise satisfies the flood insurance requirements, but in an insufficient amount, the lender would be required to force place only for the “insufficient amount,” that is, the difference between the amount the borrower insured and the amount of flood insurance required under the Regulation.

Additionally, while not required under the Act or the Regulation, the Agencies indicate that a lender or its servicer could include in the notice to the borrower the amount of flood insurance needed to satisfy the statutory requirement. By providing this information, the lender or its servicer can help ensure that a borrower obtains the appropriate amount of insurance.

New proposed Q&A Force Placement 2 would clarify that the Regulation requires the lender, or its servicer, to send the borrower the force-placement notice upon making a determination that the building or mobile home and any personal property securing the designated loan is not covered by flood insurance or is covered by flood insurance in an amount less than the amount required under the Regulation.

Current Q&A 58 would be re-designated as proposed Q&A Force Placement 3 and would remain unchanged. Proposed Q&A 60, re-proposed in 2011 but not finalized, would be re-designated as proposed Q&A Force Placement 4 and would discuss whether a lender can satisfy its notice requirement by sending the force-placement notice to the borrower prior to the expiration of the flood insurance policy. The Agencies would specifically state in the proposed answer that a lender or servicer must send a notice upon determining that the collateral property securing the loan is either not covered by flood insurance or the insurance is inadequate. Although the proposed answer provides that a lender may send notice prior to the expiration date as a courtesy, the lender or servicer is still required to send notice upon determining the flood insurance policy has actually lapsed or is determined to be insufficient in order to meet the statutory requirement. Current Q&A 61 would be re-designated as proposed Q&A Force Placement 5 and would contain minor revisions for clarity with no change in meaning or substance. New proposed Force Placement 6 would clarify that, once a lender makes a determination that a designated loan has no or insufficient flood insurance coverage, the lender must notify the borrower and, if the borrower fails to obtain sufficient flood insurance coverage within 45 days after the original notice, the lender must purchase coverage on the borrower's behalf and may not extend the period for obtaining force-placed coverage by sending another force-placement notice during that time. New proposed Q&A Force Placement 7 would address when a force-placed policy should begin to provide coverage and give an example. Specifically, the proposed answer would state that a lender's new force-placed policy should begin to provide coverage the day after the borrower's existing policy expires. The proposed answer would also state that a lender or its servicer may not require the borrower to pay for double coverage and that the Regulation requires a lender or servicer to refund the borrower for any periods of overlap between the borrower's policy and the force-placed policy.

Current Q&A 59 would be re-designated as proposed Q&A Force Placement 8 and would be significantly revised to discuss more fully the minimum amount of flood insurance coverage that is statutorily required and to illustrate this point through a hypothetical example. Specifically, the proposed answer would illustrate that if the outstanding principal balance is the basis for the minimum amount of required flood insurance, the lender must ensure that the force-placed policy amount covers the existing loan balance plus any additional force-placed premium and fees that will be added to the loan balance.

Current Q&A 62 would be re-designated as proposed Q&A Force Placement 9 and would clarify that a lender or servicer may charge a borrower for the cost of force-placed insurance beginning on the date of lapse or insufficient coverage, and would not have to wait 45 days after providing notification to force place insurance. Lenders that monitor loans secured by property located in an SFHA for continuous coverage of flood insurance help ensure that they complete the force placement of flood insurance in a timely manner and minimize any gaps in coverage and any charge to the borrower for coverage for a timeframe prior to the lender's or its servicer's date of discovery and force placement. The proposed answer would explain that if a lender or its servicer, despite its monitoring efforts, discovers a loan with no or insufficient coverage, it may charge for the cost of premiums and fees incurred by the lender or servicer in purchasing the flood insurance on the borrower's behalf, including premiums and fees incurred for coverage beginning on the date of lapse, if the lender has purchased a policy on the borrower's behalf and that policy was effective as of the date of the insufficient coverage.

The Agencies propose to add new Q&A Force Placement 10 to discuss whether the addition of the amount of force-placed insurance policy premiums and fees to the outstanding balance of a loan would constitute an “increase” that would trigger the applicability of flood insurance regulatory requirements. In the answer to proposed Q&A Force Placement 10, the Agencies discuss three options that the Agencies understand lenders currently use to

charge a borrower for force-placed flood insurance and the impact of each option on the amount of coverage. Under the proposed Q&A, the subsequent treatment of the flood insurance premiums and fees would depend on which method the lender chooses. Specifically, the proposed answer provides that if the lender chooses to add the premium and fees to the mortgage balance and the lender's loan contract includes a provision permitting the lender or servicer to advance funds to pay for flood insurance premiums and fees as additional debt, such an advancement would be considered part of the loan and not an “increase” in the loan amount, and therefore would not be considered a triggering event. The proposed Q&A continues to explain that if, however, there is no explicit provision permitting such advancement in the loan contract, the addition of the force-placed premiums and fees would be considered an “increase” in the loan amount and would be a triggering event because no advancement of funds was contemplated as part of the loan. If the premiums and fees are added to an unsecured account or billed directly to the borrower, the proposed Q&A states that these approaches would not result in an increase in the loan balance and therefore would not be considered triggering events.

New proposed Q&A Force Placement 11 would address the sufficiency of evidence of flood insurance in connection with refunding premiums paid by a borrower for force-placed insurance during any period of overlap with borrower-purchased insurance. The proposed answer would provide that as stated in the Regulation, a lender is required to refund premiums paid by a borrower for force-placed insurance during any period of overlap with borrower-purchased insurance. The proposed answer would state that in that scenario, a lender must accept a policy declarations page that includes the existing flood insurance policy number and the identity of and contact information for, the insurance company or its agent and that the Regulation does not require that the declarations page include any additional information. In addition, the proposed answer would note that in situations not involving a lender's refund of premiums for force-placed insurance, the Regulation does not specify what documentation would be sufficient. The proposed answer also provides that generally, it is appropriate, although not required by the Regulation, for lenders to accept a copy of the flood insurance application and premium payment as evidence of proof of purchase for new policies.

New proposed Q&A Force Placement 12 would reinforce the requirement that a lender is to refund any premiums and fees paid for by the borrower for force-placed insurance for any overlap period within 30 days of receipt of a confirmation of a borrower's existing flood insurance coverage without exception. Such refund is required even in situations in which a lender cannot obtain a refund from the insurance company because the borrower did not provide proof of coverage in a timely manner, or when the insurance company fails to provide the refund within 30 days.

New proposed Q&A Force Placement 13 would explain that a lender can rely on a force-placed insurance policy to satisfy the mandatory purchase requirement for a refinance or loan modification if the borrower does not purchase his or her own policy. Assuming the force-placed policy is in effect and otherwise satisfies the regulatory coverage standards, then that policy may satisfy the mandatory purchase requirement. The Agencies suggest in the proposed answer that lenders could encourage the borrower to purchase his or her own policy, likely at a reduced cost, prior to the loan closing.

In response to an issue raised in the EGRPRA report, new proposed Q&A Force Placement 14 would explain the process for renewal of force-placed coverage by requiring the lender to follow its normal communications practice with its insurance provider to renew the flood insurance policy on the borrower's behalf to ensure that flood insurance coverage remains in place. Under the proposed answer, the lender is not required to send a notice prior to force-placing insurance at the expiration of a force-placed policy. However, the proposed answer provides that the lender or its servicer, at its discretion, may notify the borrower about its plan to renew the force-placed policy.

New proposed Q&A Force Placement 15 would indicate that, although there is no explicit duty to monitor flood insurance coverage over the life of the loan in the Act or Regulation, for purposes of safety and soundness, many lenders obtain “life-of-loan” monitoring. The Agencies believe such a practice could help ensure that lenders complete the force placement of flood insurance in a timely manner upon lapse of a policy, that there is continuous coverage, and that lenders are promptly made aware of flood map changes.

New proposed Q&A Force Placement 16 would address what the Act and Regulation require a lender or its servicer to do if a lender or servicer receives a notice of remapping that states that a property will be remapped into an SFHA as of a future effective date. The proposed answer would clarify that if a lender or its servicer determines at any time during the term of a designated loan that the building or mobile home and any personal property securing the loan is uninsured or underinsured, the lender or servicer must begin the force-placement process. For a loan secured by a property subject to a remapping that was not previously located in an SFHA, such a loan does not become a designated loan until the effective date of the map change. Therefore, when a lender or its servicer receives advance notice of a map change, the effective date of the map change is the date the lender or servicer must determine whether the property is covered by sufficient flood insurance. If the borrower does not purchase a flood insurance policy that begins on the effective date of the map change, the lender or its servicer must send the force-placement notice to the borrower.

XVI. Flood Insurance Requirements in the Event of the Sale or Transfer of a Designated Loan and/or Its Servicing Rights

The Agencies propose to move current section VIII to proposed section XVI as part of the overall reorganization of the Interagency Questions and Answers. Current Q&As 44 through 50 would be re-designated as proposed Q&As Servicing 1-7, respectively, with minor nonsubstantive modifications to account for the change in the title of the head of FEMA from “Director” to “Administrator” and for purposes of clarity.

XVII. Mandatory Civil Money Penalties

For organizational purposes, the Agencies propose to move current section XVI to proposed section XVII. Current Q&As 81 and 82 would be included in this section and re-designated as proposed Q&As Penalty 1 and 2, respectively. The changes proposed to the Q&As are for purposes of clarity and accuracy with no intended change in meaning or substance.

The Agencies solicit comments on all aspects of the revised and new proposed Q&As.

The following re-designation table is provided as an aid to assist the public in reviewing the proposed revisions to the 2009 and 2011 Interagency Questions and Answers.

2009 & 2011 Interagency Q&A

Proposed Interagency Q&A

Section I. Determining When Certain Loans Are Designated Loans for Which Flood Insurance Is Required Under the Act and Regulation

Section I. Determining the Applicability of Flood Insurance Requirements for Certain Loans.

Section 1, Question 1

Section I, Applicability 1.

Section 1, Question 2

Section I, Applicability 4.

Section 1, Question 3

Section I, Applicability 5.

Section 1, Question 4

Section I, Applicability 9.

Section 1, Question 5

Section I, Applicability 6.

Section 1, Question 6

Section I, Applicability 7.

Section 1, Question 7

Section I, Applicability 8.

Section II. Determining the Appropriate Amount of Flood Insurance Required Under the Act and Regulation

Section VIII. Determining the Appropriate Amount of Flood Insurance Required.

Section II, Question 8

Section VIII, Amount 1.

Section II, Question 9

Section VIII, Amount 2.

Section II, Question 10

Deleted.

Section II, Question 11

Section VIII, Amount 3.

Section II, Question 12

Section VIII, Amount 4.

Section II, Question 13

Section VIII, Amount 5.

Section II, Question 14

Section VIII, Amount 6.

Section II, Question 15

Section VIII, Amount 7.

Section II, Question 16

Section VIII, Amount 8.

Section II, Question 17

Section VIII, Amount 9.

Section III. Exemptions from the Mandatory Flood Insurance Requirements

Section II. Exemptions from the Mandatory Flood Insurance Purchase Requirements.

Section III, Question 18

Section II, Exemptions 1.

Section IV. Flood Insurance Requirements for Construction Loans

Section IX. Flood Insurance Requirements for Construction Loans.

Section IV, Question 19

Section IX. Construction 1.

Section IV, Question 20

Section IX. Construction 2.

Section IV, Question 21

Section IX. Construction 3.

Section IV, Question 22

Section IX. Construction 4.

Section IV, Question 23

Section IX. Construction 5.

Section V. Flood Insurance Requirements for Nonresidential Buildings.

Section V, Question 24

Section I, Applicability 2.

Section V, Question 25

Section I, Applicability 3.

Section VI. Flood Insurance Requirements for Residential Condominiums

Section X. Flood Insurance Requirements for Residential Condominiums and Co-Ops.

Section VI, Question 26

Section X, Condo and Co-Op 1.

Section VI, Question 27

Section X, Condo and Co-Op 2.

Section VI, Question 28

Section X, Condo and Co-Op 3.

Section VI, Question 29

Section X, Condo and Co-Op 4.

Section VI, Question 30

Section X, Condo and Co-Op 5.

Section VI, Question 31

Section X, Condo and Co-Op 6.

Section VI, Question 32

Section X, Condo and Co-Op 7.

Section VI, Question 33

Section X, Condo and Co-Op 8.

Section VII. Flood Insurance Requirements for Home Equity Loans, Lines of Credit, Subordinate Liens, and Other Security Interests in Collateral Located in an SHFA

Section XI. Flood Insurance Requirements for Home Equity Loans, Lines of Credit, Subordinate Liens, and Other Security Interests in Collateral Located in an SFHA.

Section VII, Question 34

Section XI, Other Security Interests 1.

Section VII, Question 35

Section XI, Other Security Interests 2.

Section VII, Question 36

Section XI, Other Security Interests 4.

Section VII, Question 37

Section XI, Other Security Interests 5.

Section VII, Question 38

Section XI, Other Security Interests 6.

Section VII, Question 39

Section XI, Other Security Interests 7.

Section VII, Question 40

Section XI, Other Security Interests 8.

Section VII, Question 41

Section XI, Other Security Interests 9.

Section VII, Question 42

Section XI, Other Security Interests 11.

Section VII, Question 43

Section XI, Other Security Interests 12.

Section VIII. Flood Insurance Requirements in the Event of the Sale or Transfer of a Designated Loan and/or Its Servicing Rights

Section XVI. Flood Insurance Requirements in the Event of the Sale or Transfer of a Designated Loan and/or Its Servicing Rights.

Section VII, Question 44

Section XVI, Servicing 1.

Section VII, Question 45

Section XVI, Servicing 2.

Section VII, Question 46

Section XVI, Servicing 3.

Section VII, Question 47

Section XVI, Servicing 4.

Section VII, Question 48

Section XVI, Servicing 5.

Section VII, Question 49

Section XVI, Servicing 6.

Section VII, Question 50

Section XVI, Servicing 7.

Section IX. Escrow Requirements

Section XII-VX. Requirement to Escrow Flood Insurance Premiums and Fees.

Section IX, Question 51

Section XII, Escrow 5.

Section IX, Question 52

Section XII, Escrow 1.

Section IX, Question 53

Deleted.

Section IX, Question 54

Deleted.

Section IX, Question 55

Section XIV, Loan Exception 1.

Section IX, Question 56

Section XIV, Loan Exception 4.

Section X. Force Placement

Section XV. Force Placement of Flood Insurance.

Section X, Question 57

Section XV, Force Placement 1.

Section X, Question 58

Section XV, Force Placement 3.

Section X, Question 59

Section XV, Force Placement 8.

Section X, Question 60

Section XV, Force Placement 4.

Section X, Question 61

Section XV, Force Placement 5.

Section X, Question 62

Section XV, Force Placement 9.

Section XI. Private Flood Insurance

Section III, Coverage—NFIP/Private Flood Insurance.

Section XI, Question 63

Section III, Coverage 1.

Section XI, Question 64

Section III, Coverage 2.

Section XII. Required Use of Standard Flood Hazard Determination Form (SFHDF)

Section IV. Required Use of Standard Flood Hazard Determination Form (SFHDF).

Section XII, Question 65

Section IV, SFHDF 1.

Section XII, Question 66

Section IV, SFHDF 2.

Section XII, Question 67

Section IV, SFHDF 3.

Section XII, Question 68

Section IV, SFHDF 4.

Section XIII. Flood Determination Fees

Section V. Flood Insurance Determination Fees.

Section XIII, Question 69

Section V, Fees 1.

Section XIII, Question 70

Section V, Fees 2.

Section XIV. Flood Zone Discrepancies

Section VI. Flood Zone Discrepancies.

Section XIV, Question 71

Section VI, Zone 1.

Section XIV, Question 72

Section VI, Zone 2.

Section XV. Notice of Special Flood Hazards and Availability of Federal Disaster Relief

Section VII. Notice of Special Flood Hazards and Availability of Federal Disaster Relief.

Section XV, Question 73

Section VII, Notice 1.

Section XV, Question 74

Section VII, Notice 2.

Section XV, Question 75

Section VII, Notice 3.

Section XV, Question 76

Section VII, Notice 4.

Section XV, Question 77

Section VII, Notice 4.

Section XV, Question 78

Section VII, Notice 5.

Section XV, Question 79

Section VII, Notice 6.

Section XV, Question 80

Section VII, Notice 7.

Section XVI. Mandatory Civil Money Penalties

Section XVII. Mandatory Civil Money Penalties.

Section XVI, Question 81

Section XVI, Question 82.

Section XVII, Penalty 1

Section XVII, Penalty 2.

Interagency Questions and Answers Regarding Flood Insurance

The Interagency Questions and Answers are organized by topic. Each topic addresses a major area of flood insurance law and regulations. For ease of reference, the following terms are used throughout this document: “Act” refers to the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as revised. “Regulation” refers to each agency's current final rule.

“Lenders” refers only to regulated lending institutions as defined in the Act.

“Designated loan” means a loan secured by a building or mobile home that is located or to be located in a special flood hazard area in which flood insurance is available under the Act. The OCC, Board, FDIC, FCA, and NCUA, (collectively, “the Agencies”) are providing answers to questions pertaining to the following topics:

The Agencies' rules are codified at 12 CFR part 22 (OCC), 12 CFR 208.25 (Board), 12 CFR part 339 (FDIC), 12 CFR part 614, subpart S (FCA), and 12 CFR part 760 (NCUA).

42 U.S. Code 4003 (a)(10).

I. Determining the Applicability of Flood Insurance Requirements for Certain Loans

II. Exemptions from the Mandatory Flood Insurance Purchase Requirements

III. Coverage—NFIP/Private Flood Insurance

IV. Required Use of Standard Flood Hazard Determination Form (SFHDF)

V. Flood Insurance Determination Fees

VI. Flood Zone Discrepancies

VII. Notice of Special Flood Hazards and Availability of Federal Disaster Relief

VIII. Determining the Appropriate Amount of Flood Insurance Required

IX. Flood Insurance Requirements for Construction Loans

X. Flood Insurance Requirements for Residential Condominiums and Co-Ops

XI. Flood Insurance Requirements for Home Equity Loans, Lines of Credit, Subordinate Liens, and Other Security Interests in Collateral Located in an SFHA

XII. Requirement to Escrow Flood Insurance Premiums and Fees—General

XIII. Requirement to Escrow Flood Insurance Premiums and Fees—Small Lender Exception

XIV. Requirement to Escrow Flood Insurance Premiums and Fees—Loan Exceptions

XV. Force Placement of Flood Insurance

XVI. Flood Insurance Requirements in the Event of the Sale or Transfer of a Designated Loan and/or Its Servicing Rights

XVII. Mandatory Civil Money Penalties

I. Determining the Applicability of Flood Insureance Requirements for Certain Loans

APPLICABILITY 1. Does the Regulation apply to a loan where the building or mobile home securing such loan is located in a community that does not participate in the National Flood Insurance Program (NFIP)?

Yes, the Regulation does apply; however, a lender need not require borrowers to obtain flood insurance for a building or mobile home located in a community that does not participate in the NFIP, even if the building or mobile home securing the loan is located in a Special Flood Hazard Area (SFHA). Nonetheless, a lender, using the standard Special Flood Hazard Determination Form (SFHDF), must still determine whether the building or mobile home is located in an SFHA.

If the building or mobile home is determined to be located in an SFHA, a lender is required to mail or deliver a written notice to the borrower.

In this

case, a lender, generally, may make a conventional loan without requiring flood insurance. However, because Federal agencies such as the Small Business Administration, Veterans Administration, or Federal Housing Administration are prohibited from guaranteeing or insuring a loan secured by a building or mobile home located in an SFHA in a community that does not participate in the NFIP, a lender would not be able to make a federally guaranteed or insured loan.

See

42 U.S.C. 4106(a). Also, a lender is responsible for exercising sound risk management practices to avoid making a loan secured by a building or mobile home located in an SFHA where no flood insurance is available, if doing so would pose an unacceptable risk to the lender.

12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR 339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a) (NCUA).

12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR 339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a) (NCUA).

APPLICABILITY 2. Some borrowers have buildings with limited utility or value and, in many cases, the borrower would not replace them if lost in a flood. Must a lender require flood insurance for such buildings?

Lenders must require flood insurance on a building or mobile home when those structures are part of the property securing the loan and are located in an SFHA in a participating community.

However, flood insurance is not required on a structure that is part of a residential property but is detached from the primary residential structure of such property and does not serve as a residence.

If the limited utility or value structure does not qualify for the detached structure exemption, a lender may consider “carving out” the building from the security it takes on the loan to avoid having to require flood insurance on the structure. However, the lender should fully analyze the risks of this option. In particular, a lender should consider whether and how it would be able to market and sell the property securing its loan in the event of foreclosure.

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR 339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c) (NCUA).

APPLICABILITY 3. What are a lender's requirements under the Regulation for a loan secured by multiple buildings when some of the buildings are located in an SFHA in which flood insurance is available and other buildings are not? What if the buildings are located in different communities and some of the communities participate in the NFIP and others do not?

A lender must determine whether any improved real property securing the loan is in an SFHA.

In cases in which the loan is secured by multiple buildings and some of the buildings are located in an SFHA in which flood insurance is available under the Act, but other buildings are not located in an SFHA (or are located in an SFHA, but not in a participating community), a lender is required to obtain flood insurance only on the buildings securing the loan that are located in an SFHA in which flood insurance is available under the Act.

For example, assume a loan is secured by five buildings as follows:

12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR 339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a) (NCUA).

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

• Buildings 1 and 2 are located in an SFHA and the community participates in the NFIP;

• Building 3 is not located in an SFHA; and

• Buildings 4 and 5 are located in an SFHA, but the communities do not participate in the NFIP.

In this scenario, the lender is required to obtain insurance only on buildings 1 and 2. As a matter of safety and soundness, however, a lender may decide to require the purchase of flood insurance (from a private insurer) on buildings 4 and 5 because these buildings are located in an SFHA. Further, depending on the risk factors of building 3, the lender may elect to require flood insurance as a matter of safety and soundness, even if the building is not located in an SFHA.

APPLICABILITY 4. What is a lender's responsibility if a particular building or mobile home that secures a loan is not located within an SFHA, or is no longer located within an SFHA due to a map change?

Although a lender is not obligated to require mandatory flood insurance on a building or mobile home securing a loan that is not located within an SFHA or is no longer located within an SFHA, a lender may, at its discretion and taking into consideration State law, as appropriate, require flood insurance for property outside of SFHAs for safety and soundness purposes as a condition of a loan being made. Each lender should tailor its own flood insurance policies and procedures to suit its business needs and protect its ongoing interest in the collateral. For loans in which the property is no longer located in an SFHA, the borrower can elect to convert the existing NFIP standard-rated policy to a lower cost NFIP Preferred Risk Policy, if available.

APPLICABILITY 5. Does a lender's purchase from another lender of a loan secured by a building or mobile home located in an SFHA in which flood insurance is available under the Act trigger any requirements under the Regulation?

No. A lender's purchase of a loan, secured by a building or mobile home located in an SFHA in which flood insurance is available under the Act, alone, is not an event that triggers the Regulation's requirements, such as making a new flood determination or requiring a borrower to purchase flood insurance. Requirements under the Regulation are triggered when a lender makes, increases, extends, or renews a designated loan.

A lender's purchase of a loan does not fall within any of those categories.

12 CFR 22.2(e), 22.3(a) (OCC); 12 CFR 208.25(b)(5) and (c)(1) (Board); 12 CFR 339.2, 339.3(a) (FDIC); 12 CFR 614.4925, 614.4930 (FCA); and 12 CFR 760.2, 760.3(a) (NCUA).

However, if a lender becomes aware at any point during the life of a designated loan that flood insurance is required, the requirements of the Regulation apply, including force placing insurance, if necessary.

Depending on the circumstances, the lender may need to conduct due diligence for safety and soundness reasons, which could include determining whether flood insurance on purchased loans is required. Additionally, if the purchasing lender subsequently refinances, extends, increases, or renews a designated loan, it must comply with the Regulation.

12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) (NCUA).

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930 (FCA); and 12 CFR 760.3(a) (NCUA).

APPLICABILITY 6. Does the Regulation apply to loans that are being restructured or modified?

It depends. If the loan otherwise meets the definition of a designated loan and if the lender increases the amount of the loan, or extends or renews the terms of the original loan, then the Regulation applies.

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930 (FCA); and 12 CFR 760.3(a) (NCUA).

APPLICABILITY 7. Are table funded loans treated as new loan originations?

Yes. Table funding, as defined in the Regulation, means a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person

advancing the funds.

A loan made through a table funding process is treated as though the party advancing the funds has originated the loan.

The funding party is required to comply with the Regulation. The table funding lender can meet the administrative requirements of the Regulation by requiring the party processing and underwriting the application to perform those functions on its behalf.

12 CFR 22.2(m) (OCC); 12 CFR 208.25(b)(11) (Board); 12 CFR 339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).

12 CFR 22.3(b) (OCC); 12 CFR 208.25(c)(2) (Board); 12 CFR 339.3(b) (FDIC); 12 CFR 614.4930(b) (FCA); and 12 CFR 760.3(b) (NCUA).

APPLICABILITY 8. Is a lender required by the Act or the Regulation to perform a review of its, or of its servicer's, existing loan portfolio for compliance with the flood insurance requirements under the Act and Regulation?

No. Apart from the requirements mandated when a loan is made, increased, extended, or renewed, a lender need only review and take action on any part of its existing portfolio for safety and soundness purposes, or if it knows or has reason to know of the need for NFIP coverage.

Regardless of the lack of such requirement in the Act and Regulation, however, sound risk management practices may lead a lender to conduct scheduled periodic reviews that track the need for flood insurance on a loan portfolio.

12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) (NCUA).

APPLICABILITY 9. Do the mandatory purchase requirements under the Act and Regulation apply when a lender participates in a loan syndication or participation?

The acquisition by a lender of an interest in a loan either by participation or syndication after that loan has been made does not trigger the requirements of the Act or the Regulation, such as making a new flood determination or requiring a borrower to purchase flood insurance.

Nonetheless, as with purchased loans, depending upon the circumstances, the lender may undertake due diligence for safety and soundness purposes to protect itself against the risk of flood or other types of loss.

Lenders who pool or contribute funds that will be simultaneously advanced to a borrower or borrowers as a loan secured by improved real estate would be making a loan that triggers the requirements of the Act and Regulation.

Federal flood insurance requirements also would apply when a group of lenders refinances, extends, renews or increases a loan.

Although the agreement among the lenders may assign compliance duties to a lead lender or agent, and include clauses in which the lead lender or agent indemnifies participating lenders against flood losses, each participating lender remains individually responsible for compliance with the Act and Regulation. Therefore, the Agencies will examine whether the regulated institution/participating lender has performed upfront due diligence to determine whether the lead lender or agent has undertaken the necessary activities to ensure that the borrower obtains appropriate flood insurance and that the lead lender or agent has adequate controls to monitor the loan(s) on an ongoing basis for compliance with the flood insurance requirements. Further, the Agencies expect the participating lender to have adequate controls to monitor the activities of the lead lender or agent for compliance with flood insurance requirements over the term of the loan.

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

Applicability 10. Is a lender expected to consider any triggering event or any cashless roll of which it becomes aware in any tranche of a multi-tranche credit facility, regardless of whether the lender participates in the affected tranche?

No. Consistent with Q&A Applicability 9, the Agencies expect that a lender participating in a multi-tranche credit facility will perform upfront due diligence to determine whether the lead lender has adequate controls to monitor the loan on an ongoing basis for compliance with the flood insurance requirements. Even though each lender participating in a tranche in a multi-tranche credit facility remains individually responsible for compliance with the flood insurance requirements relating to structures securing the tranche in which it participates, this obligation can be achieved through the upfront due diligence process when determining the lead lender/administrative agent's ongoing monitoring for compliance with flood insurance requirements.

A multi-tranche credit facility is analogous in many respects to a loan syndication or participation. Q&A Applicability 9 addresses applicability of the mandatory purchase requirements when a lender participates in a loan syndication or participation. Similar to a loan syndication or participation, a multi-tranche credit facility involves one credit agreement that describes and governs all the tranches. In addition, similar to a loan syndication or participation, a multi-tranche credit facility typically has one lead lender that acts as the administrative agent for the credit facility and its tranches. Thus, the Agencies do not expect a lender participating in one tranche in a multi-tranche credit facility to be responsible for taking direct steps to comply with flood insurance requirements in connection with a triggering event (

i.e.,

making, increasing, extending or renewing) or cashless roll that occurs in a tranche in which the lender does not participate.

A multi-tranche commercial credit facility is a loan arrangement containing more than one type of loan or tranche. Each loan within the overall credit facility is made to the same borrower or group of related borrowers, but the loans may have different lenders and different terms and conditions. For example, a credit facility might have one tranche that is a revolving line of credit with a one-year maturity date and one or more additional tranches that are fixed rate loans with different interest rates and different maturity dates. Various lenders may participate in each tranche. Generally, the tranches share the same collateral and there is one credit agreement that describes and governs all the tranches.

Under most multi-tranche credit facility agreements, a triggering event can occur within a particular tranche without any requirement to notify and obtain the consent of the lenders not participating in that tranche. Lenders may also participate in a “cashless roll,” which is an exchange of an existing loan for a new or amended loan without any transfer of cash. A cashless roll may be used to replace or supplement existing tranches, but not to increase the total amount of committed debt; therefore, this is not considered a triggering event.

Applicability 11. Does an automatic extension of a credit facility, that was agreed upon by the borrower and the lender at loan origination and memorialized in the loan agreement, constitute a triggering event (i.e., making, increasing, extending or renewing) that would trigger the federal flood insurance requirements?

No. An automatic extension of a credit facility that was agreed upon by the lender and the borrower at loan origination and memorialized in the loan agreement does not constitute a

triggering event (

i.e.,

making, increasing, extending or renewing) that would trigger the federal flood insurance requirements, because the automatic extension was agreed to in the original loan contract.

Applicability 12. What is the applicability of the mandatory purchase requirement during a period of time when coverage under the NFIP is not available?

During a period when coverage under the NFIP is not available, such as due to a lapse in authorization or in appropriations, lenders may continue to make loans subject to the Regulation without requiring flood insurance coverage. However, lenders must continue to make flood determinations,

provide timely, complete, and accurate notices to borrowers,

and comply with other applicable parts of the Regulation.

12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR 339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a) (NCUA).

12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR 339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a) (NCUA).

In addition, lenders should evaluate safety and soundness and legal risks and prudently manage those risks during a period when coverage under the NFIP is not available. Lenders should take appropriate measures or consider possible options in consultation with the borrower to mitigate loss exposures in the event of a flood during such periods. For example,

• Lenders may determine the risk of loss is sufficient to justify a postponement in closing the loan until the NFIP coverage is available again.

• Lenders may require the borrower to obtain private flood insurance if available, as a condition of closing the loan. However, after considering the cost of the private flood policy, a lender or the borrower may decide to postpone closing rather than incur a long-term obligation to address a possible short-term lapse.

• Lenders may make the loan without requiring the borrower to apply for flood insurance and pay the premium while NFIP coverage is unavailable. However, this option poses a number of risks that should be carefully evaluated. Moreover, once NFIP coverage becomes available again, the Agencies expect that flood insurance will be obtained for these loans, including, if necessary, by force placement.

Before making such loans, lenders should make borrowers aware of the flood insurance requirements and that force-placed insurance is typically more costly than borrower-obtained insurance. Lenders also should have a process to identify these loans to ensure that insurance is promptly purchased when NFIP coverage becomes available subsequent to their closing.

12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) (NCUA).

II. Exemptions From the Mandatory Flood Insurance Purchase Requirements

Exemptions 1. What are the exemptions from the mandatory purchase requirement?

There are only three exemptions from the mandatory requirement to purchase flood insurance on a designated loan. The first applies to State-owned property covered under a policy of self-insurance satisfactory to the Administrator of FEMA.

The second applies if both the original principal balance of the loan is $5,000 or less, and the original repayment term is one year or less.

The third applies to any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence. For purposes of the detached structure exemption, a “structure that is a part of residential property” is a structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes. In addition, a structure is “detached” from the primary residential structure if it is not joined by any structural connection to that structure. Furthermore, whether a structure “does not serve as a residence” is based upon the good faith determination of the lender that the structure is not intended for use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities.

If one of these exemptions applies, a borrower may still elect to purchase flood insurance. Also, a lender may require flood insurance as a condition of making the loan, as a matter of safety and soundness.

12 CFR 22.4(a) (OCC); 12 CFR 208.25(d)(1) (Board); 12 CFR 339.4(a) (FDIC); 12 CFR 614.4932(a) (FCA); and 12 CFR 760.4(a) (NCUA).

12 CFR 22.4(b) (OCC); 12 CFR 208.25(d)(2) (Board); 12 CFR 339.4(b) (FDIC); 12 CFR 614.4932(b) (FCA); and 12 CFR 760.4(b) (NCUA).

12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR 339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c) (NCUA).

Exemptions 2. Does a lender have to take a security interest in the primary residential structure for detached structures to be eligible for the detached structure exemption? For example, suppose the house on a farm is not collateral, but all of the outbuildings including the barn, the equipment storage shed, and the silo (which are used for farm production), and a detached garage where the homeowner keeps his car, are taken as collateral. May the lender apply the detached structure exemption to the outbuildings?

The lender does not have to take a security interest in the primary residential structure for detached structures to be eligible for the exemption, but the lender needs to evaluate the uses of detached structures to determine if they are eligible.

The term “a structure that is part of a residential property” in the detached structure exemption applies only to structures for which there is a residential use and not to structures for which there is a commercial, agricultural, or other business use.

In this example, only the garage is serving a residential use, so it could qualify for the exemption. The barn, equipment storage shed, and silo, which are used for farm production, would not qualify for the exemption.

12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR 339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c) (NCUA).

12 CFR 22.4(c)(1) (OCC); 12 CFR 208.25(d)(3)(i) (Board); 12 CFR 339.4(c)(1) (FDIC); 12 CFR 614.4932(c)(1) (FCA); and 12 CFR 760.4(c)(1) (NCUA).

Exemptions 3. Do detached structures require a flood hazard determination to be performed even if coverage is not required?

Because a flood hazard determination is often needed to identify the number and types of structures on the property, conducting a flood hazard determination remains necessary for the lender to be able to comply with the flood insurance requirements.

12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR 339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a) (NCUA).

Exemptions 4. If a borrower currently has a flood insurance policy on a detached structure that is part of residential property and the detached structure does not serve as a residence, may the lender or its servicer cancel its requirement to carry flood insurance on that structure?

Yes. If a borrower has a flood insurance policy on a detached structure that is part of a residential

property and does not serve as a residence, the lender is no longer mandated by the Act to require flood insurance on that structure.

The lender may allow the borrower to cancel the policy. If warranted as a matter of safety and soundness, the lender may continue to require flood insurance coverage on the detached structure.

12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR 339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c) (NCUA).

Exemptions 5. If a property is remapped into an SFHA, does that trigger a review of the intended use of each detached structure?

No. A lender must examine the status of a detached structure upon a qualifying triggering event—

i.e.,

making, increasing, extending, or renewing a loan.

A remapping is not a triggering event. There is no duty to monitor the status of a detached structure following the lender's initial determination. However, regardless of the absence of such requirement in the Regulation, sound risk management practices may lead a lender to conduct scheduled periodic reviews that track the need for flood insurance on a loan portfolio. Consistent with existing obligations under the Regulation, if a lender determines at any time that a property has become subject to the mandatory flood insurance purchase requirement and, as a result, the collateral is uninsured or underinsured, the lender has a duty to inform the borrower of the obligation to obtain or increase insurance coverage and to purchase flood insurance on the borrower's behalf, as necessary.

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) (NCUA).

Exemptions 6. May a lender review current loans in its portfolio as the flood insurance policies renew and determine that it will no longer require flood insurance on a detached structure in an SFHA if the structure does not contribute to the value of the property securing the loan?

A lender or servicer could initiate such a review; however, the Regulation does not permit the exemption of structures from the mandatory flood insurance purchase requirement based solely on whether the detached structure contributes value to the overall residential property securing the loan.

In the case of any residential property, flood insurance is not required on any structure that is part of such property as long as it is detached from the primary residential structure and does not serve as a residence.

In addition, there are other exemptions that could apply: The exemption for State-owned property covered under a policy of self-insurance satisfactory to the Administrator of FEMA or the exemption for property securing any loan with an original principal balance of $5,000 or less and a repayment term of one year or less.

12 CFR 22.4 (OCC); 12 CFR 208.25(d) (Board); 12 CFR 339.4 (FDIC); 12 CFR 614.4932 (FCA); and 12 CFR 760.4 (NCUA).

12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR 339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c) (NCUA).

12 CFR 22.4(a) and (b) (OCC); 12 CFR 208.25(d)(1) and (2) (Board); 12 CFR 339.4(a) and (b) (FDIC); 12 CFR 614.4932(a) and (b) (FCA); and 12 CFR 760.4(a) and (b) (NCUA).

Exemptions 7. If a loan is secured by a residential property and is joined to another building by a stairway or covered walkway, for purposes of Federal flood insurance requirements, would the other building qualify as a detached structure?

For purposes of the detached structure exemption, a structure is “detached” from the primary residential structure if it is not joined by any structural connection to that structure.

That is, a structure is “detached” if it stands alone. This definition is consistent with the coverage provision of the NFIP's Standard Flood Insurance Policy (SFIP) for additions and extensions to the dwelling unit. In this case, the connected structure would not qualify as a detached structure because it is attached to the primary residence.

12 CFR 22.4(c)(2) (OCC); 12 CFR 208.25(d)(3)(ii) (Board); 12 CFR 339.4(c)(2) (FDIC); 12 CFR 614.4932(c)(2) (FCA); and 12 CFR 760.4(c)(2) (NCUA).

For purposes of insurance coverage under the NFIP, FEMA provides that if one building is attached to another through a covered breezeway or similar connection, it may be insured as one building under one policy or may be insured separately under two policies.

See

the FEMA NFIP

Flood Insurance Manual

for guidance.

III. Coverage—NFIP/Private Flood Insurance

Coverage 1. What are some factors to consider when determining whether a flood insurance policy issued by a private insurer provides sufficient protection of a loan secured by improved real property located in an SFHA, consistent with general safety and soundness principles?

Some factors, among others, that a lender could consider in determining whether a policy provides sufficient protection of a loan include whether: (1) A policy's deductibles are reasonable based on the borrower's financial condition; (2) the insurer provides adequate notice of cancellation to the mortgagor and mortgagee to allow for timely force placement of flood insurance, if necessary; (3) the terms and conditions of the policy with respect to payment per occurrence or per loss and aggregate limits are adequate to protect the regulated lending institution's interest in the collateral; (4) the flood insurance policy complies with applicable State insurance laws; and (5) the private insurance company has the financial solvency, strength, and ability to satisfy claims.

Coverage 2. May a lender rely on a private insurance policy providing portfolio-wide coverage to meet the flood insurance purchase requirement or the force placement requirement under the Regulation?

No. A private insurance policy that provides a lender portfolio-wide coverage may provide protection to the lender in certain circumstances. For example, when a flood insurance policy has expired and the borrower has failed to renew coverage, private insurance policies providing portfolio-wide coverage may be useful protection for the lender for a gap in coverage in the period of time before a force-placed policy takes effect. However, even if a lender has portfolio-wide coverage to address gaps, the lender must still ensure the flood insurance purchase requirement is satisfied at the time a loan is made, increased, renewed or extended, and the lender must still force place coverage on the borrower's behalf in a timely manner, as required,

and may not rely on a private insurance policy that provides portfolio-wide coverage as a substitute for a force-placed policy.

12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) (NCUA).

Coverage 3. When does mandatory flood insurance on a designated loan need to be in place during the closing process?

The Regulation states that a lender cannot “make” a loan secured by a property in an SFHA without adequate flood insurance coverage being in place.

A lender should use the loan “closing date” to determine the date by which flood insurance must be in place for a designated loan. FEMA deems the “closing date” as the day the ownership

of the property transfers to the new owner based on State law.

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

“Wet funding” and “dry funding,” which varies by State, refer to when a mortgage is considered officially closed. In a “wet” settlement State, the signing of closing documents, funding, and transfer of title occur all on the same day. By contrast, in a “dry” settlement State, documents are signed on one date, but loan funding and/or transfer of title/recording occur on subsequent date(s). Therefore, in “dry” settlement States, the “closing date” is the date of property transfer, regardless of loan signing or funding date.

It is also important to note that the application and premium payment for NFIP flood insurance must be provided at or prior to the closing date since this impacts the FEMA flood insurance effective date and any resulting 30-day waiting period for new policies not made in connection with a triggering event. This application requirement applies for properties located in both dry and wet settlement States.

See

NFIP

Flood Insurance Manual.

IV. Required Use of Standard Flood Hazard Determination Form (SFHDF)

SFHDF 1. Does the SFHDF replace the borrower notification form?

No. The SFHDF is used by the lender to determine whether the building or mobile home offered as collateral security for a loan is or will be located in an SFHA in which flood insurance is available under the Act.

The notification form, on the other hand, is used to notify the borrower(s) that the building or mobile home is or will be located in an SFHA and to inform the borrower(s) about flood insurance requirements and the availability of Federal disaster relief assistance.

12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR 339.6 (FDIC); 12 CFR 614.4940 (FCA); and 12 CFR 760.6 (NCUA).

12 CFR 22.9 (OCC); 12 CFR 208.25(i) (Board); 12 CFR 339.9 (FDIC); 12 CFR 614.4955 (FCA); and 12 CFR 760.9 (NCUA).

SFHDF 2. May a lender provide the SFHDF to the borrower?

Yes. Although not a statutory requirement, a lender may provide a copy of the flood determination to the borrower so they can better understand their flood risk. The Agencies note that under the FEMA process for a Letter of Determination Review (LODR), a lender would also need to make the determination available to the borrower. FEMA requires that the lender and the borrower request the LODR jointly within 45-days of the notification of the requirement to purchase flood insurance for a fee. In the event a lender provides the SFHDF to the borrower, the signature of the borrower is not required to acknowledge receipt of the form.

SFHDF 3. May the SFHDF be used in electronic format?

Yes.

In the final rule adopting the SFHDF, FEMA stated: “If an electronic format is used, the format and exact layout of the Standard Flood Hazard Determination Form is not required, but the fields and elements listed on the form are required. Any electronic format used by lenders must contain all mandatory fields indicated on the form.” It should be noted that the lender must be able to reproduce the form upon receiving a document request by its Federal supervisory agency.

12 CFR 22.6(b) (OCC); 12 CFR 208.25(f)(2) (Board); 12 CFR 339.6(b) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(b) (NCUA).

SFHDF 4. May a lender rely on a previous determination for a refinancing or assumption of a loan or multiple loans to the same borrower secured by the same property?

It depends. The Act (42 U.S.C. 4104b(e)) permits a lender to rely on a previous flood determination using the SFHDF when it increases, extends, renews, or purchases a loan secured by a building or a mobile home. Under the Act, the “making” of a loan is not listed as a permissible event that permits a lender to rely on a previous determination. When the loan involves a refinancing or assumption by the same lender who obtained the original flood determination on the same property, the lender may rely on the previous determination only if the original determination was made not more than seven years before the date of the transaction, the basis for the determination was set forth on the SFHDF, and there were no map revisions or updates affecting the security property since the original determination was made. Further, if the same lender makes multiple loans to the same borrower secured by the same improved real estate, the lender may rely on its previous determination if the original determination was made not more than seven years before the date of the transaction, the basis for the determination was set forth on the SFHDF, and there were no map revisions or updates affecting the security property since the original determination was made. These loans are extended by the same lender, to the same borrower, and are secured by the same improved real estate, and, therefore, these types of transactions are the functional equivalent of an increase of a loan.

When the loan involves a refinancing or assumption made by a lender different from the one who obtained the original determination, this would constitute the making of a new loan, thereby requiring a new determination.

V. Flood Insurance Determination Fees

Fees 1. When can lenders or servicers charge the borrower a fee for making a determination?

There are four instances under the Act and Regulation when the borrower can be charged a fee for a flood determination:

• When the determination is made in connection with the making, increasing, extending, or renewing of a loan that is initiated by the borrower;

• When the determination reflects a revision or updating by FEMA of floodplain areas or flood-risk zones;

• When the determination reflects FEMA's publication of a notice or compendium that affects the area in which the security property is located, or FEMA requires a determination as to whether the building securing the loan is located in an SFHA; or

• When the determination results in force placement of insurance.

12 CFR 22.8(b) (OCC); 12 CFR 208.25(h)(2) (Board); 12 CFR 339.8(b) (FDIC); 12 CFR 614.4950(b) (FCA); and 12 CFR 760.8(b) (NCUA).

Loan or other contractual documents between the parties may also permit the imposition of fees.

Fees 2. May charges made for life-of-loan reviews by flood determination firms be passed along to the borrower?

Yes, with limitations noted below. In addition to the initial determination at the time a loan is made, increased, renewed, or extended, many flood determination firms provide a service to the lender to review and report changes in the flood status of a dwelling for the entire term of the loan (

i.e.,

life-of-loan monitoring). The fee charged for the service at loan closing is a composite fee for conducting both the original and subsequent reviews. Charging a fee for the original determination is clearly authorized by the Act. The Agencies agree that a determination fee may include, among other things, reasonable fees for a lender, servicer, or third party to monitor the flood hazard status of property securing a loan in order to make determinations on an ongoing basis.

However, the life-of-loan fee is based on the authority to charge a determination fee and, therefore, the composite determination/life-of-loan

monitoring fee may be charged only if the events specified in the answer to Q&A Fees 1 occur.

Further, a lender may not charge a composite determination and life-of-loan fee if the loan does not close, because such life-of loan fee would be an unearned fee in violation of the Real Estate Settlement Procedures Act.

12 CFR 22.8 (OCC); 12 CFR 208.25(h) (Board); 12 CFR 339.8 (FDIC); 12 CFR 614.4950 (FCA); and 12 CFR 760.8 (NCUA).

12 U.S.C. 2607.

See

12 CFR 1024.14(c).

VI. Flood Zone Discrepancies

Zone 1. What should a lender do when there is a discrepancy between the flood hazard zone designation on the flood determination form and the flood insurance policy?

If a lender receives a policy declarations page that has a flood zone designation that is different from the flood zone shown on the SFHDF, it should consider documenting the discrepancy in the loan file. If the SFHDF indicates that the building securing the loan is in an SFHA, the lender must require the appropriate amount of insurance coverage in accordance with the Act and Regulation,

but the lender is not otherwise required to resolve a discrepancy between the flood zone designation on the SFHDF and the designation on the flood insurance policy declarations page provided by the borrower. This guidance applies to any flood zone discrepancy that arises in connection with a mortgage loan that is made, increased, extended or renewed. In addition, the guidance applies to any building that has been rated in accordance with NFIP procedures.

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

For a policy issued under the NFIP, if a misrating is discovered at the time of loss resulting from an incorrect flood zone, and a policyholder has underpaid the flood insurance premium, a policyholder may keep the contracted coverage limits if an additional premium is paid. Once paid, a revised declarations page will be issued showing the corrected flood zone. The lender will receive a copy of the declarations page and may receive a copy of the underpayment notice.

If the borrower does not pay the additional premium, resulting in inadequate coverage, lenders must proceed with force-placement procedures.

On the other hand, if a policyholder has overpaid the flood insurance premium as a result of a misrating, FEMA may allow a refund of insurance premiums under certain circumstances.

See NFIP Flood Insurance Manual

for specific instructions. Private policies may resolve flood zone discrepancies differently.

12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 339.7(a)(FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) (NCUA).

Zone 2. Is a lender in violation of the Regulation if there is discrepancy between the flood zone on the SFHDF and the flood insurance policy declarations page?

No, a lender is not in violation of the Regulation if there is a discrepancy between the flood zone on the SFHDF and the flood zone on the policy declarations page. As provided in Q&A Zone 1, a lender should consider documenting any zone discrepancy in the loan file.

Zone 3. What should a lender do when the lender's flood zone determination specifies that a building securing the loan is located in an SFHA requiring mandatory flood insurance coverage, but the borrower disputes that determination?

If a borrower disputes a lender's determination that the building securing the loan is located in an SFHA requiring mandatory flood insurance coverage, the parties involved in making the determination are encouraged to resolve the flood zone discrepancy before contacting FEMA for a final determination. If the flood zone discrepancy cannot be resolved, an appeal may be filed with FEMA. Depending on the nature of the dispute, FEMA has different options for review, including:

• Letters of Determination Review (LODR), and

• Letters of Map Change (LOMC), which include Letters of Map Amendment (LOMA), Letters of Map Revision (LOMR), and Letters of Map Revision Based on Fill (LOMR-F).

Lenders and borrowers should consult FEMA guidance on the appropriate process to follow, any applicable fees, and any deadlines by which the request to review must be made. However, as long as the lender's flood determination specifies that a building securing the loan is located in an SFHA and requires mandatory flood insurance coverage, sufficient coverage must be in place in accordance with the Act and the Regulation until FEMA has determined that the building is not in an SFHA.

As noted in Q&A Zone 1, if there is sufficient insurance coverage in place, lenders are not required to resolve flood zone discrepancies between the flood zone determination form and the flood insurance policy.

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

VII. Notice of Special Flood Hazards and Availability of Federal Disaster Relief

Notice 1. Does the Notice of Special Flood Hazards have to be provided to each borrower for a real estate related loan?

No. The Notice of Special Flood Hazards must be provided to one borrower when the lender determines that the property securing the loan is or will be located in an SFHA.

In a transaction involving multiple borrowers, the lender need only provide the Notice of Special Flood Hazards to any one of the borrowers in the transaction. Lenders may provide multiple notices if they choose. The lender and borrower(s) typically designate the borrower to whom the Notice of Special Flood Hazards will be provided.

12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR 339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a) (NCUA).

Notice 2. Lenders making loans on mobile homes may not always know where the home is to be located until just prior to, or sometimes after, the time of loan closing. How is the requirement to provide the Notice of Special Flood Hazards applied in these situations?

As required by the Regulation, a lender must provide the Notice of Special Flood Hazards to the borrower within a reasonable time before the completion of the transaction.

If a lender determines that a mobile home securing a designated loan will be located in an SFHA just prior to closing, the lender may need to delay the closing until the Notice of Special Flood Hazards has been provided in accordance with the Regulation.

12 CFR 22.9(c) (OCC); 12 CFR 208.25(i)(2) (Board); 12 CFR 339.9(c) (FDIC); 12 CFR 614.4955(c) (FCA); and 12 CFR 760.9(c) (NCUA).

In the case of loan transactions secured by mobile homes not located on a permanent foundation, the Agencies note that such “home only” transactions are excluded from the definition of mobile home and the notice requirements would not apply to these transactions. However, the Agencies encourage a lender to advise the borrower that if the mobile home is later located on a permanent foundation in an SFHA, flood insurance will be

required. If the lender, when notified of the location of the mobile home subsequent to the loan closing, determines that it has been placed on a permanent foundation and is located in an SFHA in which flood insurance is available under the Act, flood insurance coverage becomes mandatory and a force-placement notice must be given to the borrower under those provisions.

If the borrower fails to purchase flood insurance coverage within 45 days after notification, the lender must force place the insurance.

12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) (NCUA).

Notice 3. When is the lender required to provide notice to the servicer of a loan that flood insurance is required?

Because the servicer of a loan is often not identified prior to the closing of a loan, the Regulation requires that notice be provided no later than the time the lender transmits other loan data, such as information concerning hazard insurance and taxes, to the servicer.

12 CFR 22.9(c) (OCC); 12 CFR 208.25(i)(2) (Board); 12 CFR 339.9(c) (FDIC); 12 CFR 614.4955(c) (FCA); and 12 CFR 760.9(c) (NCUA).

Notice 4. What will constitute appropriate form of notice to the servicer?

Delivery to the servicer of a copy of the notice given to the borrower is appropriate notice. The Regulation also provides that the notice can be made either electronically or by a written copy.

12 CFR 22.9(c) (OCC); 12 CFR 208.25(i)(2) (Board); 12 CFR 339.9(c) (FDIC); 12 CFR 614.4955(c) (FCA); and 12 CFR 760.9(c) (NCUA).

In the case of a servicer affiliated with the lender, the Act requires the lender to notify the servicer of special flood hazards and the Regulation reflects this requirement. Neither the Act nor the Regulation contains an exception for affiliates.

12 U.S.C. 4104a(a)(1); 12 CFR 22.9(c) (OCC); 12 CFR 208.25(i)(2) (Board); 12 CFR 339.9(c) (FDIC); 12 CFR 614.4955(c) (FCA); and 12 CFR 760.9(c) (NCUA).

Notice 5. How long must the lender maintain the record of receipt by the borrower of the Notice of Special Flood Hazards?

The record of receipt provided by the borrower must be maintained for the period of time that the lender owns the loan.

Examples of a record of receipt include: The borrower's signed acknowledgment of receipt of the Notice of Special Flood Hazards; the borrower's initials on a form that acknowledges receipt; or a certified return receipt if the Notice of Special Flood Hazards was mailed to the borrower. Lenders may keep the record in the form that best suits the lender's business practices. Lenders may retain the record electronically, but they must be able to retrieve the record within a reasonable time pursuant to a document request from their Federal supervisory agency.

12 CFR 22.9(d) (OCC); 12 CFR 208.25(i)(3) (Board); 12 CFR 339.9(d) (FDIC); 12 CFR 614.4955(d) (FCA); and 12 CFR 760.9(d) (NCUA).

Notice 6. Can a lender rely on a previous Notice of Special Flood Hazards if it is less than seven years old, and it is the same property, same borrower, and same lender?

The Regulation does not address waiving the requirement to provide the Notice of Special Flood Hazards to the borrower. Although subsequent transactions by the same lender with respect to the same property are the functional equivalent of a renewal and do not require a new determination, the lender must still provide a new Notice of Special Flood Hazards to the borrower.

12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR 339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a) (NCUA).

Notice 7. Is use of the sample form of Notice of Special Flood Hazards mandatory?

Although lenders are required to provide a Notice of Special Flood Hazards to a borrower when they make, increase, extend, or renew a loan secured by an improved structure located in an SFHA,

use of the sample form of Notice of Special Flood Hazards provided in Appendix A of the Regulation is not mandatory. It should be noted that the sample form includes other information in addition to what is required by the Act and the Regulation. Lenders may personalize, change the format of, and add information to the sample form of notice, if they choose. However, a lender-revised Notice of Special Flood Hazards must provide the borrower with at least the minimum information required by the Act and Regulation.

Therefore, lenders should consult the Act and Regulation to determine the information needed.

12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR 339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a) (NCUA).

12 U.S.C. 4104a(a)(3); 12 CFR 22.9(b) (OCC); 12 CFR 208.25(i)(1) (Board); 12 CFR 339.9(b) (FDIC); 12 CFR 614.4955(b) (FCA); and 12 CFR 760.9(b) (NCUA).

VIII. Determining the Appropriate Amount of Flood Insurance Required

Amount 1. The Regulation states that the amount of flood insurance required “must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act.” What is meant by the “maximum limit of coverage available for the particular type of property under the Act”?

“The maximum limit of coverage available for the particular type of property under the Act” depends on the value of the secured collateral. First, under the NFIP, there are maximum caps on the amount of insurance available for buildings located in a participating community under the Regular Program. For single-family and two-to-four family dwellings and individually owned condominium units insured under the Dwelling Form policy, the maximum limit is $250,000. For a residential condominium building insured under the Residential Condominium Building Association Policy (RCBAP) form, the maximum amount of insurance available is $250,000 multiplied by the number of units. For all other buildings insured under the General Property Form, the maximum limit of building coverage available is $500,000. This includes all non-residential buildings, mixed-use condominium buildings not eligible for coverage under the RCBAP, and other residential buildings of five or more families, such as cooperatives or apartment buildings in the non-condominium form of ownership. (In participating communities that are under the emergency program phase, the maximum limits of insurance are different.) The maximum limit for contents insured under the Dwelling Form and RCBAP is $100,000 ($100,000 total, not per unit) and $500,000 for contents insured under the General Property Form.

See

NFIP

Flood Insurance Manual.

In addition to the maximum caps under the NFIP, the Regulation also provides that “flood insurance coverage under the Act is limited to the building or mobile home and any personal property that secures a loan and not the land itself,” which is commonly referred to as the “insurable value” of a structure.

The NFIP does not insure

land; therefore, land values are not included in the calculation.

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

An NFIP policy will not cover an amount exceeding the “insurable value” of the structure, so the maximum amount of insurance coverage is the applicable limit available under the NFIP or the insurable value, whichever is less. In determining coverage amounts for flood insurance, lenders often follow the same practice used to establish other hazard insurance coverage amounts. However, unlike the insurable valuation used to underwrite most other hazard insurance policies, the insurable value of improved real estate for flood insurance purposes also includes the repair or replacement cost of the foundation and supporting structures. It is very important to calculate the correct insurable value of the property; otherwise, the lender might inadvertently require the borrower to purchase too much or too little flood insurance coverage. For example, if the lender fails to exclude the value of the land when determining the insurable value of the improved real estate, the borrower will be asked to purchase coverage that exceeds the amount the NFIP will pay in the event of a loss. (Please note, however, when taking a security interest in improved real estate where the value of the land, excluding the value of the improvements, is sufficient collateral for the debt, the lender must nonetheless require flood insurance to cover the value of the structure if it is located in a participating community's SFHA.)

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

Amount 2. What is the “insurable value” of a building and how is it used to determine the required amount of flood insurance?

The insurable value of the building may generally be the same as 100 percent Replacement Cost Value (RCV), which is the cost to replace the building with the same kind of material and construction without deduction for depreciation. In calculating the amount of insurance to require, the lender and borrower (either by themselves or in consultation with the flood insurance provider or other appropriate professional) may choose from a variety of approaches or methods to establish the insurable value. They may use an appraisal based on a cost-value (not market-value) approach, a construction-cost calculation, the insurable value used on a hazard insurance policy (recognizing that the insurable value for flood insurance purposes may differ from the coverage provided by the hazard insurance and that adjustments may be necessary; for example, most hazard policies do not cover foundations), or any other reasonable approach, so long as it can be supported.

In cases involving certain residential or condominium properties, insurance policies under the NFIP should be written to, and the insurance loss payout usually would be the equivalent of, RCV. However, lenders should avoid a situation in which the insured borrower pays for more coverage than the insured would recover in the event of a loss. Therefore, to strictly link insurable value to RCV is not always practical. In cases involving nonresidential properties, and even some residential properties, the insurance loss payout might be based on actual cash value, which is RCV less physical depreciation. Insurance policies written at RCV for these properties would require an insured to pay for coverage that exceeds the amount the NFIP or private insurer would pay in the event of a loss, and this situation should be avoided. Therefore, it is reasonable for lenders, in determining the amount of flood insurance required, to consider the extent of recovery allowed under the NFIP or private policy for the type of property being insured. Doing so would allow the lender to assist the borrower in avoiding situations in which the insured pays for coverage that exceeds the amount the insured would recover in the event of a loss.

Lenders should be equally mindful of avoiding situations in which, as a result of insuring at a level below RCV, they underinsure property.

Amount 3. What are examples of residential buildings?

A residential building is a non-commercial building designed for habitation by one or more families or a mixed-use building that qualifies as a

single-family, 2-4 family,

other residential building.

The NFIP provides the following definitions:

single family

dwelling is either a residential single-family building in which the total floor area devoted to non-residential uses is less than 50 percent of the building's total floor area,

a single-family residential unit within a 2-4 family building, other-residential building, business, or non-residential building, in which commercial uses within the unit are limited to less than 50 percent of the unit's total floor area.

2-4 family residential building

is a residential building, including an apartment building, containing 2-4 residential spaces and in which commercial uses are limited to less than 25 percent of the building's total floor area. This category includes apartment buildings and condominium buildings. This excludes hotels and motels with normal room rentals for less than 6 months.

other residential building

is a residential building that is designed for use as a residential space for 5 or more families or a mixed-use building in which the total floor area devoted to non-residential uses is less than 25 percent of the total floor area within the building. This category includes condominium and apartment buildings as well as hotels, motels, tourist homes, and rooming houses where the normal occupancy of a guest is 6 months or more. Additional examples of other residential buildings include dormitories and assisted-living facilities.

For more complete information, refer to the NFIP

Flood Insurance Manual.

Amount 4. What are examples of nonresidential buildings?

A nonresidential building is one in which the named insured is a commercial enterprise primarily carried out to generate income and the coverage is for:

• A building designed as a non-habitational building;

• A mixed-use building in which the total floor area devoted to residential uses is 50 percent or less of the total floor area within the building if the residential building is a single-family property;

75 percent or less of the total floor area within the building for all other residential properties;

• A building designed for use as office or retail space, wholesale space, hospitality space, or for similar uses.

In addition, the NFIP describes other non-residential buildings as including, but not limited to, churches, schools, farm buildings (including grain bins and silos), garages, pool houses, clubhouses, and recreational buildings.

For more complete information, refer to the NFIP

Flood Insurance Manual.

Amount 5. How much insurance is required on a building located in an SFHA in a participating community?

The amount of insurance required by the Act and Regulation is the lesser of:

• The outstanding principal balance of the loan(s); or

• The maximum amount of insurance available under the NFIP, which is the lesser of:

○ The maximum limit available for the type of structure; or

○ The “insurable value” of the structure.

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

Example:

(Calculating insurance required on a nonresidential building):

Loan security includes one equipment shed located in an SFHA in a participating community under the Regular Program.

• Outstanding loan principal balance is $300,000.

• Maximum amount of insurance available under the NFIP:

○ Maximum limit available for type of structure is $500,000 per building (nonresidential building).

○ Insurable value of the equipment shed is $30,000.

The minimum amount of insurance required by the Regulation for the equipment shed is $30,000.

Amount 6. Is flood insurance required for each building when the real estate security contains more than one building located in an SFHA in a participating community? If so, how much coverage is required?

Yes. The lender must determine the amount of insurance required on each building and add these individual amounts together.

The total amount of required flood insurance is the lesser of:

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

• The outstanding principal balance of the loan(s); or

• The maximum amount of insurance available under the NFIP, which is the lesser of:

○ The maximum limit available for the type of structures; or

○ The “insurable value” of the structures.

The amount of total required flood insurance can be allocated among the secured buildings in varying amounts, but all buildings in an SFHA must be covered in accordance with the statutory requirement.

Example:

Lender makes a loan in the principal amount of $150,000 secured by five nonresidential buildings, only three of which are located in SFHAs within participating communities.

• Outstanding loan principal is $150,000.

• Maximum amount of insurance available under the NFIP.

○ Maximum limit available for the type of structure is $500,000 per building for nonresidential buildings (or $1.5 million total); or

○ Insurable value ($100,000 for each nonresidential building for which insurance is required, or $300,000 total).

Amount of insurance required for the three buildings is $150,000. This amount of required flood insurance could be allocated among the three buildings in varying amounts, so long as each is covered in accordance with the statutory requirement.

Amount 7. If the insurable value of a building or mobile home securing a designated loan is less than the outstanding principal balance of the loan, must a lender require the borrower to obtain flood insurance up to the balance of the loan?

No. The Regulation provides that the amount of flood insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for a particular type of property under the Act. The Regulation also provides that flood insurance coverage under the Act is limited to the building or mobile home and any personal property that secures a loan and not the land itself.

Since the NFIP policy does not cover land value, lenders determine the amount of insurance necessary based on the insurable value of the improvements.

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

Amount 8. Can a lender require more flood insurance than the minimum required by the Regulation?

Yes. Lenders are permitted to require more than the minimum amount of flood insurance required by the Regulation, taking into consideration applicable State and Federal law and safe and sound banking practices, as appropriate. However, the borrower or lender may have to seek such coverage outside the NFIP. Although a lender has the responsibility to tailor its own flood insurance policies and procedures to suit its business needs and protect its ongoing interest in the collateral, it should consider the extent of recovery allowed under the NFIP or a private policy for the type of property being insured to assist the borrower in avoiding paying for coverage that exceeds the amount the insured would recover in the event of a loss.

Amount 9. Can a lender allow the borrower to use the maximum deductible to reduce the cost of flood insurance?

Yes. However, it may not be a sound business practice for a lender, as a matter of policy, to always allow the borrower to use the maximum deductible. A lender should determine the reasonableness of the deductible on a case-by-case basis, taking into account the risk that such a deductible would pose to the borrower and lender. A lender may not allow the borrower to use a deductible amount equal to the insurable value of the property to avoid the mandatory purchase requirement for flood insurance.

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

IX. Flood Insurance Requirements For Construction Loans

Construction 1. Is a loan secured only by land, which is located in an SFHA in which flood insurance is available under the Act and that will be developed into buildable lot(s), a designated loan that requires flood insurance?

No. A designated loan is a loan secured by a building or mobile home that is located or to be located in an SFHA in which flood insurance is available under the Act.

Any loan secured only by land that is located in an SFHA in which flood insurance is available is not a designated loan since it is not secured by a building or mobile home.

12 CFR 22.2(e) (OCC); 12 CFR 208.25(b)(5) (Board); 12 CFR 339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).

Construction 2. Is a loan secured or to be secured by a building in the course of construction that is located or to be located in an SFHA in which flood insurance is available under the Act a designated loan?

Yes. A lender must always make a flood determination prior to loan origination to determine whether a building to be constructed that is security for the loan is located or will be located in an SFHA in which flood insurance is available under the Act.

If the building or mobile home is located or will be located in an SFHA, then the loan is a designated loan and the lender must provide the requisite notice to the borrower prior to loan origination.

The lender must then comply with the mandatory purchase

requirement under the Act and Regulation.

12 CFR 22.6(a) (OCC): 12 CFR 208.25(f)(1) (Board); 12 CFR 339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a) (NCUA).

12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR 339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a) (NCUA).

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

Construction 3. Is a building in the course of construction that is located in an SFHA in which flood insurance is available under the Act eligible for coverage under an NFIP policy?

Yes. Buildings in the course of construction that have yet to be walled and roofed are eligible for coverage except when construction has been halted for more than 90 days and/or if the lowest floor used for rating purposes is below the Base Flood Elevation (BFE). Materials or supplies intended for use in such construction, alteration, or repair are not insurable unless they are contained within an enclosed building on the premises or adjacent to the premises. (NFIP

Flood Insurance Manual

The NFIP

Flood Insurance Manual

defines “start of construction” in the case of new construction as “either the first placement of permanent construction of a building on site, such as the pouring of a slab or footing, the installation of piles, the construction of columns, or any work beyond the stage of excavation; or the placement of a manufactured (mobile) home on a foundation.”

Although an NFIP policy may be purchased prior to the start of construction, as a practical matter, coverage under an NFIP policy is not effective until actual construction commences or when materials or supplies intended for use in such construction, alteration, or repair are contained in an enclosed building on the premises or adjacent to the premises.

Construction 4. When must a lender require the purchase of flood insurance for a loan secured by a building in the course of construction that is located in an SFHA in which flood insurance is available?

Under the Act, as implemented by the Regulation, a lender may not make, increase, extend, or renew any loan secured by a building or a mobile home, located or to be located in an SFHA in which flood insurance is available, unless the property is covered by adequate flood insurance for the term of the loan.

The NFIP rules provide lenders an option to comply with the mandatory purchase requirement for a loan secured by a building in the course of construction that is located in an SFHA by requiring borrowers to have a flood insurance policy in place at the time of loan origination. Such a policy is issued based upon the construction designs and intended use of the building. A borrower should obtain a provisional rating (available only if certain criteria are met) to enable the placement of coverage prior to receipt of the Elevation Certificate (EC). In accordance with the NFIP requirement, it is expected that an EC will be secured and a full-risk rating completed within 60 days of the policy effective date. Failure to obtain the EC could result in reduced coverage limits at the time of a loss. (

See

NFIP

Flood Insurance Manual

12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA).

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