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

Federal RegisterMay 31, 2022

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 22

[Docket IDs OCC-2020-0033, OCC-2020-0008]

FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Docket No. R-1742, OP-1720]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 339

RIN 3064-ZA16

FARM CREDIT ADMINISTRATION

12 CFR Part 614

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 760

RIN 3133-AF31, 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); and National Credit Union Administration (NCUA).

ACTION:

Guidance.

SUMMARY:

The OCC, Board, FDIC, FCA, and NCUA (collectively, the Agencies) are reorganizing, revising, and expanding the Interagency Questions and Answers Regarding Flood Insurance. This revised guidance will assist lenders in meeting their responsibilities under Federal flood insurance law and increase public understanding of the Agencies' respective flood insurance regulations. Significant topics addressed by the revisions include guidance related to major amendments to the flood insurance laws with regard to the escrow of flood insurance premiums, the detached structure exemption, force placement procedures, and the acceptance of flood insurance policies issued by private insurers. With this issuance, the Agencies are consolidating the Questions and Answers proposed by the Agencies in July 2020 and the Questions and Answers proposed by the Agencies in March 2021 into one set of Interagency Questions and Answers Regarding Flood Insurance.

DATES:

The issuance date of this guidance is May 11, 2022.

FOR FURTHER INFORMATION CONTACT:

OCC:

Rhonda L. Daniels, Compliance Specialist, Compliance Risk Policy Division, (202) 649-5405; Amber Dapshi, Compliance Specialist, Compliance Risk Policy Division, (240) 646-4348; Heidi M. Thomas, Special Counsel, Sadia Chaudhary, Counsel, Rima Kundnani, Counsel, or Cyndy MacMahon, Attorney, Chief Counsel's Office, (202) 649-5490. If you are deaf, hard of hearing, or have a speech disability, please dial 7-1-1 to access telecommunications relay services.

Board:

Vivian W. Wong, Senior Counsel, (202) 452-3667, Matthew Dukes, Counsel, (202) 973-5096, or Keshia King, Lead Supervisory Policy Analyst, (202) 452-2496, Division of Consumer and Community Affairs; or Daniel Ericson, Senior Counsel, (202) 452-3359, Legal Division; for users of Telecommunications Relay Service (TRS),Telecommunications Device for the Deaf (TDD) only, contact 711 or (202) 263-4869.

FDIC:

Navid Choudhury, Counsel, Policy Unit, Legal Division, (202) 898-6526; or Simin Ho, Senior Policy Analyst, Division of Depositor and Consumer Protection, (202) 898-6907.

FCA:

Ira D. Marshall, Senior Policy Analyst, Office of Regulatory Policy, (703) 883-4379, TTY (703) 883-4056 or Jennifer Cohn, Assistant General Counsel, Office of General Counsel, (720) 213-0440.

NCUA:

Thomas Zells, Senior Staff Attorney, Office of General Counsel, (703) 518-6540, or Simon Hermann, 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, FCA, and NCUA

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

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

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 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 (July 6, 2011).

61 FR 45684 (Aug. 29, 1996).

In October 2013, the Agencies jointly issued proposed rules

to implement the escrow, force placement, and private flood insurance provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (the Biggert-Waters Act).

In March 2014, Congress enacted the Homeowner Flood Insurance Affordability Act (HFIAA), which, among other things, amended the Biggert-Waters Act's requirements regarding the escrow of flood insurance premiums and fees and created a new exemption from the mandatory flood insurance purchase requirement 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 in the Biggert-Waters Act related to private flood insurance, with a final rule issued in July 2015 (2015 Final Rule).

In February 2019, the

Agencies finalized regulations to implement the private flood insurance related provisions of the Biggert-Waters Act (2019 Final Rule).

78 FR 65107 (Oct. 30, 2013).

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

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

80 FR 43215 (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).

Interagency Questions and Answers Regarding Flood Insurance

Since 1997, the Interagency Questions and Answers

have provided the lending industry and other interested parties with guidance addressing a wide spectrum of technical flood insurance-related compliance issues. In 2009, the Agencies comprehensively revised and reorganized the initial 1997 Interagency Questions and Answers (2009 Interagency Questions and Answers). In 2011, the Agencies further finalized two additional Q&As that were proposed in 2009, and re-proposed three Q&As that were never finalized.

Throughout this document, “Interagency 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.

For additional information on the history of the Interagency Questions and Answers, please see the preamble to the July 2020 Proposed Interagency Questions and Answers at 85 FR 40442 (July 6, 2020).

In light of the significant changes to flood insurance requirements pursuant to the Biggert-Waters Act and HFIAA, as well as the Agencies' regulations issued to implement these laws, the Agencies proposed new and revised Interagency Questions and Answers in July 2020 (July 2020 Proposed Questions and Answers) that covered a broad range of topics related to technical flood insurance-related issues, including the escrow of flood insurance premiums, the detached structure exemption to the mandatory purchase of flood insurance requirement, and force placement procedures.

This proposal also reorganized the Interagency Questions and Answers to provide a more logical flow of questions through the flood insurance process. The Agencies also committed in the July 2020 Proposed Questions and Answers to separately issuing for notice and comment additional proposed questions and answers relating to the 2019 Final Rule implementing the private flood insurance provisions of the Biggert-Waters Act. The Agencies published these proposed questions and answers in March 2021 (March 2021 Proposed Questions and Answers).

See

85 FR 40442 (July 6, 2020). The comment period for the July 2020 Proposed Questions and Answers was extended from Sept. 4, 2020 to Nov. 3, 2020.

See

85 FR 54946 (Sept. 3, 2020).

See

86 FR 14696 (Mar. 18, 2021).

With this

Federal Register

document, the Agencies are consolidating the July 2020 Proposed Questions and Answers and the March 2021 Proposed Questions and Answers into one set of Interagency Questions and Answers Regarding Flood Insurance (2022 Interagency Questions and Answers), consisting of 144 Questions and Answers (including 24 private flood insurance questions and answers), revised as appropriate based on comments received. Specifically, the Q&As in the March 2021 Proposed Questions and Answers are now set forth as sections III, IV, and V in the 2020 Interagency Questions and Answers, and the remaining sections, with the exception of proposed Section III discussed below, are renumbered accordingly. The Agencies also are making non-substantive revisions to certain questions and answers to more directly respond to the question asked, provide additional clarity, or make technical corrections.

These 2022 Interagency Questions and Answers supersede the 2009 Interagency Questions and Answers (and the 2011 amendments to the 2009 Interagency Questions and Answers) and supplement other guidance or interpretations issued by the Agencies related to loans in areas having special flood hazards. 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.

The issuance of these 2022 Interagency Questions and Answers responds to requests over the years from the lending industry, including at conferences and through interagency webinars, to provide additional guidance on flood insurance compliance issues. In addition, the 2022 Interagency Questions and Answers are responsive to requests made pursuant to the most recent review under the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA), which directs some of the Agencies 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 most recent 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 Agencies update the Interagency Questions and Answers. In the 2017 EGRPRA Joint Report to Congress issued by the Federal Financial Institutions Examination Council (FFIEC), the Board, FDIC, and OCC indicated that they agreed with commenters that the Interagency Questions and Answers should be updated and planned to address many of the flood insurance issues raised by EGRPRA commenters.

Accordingly, in issuing these 2022 Interagency Questions and Answers, the Agencies are addressing the commitment made in the 2017 EGRPRA Joint Report to Congress.

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 and is available at

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

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, the 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, as required by the Farm Credit System Reform Act of 1996 (

see

12 U.S.C. 2252 note), FCA engages in periodic regulatory review. The Consumer Financial Protection Bureau (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.

Specifically, the OCC, Board, and FDIC stated in the EGRPRA report that they “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.” FFIEC Joint EGRPRA Report to Congress, March 2017 at 56; available at

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

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 proposed 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. Moreover, the Agencies also proposed a new system of designation for the Q&As. Rather than numbering the Q&As successively

through all the categories, each Q&A would be designated by the category to which it belongs and then designated in numerical order for that particular category. This numbering system enables the Agencies to add or delete Q&As in the future without needing to significantly renumber or reorganize all of the Q&As. Furthermore, the Agencies have added three new Q&As (Applicability 13, Amount 10, and Condo and Co-op 9) to better address commenters' questions and for organizational purposes, rather than adding information into existing Q&As.

As discussed below, commenters supported the proposed reorganization. Therefore, the Agencies are adopting this reorganization with the inclusion of three new categories related to the private flood insurance requirements, proposed in the March 2021 Proposed Questions and Answers. The table below sets forth the current categories and the corresponding new, reorganized categories for purposes of comparison:

Table of Contents

Category from

2009 interagency questions and answers

Reorganized category in 2022 interagency questions and

answers

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

Private Flood Insurance—Mandatory Acceptance [Mandatory].

IV.

Flood Insurance Requirements for Construction Loans

Private Flood Insurance—Discretionary Acceptance [Discretionary].

Flood Insurance Requirements for Non-residential Buildings

Private Flood Insurance—General Compliance [Private Flood Compliance].

VI.

Flood Insurance Requirements for Residential Condominiums

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

VII.

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

Flood Insurance Determination Fees [Fees].

VIII.

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

Flood Zone Discrepancies [Zone].

IX.

Escrow Requirements

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

Force Placement

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

XI.

Private Flood Insurance

Flood Insurance Requirements for Construction Loans [Construction].

XII.

Required Use of Standard Flood Hazard Determination Form (SFHDF)

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

XIII.

Flood Determination Fees

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].

XIV.

Flood Zone Discrepancies

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

XV.

Notice of Special Flood Hazards and Availability of Federal Disaster Relief

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

XVI.

Mandatory Civil Money Penalties

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

XVII.

Force Placement of Flood Insurance [Force Placement].

XVIII.

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

XIX.

Mandatory Civil Money Penalties [Penalty].

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 of 2014 (codified at 42 U.S.C. 4001

et seq

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

References to the

NFIP Flood Insurance Manual

refer to the version published in April 2021.

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).

Public Comments

The Agencies solicited comment on all aspects of the proposed Q&As and received a total of 22 substantive comment letters on the July 2020 Proposed Questions and Answers and 11 substantive comment letters on the March 2021 Proposed Questions and Answers. Many of the commenters supported the proposed organizational changes to the Interagency Questions and Answers and believed the new organization provided clarity, increased understanding, and was user-friendly. In addition, some commenters specifically found the grouping by topic to be very useful, noting this would improve accessibility and allow the Agencies to easily revise the Interagency Questions and Answers in the future.

One commenter found the addition of references to the Regulation to be beneficial. Another commenter requested that the Agencies combine both sets of questions and answers into one set of final questions and answers. As indicated above, the Agencies are adopting the proposed reorganization of the Interagency Questions and Answers and combining both the July 2020 Proposed Questions and Answers and the March 2021 Proposed Questions and Answers into one document.

One commenter requested that these Interagency Questions and Answers be made available to insurance agents, which would be helpful for lenders and make the process easier for borrowers. A few commenters also suggested that the NCUA add the finalized Interagency Questions and Answers to the Regulation as an Appendix. The commenters felt that this would ensure the Interagency Questions and Answers are easily located and used by credit union staff in years to come.

The Agencies note that the Interagency Questions and Answers are already publicly available, including to insurance agents, as the Interagency Questions and Answers are published in the

Federal Register

and readily accessible on the Agencies' websites. At this time, the Agencies decline to add the Interagency Questions and Answers to the Regulation as an Appendix. Furthermore, the NCUA is committed to assisting credit unions comply with the flood insurance requirements.

In addition, the Agencies received several comments that urged the Agencies to provide periodic updates and review the Interagency Questions and Answers on a regular basis, as well as to allow the industry an adequate notice and comment period. Commenters stated that this would provide industry and other stakeholders predictable opportunities to provide feedback on compliance issues and questions as they arise. Commenters also felt this type of review would maintain the Interagency Questions and Answers in a more organized manner and would ensure the guidance keeps pace with the marketplace and the issues that arise with respect to compliance. One commenter emphasized that this review should take place more frequently than the 10-year EGRPRA cycle and recommended a formal review of the Interagency Questions and Answers every three to five years. Other commenters stated that additional issues may arise for credit unions, who planned to share these issues with the NCUA, and asked that the Interagency Questions and Answers be updated in the future to provide additional clarity.

The Agencies understand the value of the Interagency Questions and Answers to the industry and other stakeholders and will continue to review the Interagency Questions and Answers and update the guidance as necessary. The Agencies agree that the reorganization of the Interagency Questions and Answers will facilitate future updates. The Agencies expect to update the Interagency Questions and Answers as needed and will provide interested parties a sufficient notice and comment period.

Other commenters encouraged the Agencies to include in the final version of the Interagency Questions and Answers an explicit statement referencing the Interagency Statement Clarifying the Role of Supervisory Guidance (Interagency Statement).

The commenters stated the Agencies should confirm that the Interagency Questions and Answers are guidance and failure to comply with the Interagency Questions and Answers are not grounds for matters requiring attention (MRAs), matters requiring immediate attention (MRIA), or any other adverse supervisory action. The Agencies confirm that the Agencies are providing the Interagency Questions and Answers as guidance only. The Agencies are not adding a reference to the Interagency Statement in the Interagency Questions and Answers because doing so is unnecessary.

The OCC, Board, FDIC, and NCUA subsequently codified this statement.

See

12 CFR part 4, appendix A to subpart F (OCC); 12 CFR part 262, appendix A (Board); 12 CFR part 302, appendix A (FDIC); and 12 CFR part 791, appendix A to subpart D (NCUA).

One commenter asked the Agencies to specifically reference which Q&As apply only to an NFIP policy and which Q&As apply to a flood insurance policy issued by a private insurance company or both. In response to this comment, the Agencies note that all the Q&As apply to all policies, whether NFIP or a flood insurance policy issued by a private insurance company, unless otherwise noted in the Q&A.

The Agencies also received a general comment regarding climate change. The commenter noted that the Interagency Questions and Answers failed to discuss climate change risks. According to the commenter, climate change risks should serve as a “safe-harbor” for insurers to deny flood coverage. Further, the commenter suggested that the Agencies should explicitly require the insurers to consider climate risks and that flood insurance should be mandatory in high risk zones as a result of climate change. Climate change risk is outside the scope of the Agencies' Interagency Questions and Answers. The Agencies note that they are working individually and on an interagency basis to address financial risks associated with climate change consistent with the Agencies' regulatory and supervisory authorities. Therefore, the Agencies decline to make changes to any of the Q&As in response to this comment.

Comments on specific Q&As are discussed below in the Section-by-Section Analysis.

Section-by-Section Analysis

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

Section I includes questions and answers related to the applicability of the Regulation's flood insurance requirements to certain loans. This proposed general applicability section included existing Q&As 1 through 7 relating to residential buildings and, for organizational purposes, incorporated existing section V's Q&As 24 and 25, which address flood insurance requirements for non-residential buildings. The Agencies also proposed a streamlined heading for this section to provide greater clarity with no intended change in substance or meaning. The Agencies proposed changes to the Q&As in this section in the July 2020 Proposed Questions and Answers.

Applicability 1.

The Agencies proposed to redesignate existing Q&A 1 as Q&A Applicability 1 with only minor language modifications, and no intended change in substance or meaning. This Q&A discusses whether the Regulation applies to a loan where the building or mobile home securing the loan is located in a community that does not participate in the NFIP. The Agencies received no specific comments on this Q&A and are adopting Q&A Applicability 1 as proposed with minor non-substantive edits.

Applicability 2.

The Agencies proposed to redesignate existing Q&A 24 as Q&A Applicability 2. This Q&A discusses whether a lender is required to mandate flood insurance for buildings with limited utility or value. The Agencies proposed to update this Q&A to indicate that the answer depends on whether buildings with limited utility meet the detached structure exemption, which provides an exemption from the mandatory purchase requirements for certain detached structures. This exemption was added by HFIAA. The proposal also removed the existing language indicating that the lender should

consider any local zoning issues or other issues that would affect its collateral. In addition, the Agencies made minor wording changes.

The Agencies received one comment on this Q&A. The commenter suggested an alternative “carve-out” approach that would permit a lender to include all buildings in the security instrument as a matter of convenience in closing the loan and in marketing the parcel of land if necessary, even if a structure could have been “carved out” as not necessary for collateral. The commenter suggested that buildings that are included as security for a loan as a matter of convenience, and not to protect the lender by providing material credit support for the loan, would not be considered to be buildings “securing the loan” that need to be covered by flood insurance. However, the approach suggested by this commenter is not legally possible because the Act

requires flood insurance on all improved property that secures a designated loan. The Agencies therefore are adopting Q&A Applicability 2 as proposed with an added cross-reference to Q&A Exemptions 1, which discusses the exemptions from the mandatory purchase requirement, for reader reference.

Public Law 93-234, 87 Stat. 975 (1973), codified at 42 U.S.C. 4012a.

Applicability 3.

The Agencies proposed to redesignate existing Q&A 25 as proposed Q&A Applicability 3. This Q&A discusses a lender's requirements under the Regulation for a loan secured by multiple buildings if only some of the buildings are located in an SFHA, or if some of the buildings are located in different communities and only some of the communities participate in the NFIP. The Agencies proposed to change the answer to emphasize when flood insurance is required as opposed to when it is not required as in the existing Q&A. Further, the Agencies proposed to include an example in the answer. The Agencies proposed these changes to provide greater clarity and to improve readability and did not intend any change in substance or meaning.

The Agencies received two comments on this proposed Q&A. One commenter requested that the Agencies add a statement that the mandatory purchase requirement is only applicable to buildings with a physical footprint at least partially within the boundaries of an SFHA. This commenter stated that the extension of a plat or lot into the SFHA does not automatically trigger the mandatory purchase of flood insurance for buildings located on that plat or lot. The other commenter requested that the Agencies address situations when a portion of a property securing a loan is located in an SFHA but the improvements located on that same property are not located in the SFHA. The commenter recommends that if the structure is not located within an SFHA, then insurance should not be required.

The Agencies confirm that land itself is not subject to the mandatory flood insurance purchase requirement. To address these comments, the Agencies are clarifying in the final answer to this Q&A that if any portion of a building is located in an SFHA in which flood insurance is available under the Act, the flood insurance requirement applies even if the entire structure is not located in the SFHA. Further, the Agencies are revising the final answer to state that a building located on a portion of a plat or lot that is not in an SFHA is not subject to the mandatory flood insurance purchase requirement even if a portion of the plat or lot not containing a building extends into an SFHA. With these amendments and some minor non-substantive edits, the Agencies are adopting Q&A Applicability 3.

Applicability 4.

The Agencies proposed to redesignate existing Q&A 2 as Q&A Applicability 4. This Q&A discusses a lender's responsibility if a particular building or mobile home that secures a loan is no longer located within an SFHA due to a map change. The Agencies proposed to broaden this Q&A to also address a lender's responsibility if a building or mobile home that secures a loan is not located within an SFHA, even if not due to a map change. In addition, the Agencies proposed to reword for clarity the sentence in the answer indicating that a lender, by contract, may still require flood insurance on such buildings or mobile homes for safety and soundness purposes. The proposed sentence states that a lender may, at its discretion and taking into consideration appropriate State law, require flood insurance for property outside of SFHAs for safety and soundness purposes as a condition of a loan being made. Further, the Agencies proposed to add language to the answer to specifically note that each lender should tailor its own flood insurance policies and procedures to suit its business needs and protect its ongoing interest in the collateral. The Agencies intended no substantive changes with these revisions. The Agencies received no specific comment on this proposed Q&A and are adopting it as proposed with one technical change. The Agencies are removing the discussion of the NFIP Preferred Risk Policy because of changes made by FEMA in Risk Rating 2.0—Equity in Action (Risk Rating 2.0).

See https://www.fema.gov/flood-insurance/risk-rating.

Applicability 5.

The Agencies proposed to redesignate existing Q&A 3 as Q&A Applicability 5 and to revise it by making minor language modifications for greater clarity, with no intended change in substance or meaning. This Q&A discusses whether a lender's purchase of a designated loan triggers any requirements under the Regulation. The Agencies received positive comment on this Q&A and are adopting it as proposed.

Applicability 6.

The Agencies proposed to redesignate existing Q&A 5, which addresses whether the Regulation applies to loans that are being restructured or modified, as proposed Q&A Applicability 6 with no changes. One commenter specifically stated that the clarification provided by Q&A Applicability 6 may be very helpful in light of the COVID-19 pandemic as more consumers may need to modify their mortgages. A few commenters requested that Q&A Applicability 6 include additional examples to clarify when flood compliance requirements are triggered in loan restructurings and modifications, and they provided specific language. As in the existing Q&A, proposed Q&A Applicability 6 states that 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. However, the Agencies agree that additional clarification on when loan restructurings and modifications trigger the Regulation's requirements would be helpful. Furthermore, the Agencies believe that rewording the question also would provide additional clarity. Therefore, the Agencies are revising the question in the final Q&A to ask whether a loan that is being restructured or modified constitutes a triggering event (making, increasing, renewing, or extending a loan) under the Regulation. In addition, the Agencies are revising the answer in the final Q&A to provide that if a loan modification or restructuring involves recapitalizing delinquent payments and other amounts due under the loan, or amounts that were otherwise originally contemplated to be part of the loan pursuant to the contract with the borrower, into the loan's outstanding principal balance and the maturity date of the loan otherwise stays the same, the Regulation would not apply because the modification or restructuring would not

increase, extend, or renew the terms of the loan. The revisions to the final answer also provide that, conversely, if the loan modification or restructuring changes terms of the loan such as by increasing the outstanding principal balance beyond what was contemplated as part of the loan under the contract with the borrower, or by extending the maturity date of the loan, the Regulation would apply because the lender increased or extended the terms of the loan beyond what was originally contemplated to be part of the loan. With these amendments, the Agencies are adopting Q&A Applicability 6.

Applicability 7.

The Agencies proposed to redesignate existing Q&A 6, which addresses whether table funded loans are treated as new loan originations, as Q&A Applicability 7. The Agencies proposed to update the answer to refer to the definition of “table funding” in the Regulation instead of to the obsolete definition of this term in the Department of Housing and Urban Development's (HUD) former Real Estate Settlement Procedures Act (RESPA) rule. The Agencies received no specific comment on this Q&A and are adopting it as proposed.

Applicability 8.

The Agencies proposed to redesignate existing Q&A 7 as Q&A Applicability 8 and proposed only one minor wording change, with no intended change in substance or meaning. This Q&A addresses whether a lender is required to perform a review of its, or of its servicers', existing loan portfolio for compliance with the flood insurance requirements under the Act and Regulation. The Agencies received positive comment on this Q&A and are adopting it as proposed.

Applicability 9.

The Agencies proposed to redesignate existing Q&A 4 as Q&A Applicability 9 and to make only minor language modifications for greater clarity, with no intended change in substance or meaning. This proposed Q&A addressed whether the mandatory purchase requirements apply to loan syndications or participations. The proposed answer provided that 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 but that, 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. The proposed answer also stated that 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, and that Federal flood insurance requirements also would apply when a group of lenders refinances, extends, renews or increases a loan. Further, the proposed answer provided that although the agreement among the lenders may assign compliance duties to a lead lender or agent, and may 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, under the proposed answer, the Agencies would 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. Lastly, the proposed answer stated that 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.

The Agencies received a number of comments on this Q&A. Some commenters requested that the Agencies offer further clarity on what constitutes sufficient “upfront due diligence” and “adequate controls to monitor the activities of the lead lender or agent for compliance with flood insurance requirements over the term of the loan.” These commenters also stated that problems arise when lead lenders have different regulators employing different approaches for upfront due diligence as well as monitoring for flood compliance. One commenter recommended the inclusion of an explicit statement in the Q&A that if a lead lender on a facility is not federally regulated, and thus not subject to flood compliance requirements, any participating lenders on that facility also do not have flood compliance obligations with respect to that facility. Another commenter requested that the Agencies indicate in the Q&A that as long as a participating non-lead lender has adopted written policies, procedures, and processes for managing the risks of flood compliance that are reasonably within that participating lender's control, that lender generally would be viewed as having satisfied its flood compliance obligations. A third commenter stated that the answer was confusing since it appears to state that flood compliance requirements can be assigned to the lead lender but subsequently states that each individual lender remains responsible for compliance. The commenter suggested that, in instances where a lead lender is in charge of ensuring flood insurance requirements are met, participating lenders be allowed to rely on, as a safe harbor, documentation from the lead lender to limit their individual exposure.

The Agencies understand the compliance complications that may arise with loan syndications and participations. However, the requirements under the Act and the Regulation apply to each lender individually, even if they are part of a loan syndication or participation. The Agencies may not remove these requirements as suggested if the lead lender is not federally-regulated nor create a safe harbor that allows a lender to rely on the lead lender's policies or procedures or on others' policies and procedures for compliance. Further, the Agencies believe it is more appropriate for lenders to determine specific due diligence procedures and controls to ensure compliance with the Act and Regulation based on the particular facts of each transaction. Therefore, the Agencies decline to include examples of such procedures and controls in the Q&A. However, to emphasize the particular concerns that may arise with lead lenders who are not federally-regulated, the Agencies are adding a statement in the final answer indicating that a non-lead lender's due diligence and monitoring of the lead lender is especially important when the lead lender itself is not subject to Federal flood insurance requirements. With this amendment, the Agencies are adopting Q&A Applicability 9.

Applicability 10.

The Agencies proposed new Q&A Applicability 10 to 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 provided 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

clarified 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. One commenter requested the same changes it suggested for proposed Q&A Applicability 9 regarding further clarification on what constitutes sufficient upfront due diligence and adequate controls and removal of flood compliance requirements if the lead lender is not federally-regulated. For the reasons stated in the discussion of Q&A Applicability 9, the Agencies decline to accept these changes and are adopting Q&A Applicability 10 as proposed with the addition of a similar statement added to Q&A Applicability 9 regarding due diligence and non-Federal lead lenders.

Applicability 11.

The Agencies proposed new Q&A Applicability 11 to 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. The Agencies received no specific comment on this Q&A and are adopting it as proposed.

Applicability 12.

The Agencies proposed new Q&A Applicability 12, based on guidance previously issued by the Agencies,

to 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 clarified 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. The proposed answer also indicated that lenders should evaluate the safety and soundness and legal risks, and prudently manage those risks, during such periods when the NFIP is unavailable. One commenter specifically commented on this proposed Q&A, stating that it provides helpful and appreciated clarity on how credit unions should proceed in the event of a lapse in authorization or appropriations. The Agencies are adopting this Q&A as proposed.

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).

New Q&A Applicability 13.

To address a number of comments regarding what is and is not a triggering event under the Regulation, and to further clarify the Interagency Questions and Answers Regarding Flood Insurance, the Agencies are adding a new Q&A Applicability 13 to the 2022 Interagency Questions and Answers to specifically address triggering events. This new Q&A provides lenders with a quick reference of what constitutes a triggering event under the Regulation.

Specifically, Q&A Applicability 13 states that under the Regulation, a triggering event occurs when a designated loan is made, increased, extended, or renewed. If a triggering event occurs with respect to a designated loan, the lender is required to comply with certain requirements of the Regulation, including the mandatory flood insurance purchase requirement, the requirement to provide the Notice of Special Flood Hazards to the borrower, the requirement to notify the Administrator of FEMA or the Administrator's designee (the insurance provider) in writing of the identity of the servicer of the loan, and the requirement to escrow for a loan secured by residential property, unless either the lender or the loan qualifies for an exception. This Q&A also includes examples of events that are not considered triggering events for purposes of the Regulation, including the purchase of a loan from another lender (

see

Q&A Applicability 5); a loan modification that does not increase the amount of the loan nor extend or renew the terms of the loan (

see

Q&A Applicability 6); the assumption of the loan by another borrower; the remapping of a building securing the loan into an SFHA; the acquisition by a lender of an interest in a loan either by participation or syndication (

see

Q&A Applicability 9); a cashless roll (

see

Q&A Applicability 10); certain automatic extensions of credit (

see

Q&A Applicability 11); and certain treatments of force placement premiums and fees (

see

Q&A Force Placement 10).

Applicability 14 (Proposed as Q&A Coverage 2).

The Agencies proposed to redesignate existing Q&A 64 as Q&A Coverage 2. As noted below, the Agencies are renumbering this Q&A as Q&A Applicability 14. This Q&A addresses when a lender may rely on an insurance policy providing portfolio-wide coverage, removes the reference to criteria set forth by FEMA, and includes language addressing a lender's reliance on a policy that provides portfolio-wide coverage.

Several commenters suggested that the Agencies clarify the term “portfolio-wide” coverage to explain that the typical “master policy” that lenders obtain and use to force place flood insurance on individual loans is different than portfolio-wide coverage. The Agencies agree with the commenters and are clarifying that a lender may not rely on an insurance policy providing portfolio-wide coverage to meet the flood insurance purchase or force placement requirements if the policy only provides coverage to the lender (“single interest”). As stated in the Regulation, flood insurance coverage under the discretionary acceptance provision must cover both the mortgagor and mortgagee (

i.e.,

lender and the borrower) as loss payees, except in the case of a policy that is provided by a condominium association, cooperative, homeowners association, or other applicable group and for which the premium is paid by the respective organization. However, the Agencies are adding language to the answer indicating that lenders may purchase a master flood insurance policy that provides coverage for its entire portfolio and covers both the lender and the borrower (“dual interest”) because these policies provide coverage for the entire portfolio as well as individual coverage, and include the issuance of an individual policy or certificate.

A few commenters suggested that the answer be clarified to state that a portfolio-wide gap policy may be useful in some circumstances, such as when a property is newly mapped into an SFHA. Additionally, a few commenters suggested that lenders be allowed to rely on master policies for compliance purposes. The Agencies decline to make these revisions. As noted in the existing and proposed Q&A, master 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, such policies do not provide coverage for the borrower and cannot be used to satisfy the force placement requirement.

One commenter stated that using the term “private insurance policy” may be confused with a borrower-procured flood insurance policy issued by a private insurer. The Agencies agree and are making technical changes to remove the term “private” when referring to

lender procured flood insurance policies in the Q&A.

The Agencies are adopting this Q&A as proposed with the amendments discussed above and an additional minor non-substantive change.

Applicability 15 (Proposed as Q&A Coverage 3).

The Agencies proposed new Q&A Coverage 3 to address when mandatory flood insurance on a designated loan is required to be in place during the closing process. As noted below, the Agencies are renumbering this Q&A as Q&A Applicability 15. This proposed Q&A clarified 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, and that 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 explained the difference between “wet funding” and “dry funding” States and how it impacts the “closing date” for purposes of flood insurance.

A few commenters suggested expanding the Q&A to clarify the “closing date” for refinances subject to rescission. One lender suggested that it would be helpful to add examples to illustrate when mandatory flood insurance needs to be in place on a designated loan. The Agencies agree and are expanding the answer to address transactions where there is no transfer of property ownership, such as a refinance, and the borrower is purchasing a new flood insurance policy or is required to increase flood insurance coverage. In these cases, the lender should use the loan's consummation date, which is the date the borrower becomes contractually obligated on the loan, as the effective date for the flood insurance policy. As a result of this clarification, the Agencies do not believe adding examples is necessary. The Agencies are adopting this Q&A with the changes discussed above.

Section II. Exemptions From the Mandatory Flood Insurance Purchase Requirements (Exemptions)

Existing section III includes one Q&A related to the exemptions from the mandatory flood insurance purchase requirements. The Agencies proposed to redesignate existing section III as section II and proposed a streamlined heading for this section to provide greater clarity with no intended change in substance or meaning. As proposed, section II includes existing Q&A 18 and six new Q&As, Exemptions 2 through 7, pertaining to the exemption from the mandatory flood insurance purchase requirements for certain detached structures created by HFIAA. The Agencies proposed changes to the Q&As in this section in the July 2020 Proposed Questions and Answers. As noted in the proposal, this set of Q&As on the detached structure exemption responds to a request for more guidance related to this exemption, as documented in the EGRPRA report.

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

Exemptions 1.

The Agencies proposed to redesignate existing Q&A 18 as Q&A Exemptions 1. This Q&A discusses the exemptions from the mandatory flood insurance purchase requirement. The Agencies proposed to revise the Q&A to include the detached structure exemption in addition to the existing exemptions for State-owned property and loans with an original principal balance of $5,000 or less and an original repayment term of one year or less. The proposed Q&A also noted 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. One commenter requested further clarity and examples on what constitutes a detached structure. Another commenter requested clarification on “mixed use” property where detached buildings that may have been used for commercial purposes but no longer have a commercial use could fall under the residential exemption if the residence is using the structure for storage. The Agencies note that what constitutes a detached structure is a fact-based determination and that the lender, who is in the best position to consider all the facts and circumstances and with input from the borrower, has the responsibility to determine what constitutes a detached structure and its purpose or the primary use of a mixed use structure. The Agencies are not in a position to provide examples for all possible scenarios. The Agencies also are including a cross reference to Q&A Exemptions 2 to provide further guidance and therefore are adopting the Q&A with this addition.

Exemptions 2.

The Agencies proposed new Q&A Exemptions 2 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 provided 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. One commenter suggested that the Agencies provide more examples of a primary residential structure. The Agencies decline to provide examples as the Agencies have indicated in the preamble to the 2015 Final Rule that whether a structure is defined as a primary residential structure is fact specific and that lenders would need to conduct good faith due diligence to make this determination. Another commenter suggested the Agencies separate this Q&A into two discrete questions to highlight different aspects of the answer. The Agencies decline to adopt this suggestion because the example is intertwined with the principles being discussed in the answer. Accordingly, the Agencies are adopting the Q&A as proposed.

Exemptions 3.

The Agencies proposed new Q&A Exemptions 3 to clarify that a flood hazard determination is required for a detached structure even though flood insurance coverage is not required on such a structure because the determination is used to identify the number and type of structures present on the property. One commenter noted that in practice, lenders first obtain a flood hazard determination as to the entire parcel of property to determine if any structures are located in an SFHA and then determine whether any detached structures on the property may be exempt under the Regulation, and therefore the proposed Q&A may imply that the presence or absence of exempt structures may affect whether a flood hazard determination is required. The Agencies agree that this Q&A may be confusing as proposed. As a result, the Agencies are revising the Q&A to clarify that a flood hazard determination is required even where detached structures are present. The revised answer provides that a flood hazard determination is needed to determine whether a building or mobile home securing a loan is or will be located in an SFHA where flood insurance is available under the Act. The answer further provides that in order to determine whether the exemption for non-residential detached structures on residential property may apply, a flood hazard determination must be conducted first, without regard to whether there may be any detached structures that could be exempt. With these amendments, the Agencies are adopting Q&A Exemptions 3.

Exemptions 4.

The Agencies proposed new Q&A Exemptions 4 to 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. The Agencies received no specific comments on this Q&A and are adopting the Q&A as proposed.

Exemptions 5.

The Agencies proposed new Q&A Exemptions 5 to address whether a property being remapped into an SFHA triggers a review of the intended use of each detached structure. Specifically, the proposed answer stated that a lender must examine the status of a detached structure upon a qualifying triggering event and that a remapping is not a triggering event. The proposed answer also stated 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. Further, the proposed answer notes that, consistent with existing obligations under the Regulation, if a lender determines at any time that a property, including a detached structure, 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.

One commenter asked whether notification of a map change constitutes notice that the property may be subject to the mandatory flood insurance purchase requirement. Another commenter inquired whether this Q&A allows a lender to rely on the initial appraisal as to what the detached structure is being used for or whether the lender is responsible for determining the current use. One commenter noted that the answer reiterates the requirements for force placement which do not seem relevant to the answer. Based on the comments received, the Agencies are revising the question to focus instead on whether a triggering event requires a lender to review the intended use of the detached structure. The answer remains unchanged, except for removing the language regarding remapping and force placement and non-substantive wording changes for clarification. In addition, the Agencies are including a reference to new Q&A Applicability 13, which explains what constitutes a triggering event. With these changes, the Agencies are adopting Q&A Exemptions 5.

Exemptions 6.

The Agencies proposed new Q&A Exemptions 6 to discuss whether a lender, following a review of its loan portfolio, may determine to no longer require flood insurance on a detached structure in an SFHA if the structure does not provide contributory value. The Agencies proposed 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. Instead, a specific exemption must apply. The Agencies received no specific comments on this Q&A and are adopting the Q&A as proposed.

Exemptions 7.

The Agencies proposed new Q&A Exemptions 7 to 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 provided 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, and “stands alone.” One commenter suggested that the Agencies allow lenders to defer to an insurer's definition for a structural connection as this term is not defined in the Regulation or statute, or that the Agencies define this term. As indicated in the proposed Q&A, the Agencies have interpreted this term to mean a structure is “detached” if it stands alone and that this interpretation is consistent with the coverage provision of the NFIP's Standard Flood Insurance Policy (SFIP) for additions and extensions to a dwelling unit. The proposed answer also included a reference to the

NFIP Flood Insurance Manual

for additional information. However, the Agencies are amending the Q&A to track the language of the Regulation and are removing the FEMA example as it is unnecessary. Therefore, the Agencies are adopting the Q&A with these changes.

Proposed Section III. Coverage (NFIP/Private Flood Insurance)

The Agencies proposed in the July 2020 Questions and Answers to move existing section XI to section III. This section included two new Q&As (Coverage 1 and 3), and existing Q&A 64 redesignated as Coverage 2. Because the Agencies are consolidating the July 2020 Proposed Questions and Answers and the March 2021 Proposed Questions and Answers, for organizational purposes, in the 2022 Interagency Questions and Answers the Agencies are moving the three Q&As under Section III Coverage to other sections as noted below and reassigning section III.

The Agencies proposed new Q&A Coverage 1 in the July 2020 Proposed Questions and Answers to assist lenders in complying with the discretionary acceptance provision and mutual aid societies provision in the Agencies' 2019 Final Rule. The Agencies are redesignating this Q&A as Q&A Discretionary 4. Please refer to Section IV, Q&A Discretionary 4 for the Agencies response to comments.

The Agencies proposed to redesignate existing Q&A 64 as Coverage 2. This Q&A addresses when a lender may rely on an insurance policy providing portfolio-wide coverage, removes the reference to criteria set forth by FEMA, and includes language addressing a lender's reliance on a policy that provides portfolio-wide coverage. The Agencies are re-designating this Q&A as Q&A Applicability 14. Please refer to Section I, Q&A Applicability 14 for the Agencies response to comments.

The Agencies proposed new Q&A Coverage 3 in the July 2020 Proposed Questions and Answers to address when mandatory flood insurance on a designated loan is required to be in place during the closing process. The Agencies redesignated Q&A Coverage 3 as Q&A Applicability 15. Please refer to Section I, Q&A Applicability 15 for the Agencies response to comments.

Additionally, the Agencies proposed in the July 2020 Proposed Questions and Answers to delete existing Q&A 63 because it was inconsistent with the Agencies' final rule implementing the private flood insurance provision of the Biggert-Waters Act.

The Agencies received no specific comment on this proposed change and are deleting this Q&A as proposed.

84 FR 4953 (Feb. 20, 2019).

Section III. Private Flood Insurance—Mandatory Acceptance (Mandatory)

The 2019 Final Rule requires lenders to accept “private flood insurance,” as defined in the Biggert-Waters Act (mandatory acceptance). In order to assist lenders in evaluating whether a flood insurance policy meets the definition of “private flood insurance,” the 2019 Final Rule also includes a compliance aid provision. Under the compliance aid provision, a lender may conclude that a policy meets the definition of “private flood insurance” without further review if the policy, or an endorsement to the policy, contains the compliance aid statement set forth in the rule.

The Agencies proposed a number of Q&As regarding mandatory acceptance and the compliance aid provision in the March 2021 Proposed Questions and Answers. As discussed in further detail below, the Agencies are combining proposed Q&A Mandatory 2 with proposed Q&A Discretionary 4 and renumbering the Q&A as Q&A Private Flood Compliance 11. The Agencies also are renumbering the other Q&As in this section accordingly.

General Comments.

The Agencies received some general comments regarding the Q&As related to the mandatory acceptance of private flood insurance policies. One commenter was supportive of the proposed Q&As, stating that the Agencies' implementation of the mandatory acceptance provisions and widespread use of a compliance aid assurance clause have allowed the private flood insurance market to thrive. This commenter believed the mandatory acceptance provisions facilitate private policy placements, ensure that consumers have access to affordable flood coverage, and provide security to lenders seeking to fulfill their compliance obligation.

Another commenter suggested the Q&As could incorporate language that clarifies digital transmission of relevant flood coverage documents, as well as physical transmission or use of paper documents, is permissible. As explained under Q&A Discretionary 2, the Regulation does not address the acceptability of electronic records, but lenders may accept electronic and digital records for recordkeeping purposes.

One commenter noted that a number of the mandatory acceptance Q&As refer to “reviews” of private flood insurance policies. This commenter stated that it would be helpful to clarify that a flood insurance policy issued by a private insurer is subject to two different reviews. According to the commenter, as with any flood insurance policy, including NFIP policies, the lender or servicer must conduct the mandatory purchase requirement review in connection with a triggering event. The commenter stated that this review would include, among other things, determining whether the policy contains the appropriate coverage limits, deductible, term of coverage, and mortgagee clause. In addition, the commenter stated that, the lender or servicer must determine whether a private flood insurance policy satisfies the definition of “private flood insurance” or could otherwise be accepted by a lender under the discretionary acceptance criteria. The commenter requested this clarification throughout the Interagency Questions and Answers.

The Agencies understand the commenter's confusion regarding the term “review” as used in some of the Q&As in the mandatory acceptance section. The Agencies have generally clarified the type of review involved for relevant mandatory acceptance Q&As, either in the text of the Q&A or the preamble.

Mandatory 1.

Proposed new Q&A Mandatory 1 addressed whether a lender may decide to only accept private flood insurance policies under the mandatory acceptance provision of the Regulation. The proposed answer confirmed that a lender may decide to only accept private flood insurance policies that the lender is required to accept under the mandatory acceptance provision because the policies meet the definition of “private flood insurance” under the Regulation. The proposed answer also clarified that a lender is not required to accept flood insurance policies that only meet the criteria set forth in the discretionary acceptance or mutual aid provision in the Regulation. The Agencies received no specific comments on this Q&A and are adopting it as proposed with minor non-substantive edits.

Mandatory 2 (Proposed as Q&A Mandatory 3).

Proposed new Q&A Mandatory 3 addressed whether the private flood insurance requirements under the Regulation require a lender to change its policy of not originating a mortgage in non-participating communities or coastal barrier regions where the NFIP is not available. The proposed answer explained that the Regulation does not require a lender to originate a loan that does not meet the lender's underwriting criteria. Further, the proposed answer noted that the flood insurance purchase requirement only applies to loans secured by structures located or to be located in an SFHA in which flood insurance is available under the Act. As stated in Q&A Applicability 1, as proposed and as adopted by the Agencies, the mandatory flood insurance purchase requirement does not apply within non-participating communities where NFIP insurance is not available under the Act. Therefore, the proposed answer states that the lender does not need to change its policy of not originating mortgages in areas where NFIP insurance is unavailable solely because of the private flood insurance requirements under the Regulation. The Agencies received no specific comments on this Q&A and are adopting it as proposed, with minor changes for clarity, and renumbered as Q&A Mandatory 2.

Mandatory 3 (Proposed as Q&A Mandatory 4).

Proposed new Q&A Mandatory 4 addressed whether the compliance aid assurance clause could act as a conformity clause that would make a flood insurance policy issued by a private insurer conform to the definition of “private flood insurance” under the Regulation. The proposed answer clarified that the compliance aid assurance clause is not intended to act as a conformity clause but rather to facilitate the ability of lenders and borrowers to recognize policies that meet the definition of “private flood insurance” and promote the consistent acceptance of policies that meet this definition.

The Agencies received a few comments on this proposed Q&A. One commenter agreed in principle that the compliance aid language should not, and cannot, act as a conformity clause, due mainly to the unique legal status that the term “conformity clause” has in State insurance regulation and contract law. Another commenter noted that whether the compliance aid assurance clause acts as a conformity clause is best interpreted by State insurance regulation and contract law. The third commenter explained that interpretation of insurance contracts, including whether the compliance aid assurance clause acts as a conformity clause, should be a matter of State law. This commenter further stated that this Q&A is outside the scope of the Federal flood insurance statutes and regulations, and is outside the Agencies' authority to interpret and apply those Federal statutes and regulations. The commenter recommended instead that the Agencies address this question by providing guidance that this is a matter of State insurance contract law. The Agencies disagree with this commenter's statement regarding the scope of the Act and Regulation and the Agencies' authority to interpret or apply the Act and Regulation. The Agencies adopted the compliance aid provision in the Regulation pursuant to the authority granted to the Agencies in the Act to issue the Regulation.

Therefore, the Agencies have the authority to interpret this provision in a Q&A.

42 U.S.C. 4012a(b)(1).

Additionally, a few of the commenters recommended that the Agencies delete references to “assurance clause” in this Q&A and revert to prior language that simply refers to this clause as the compliance aid language or statement. The commenters noted that the addition of “assurance clause” in the current

Q&A could infer a meaning beyond that intended by the Agencies because the term “assurance clause” has broad meaning under State insurance regulations and insurance laws. The Agencies agree with these comments. The Agencies are removing references to “assurance clause” in the final Q&A, as well as in the other Q&As, and will refer to this as the “compliance aid statement” per the Regulation. With this change, and a minor change for clarity, the Agencies are adopting this Q&A as proposed and renumbered as Q&A Mandatory 3.

Mandatory 4 (Proposed as Q&A Mandatory 5).

Proposed new Q&A Mandatory 5 stated that a lender is not required to accept a flood insurance policy issued by a private insurer solely because the policy contains the compliance aid assurance clause if the lender chooses to conduct its own review and determines the flood insurance policy actually does not meet the mandatory acceptance requirements. The proposed answer noted that if a flood insurance policy issued by a private insurer does not include the compliance aid assurance clause, the lender must still review the policy to determine if it meets the requirements for private flood insurance as set forth in the Regulation before the lender may choose to reject the policy.

One commenter believed that a flood insurance policy issued by a private insurer that includes the compliance aid statement must be accepted and did not support Q&A Mandatory 5. The Agencies have been clear that a lender is not required to accept a flood insurance policy issued by a private insurer solely because it contains the compliance aid statement. Lenders may still, at their discretion, review a flood insurance policy issued by a private insurer that contains the compliance aid statement and reject the policy if they do not believe it meets the definition of “private flood insurance” or if it does not meet other requirements of the Regulation, such as providing the required amount of insurance.

Other commenters emphasized that Q&A Mandatory 5 is confusing and unclear. For example, commenters pointed out that a lender does not have to accept a flood insurance policy issued by a private insurer that does not meet the coverage requirements and a review is not required if a policy does not meet the coverage requirements. Commenters were unsure if the “required to accept” phrase in the question applies only to an assessment of whether the policy meets the definition of “private flood insurance” or if a lender could be required to accept the policy even if the policy is otherwise insufficient (such as the required dollar amount of coverage).

Some commenters believed the Agencies make an assumption about a given lender's processes by concluding that the lender would review a policy under mandatory acceptance criteria before the lender would review under discretionary acceptance criteria even though the Agencies make clear under proposed Q&A Mandatory 8 that a lender “may first review the policy to determine whether it meets the criteria under the discretionary acceptance provision.” One commenter emphasized that the Agencies go further than necessary in the proposed response and seem to dictate certain processes for the lender.

In addition, commenters suggested the Agencies consider alternative language for Q&A Mandatory 5. One commenter was confused by the Agencies' choice of language that did not align with the Regulation or the preamble discussion on the proposed Q&A. One commenter recommended the Agencies modify the answer to use plain language from the 2019 Final Rule and use consistent language to avoid confusion regarding key compliance concepts.

As explained in the preamble to the 2019 Final Rule, the Regulation does not permit lenders to reject a flood insurance policy issued by a private insurer solely because the policy is not accompanied by the compliance aid statement.

The Agencies stress that the compliance aid statement is meant to be an aid for lenders and it is not required for lenders to accept a flood insurance policy issued by a private insurer. In addition, lenders should remember that other aspects of the Regulation must be met for a lender to accept a flood insurance policy issued by a private insurer, even if the policy meets the definition of “private flood insurance.”

84 FR 4953, 4959 (Feb. 20, 2019).

However, the Agencies understand the commenters' concerns about Q&A Mandatory 5 as proposed and are incorporating suggested changes to address these issues. The final answer provides that if a flood insurance policy issued by a private insurer includes the compliance aid statement, the lender may choose to rely upon the statement and would not need to review the policy further to determine if the policy meets the definition of “private flood insurance.” The final answer also makes clear, however, that the lender is not required to accept this policy based upon inclusion of the compliance aid statement alone and may choose to make its own determination about whether the policy meets the definition of “private flood insurance” or whether the policy is acceptable under the discretionary acceptance or mutual aid criteria. In addition, if a flood insurance policy issued by a private insurer does not include the compliance aid statement, the final answer provides that the lender may not reject the policy solely because it does not include this statement. The final answer also states that a lender is not relieved from the requirement to accept a policy that meets the definition of “private flood insurance” and provides the required amount of insurance under the Regulation. The final answer also provides that the lender may determine the policy is acceptable under the discretionary acceptance or mutual aid criteria.

Lastly, as mentioned in Q&A Mandatory 3 in this section, the Agencies are changing the term “compliance aid assurance clause” throughout this Q&A to “compliance aid statement” to be consistent with the Regulation.

With these changes, the Agencies are adopting proposed Q&A Mandatory 5 and renumbering it as Q&A Mandatory 4.

Mandatory 5 (Proposed as Q&A Mandatory 6).

Proposed new Q&A Mandatory 6 discussed whether a lender is required to conduct an additional review of a flood insurance policy issued by a private insurer under the mandatory acceptance provision if the policy includes the compliance aid assurance clause. The proposed answer stated that under the mandatory acceptance provision of the Regulation, if a policy or an endorsement to the policy contains the compliance aid assurance clause, a lender is

not

required to conduct any further review of the policy in order to determine that the policy meets the definition of “private flood insurance.” The proposed answer also clarified that the language of the compliance aid assurance clause must be stated as set forth in the Regulation in order for the lender to rely on the protections of the compliance aid assurance clause. However, a lender need not reject a policy containing the compliance aid assurance clause if the formatting, font, punctuation, and similar stylistic effects that do not change the substantive meaning of the clause are different from the compliance aid assurance clause set forth in the Regulation. The proposed answer included a cross-reference to proposed new Q&A Mandatory 7.

The Agencies received a specific comment on Q&A Mandatory 6 that was

supportive. The commenter agreed that if a policy or an endorsement to the policy contains the compliance aid statement, further review is not necessary in order for the lender to determine that a policy meets the definition of “private flood insurance.” Therefore, the Agencies are adopting this Q&A as proposed, other than amending the term “compliance aid assurance clause” throughout the Q&A to “compliance aid statement” to be consistent with the Regulation. The Agencies are also renumbering Q&A Mandatory 6 as proposed to Q&A Mandatory 5 and updating the included cross-reference.

Mandatory 6 (Proposed as Q&A Mandatory 7).

Proposed new Q&A Mandatory 7 described additional reviews a lender must conduct when a flood insurance policy issued by a private insurer includes the compliance aid assurance clause, as the clause only assists a lender in making the determination that a flood insurance policy meets the definition of “private flood insurance” in the Regulation, and not other requirements specified in the Regulation. Specifically, under the proposed answer, the lender also must ensure that the amount of insurance is 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. The answer also included a cross-reference to proposed new Q&A Mandatory 6.

One commenter recommended that the Agencies revise Q&A Mandatory 7 and include a new Q&A under the Private Flood Compliance section. This commenter understood that the Agencies are attempting to reassure lenders who may be reluctant to accept a flood insurance policy issued by a private insurer merely because the policy includes the compliance aid statement. At the same time, the commenter believed that the Agencies do not want lenders to overlook the fundamental “requirements for coverage” review. Thus, the commenter suggested the Agencies simplify Q&A Mandatory 7 and move the language regarding coverage and other applicable requirements to a new Q&A under the Private Flood Compliance section. In addition, this commenter further recommended the Agencies include appropriate cross-references between Q&A Mandatory 7 and their suggested new Q&A, as well as to applicable questions under other sections. The Agencies disagree with this comment. Under the Regulation, lenders must determine whether a policy issued by a private flood insurance company meets both the definition of “private flood insurance” and the required amount of insurance under the Regulation. The intent of proposed Q&A Mandatory 7 is to remind lenders that they must review the policy to ensure that it meets the amount of insurance required under the Regulation even if the policy includes the compliance aid statement.

Many commenters had concerns with the sentence in the answer recommending that lenders ensure the accuracy of other key aspects of the policy, such as the borrower's name and address. These commenters specifically found the phrase “key aspects of the policy” to be ambiguous, open-ended, extraneous, and potentially problematic and recommended either its deletion or amendment. Specifically, one commenter noted that because there are no statutory or regulatory requirements or references regarding this phrase or the included examples, this sentence could confuse lenders. Another commenter stated that the Agencies should clearly define the exact elements that lenders must review beyond the compliance aid statement. One commenter suggested that the Agencies instead instruct lenders to review the policy as they would review other insurance policies for safety and soundness. Further, one commenter explained that there are many valid reasons for differences between the named parties on a mortgage and a property insurance policy as well as for differences in the physical address of the property, especially if the mortgage system reflects the legal description for the property as opposed to a mailing address.

The Agencies agree with the commenters that the phrase “other key aspects of the policy” is unclear. Because this sentence is not necessary to answer the question, the Agencies are deleting it in the final answer. Using alternative language regarding safety and soundness, as suggested by one commenter, would not eliminate ambiguity. However, the Agencies note that this deletion does not eliminate the need for lenders to conduct other reviews of a policy pursuant to their internal processes.

One commenter requested that the Agencies use the term “limit” instead of the term “coverage” the first time it appears in the answer. The Agencies have considered this request and are changing this use of “coverage” to “amount of insurance,” which is the phrase used in the Regulation.

Additionally, the Agencies are adding a reference to the Regulation in the question in this Q&A to avoid further confusion. The Agencies also are amending the term “compliance aid assurance clause” throughout the Q&A to “compliance aid statement” to be consistent with the Regulation.

With these changes, the Agencies are adopting this Q&A, renumbering it as Q&A Mandatory 6, and making a corresponding update to the included cross-reference.

Mandatory 7 (Proposed as Q&A Mandatory 8).

Proposed new Q&A Mandatory 8 addressed whether a lender may use the criteria under the discretionary acceptance provision to decide whether to accept a policy that does not contain the compliance aid assurance clause without first reviewing the policy to determine if it meets the mandatory acceptance provision. The proposed answer clarified that a lender may first review the policy to determine whether it meets the criteria under the discretionary acceptance provision. However, if the policy is not accepted under the discretionary acceptance provision, the lender still needs to determine whether it

must

accept the policy under the mandatory acceptance criteria. The proposed answer also reminded lenders to document that a policy provides sufficient protection of the loan if the lender accepts the policy under the discretionary acceptance provision of the Regulation.

The Agencies did not receive any specific comment on Q&A Mandatory 8. However, the Agencies are adding a cross reference to Q&A Discretionary 2 regarding the documentation of the sufficient protection of the loan, which provides that the lender may document this information electronically. The Agencies also are amending the term “compliance aid assurance clause” in the question to “compliance aid statement” to be consistent with the Regulation. The Agencies are adopting Q&A Mandatory 8 with minor clarifying edits and renumbering as Q&A Mandatory 7.

Mandatory 8 (Proposed as Q&A Mandatory 9).

Proposed new Q&A Mandatory 9 noted that if the compliance aid assurance clause is included on the declarations page, a lender may accept the policy without further review to determine whether the policy meets the definition of “private flood insurance.” However, a lender also must ensure that the policy provides the amount of insurance as required under the Regulation. One commenter pointed out that many private flood insurance policies do not include this representation on the declarations page, but they do include it in the policy, and requested that the Agencies edit this Q&A to reflect this fact. The Agencies note that the

Regulation provides that a lender may accept a flood insurance policy issued by a private insurer if the compliance aid statement is in the policy. The purpose of the proposed Q&A was to provide guidance when a lender receives only the declarations page and not the policy. Therefore, to clarify this Q&A, the Agencies are changing the question to refer to the lender only receiving a declarations page without receiving a copy of the policy.

Another commenter asked the Agencies to amend the response to make it clear that the lender may determine that the policy meets the definition of “private flood insurance” without further review. The Agencies agree and have revised the answer as suggested by this commenter, which better reflects the language in the Regulation.

One commenter stated that it would be helpful for the Agencies to identify in the answer the specific items that a lender must review to ensure compliance with the mandatory purchase requirement when the compliance aid assurance clause is included. The Agencies have addressed this issue in Q&A Mandatory 6 and included a cross-reference to Q&A Mandatory 6 in Q&A Mandatory 9. Therefore, the Agencies do not believe it is necessary to amend Q&A Mandatory 9 to include this information.

Lastly, the Agencies are amending the term “compliance aid assurance clause” throughout the Q&A to “compliance aid statement” to be consistent with the Regulation.

With the changes described above, the Agencies are adopting this Q&A, renumbering it as Q&A Mandatory 8, and making a corresponding update to the included cross-reference.

Mandatory 9 (Proposed as Private Flood Compliance 11).

The Agencies are renumbering proposed Q&A Private Flood Compliance 11 as Q&A Mandatory 9 in the 2022 Interagency Questions and Answers because it more appropriately fits within the Mandatory Acceptance Q&A section. As proposed, this Q&A addressed whether a lender may accept a private flood insurance policy that includes a compliance aid assurance clause, but that also includes a disclaimer that the “insurer is not licensed in the State or jurisdiction in which the property is located.” The proposed answer explained circumstances under which lenders may accept a policy issued by an insurer that is not licensed in the State or jurisdiction in which the property is located. The proposed answer also included a cross-reference to proposed Q&A Private Flood Compliance 10, which addressed whether lenders may accept policies issued by private insurers that are surplus lines insurers

for noncommercial residential properties.

The National Association of Insurance Commissioners (NAIC) notes, “[t]he surplus lines market (inclusive of U.S. and non-U.S. domiciled insurers) is a distinct segment of the industry consisting of non-admitted specialized insurers covering risks not available within the admitted market . . . Surplus lines insurers are subject to regulatory requirements and are overseen for solvency by their domiciliary [S]tate or country.”

https://content.naic.org/cipr_topics/topic_surplus_lines.htm.

For specific definitions related to surplus lines insurers, lenders should review the State law in which the property is located.

Some commenters suggested revising the answer to be more direct and to remove language that is addressed in Q&A Private Flood Compliance 10. The Agencies agree with the commenters that the answer can be worded more effectively and are adopting language similar to that recommended by one of the commenters. As revised, the answer provides that if the policy includes a statement indicating that the insurer is not licensed in the State or jurisdiction in which the property is located, suggesting that the policy is issued by a surplus lines insurer, but contains a compliance aid statement, lenders may accept the policy as long as the policy complies with the Regulation and applicable State laws. However, the Agencies note that the language removed from the proposed answer that provided specific circumstances under which lenders may accept a policy issued by a surplus lines insurer is still relevant. Specifically, a lender may accept a policy issued by a surplus lines insurer recognized or not disapproved by the relevant State insurance regulator as protection for loan collateral that is a commercial property. Also, a lender may accept a policy issued by a surplus lines insurer as protection for loan collateral that is a noncommercial property as a policy issued by an insurance company that is “otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located.”

The Agencies also are making one technical change to this question, amending the term “compliance aid assurance clause” to “compliance aid statement” to be consistent with the Regulation.

With the changes described above, the Agencies are adopting Q&A Mandatory 9.

Section IV. Private Flood Insurance—Discretionary Acceptance (Discretionary)

The 2019 Final Rule permits a lender, at its discretion, to accept a flood insurance policy issued by a private insurer even if the policy does not meet the statutory and regulatory definition of “private flood insurance,” provided the policy meets certain requirements in the rule (discretionary acceptance). The 2019 Final Rule also permits a lender, at its discretion, to accept certain mutual aid plans that meet the conditions stated in the rule.

The Agencies proposed the Q&As in this section, except for Q&A Discretionary 4, in the March 2021 Proposed Questions and Answers. The Agencies originally proposed Q&A Discretionary 4, as adopted in these 2022 Interagency Questions and Answers, as Q&A Coverage 1 in the July 2020 Proposed Questions and Answers. The Agencies are combining proposed Q&A Discretionary 4 with proposed Q&A Mandatory 2 and renumbering this Q&A as Q&A Private Flood Compliance 11, as discussed in more detail below.

Discretionary 1.

Proposed Q&A Discretionary 1 addressed whether lenders are required to accept flood insurance policies that meet the discretionary acceptance criteria. The proposed answer notes that the discretionary acceptance criteria in the Regulation set forth the minimum acceptable criteria that a flood insurance policy must have for the lender to accept the policy under the discretionary acceptance provision. The proposed answer clarified that it is at the lender's discretion to accept a policy that meets the discretionary acceptance criteria so long as the policy does not meet the mandatory acceptance criteria. The Agencies received no specific comments on this Q&A and are adopting Q&A Discretionary 1 as proposed.

Discretionary 2.

Proposed Q&A Discretionary 2 addressed the requirements for documentation to demonstrate that a policy provides sufficient protection of a loan when a lender accepts that policy under the discretionary acceptance criteria. The proposed answer explained that the Regulation requires the lender to document its conclusion in writing that the policy provides sufficient protection of the loan, consistent with safety and soundness principles. In addition, the proposed answer included a cross-reference to Q&A Discretionary 4 which discusses some factors to consider when determining whether a flood insurance policy issued by a private insurer provides sufficient protection of the

loan, consistent with safety and soundness principles.

Furthermore, the proposed answer noted that while the Regulation does not require any specific documentation to demonstrate that the policy provides sufficient protection of the loan, lenders may include any information that reasonably supports the lender's conclusion following review of the policy.

These factors include whether: (1) A policy's deductibles are reasonable based on a borrower's financial condition; (2) the insurer provides adequate notice of cancellation to the mortgagor and the mortgagee; (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 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 strength, solvency and ability to satisfy claims.

See

85 FR 40442, 40458 (July 6, 2020).

One commenter on this Q&A suggested that the Agencies clarify that a lender's electronic records may serve as documentation that demonstrates that a policy provides sufficient protection of the loan. The Agencies note that specific provisions in the Regulation allow for the use of electronic records. For example, the Regulation allows for the use of the Standard Flood Hazard Determination Form in an electronic format. Although there are no general provisions in the Regulation regarding the acceptability of electronic records, the Agencies agree that electronic and digital records are acceptable for a lender's recordkeeping purposes. In consideration of this comment, the Agencies are amending the Q&A by adding that a lender's review of a policy under the discretionary acceptance provision may be performed and recorded electronically.

The second commenter asked the Agencies to clarify whether in situations where a loan is secured by a building and land, and the value of the land securing a loan is greater than the loan amount, the lender could determine that flood insurance is not required or that the deductible may be higher than what the mandatory purchase criteria allows. The Agencies note that the Regulation requires that flood insurance 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, and that land is excluded from this analysis. Therefore, the lender cannot waive the flood insurance requirement based on the value of the land. Additionally, a flood insurance policy issued by a private insurer must provide sufficient protection of the designated loan, consistent with general safety and soundness principles. When evaluating higher deductibles, lenders should ensure the deductible is reasonable considering the borrower's financial condition. The Agencies believe that no change is needed in the Q&A to address this comment and that readers should refer to Q&A Private Flood Compliance 1.

With the amendment described above, the Agencies are adopting Q&A Discretionary 2.

Discretionary 3.

Proposed Q&A Discretionary 3 addressed how a lender could evaluate concerns related to an insurer's solvency, strength, and ability to pay claims in order to determine whether an insurance policy provides sufficient protection of a loan, consistent with general safety and soundness principles. The proposed answer provided that a lender may evaluate an insurer's solvency, strength, and ability to satisfy claims by obtaining information from the State insurance regulator's office of the State in which the property securing the loan is located, among other options. The proposed answer further indicated that a lender could rely on the licensing or other processes used by the State insurance regulator for such an evaluation.

A number of commenters suggested that the Agencies provide additional examples for evaluating an insurer's solvency, including the use of third-party sources of information such as credit rating agencies. Although lenders could consider many sources of information to evaluate an insurer, the Agencies decline to provide examples other than those included in the proposed Q&A. Further, including credit rating agencies as an example would be inconsistent with the principle in Section 939A of the Dodd-Frank Act, which required the Agencies to remove references to, or requirements of reliance on, credit ratings in their regulations with regard to assessment of the creditworthiness of a security or money market instrument using credit rating agencies. Although this provision concerns regulations, and not guidance, and is focused on the creditworthiness of a security or money market instrument, and not the solvency of an insurer, the Agencies believe it would be inappropriate to endorse or reference the use of credit rating agencies in the Interagency Questions and Answers in light of Section 939A of the Dodd-Frank Act.

One commenter suggested that the Agencies remove the requirement for financial institutions to evaluate the solvency and strength of private flood insurers. The Agencies note that the Regulation does not require lenders to evaluate the solvency and strength of private flood insurers. Rather, it requires lenders to determine that the policy provides sufficient protection of the designated loan, consistent with general safety and soundness principles. Evaluating the solvency and strength of private flood insurers is one factor, among others, that lenders could consider in making this determination, as detailed in Q&A Discretionary 4 as adopted, discussed below. For these reasons, the Agencies are adopting the Q&A as proposed, with an update to the included cross-reference to reflect Q&A renumbering.

Discretionary 4 (Proposed as Q&A Coverage 1).

The Agencies proposed new Q&A Coverage 1 in the July 2020 Proposed Questions and Answers 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. As noted above, the Agencies are renumbering this Q&A as Discretionary 4. The Q&A provides additional information on some factors to consider when determining whether a flood insurance policy issued by a private insurer provides sufficient protection of a loan.

The Agencies received several comments on this Q&A. One commenter supported the Q&A because it is not overly prescriptive and will likely enhance the development of the private flood insurance market. A few commenters recommended that the Agencies clarify that the sufficient protection of a loan requirement only applies to the discretionary acceptance provision. The Agencies agree and are clarifying the question so that it specifically references the discretionary acceptance and mutual aid acceptance provisions.

One commenter recommended that the Agencies expand the answer to explain that if a flood insurance policy issued by a private insurer or flood endorsement to an insurance policy issued by a private insurer states that the policy meets the definition of private flood insurance under 42 U.S.C. 4012a, or includes similar alternative language, such as that the coverage is at least as broad as the NFIP, the policy is explicitly acceptable. Additionally, the commenter suggested that if the flood insurance policy issued by a private issuer is determined to be less than the coverage provided under an NFIP policy, and the policy states that coverage is amended to match the terms of an NFIP policy, that the policy is explicitly acceptable. The Regulation provides a specific compliance aid

provision to assist lenders in determining if a policy meets the definition of private flood insurance. While lenders may consider the alternative language noted above when reviewing flood insurance policies issued by private insurers, making a policy acceptable based on such statements would not be consistent with the Regulation. Therefore, the Agencies are adopting proposed Q&A Coverage 1, renumbered as Discretionary 4, with the amendments discussed above.

Section V. Private Flood Insurance—General Compliance (Private Flood Compliance)

The Agencies proposed eleven new Q&As in this section in the March 2021 Proposed Questions and Answers. As discussed in more detail above, the Agencies are renumbering proposed Q&A Private Flood Compliance 11 from the March 2021 Proposed Questions and Answers as Q&A Mandatory 9. Q&A Private Flood Compliance 11, as adopted in these 2022 Interagency Questions and Answers, is a combination of proposed Q&A Mandatory 2 and proposed Q&A Discretionary 4 from the March 2021 Proposed Questions and Answers.

Private Flood Compliance 1.

Proposed new Q&A Private Flood Compliance 1 addressed the maximum deductible permissible for a flood insurance policy issued by a private insurer on properties located in an SFHA. The proposed answer clarified that the analysis depends on whether the lender is accepting the flood insurance policy under the mandatory acceptance provision or the discretionary acceptance provision.

For a private flood insurance policy that the lender is accepting under the mandatory acceptance provision, the proposed answer stated that the Regulation provides that the policy must contain a deductible that is “at least as broad as” the maximum deductible in the SFIP under the NFIP, which means that the deductible is no higher than the specified maximum under an SFIP for any total coverage amount up to the maximum available under the NFIP at the time the policy is provided to the lender. Further, the proposed answer provided that a policy with a coverage amount exceeding that available under the NFIP may have a deductible exceeding the specific maximum deductible under an SFIP. However, the proposed answer also advised that for safety and soundness purposes, the lender should consider whether the deductible is reasonable based on the borrower's financial condition, consistent with guidance the Agencies proposed in Q&A Amount 9

and with how deductibles may be evaluated under the discretionary acceptance provision. The proposed answer also set forth examples to aid in compliance.

Proposed Q&A Amount 9 provided that 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 the lender.

Further, the proposed answer provided that for purposes of compliance with the discretionary acceptance provision, the Regulation requires that the policy provide sufficient protection of the loan, consistent with general safety and soundness principles. The proposed answer stated that among other factors a lender could consider in determining whether the policy provides sufficient protection of the loan is whether the deductible is reasonable based on the borrower's financial condition. The proposed answer further provided that unlike the limitation on deductibles for policies accepted under the mandatory acceptance provision for any total coverage amount up to the maximum available under the NFIP, a lender can accept a flood insurance policy issued by a private insurer under the discretionary acceptance provision with a deductible higher than that for an SFIP for a similar type of property, provided the lender has determined the policy provides sufficient protection of the loan, consistent with general safety and soundness provisions. Finally, the proposed answer provided that whether a lender is evaluating the policy under the mandatory acceptance provision or the discretionary acceptance provision, 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.

The Agencies received several comments on this Q&A. One commenter asked for clarification of the flood insurance requirements for non-residential detached structures that are part of a commercial property and requested that the Agencies not limit the applicability of the detached structure exemption only to residential properties. The Agencies note that Congress established the detached structure exemption in HFIAA. This exemption provides that any structure that is part of a residential property but detached from the primary residential structure and does not serve as a residence is not required to be covered by flood insurance. As this statutory exemption only applies to a detached structure that is part of a residential property, the Agencies cannot create an exemption for detached structures that are part of a commercial property. Therefore, the Agencies do not have authority to revise the answer as requested.

One commenter requested clarification regarding the deductible when multiple buildings are insured on a single insurance policy. Some other commenters requested clarification on how the statement in Q&A Amount 9 referenced in the final paragraph of the proposed Q&A applies differently to a flood insurance policy issued by a private insurer covering multiple individual buildings versus an NFIP policy, which is limited to covering a single building. In response to these comments, the Agencies are amending the answer to add language that provides that a lender may accept a private flood insurance policy covering multiple buildings regardless of whether any single building covered by the policy has an insurable value lower than the amount of the per occurrence deductible. The Agencies also are adding cross-references to new Q&A Amount 10 and Q&A Private Flood Compliance 2, which address related deductible issues, to assist the reader.

One commenter indicated that the Q&A should include guidance that directs private insurers to consider climate change risk when setting flood insurance deductibles. As discussed above, climate change risk is outside the scope of the Agencies' Interagency Questions and Answers. As indicated previously, the Agencies are working individually and on an interagency basis to address financial risks associated with climate change consistent with the Agencies' regulatory and supervisory authorities. Therefore, the Agencies decline to make any change to the Q&A in response to this comment. For clarity, the Agencies are rewording the reference to the deductible requirement in the Regulation. With this clarifying edit and the amendment as noted, the Agencies are adopting Q&A Private Flood Compliance 1.

Private Flood Compliance 2.

Proposed new Q&A Private Flood Compliance 2 clarified that a lender may require that the deductible of any flood insurance policy issued by a private insurer be lower than the maximum deductible for an NFIP policy, under both the mandatory acceptance provision and the discretionary acceptance provision. The proposed answer further stated that for the mandatory acceptance provision, the Regulation requires that the private flood insurance policy be at least as broad as an NFIP policy, which includes a requirement that the private flood

insurance policy contain a deductible

no higher

than the specified maximum deductible for an SFIP. Therefore, the proposed answer clarified that a lender may require a borrower's private flood insurance policy deductible to be lower than the maximum deductible for an NFIP policy in connection with a policy that the lender accepts under the mandatory acceptance provision consistent with general safety and soundness principles and based on a borrower's financial condition, among other factors. With respect to the discretionary acceptance provision, the proposed answer noted that the lender need only consider whether the policy, including the stated deductible, provides sufficient protection of the loan, consistent with general safety and soundness principles. The proposed answer also included a reference to proposed Q&A Private Flood Compliance 1, which also addresses deductibles.

A commenter requested that the Agencies include in the answer an example of when a lender is not required to accept a policy for safety and soundness reasons related to the deductible, such as when a deductible is too high based on the borrower's financial condition. The Agencies decline to include an example in the answer because the answer already makes clear that a lender can require, as a condition of accepting the policy, a lower deductible for safety and soundness reasons. The Agencies note that the issues of deductibles as they relate to flood insurance policies issued by private insurers are already discussed in Q&A Private Flood Compliance 1. Therefore, the Agencies are adopting this Q&A as proposed with some minor non-substantive edits.

Private Flood Compliance 3.

Proposed Q&A Private Flood Compliance 3 provided guidance regarding whether a lender may charge fees to the borrower for the lender's use of a third party to review flood insurance policies. The proposed answer provided that the Act and the Regulation do not prohibit lenders from charging fees to borrowers for contracting with a third party to review flood insurance policies, including a policy issued by a private insurer, and, as provided in Q&A Fees 1 and Q&A Fees 2, lenders may charge limited, reasonable fees for flood determinations and life-of-loan monitoring.

The proposed answer reminded lenders that they should be aware of any other applicable requirements regarding fees and disclosures of fees.

New Q&A Fees 1, which is adapted from current Q&A 69, lists the four instances in the Act and Regulation when a lender or servicer can charge the borrower a fee for making a flood determination. New Q&A Fees 2, adapted from current Q&A 70, provides that charges made for life-of-loan reviews by determination firms may be passed to the borrower under certain conditions.

A commenter suggested that the Q&A should be expanded to specifically speak to the lender's ability to condition its acceptance of a flood insurance policy issued by a private insurer on payment of a fee. The Agencies disagree. As provided in the Act and the Regulation, a lender is required to accept a flood insurance policy issued by a private insurer that meets the definition of “private flood insurance,” as long as the policy meets the amount of insurance required under the Regulation. Therefore, a lender cannot condition the acceptance of such a policy on the payment of a fee by the borrower. Further, as stated above lenders should be aware of any other applicable requirements regarding fees and disclosures of fees. Therefore, the Agencies are adopting this Q&A as proposed with minor non-substantive edits.

Private Flood Compliance 4.

Proposed new Q&A Private Flood Compliance 4 addressed the lender's responsibility to ensure a policy issued by a private insurer meets the private flood insurance requirements of the Regulation if the policy is not available prior to loan closing. The proposed answer stated that the Act and Regulation do not specify the acceptable types of documentation for a lender to rely on when reviewing a flood insurance policy issued by a private insurer. The proposed answer also advised lenders to determine whether they have sufficient evidence to show the policy meets requirements under the Regulation and that if the lender does not have enough information to make this determination, then the lender should timely request additional information as necessary to complete its review. The proposed answer also suggested some optional steps that a lender could take to mitigate against closing delays.

The Agencies received a number of comments on this Q&A. Commenters asserted that lenders may not be able to obtain, before closing, a full policy or other information sufficient to determine whether a policy complies with the private flood insurance requirements of the Regulation. The commenters suggested revising the answer to provide that a lender may close a loan without determining whether the policy satisfies these requirements and, if the lender later determines that the policy does not satisfy these requirements, the lender would then comply with the Act's force-placed insurance requirements. The commenters also noted that with NFIP policies, lenders often rely on paid applications as evidence of coverage and receive a declarations page only after loan closing.

The Agencies decline to make the changes the commenters request. If a borrower is obtaining a flood insurance policy issued by a private insurer, the lender must determine whether the policy meets the requirements under the Regulation. If the lender cannot make this determination before closing on the loan, it may need to delay the closing. As discussed in Q&A Private Flood Compliance 5, the declarations page, if available to the lender before closing, may provide enough information for the lender to determine whether the policy meets the mandatory acceptance provision or discretionary acceptance provision of the Regulation or may contain the compliance aid statement, in which case the lender may rely solely on the declarations page. Otherwise, the lender may choose to ask the borrower to obtain the necessary information from the private insurer to provide to the lender.

Further, with respect to the commenter's statement that with NFIP policies, lenders often rely before closing on paid applications for coverage and do not receive a declarations page until after closing, the Agencies note that an NFIP policy does not need to be evaluated to determine if it complies with the private flood insurance requirements of the Regulation. In contrast, flood insurance policies issued by private insurers may not necessarily satisfy the private flood insurance requirements of the Regulation. As indicated above, a lender must review such a policy to determine if it satisfies these requirements.

Finally, commenters also requested that the answer distinguish its applicability to the two forms of review: The review of sufficiency for compliance with the mandatory purchase requirement and the review of acceptability under the private flood insurance requirements of the Regulation. The intent of this Q&A is to remind lenders of their responsibility to ensure that a policy meets the private flood insurance requirements of the Regulation if the policy is not available prior to loan closing. It is not to address any of the other requirements in the Regulation. To clarify this, the Agencies are amending the Q&A so that it addresses only the private flood insurance requirements under the

Regulation and does not address any other flood requirements that the Regulation imposes. The Agencies also are adding in this Q&A a reference to Q&A Private Flood Compliance 5, to direct readers to guidance on whether a declarations page provides sufficient information for a lender to determine whether the policy complies with the private flood insurance requirements of the Regulation.

With the exception of the changes discussed above, the Agencies are adopting this Q&A as proposed.

Private Flood Compliance 5.

Proposed new Q&A Private Flood Compliance 5 addressed whether a declarations page provides sufficient information for a lender to determine whether a policy complies with the private flood insurance requirements of the Regulation. Under the proposed answer, the lender may rely on the declarations page if it provides sufficient information for the lender to determine whether the policy meets the mandatory acceptance provision or the discretionary acceptance provision of the Regulation or if the declarations page contains the compliance aid assurance clause. However, if the declarations page does not provide sufficient information, the proposed answer suggested that the lender should request additional information about the policy to aid its determination.

The Agencies received a number of comments on this Q&A. Similar to Q&A Private Flood Compliance 4, the commenters asserted that the information lenders receive before closing may not be sufficient to determine whether the policy complies with the private flood insurance requirements of the Regulation, even though it is sufficient to determine that the policy satisfies the mandatory purchase requirement, and they suggested revising the answer to provide that a lender may close a loan without determining whether the policy satisfies the private flood insurance requirements. If the lender later determined that the policy does not satisfy these requirements, the lender would then comply with the Act's force-placed insurance requirements. For the reasons discussed in Private Flood Compliance 4, the Agencies decline to make the requested changes.

Commenters further requested that the answer distinguish its applicability to the two forms of review: The review of sufficiency for compliance with the mandatory purchase requirement and the review of acceptability under the private flood insurance requirements of the Regulation. The Agencies note that the focus of this Q&A is on the private flood insurance requirements of the Regulation and not any other flood requirements imposed by the Regulation. To clarify this, the Agencies are revising the question to specifically refer only to the private flood insurance requirements under the Regulation.

Several of the commenters requested guidance about a lender's authority to request necessary information from the borrower or insurer. The Agencies affirm that lenders may seek necessary information from borrowers and insurers. As discussed above, if a lender is unable to obtain the necessary information about a policy issued by a private insurer before closing, it may need to delay the closing. Another commenter suggested that the Q&A is unnecessarily limited by references to the declarations page and that that the Agencies should revise the Q&A to focus on the various forms of, and purposes for examining, evidence of coverage rather than emphasizing the declarations page. The Agencies note that this Q&A focuses on the declarations page because, prior to proposing this Q&A, the Agencies had received many questions requesting guidance on whether a declarations page provides sufficient information for a lender to determine whether a policy complies with the private flood insurance requirements of the Regulation. Q&A Private Flood Compliance 4 makes clear that the Act and Regulation do not specify the acceptable types of documentation on which a lender must rely when reviewing a flood insurance policy issued by a private insurer. If the necessary information is contained in other appropriate documentation, the lender need not rely on the declarations page.

The Agencies are adopting this Q&A as proposed, with the change to the question discussed above, and with one technical change to the answer that amends the term “compliance aid assurance clause” to “compliance aid statement” to be consistent with the Regulation.

Private Flood Compliance 6.

The Agencies proposed new Q&A Private Flood Compliance 6 to provide guidance on a lender's ability to accept multiple-peril policies. Specifically, the proposed answer clarified that a lender may accept multiple-peril policies that cover the hazard of flood under the private flood insurance provisions of the Regulation, provided they meet the requirements of the Regulation.

A commenter requested that the Q&A clarify that lenders are permitted to accept both standalone multiple-peril policies that address flood risks and policies that insure against other risks and that have a flood-related endorsement, as long as the mandatory or discretionary provisions of the Regulation are otherwise satisfied. The Agencies agree that lenders may accept multiple-peril policies that either address flood risks in the policy itself or address flood risks as an endorsement to the policy, and have amended to answer to clarify this.

The Agencies are also making a technical correction to this Q&A by removing the phrase “provided the policy meets the requirements under the Regulation.” This phrase is redundant because the private flood insurance provisions of the Regulation already require the policy to meet the Regulation's requirements.

The Agencies are adopting this Q&A with this amendment.

Private Flood Compliance 7.

Proposed new Q&A Private Flood Compliance 7 addressed the question of how the private flood insurance requirements of the Regulation work in conjunction with requirements of secondary market investors, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The proposed answer first reminded lenders that they must comply with the Federal flood insurance requirements. The proposed answer then noted that secondary market investor requirements are separate from the requirements of the Regulation, and that, if a lender plans to sell loans to such an investor, the lender should carefully review the investor's requirements and direct questions regarding these requirements to the appropriate entities. The Agencies did not receive any specific comment on proposed Q&A Private Flood Compliance 7. Therefore, the Agencies are adopting Q&A Private Flood Compliance 7 as proposed, with one technical change to the question. Specifically, the Agencies are amending the term “compliance aid assurance clause” to “compliance aid statement” to be consistent with the Regulation.

Private Flood Compliance 8.

Proposed new Q&A Private Flood Compliance 8 provided guidance to servicers for loans covered by flood insurance mandated by the Act. Specifically, the proposed answer clarified that for loans serviced on behalf of lenders supervised by the Agencies, the servicer must comply with the Regulation in determining whether a flood insurance policy issued by a private insurer must be accepted under the mandatory acceptance provision or may be accepted under the discretionary acceptance or mutual aid provisions. However, for loans serviced

on behalf of other entities not supervised by the Agencies, the proposed answer stated that the servicer should comply with the terms of its contract with such an entity. The proposed answer suggested that when servicing loans on behalf of Fannie Mae or Freddie Mac, where there are insurer rating requirements specified within those entities' servicing guidance or other relevant authorities that are not included in the Regulation, the servicer should adhere to those servicing requirements. The Agencies did not receive any specific comment on proposed Q&A Private Flood Compliance 8. Therefore, the Agencies are adopting Q&A Private Flood Compliance 8 as proposed.

Private Flood Compliance 9.

Proposed new Q&A Private Flood Compliance 9 provided guidance regarding optional methods lenders can use to address questions on whether an insurer is licensed, admitted, or otherwise approved to do business in a particular State, which is one of the factors lenders must evaluate under both the mandatory acceptance and discretionary acceptance provisions. Specifically, proposed new Q&A Private Flood Compliance 9 explained that a lender could determine whether an insurer is licensed, admitted, or otherwise approved in a particular State, or whether a surplus lines or nonadmitted alien insurer

is permitted to issue an insurance policy in a particular State, by reviewing the website of the State insurance regulator where the collateral property is located or by contacting the State insurance regulator directly. Further, the proposed answer noted that the information with respect to surplus lines insurer eligibility may be available in the Consumer Insurance Search (CIS) tool available on the National Association of Insurance Commissioners (NAIC) website.

The proposed answer stated that lenders also may consult commercial service providers regarding the eligibility of surplus lines insurers in particular States as long as the lenders have a reasonable basis to believe that these service providers have reliable information. With regard to nonadmitted alien insurers in particular, the proposed answer suggested that lenders could review the NAIC's Quarterly Listing of Alien Insurers.

The NAIC notes that “[w]hereas [S]tates monitor the eligibility of U.S. domiciled surplus lines insurers, alien insurers eligible to write surplus lines premium are listed on the NAIC Quarterly Listing of Alien Insurers [

https://www.naic.org/prod_serv_alpha_listing.htm#quarterly_alien

] . . . [Alien insurers] are prohibited from establishing a U.S. branch office.”

https://content.naic.org/cipr_topics/topic_surplus_lines.htm.

See https://content.naic.org/cis_consumer_information.htm.

See https://www.naic.org/prod_serv_alpha_listing.htm#quarterly_alien.

The Agencies received one comment requesting that the Agencies allow financial institutions to rely on the regulated insurance companies to comply with the lender's regulatory requirement to use a licensed insurance company because it is difficult to identify the insurer that is behind a specific flood insurance policy when the policy is issued by a syndicate of an alien insurer. As indicated above, if there is a compliance aid statement, and the lender is accepting the policy under mandatory acceptance, no further review is required to determine the status of the insurer.

See

Q&A Mandatory 6. However, the Agencies do not agree that the lender can waive its duty to verify whether an insurer is licensed, admitted, or otherwise approved in a particular State, or whether a surplus lines or nonadmitted alien insurer is permitted to issue an insurance policy in a particular State, if there is no compliance aid statement or if the lender is choosing to conduct its own review of whether the policy must be accepted under the mandatory acceptance provision or may be accepted under the discretionary acceptance provision. The Agencies are adopting Q&A Private Flood Compliance 9 as proposed.

Private Flood Compliance 10.

Proposed new Q&A Private Flood Compliance 10 addressed whether lenders may accept policies issued by private insurers that are surplus lines insurers for noncommercial residential properties. The proposed answer explained that if the surplus lines insurer is eligible or not disapproved to place insurance in the State or jurisdiction in which the property to be insured is located, lenders may accept policies issued by surplus lines insurers as coverage for noncommercial (

i.e.,

residential) properties. In addition, the proposed answer confirmed that policies issued by surplus lines insurers for noncommercial properties are covered in the definition of “private flood insurance” and in the discretionary acceptance provision, which the Agencies noted in the preamble to the March 2021 Proposed Questions and Answers and in the proposed answer is consistent with the Act and the Regulation.

Specifically, the Agencies explained that in the definition of “private flood insurance,” surplus lines policies for noncommercial properties are covered as policies that are issued by insurance companies that are “otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located.” The proposed answer also noted that within the discretionary acceptance provision, noncommercial residential policies issued by surplus lines carriers are covered as policies that are issued by private insurance companies that are “otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located.”

During discussion of the Biggert-Waters Act on the Senate floor, Sen. Crapo noted that surplus lines insurers can provide flood insurance coverage for residential properties and asked for clarification regarding the inclusion of surplus lines coverage in the definition of “private flood insurance.” In his response, Sen. Johnson stated, “[T]he definition of `private flood insurance' includes private flood insurance provided by a surplus lines insurer and is not intended to limit surplus lines eligibility to nonresidential properties. While the Senator is correct that surplus lines insurance is specifically mentioned in that context, overall the definition accommodates private flood insurance from insurers who are `licensed, admitted, or otherwise approved' in the State where the property is located.” 158 Cong. Rec. S6051 (daily ed. Sept. 10, 2012).

As the Agencies discussed in the preamble to the March 2021 Proposed Questions and Answers, if the surplus lines insurer is eligible or not disapproved to place insurance in the State or jurisdiction in which a property to be insured is located, the surplus lines insurer is deemed to be “otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located” for purposes of the Act and Regulation. Therefore, the proposed answer noted that even if the surplus lines insurer is not considered to be engaged in the business of insurance under applicable State law, the surplus lines insurer nevertheless would meet the criteria

only

for purposes of this provision of the Regulation if the insurer is eligible or not disapproved to place insurance in the State or jurisdiction in which a property to be insured is located.

In the preamble to the March 2021 Proposed Questions and Answers, the Agencies provided an example to illustrate this concept, noting that under section 1776 of the California Insurance Code, the permission granted to allow an insurance policy issued by a nonadmitted insurer to be placed in California, “shall not be deemed or construed to authorize any insurer to do business in [California].”

In addition,

section 1776 of the California Insurance Code states that “[p]lacement activities of a licensed surplus line broker in accordance with [California law], including, but not limited to, policy issuance, shall not be deemed or construed to be business done by the insurer in [California].”

However, as discussed in the March 2021 Proposed Questions and Answers, it is the Agencies' understanding that these provisions of California law do not make ineligible or disapprove any individual surplus lines insurer from placing insurance in California if they meet all other applicable requirements in California law. Consequently, a surplus lines insurer that is eligible or not disapproved to place insurance in California is “otherwise approved” for purposes of the Regulation even though the surplus lines insurer is not authorized to do business in California for purposes of Section 1776 of the California Insurance Code.

Cal. Ins. Code Section 1776.

Id.

Some commentors suggested that the Agencies consider removing or redrafting the Q&A because it suggests that lenders have an independent obligation to verify the eligibility of surplus lines insurers seeking to write flood coverage. The Agencies decline to make the suggested changes noting that, absent a compliance aid statement under the mandatory acceptance provision, the lender is required under the Regulation to verify the insurer's eligibility, as discussed above in connection with Q&A Private Flood Compliance 9. One commenter also suggested shortening the answer to only include the first sentence. The Agencies intentionally included the more detailed answer based on questions the Agencies have received and do not elect to shorten it. Therefore, the Agencies are adopting Q&A Private Flood Compliance 10 as proposed with one minor non-substantive edit to the question.

Private Flood Compliance 11 (Proposed as Q&As Mandatory 2 and Discretionary 4).

Proposed Q&A Mandatory 2 and proposed Q&A Discretionary 4 addressed lender requirements for reviewing flood insurance policies issued by private insurers. Because both proposed Q&As discussed similar issues, the Agencies are combining these two Q&As and renumbering them as Q&A Private Flood Compliance 11.

Proposed new Q&A Mandatory 2 addressed when a lender must review a flood insurance policy issued by a private insurer to make sure the policy meets the mandatory acceptance criteria, other than at loan origination. The proposed answer provided that other than at loan origination, a lender must review a flood insurance policy issued by a private insurer to determine whether it meets the mandatory acceptance criteria when the policy comes up for renewal, or any time the borrower presents the lender with any new flood insurance policy issued by a private insurer. The proposed answer clarified that a lender must review the policy in these instances regardless of whether a triggering event occurred (making, increasing, extending or renewing a loan).

The proposed answer further explained that a lender may determine that the policy meets the mandatory acceptance criteria without further review if the policy or an endorsement to the policy includes the compliance aid assurance clause and clarified that if the policy does not meet the mandatory acceptance criteria, the lender may still accept the policy if it meets the discretionary acceptance criteria, or, if applicable, the mutual aid plan criteria. The proposed answer indicated that if the policy does not meet the mandatory acceptance, discretionary acceptance, or mutual aid plan criteria, the lender must notify the borrower in accordance with the force placement provisions of the Regulation and further indicated that if the borrower does not purchase flood insurance that complies with the Regulation, the lender must purchase insurance on the borrower's behalf.

The proposed answer also clarified that if a lender previously reviewed the flood insurance policy under the discretionary acceptance provision to ensure that the policy meets the private flood insurance requirements of the Regulation, the lender may rely on its previous review, provided there are no changes to the terms of the policy. However, as required by the Regulation, the proposed answer indicated that the lender must document its conclusion regarding sufficiency of protection of the loan in writing.

Proposed Q&A Discretionary 4 addressed whether a lender is required to review a flood insurance policy upon renewal if that policy was issued by a private insurer and was originally accepted in accordance with the discretionary acceptance provision. The proposed answer provided that if a lender had accepted a flood insurance policy issued by a private insurer in accordance with the discretionary acceptance requirements and the policy is renewed, the lender must review the policy upon renewal to ensure that it continues to meet the discretionary acceptance requirements. The proposed answer also stated that a lender would need to document its conclusion regarding sufficiency of the protection of the loan in writing upon each renewal to indicate that the policy continues to provide sufficient protection of the loan.

One commenter to proposed Q&A Mandatory 2 stated its belief that a private policy should be reviewed either at every policy renewal or when making, increasing, extending or renewing a loan but believes it would be best if the policy is reviewed when making, increasing, extending or renewing a loan. This commenter also stated that in connection with a renewal of a policy, a lender should be able to rely on its prior review in connection with mandatory acceptance to be consistent with the proposed answer to Q&A Mandatory 2 that allows a lender to rely on its prior review in connection with discretionary acceptance. Some commenters indicated that proposed Q&As Mandatory 2 and Discretionary 4 suggest that there is a distinction between the level of review required in connection with making, increasing, extending or renewing a loan (triggering event) and the level of review required to accept a new policy during the loan term or renewal of the policy that had initially been accepted, and recommended that the Agencies revise the answers to clarify the level of review required in connection with a triggering event and the renewal of coverage. Some commenters noted that in connection with private flood insurance, a private flood insurance policy must be reviewed for both the acceptability of the policy (

i.e.,

whether the policy meets the definition of “private flood insurance”) and sufficiency (

i.e.,

the amount and term of coverage), and they requested guidance on whether there is a distinction between the review required in connection with a triggering event and upon renewal of the policy. One commenter appreciated the statement in proposed Q&A Mandatory 2 that “the lender may rely on its previous review, provided there are no changes to the terms of the policy” and recommended that the Agencies provide additional detail as to what elements of the prior review may be relied on during review of the same policy at renewal. Other commenters stated that proposed Q&A Mandatory 2 conflicts with proposed Q&A Applicability 8, which stated that “[a]part 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.” These commenters recommended that the Agencies clarify that a private policy must be reviewed upon the making, increasing, extending or renewing of a loan, and otherwise may be reviewed periodically consistent with safety and soundness principles. These commenters also suggested that the Q&A refer to acceptance “criteria” rather than “requirements” unless referring to a specific required action. The commenters noted that proposed Q&A Discretionary 4 draws a distinction between origination and renewal, yet there is no statutory requirement to review policies at renewal. The commenters suggested the Agencies remove the requirement that the lender must review the policy upon renewal, and instead state that the lender should have procedures to ensure that the policy continues to meet the discretionary acceptance criteria.

Based on the comments, the Agencies agree that a lender should be able to rely at renewal on a prior review of a private policy in connection with mandatory acceptance and discretionary acceptance. Accordingly, the Agencies are combining the guidance contained in proposed Q&A Mandatory 2 with proposed Q&A Discretionary 4 and are removing the language in the first paragraph of the proposed answer to Q&A Mandatory 2 that would have required a lender to review a private policy to determine whether it meets the mandatory acceptance criteria when the policy comes up for renewal. To improve readability, the Agencies are removing the reference in proposed Q&A Mandatory 2 to “making, increasing, extending or renewing a loan” after the term “triggering event” in the first paragraph. Additionally, the Agencies are amending the term “compliance aid assurance clause” in the first paragraph of proposed Q&A Mandatory 2 to “compliance aid statement” to be consistent with the Regulation.

The Agencies also are revising and broadening the second paragraph of the answer to proposed Q&A Mandatory 2 to provide that if a lender has previously reviewed the flood insurance policy under any of the private flood provisions of the Regulation—the mandatory acceptance provision, the discretionary acceptance provision, or the mutual aid plan provision, the lender may rely on its prior review, provided there are no changes to the terms of the policy that would affect acceptance under the Regulation. The Agencies also are removing the phrase “to ensure that the policy meets the private flood insurance requirements of the Regulation” in this paragraph of proposed Q&A Mandatory 2 because it is redundant. The answer for Q&A Private Flood Compliance 11 provides that the lender should have effective internal controls in place through appropriate policies, procedures, training and monitoring to ensure compliance with the requirements of the Regulation. The Agencies interpret the Regulation to provide that when there are no changes to the terms of the policy that would affect acceptance under the Regulation, the lender's previous written documentation will constitute the documentation required under the Regulation each time the policy comes up for renewal and are amending the answer to address this issue. The Agencies believe that the answer properly distinguishes “criteria” from “requirements” under the Regulation and therefore decline to change this term as requested by the commenter.

Finally, a few commenters to proposed Q&A Mandatory 2 stated that references to force placement in the proposed Q&A seemed unnecessary and further complicate the message as to the level of review needed upon the renewal of a private insurance policy. As the answer to Q&A Private Flood Compliance 11 provides that in connection with a policy renewal a lender may rely on a previous review of the policy provided that there are no changes to the terms of the policy that would affect acceptance under the Regulation, the Agencies are not including the language regarding force placement that was proposed in Q&A Mandatory 2.

With these amendments, the Agencies are adopting Q&A Private Flood Compliance 11.

Section VI. Standard Flood Hazard Determination Form (SFHDF)

Proposed section IV included questions and answers related to use of the Standard Flood Hazard Determination Form (SFHDF). The Agencies proposed to move existing section XII to section IV for organizational purposes. Accordingly, this proposal redesignated existing Q&As 65 through 68 as Q&As SFHDF 1 through 4, respectively. The Agencies proposed changes to the Q&As in this section in the July 2020 Proposed Questions and Answers. Because the Agencies are combining the July 2020 Proposed Questions and Answers and the March 2021 Proposed Questions and Answers into one Interagency Questions and Answers document, the Agencies are renumbering this SFHDF section as Section VI in the 2022 Interagency Questions and Answers and streamlining the title.

SFHDF 1.

The Agencies proposed to redesignate existing Q&A 65 as Q&A SFHDF 1 with only minor language modifications and no intended change in substance or meaning. This Q&A addresses whether the SFHDF replaces the borrower notification form. The Agencies received no specific comments on this Q&A and are adopting Q&A SFHDF 1 as proposed.

SFHDF 2.

The Agencies proposed to redesignate existing Q&A 66 as Q&A SFHDF 2 with only minor language modifications and no intended change in substance or meaning. This Q&A addresses whether a lender may provide a copy of the SFHDF to the borrower. The Agencies received two comments on this proposed Q&A. Both commenters suggested removing the phrase “so they can better understand their flood risk” from the answer as the lender need not contemplate a borrower's intended use of a flood determination and there may be other reasons for providing a flood determination to a borrower. One commenter suggested that references to FEMA's Letter of Determination Review (LODR) process be removed from the answer as it falls outside the scope of the question. In consideration of the comments received, the Agencies are removing the language regarding the borrower's understanding of their flood risk and limiting references to the LODR to note only that a lender would need to make a flood determination available to a borrower under this FEMA process. With these amendments and some minor non-substantive edits, the Agencies are adopting Q&A SFHDF 2.

SFHDF 3.

The Agencies proposed to redesignate existing Q&A 67 as Q&A SFHDF 3 with only minor language modifications and no intended change in substance or meaning. This Q&A addresses the use of an SFHDF in electronic format. The Agencies received no specific comments on this Q&A and are adopting Q&A SFHDF 3 as proposed.

SFHDF 4.

The Agencies proposed to redesignate existing Q&A 68 as Q&A SFHDF 4 with only minor language modifications and no intended change in substance or meaning. This Q&A addresses the circumstances when a lender may rely on a previous SFHDF. The Agencies received one specific comment on this proposed Q&A. The commenter suggested clarifying the Q&A to note that an SFHDF may be reused for the same collateral on a subsequent loan secured by the same

collateral. The Agencies note that the existing Q&A states “if the same lender makes multiple loans to the same borrower secured by the same secured real estate, the lender may rely on its previous determination” if the other requirements referenced in the answer are satisfied. Therefore, no changes to the Q&A are needed to address this comment and the Agencies are adopting Q&A SFHDF 4 as proposed.

Section VII. Flood Insurance Determination Fees (Fees)

The Agencies proposed in the July 2020 Proposed Questions and Answers to move existing section XIII, which contains questions and answers related to flood insurance determination fees, to proposed section V for organizational purposes. Because the Agencies are combining the July 2020 Proposed Questions and Answers and the March 2021 Proposed Questions and Answers into one document, the Agencies are renumbering this Fees section as Section VII in the 2022 Interagency Questions and Answers.

Fees 1.

The Agencies proposed to redesignate existing Q&A 69 as Q&A Fees 1 with only minor changes and no intended change in substance or meaning. This Q&A addresses when a lender or servicer can charge a borrower a fee for making a flood determination. The Agencies did not receive any specific comment on proposed Q&A Fees 1, and are adopting it as proposed.

Fees 2.

The Agencies proposed to redesignate existing Q&A 70 as Q&A Fees 2 with only minor changes and no intended change in substance or meaning. This Q&A addresses whether charges made for life-of-loan reviews by flood determination firms may be passed along to the borrower. The Agencies did not receive any specific comment on proposed Q&A Fees 2 and are adopting it as proposed.

Section VIII. Flood Zone Discrepancies (Zone)

The Agencies proposed to redesignate the Q&As in existing section XIV, which addresses flood zone discrepancies, as section VI, and to redesignate current Q&As 71 and 72 as Q&As Zone 1 and 2. The Agencies also proposed to add new Q&A Zone 3 to address borrower disputes of a lender's flood zone determination. The Agencies proposed these changes in the July 2020 Proposed Questions and Answers. Because the Agencies are combining the July 2020 Proposed Questions and Answers and the March 2021 Proposed Questions and Answers into one document, the Agencies are renumbering this Zone section as Section VIII in the 2022 Interagency Questions and Answers.

One commenter said that it supported the changes to this section because it is frustrating for agents when lenders demand that specific flood zones appear on a declarations page; the commenter believes that lenders should be concerned only with whether the structure is in an SFHA and the limit on the policy. Another commenter stated that all three Q&As in this section provide consistent clarification that the SFHDF is the dominant form when discrepancies arise.

Zone 1.

The Agencies proposed to redesignate existing Q&A 71 as Q&A Zone 1. Q&A 71 addresses what a lender should do when there is a discrepancy between the flood hazard zone designation on the flood determination form and the flood insurance policy declarations page. The Agencies proposed to revise the answer to Q&A 71 to reflect a change in the Agencies' expectations regarding a lender's obligation in the event of such a discrepancy. The proposal stated that a lender is no longer required to attempt to resolve the discrepancy but that the lender should consider documenting the discrepancy in the loan file. The proposal further stated that 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 is not otherwise required to attempt to resolve the discrepancy as previously indicated in current Q&A 71.

Since the Agencies proposed Q&A Zone 1 in July 2020, FEMA has begun to implement Risk Rating 2.0 effective October 1, 2021.

Under Risk Rating 2.0, the determination of insurance premiums for NFIP policies no longer relies on the flood zone. As such, the flood zone is no longer included on the declarations page for NFIP policies issued under Risk Rating 2.0. Consistent with changes brought on by Risk Rating 2.0, and after additional review, the Agencies are further revising this question and answer. Specifically, the Agencies are removing references to the declarations page and simplifying the answer to state that a lender need not reconcile or otherwise be concerned with a flood zone discrepancy to be in compliance with the Act and the Regulation. Finally, the Agencies are replacing references to the flood zone “on the flood insurance policy declarations page” with the flood zone “associated with a flood insurance policy” as a clarifying change.

See https://www.fema.gov/flood-insurance/risk-rating.

Several commenters stated that they appreciate the Agencies' change in position that a lender is no longer required to reconcile discrepancies between the SFHDF and the declarations page.

Some commenters sought clarification of this proposed Q&A; they believed its language erroneously suggested that force placement is appropriate to cover a loss that has already occurred when a premium deficiency is discovered during the claim handling process. One commenter stated that the force placement requirement should apply during the life of the loan, whenever a discrepancy arises (such as with a policy renewal or replacement or a remapping event), not just if a discrepancy arises in connection with the making, increasing, refinancing, or extending of a loan (a triggering event). Another commenter stated that if permitted by the security instrument, a lender could satisfy its statutory and regulatory obligations by advancing the funds necessary to pay the additional premium. This commenter suggested adding language to the Q&A that would expressly permit this alternative. The Agencies note that lenders no longer need to be concerned with potential misratings resulting from an incorrect flood zone for NFIP policies due to changes made by FEMA in Risk Rating 2.0; therefore, the Agencies are revising the final Q&A to reflect this change.

A commenter asked if this Q&A should be understood to mean the lender is no longer required to send to the insurance agent and/or the underwriter a reminder of FEMA's letter of April 18, 2008 (W-08021).

Another commenter asked if the lender is allowed to continue the existing practice with respect to discrepancies, including providing notification to the insurance agent or company. A third commenter asked whether the guidance should speak to the lender addressing a discrepancy at the time it is discovered rather than at the time of a potential loss, which could benefit both the lender and the borrower. In response, the Agencies affirm that there is no expectation that lenders will continue the existing practice, or take any other action, with respect to discrepancies

beyond what is described in this Q&A. The Agencies believe that Q&A 71, which sets forth expectations for resolving discrepancies, is unnecessarily burdensome. However, a lender is not prohibited from continuing the existing practice or otherwise attempting to resolve a discrepancy at any time. The Agencies are making no changes to the Q&A in response to these comments.

FEMA letter W-08021, dated April 16, 2008, set forth procedures for insurance companies relating to flood zone discrepancies. FEMA's letter attached a Financial Institution Letter, FIL-114-2007, issued by the FDIC and dated December 21, 2007, regarding managing risks associated with lapses in flood insurance coverage. FEMA letter W-08021 was archived in April 2018, and FIL-114-2007 was deactivated on December 1, 2018.

A few commenters asked the Agencies to clarify that before it initiates the force placement process, the lender or servicer must first receive notice that the borrower is not paying the additional premium and must determine that the coverage is inadequate. As noted above, for NFIP policies, lenders no longer need to be concerned with potential misratings resulting from an incorrect flood zone due to changes made by FEMA in Risk Rating 2.0; therefore, the Agencies are revising Q&A Zone 1 accordingly. In light of these revisions, there is no longer a need to address these comments regarding force placement in this context.

One commenter requested that the Agencies clarify that the reference to the “appropriate amount of insurance coverage” refers to the dollar limit of flood insurance required. The Agencies confirm that this language refers to the dollar amount of the required insurance coverage. The Agencies are making no changes to the Q&A in response to this comment.

One commenter sought clarification on how to handle zone discrepancies arising from flood insurance policies issued by private insurers, and another commenter stated that providing flexibility on how discrepancies are resolved with regard to flood insurance policies issued by private insurers is important. The Agencies note that companies that issue private flood insurance policies have discretion in how they may require lenders to handle flood insurance discrepancies. Accordingly, the Agencies are unable to provide clarification or guidance on this matter. Lenders may want to contact the insurers for information. The Agencies are making no changes to the Q&A in response to this comment.

One commenter asked the Agencies to add a statement regarding the acceptability of Newly Mapped rated policies that show a non-SFHA zone as the “rated” flood zone. The statement would provide that as long as the “current” flood zone matches the lender's determined zone, the policy satisfies the mandatory purchase requirement. The Agencies note that this request concerns FEMA policy, not Agency policy, and an Agency response to the request is beyond the scope of this Q&A.

The Agencies are adopting Q&A Zone 1 with the revisions discussed above.

Zone 2.

The Agencies proposed to redesignate existing Q&A 72 as Q&A Zone 2. This Q&A addresses whether a lender is in violation of the Regulation if there is a discrepancy between the flood zone on the flood determination form and the policy declarations page. The Agencies proposed to revise this answer to reflect a change in the Agencies' views on this question. The proposed Q&A clarified 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. This proposed change is consistent with the 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, discussed in connection with Q&A Zone 1, above. The Agencies received no specific comments on proposed Q&A Zone 2 and are adopting it as proposed with two changes. First, as in Q&A Zone 1, the Agencies are replacing references to the flood zone “on the flood insurance policy declarations page” with the flood zone “associated with a flood insurance policy” to conform with changes made by FEMA in Risk Rating 2.0.

Second, the Agencies are removing the language on documentation to reflect the changes made to Q&A Zone 1.

See https://www.fema.gov/flood-insurance/risk-rating.

Zone 3.

The Agencies proposed new Q&A Zone 3 to 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. One commenter was strongly in favor of this Q&A. Another commenter appreciated the guidance and suggested adding emphasis in the first paragraph to the possible role of the flood determination vendor in resolving a dispute so that the dispute does not need to be elevated to FEMA. The Agencies encourage the parties to take appropriate ac

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