Loans in Areas Having Special Flood Hazards; Interagency Questions and Answers Regarding Flood Insurance
| Published date | 06 July 2020 |
| Citation | 85 FR 40442 |
| Record Number | 2020-14015 |
| Section | Proposed rules |
| Court | Farm Credit Administration,Federal Deposit Insurance Corporation,National Credit Union Administration,The Comptroller Of The Currency Office |
Federal Register, Volume 85 Issue 129 (Monday, July 6, 2020)
[Federal Register Volume 85, Number 129 (Monday, July 6, 2020)]
[Proposed Rules]
[Pages 40442-40478]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14015]
[[Page 40441]]
Vol. 85
Monday,
No. 129
July 6, 2020
Part III
Department of the Treasury
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Office of the Comptroller of the Currency
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Federal Reserve System
Federal Deposit Insurance Corporation
Farm Credit Administration
National Credit Union Administration
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12 CFR Parts 22, 208, 339, et al.
Loans in Areas Having Special Flood Hazards; Interagency Questions and
Answers Regarding Flood Insurance; Proposed Rule
Federal Register / Vol. 85, No. 129 / Monday, July 6, 2020 / Proposed
Rules
[[Page 40442]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 22
[Docket ID OCC-2020-0008]
FEDERAL RESERVE SYSTEM
12 CFR Part 208
[Docket No. OP-1720]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 339
RIN 3064-ZA16
FARM CREDIT ADMINISTRATION
12 CFR Part 614
RIN 3052-AD42
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 760
RIN 3133-AF14
Loans in Areas Having Special Flood Hazards; Interagency
Questions and Answers Regarding Flood Insurance
AGENCY: Office of the Comptroller of the Currency (OCC), Treasury;
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); Farm Credit Administration (FCA);
National Credit Union Administration (NCUA).
ACTION: Notification and request for comment.
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SUMMARY: The OCC, Board, FDIC, FCA, and NCUA (collectively, the
Agencies) propose to reorganize, revise, and expand the Interagency
Questions and Answers Regarding Flood Insurance and solicit comment on
all aspects of the amendments. To help lenders meet their
responsibilities under Federal flood insurance law and to increase
public understanding of their flood insurance regulations, the Agencies
have prepared proposed new and revised guidance addressing the most
frequently asked questions and answers about flood insurance.
Significant topics addressed by the proposed revisions include the
effect of major amendments to flood insurance laws with regard to the
escrow of flood insurance premiums, the detached structure exemption,
and force-placement procedures.
DATES: Comments on the proposed questions and answers must be submitted
on or before September 4, 2020.
ADDRESSES: Interested parties are invited to submit written comments
to:
OCC: Commenters are encouraged to submit comments through the
Federal eRulemaking Portal or email, if possible. Please use the title
``Loans in Areas Having Special Flood Hazards; Interagency Questions
and Answers Regarding Flood Insurance'' to facilitate the organization
and distribution of the comments. You may submit comments by any of the
following methods:
Federal eRulemaking Portal--Regulations.gov Classic or
Regulations.gov Beta:
Regulations.gov Classic: Go to https://www.regulations.gov/. Enter
``Docket ID OCC-2020-0008'' in the Search Box and click ``Search.''
Click on ``Comment Now'' to submit public comments. For help with
submitting effective comments please click on ``View Commenter's
Checklist.'' Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting public comments.
Regulations.gov Beta: Go to https://beta.regulations.gov/ or click
``Visit New Regulations.gov Site'' from the Regulations.gov Classic
homepage. Enter ``Docket ID OCC-2020-0008'' in the Search Box and click
``Search.'' Public comments can be submitted via the ``Comment'' box
below the displayed document information or by clicking on the document
title and then clicking the ``Comment'' box on the top-left side of the
screen. For help with submitting effective comments please click on
``Commenter's Checklist.'' For assistance with the Regulations.gov Beta
site, please call (877) 378-5457 (toll free) or (703) 454-9859 Monday-
Friday, 9 a.m.-5 p.m. ET or email [email protected].
Email: [email protected].
Mail: Chief Counsel's Office, Attention: Comment
Processing, Office of the Comptroller of the Currency, 400 7th Street
SW, Suite 3E-218, Washington, DC 20219.
Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218,
Washington, DC 20219.
Fax: (571) 465-4326.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2020-0008'' in your comment. In general, the OCC will
enter all comments received into the docket and publish the comments on
the Regulations.gov website without change, including any business or
personal information provided such as name and address information,
email addresses, or phone numbers. Comments received, including
attachments and other supporting materials, are part of the public
record and subject to public disclosure. Do not include any information
in your comment or supporting materials that you consider confidential
or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this action by any of the following methods:
Viewing Comments Electronically--Regulations.gov Classic
or Regulations.gov Beta:
Regulations.gov Classic: Go to https://www.regulations.gov/. Enter
``Docket ID OCC-2020-0008'' in the Search box and click ``Search.''
Click on ``Open Docket Folder'' on the right side of the screen.
Comments and supporting materials can be viewed and filtered by
clicking on ``View all documents and comments in this docket'' and then
using the filtering tools on the left side of the screen. Click on the
``Help'' tab on the Regulations.gov home page to get information on
using Regulations.gov. The docket may be viewed after the close of the
comment period in the same manner as during the comment period.
Regulations.gov Beta: Go to https://beta.regulations.gov/ or click
``Visit New Regulations.gov Site'' from the Regulations.gov Classic
homepage. Enter ``Docket ID OCC-2020-0008'' in the Search Box and click
``Search.'' Click on the ``Comments'' tab. Comments can be viewed and
filtered by clicking on the ``Sort By'' drop-down on the right side of
the screen or the ``Refine Results'' options on the left side of the
screen. Supporting materials can be viewed by clicking on the
``Documents'' tab and filtered by clicking on the ``Sort By'' drop-down
on the right side of the screen or the ``Refine Results'' options on
the left side of the screen.'' For assistance with the Regulations.gov
Beta site, please call (877) 378-5457 (toll free) or (703) 454-9859
Monday-Friday, 9 a.m. -5 p.m. ET or email
[email protected].
The docket may be viewed after the close of the comment period in
the same manner as during the comment period.
Viewing Comments Personally: You may personally inspect
comments at the OCC, 400 7th Street SW, Washington, DC 20219. For
security reasons, the OCC requires that visitors make an appointment to
inspect comments. You may do so by calling (202) 649-6700 or, for
persons who are deaf or hearing impaired, TTY, (202) 649-5597. Upon
arrival, visitors will be required to present valid government-issued
photo
[[Page 40443]]
identification and submit to security screening in order to inspect
comments.
Board: You may submit comments, identified by Docket No. OP-1720,
by any of the following methods:
Agency website: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Email: [email protected]. Include the
docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551.
All public comments will be made available on the Board's website
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room 146, 1709 New York Avenue NW, Washington, DC 20006,
between 9:00 a.m. and 5:00 p.m. on weekdays.
FDIC: You may submit comments, identified by RIN 3064-ZA16, by any
of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Agency Website: https://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments.
Email: [email protected]. Include RIN 3064-ZA16 in the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street NW, Washington, DC 20429.
Hand Delivery/Courier: Comments may be hand-delivered to
the guard station at the rear of the 550 17th Street building (located
on F Street) on business days between 7:00 a.m. and 5:00 p.m.
Instructions: All submissions must include the agency name and RIN
3064-ZA16 for this rulemaking. Comments received will be posted without
change to https://www.fdic.gov/regulations/laws/federal/, including any
personal information provided. For detailed instructions on sending
comments and additional information on the rulemaking process, see the
``Public Participation'' heading of the SUPPLEMENTARY INFORMATION
section of this document.
FCA: We offer a variety of methods for you to submit your comments.
For accuracy and efficiency reasons, commenters are encouraged to
submit comments by email or through the FCA's website. As facsimiles
(fax) are difficult for us to process and achieve compliance with
section 508 of the Rehabilitation Act, we are no longer accepting
comments submitted by fax. Regardless of the method you use, please do
not submit your comment multiple times via different methods. You may
submit comments by any of the following methods:
Email: Send us an email at [email protected].
FCA Website: http://www.fca.gov. Click inside the ``I want
to . . . '' field near the top of the page; select ``comment on a
pending regulation '' from the dropdown menu; and click ``Go.'' This
takes you to an electronic public comment form.
Mail: David P. Grahn, Director, Office of Regulatory
Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA
22102-5090.
You may review copies of all comments we receive at our office in
McLean, Virginia, or from our website at http://www.fca.gov. Once you
are in the website, click inside the ``I want to . . . '' field near
the top of the page; select ``find comments on a pending regulation''
from the dropdown menu; and click ``Go.'' This will take you to the
Comment Letters page where you can select the regulation for which you
would like to read the public comments. We will show your comments as
submitted, including any supporting data provided, but for technical
reasons, we may omit items such as logos and special characters.
Identifying information that you provide, such as phone numbers and
addresses, will be publicly available. However, we will attempt to
remove email addresses to help reduce internet spam.
NCUA: You may submit comments identified by RIN 3133-AF14 by any of
the following methods (please send comments by one method only). Please
note that the NCUA is now accepting electronic comments only through
the Federal eRulemaking portal, Regulations.gov:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Fax: (703) 518-6319. Use the subject line ``[Your name]
Comments on Flood Insurance, Interagency Questions & Answers'' on the
transmission cover sheet.
Mail: Address to Gerard S. Poliquin, Secretary of the
Board, National Credit Union Administration, 1775 Duke Street,
Alexandria, Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
Public Inspection: You can view all public comments on the agency's
website at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as
submitted, except for those we cannot post for technical reasons. The
NCUA will not edit or remove any identifying or contact information
from the public comments. You may inspect paper copies of comments in
the NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314,
by appointment weekdays between 9:00 a.m. and 3:00 p.m. To make an
appointment, call (703) 518-6540 or send an email to [email protected].
FOR FURTHER INFORMATION CONTACT:
OCC: Rhonda L. Daniels, Compliance Specialist, Compliance Risk
Policy Division, (202) 649-5405; or Sadia A. Chaudhary, Counsel, Chief
Counsel's Office, (202) 649-6350, or, for persons who are deaf or
hearing impaired, TTY, (202) 649-5597.
Board: Lanette Meister, Senior Supervisory Consumer Financial
Services Analyst (202) 452-2705 or Vivian W. Wong, Senior Counsel (202)
452- 3667, Division of Consumer and Community Affairs; Daniel Ericson,
Senior Counsel (202) 452-3359, Legal Division; for users of
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.
FDIC: Navid Choudhury, Counsel, Consumer Compliance Unit, Legal
Division, (202) 898-6526, [email protected]; or Simin Ho, Senior
Policy Analyst, Division of Depositor and Consumer Protection, (202)
898-6907, [email protected].
FCA: Ira D. Marshall, Senior Policy, Analyst, Office of Regulatory
Policy, (703) 883-4379, TTY (703) 883-4056; or Jennifer Cohn, Senior
Counsel, Office of General Counsel, (703) 883- 4020, TTY (703) 883-
4056.
NCUA: Sarah Chung, Senior Staff Attorney, Office of General
Counsel, (703) 518-6540, or Lou Pham, Senior Credit Specialist, Office
of Examination and Insurance, (703) 518-6360.
SUPPLEMENTARY INFORMATION:
Background
The National Flood Insurance Act of 1968 created the National Flood
Insurance Program (NFIP), which is administered by the Federal
Emergency
[[Page 40444]]
Management Agency (FEMA).\1\ 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.
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\1\ Public Law 90-448, 82 Stat. 572 (1968).
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Congress expanded the NFIP by enacting the Flood Disaster
Protection Act of 1973 (FDPA).\2\ 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.\3\ 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.\4\ The OCC, Board, FDIC, OTS,
NCUA, and FCA \5\ fulfilled these requirements by issuing a joint final
rule in the summer of 1996.\6\
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\2\ Public Law 93-234, 87 Stat. 975 (1973).
\3\ Title V of Public Law 103-325, 108 Stat. 2255 (1994).
\4\ Title V of Public Law 103-325, 108 Stat. 2255 (1994).
\5\ Throughout this document ``the Agencies'' includes the OTS
with respect to events that occurred prior to July 21, 2011, but
does not include OTS with respect to events thereafter. Sections 311
and 312 of the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the Dodd-Frank Act) transferred OTS's functions to other
agencies on July 21, 2011. The OTS's supervisory functions relating
to Federal savings associations were transferred to the OCC, while
those relating to state savings associations were transferred to the
FDIC. See also 76 FR 39246 (Jul. 6, 2011).
\6\ 61 FR 45684 (August 29, 1996).
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In connection with the 1996 joint rulemaking process, commenters
asked the Agencies to clarify specific issues covering a wide spectrum
of the proposed rule's provisions. The Agencies addressed many of these
requests in the preamble to the joint final rule. The Agencies
concluded, however, that given the number, level of detail, and
diversity of the requests, guidance addressing technical compliance
issues would be helpful and appropriate. The Federal Financial
Institutions Examination Council (FFIEC) fulfilled that objective
through the initial release of the Interagency Questions and Answers in
1997 (1997 Interagency Questions and Answers).\7\
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\7\ 62 FR 39523 (July 23, 1997). Throughout this document,
``Questions and Answers'' refers to the Interagency Questions and
Answers Regarding Flood Insurance in its entirety; ``Q&A'' refers to
an individual question and answer within the Questions and Answers.
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After notice and comment, the Agencies comprehensively updated the
1997 Interagency Questions and Answers in July 2009 (2009 Interagency
Questions and Answers) through significant revision and reorganization.
As part of the 2009 effort, the Agencies also proposed five new Q&As
for comment relating to insurable value and force placement of flood
insurance.\8\ As a result, the 2009 Interagency Questions and Answers
included a total of 77 final Q&As, which superseded the 1997
Interagency Questions and Answers.\9\
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\8\ 74 FR 35914 (July 21, 2009).
\9\ 74 FR 35914 (July 21, 2009).
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On October 17, 2011, the Agencies finalized two of the five new
proposed Q&As from 2009, one relating to insurable value and one
relating to force placement, and withdrew one Q&A regarding insurable
value.\10\ The two finalized Q&As (2011 Interagency Questions and
Answers) supplemented the 2009 Interagency Questions and Answers. As
part of the same Federal Register notice, based on comments received,
the Agencies proposed to significantly revise the remaining two Q&As
regarding force placement of flood insurance that were initially
proposed in 2009, and proposed revisions to a previously finalized Q&A
on force placement for consistency with the re-proposed Q&As. These
three revised Q&As were re-proposed for comment in the October 17,
2011, Federal Register notice.
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\10\ 76 FR 64175. The Agencies finalized Q&As 9 (insurable
value) and 61 (force placement) and withdrew Q&A 10 (insurable
value).
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Before the Agencies could finalize the three re-proposed Q&As, the
Federal flood insurance statutes were amended by two major pieces of
legislation, the Biggert-Waters Flood Insurance Reform Act of 2012 (the
Biggert-Waters Act) and the 2014 Homeowner Flood Insurance
Affordability Act (HFIAA). The Biggert-Waters Act amended the
requirements that the Agencies have authority to implement and
enforce.\11\ Among other things, the Biggert-Waters Act: (1) Required
the Agencies to issue a rule regarding the escrow of premiums and fees
for flood insurance; (2) clarified the requirement to force place
insurance; and (3) required the Agencies to issue a rule to direct
regulated lending institutions to accept ``private flood insurance,''
as defined by the Biggert-Waters Act, and to notify borrowers of the
availability of private flood insurance.
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\11\ Public Law 112-141, 126 Stat. 916 (2012).
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In October 2013, the Agencies jointly issued proposed rules to
implement the escrow, force placement, and private flood insurance
provisions of the Biggert-Waters Act.\12\ In March 2014, the HFIAA was
enacted, which, among other things, amended the Biggert-Waters Act
requirements regarding the escrow of flood insurance premiums and fees
and created a new exemption from the mandatory flood insurance purchase
requirements for certain detached structures.\13\ The Agencies
finalized the regulations to implement provisions in the Biggert-Waters
Act and HFIAA under the Agencies' jurisdiction, except for the
provisions related to private flood insurance, with a final rule issued
in July 2015.\14\ In February 2019, the Agencies finalized regulations
that implement the private flood insurance related provisions of the
Biggert-Waters Act.\15\
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\12\ 78 FR 65108 (Oct. 30, 2013).
\13\ Public Law 113-89, 128 Stat. 1020 (2014).
\14\ 80 FR 43216 (July 21, 2015). Subsequently, on November 7,
2016, the Agencies re-proposed the private flood insurance
provisions through a joint notice of proposed rulemaking (81 FR
78063).
\15\ 84 FR 4953 (Feb. 20, 2019).
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The Agencies are releasing for public comment proposed revisions
and new Interagency Q&As in light of the significant changes to flood
insurance requirements pursuant to the Biggert-Waters Act and HFIAA as
well as regulations issued to implement these laws. Further, over the
years, the lending industry has requested that the Agencies provide
additional guidance on flood insurance compliance issues on many
occasions, including at conferences and through interagency webinars.
Finally, pursuant to the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (EGRPRA), certain Agencies are directed to
conduct a joint review of their regulations every 10 years and consider
whether any of those regulations are outdated, unnecessary, or unduly
burdensome.\16\ As part of the joint
[[Page 40445]]
review, the Board, FDIC, OCC and NCUA received comments on the
Agencies' flood insurance rules. Several commenters asked for more
guidance to the industry on flood insurance requirements, particularly
with respect to renewal notices for force-placed insurance policies,
the required amount of flood insurance, and flood insurance
requirements for tenant-owned buildings and detached structures. One
commenter specifically requested that the Interagency Flood Questions
and Answers be updated. In the FFIEC's EGRPRA Joint Report to Congress,
the Board, FDIC, and OCC indicated that they:
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\16\ Public Law 104-208, 110 Stat. 3001 (1996) (codified at 12
U.S.C. 3311). The most recent report to Congress required by EGRPRA
was published by the Board, FDIC, OCC, and NCUA under the FFIEC in
March 2017. The NCUA, although an FFIEC member, is not a ``federal
banking agency'' within the meaning of EGRPRA and so is not required
to participate in the review process. Nevertheless, NCUA elected to
participate in the EGRPRA review and conducted its own parallel
review of its regulations. The FCA is not subject to EGRPRA;
however, it is directed by the Farm Credit System Reform Act of 1996
to conduct a regulatory review (see 12 U.S.C. 2252 note) and
conducts such review every four years. The CFPB, although an FFIEC
member, is not a ``federal banking agency'' within the meaning of
EGRPRA and so is not required to participate in the review process.
``agree with these EGRPRA commenters that additional agency guidance
on flood insurance requirements would be helpful to the banking
industry and that the Interagency Flood Q&As should be updated to
address recent amendments to the flood insurance statutes. In fact,
the agencies have begun work on revising the Interagency Flood Q&As
to reflect the agencies' recently issued final rules implementing
the Biggert-Waters Act and HFIAA requirements and to address other
issues that have arisen since the last update in 2011. As part of
this revision, the agencies also plan to address many of the flood
insurance issues raised by EGRPRA commenters.'' \17\
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\17\ https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.
Accordingly, the Agencies, in proposing these Interagency Questions
and Answers for public comment, are addressing the commitment made in
the EGRPRA Joint Report to Congress.
This 2020 proposal to reorganize, revise, and introduce new
Interagency Q&As includes the introduction of new Q&As on escrow of
flood insurance premiums, force placement of flood insurance, and the
detached structures exemption. The Agencies are also proposing to
revise and reorganize the existing Q&As into new categories by subject
to enhance clarity and understanding for users, and improve
efficiencies by making it easier to find information related to
technical flood insurance topics. Once finalized, the new Interagency
Questions and Answers will supersede the 2009 and the 2011 Interagency
Questions and Answers and supplement other guidance or interpretations
issued by the Agencies relative to loans in areas having special flood
hazards. Along with the finalized new Interagency Questions and
Answers, the Agencies plan to issue separately for notice and comment
another set of proposed Q&As relating to the private flood insurance
rule. In the interim, the Agencies have provided information regarding
the private flood insurance rule that may serve as a resource in a
webinar dated June 18, 2019.\18\ 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.
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\18\ https://consumercomplianceoutlook.org/outlook-live/2019/interagency-flood-insurance-regulation-update/.
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Public Comments
The Agencies invite specific public comment on the proposed new and
revised Interagency Questions and Answers. If lenders, community
groups, or other parties have unanswered questions or comments about
the Agencies' flood insurance regulations, they should submit them to
the Agencies. The Agencies will consider including these Q&As in future
guidance. Comments are also invited on whether the proposed Q&As are
stated clearly and how they might be revised to be easier to read.
Reorganization of Interagency Questions and Answers
For ease of reference and in light of the increased number of
subjects covered that address complex issues, the Agencies propose to
reorganize the Interagency Questions and Answers to provide a more
logical flow of questions through the flood insurance process for
lenders, servicers, regulators, and policyholders. The table below sets
forth the current categories and the corresponding new, reorganized
categories for purposes of comparison:
Table of Contents
------------------------------------------------------------------------
Category from current table (from 2009
Q&A) Reorganized category
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I. Determining When Certain Loans Are Determining the Applicability
Designated Loans for Which Flood of Flood Insurance
Insurance Is Required Under the Act Requirements for Certain Loans
and Regulation. [Applicability].
II. Determining the Appropriate Amount Exemptions From the Mandatory
of Flood Insurance Required Under the Flood Insurance Purchase
Act and Regulation. Requirements [Exemptions].
III. Exemptions From the Mandatory Coverage -NFIP/Private Flood
Flood Insurance Requirements. Insurance [Coverage].
IV. Flood Insurance Requirements for Required Use of Standard Flood
Construction Loans. Hazard Determination Form
[SFHDF].
V. Flood Insurance Requirements for Flood Insurance Determination
Nonresidential Buildings. Fees [Fees].
VI. Flood Insurance Requirements for Flood Zone Discrepancies
Residential Condominiums. [Zone].
VII. Flood Insurance Requirements for Notice of Special Flood Hazards
Home Equity Loans, Lines of Credit, and Availability of Federal
Subordinate Liens, and Other Security Disaster Relief [Notice].
Interests in Collateral Located in an
SHFA.
VIII. Flood Insurance Requirements in Determining the Appropriate
the Event of the Sale or Transfer of a Amount of Flood Insurance
Designated Loan and/or Its Servicing Required [Amount].
Rights.
IX. Escrow Requirements................ Flood Insurance Requirements
for Construction Loans
[Construction].
X. Force Placement..................... Flood Insurance Requirements
for Residential Condominiums
and Co-Ops [Condo and Co-Op ].
XI. Private Flood Insurance............ Flood Insurance Requirements
for Home Equity Loans, Lines
of Credit, Subordinate Liens,
and Other Security Interests
in Collateral Located in an
SFHA [Other Security
Interests].
XII. Required Use of Standard Flood Requirement to Escrow Flood
Hazard Determination Form (SFHDF). Insurance Premiums and Fees--
General [Escrow].
XIII. Flood Determination Fees......... Requirement to Escrow Flood
Insurance Premiums and Fees--
Small Lender Exception [Small
Lender Exception].
XIV. Flood Zone Discrepancies.......... Requirement to Escrow Flood
Insurance Premiums and Fees--
Loan Exceptions [Loan
Exceptions].
XV. Notice of Special Flood Hazards and Force Placement of Flood
Availability of Federal Disaster Insurance [Force Placement].
Relief.
[[Page 40446]]
XVI. Mandatory Civil Money Penalties... Flood Insurance Requirements in
the Event of the Sale or
Transfer of a Designated Loan
and/or Its Servicing Rights
[Servicing].
XVII................................... Mandatory Civil Money Penalties
[Penalty].
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Moreover, the Agencies also propose a new system of designation for
the Q&As. Rather than numbering the Q&As successively through all the
categories, each Q&A will be designated by the category to which it
belongs and then designated in numerical order for that particular
category. For example, Q&As in the first category, Determining the
Applicability of Flood Insurance Requirements for Certain Loans, would
be re-designated as Applicability 1, Applicability 2, etc. This
numbering system would enable the Agencies to add or delete Q&As in the
future without needing to significantly renumber or reorganize all of
the Q&As. The Agencies specifically solicit comment as to the proposed
re-designations, whether they would promote ease of reference and
whether some other designation system might be more preferable.
For ease of reference, the following terms are used throughout this
document: ``Act'' refers to the National Flood Insurance Act of 1968
and the Flood Disaster Protection Act of 1973, as revised by the
National Flood Insurance Reform Act of 1994, Biggert-Waters Flood
Insurance Reform Act of 2012 and Homeowner Flood Insurance
Affordability Act (codified at 42 U.S.C. 4001 et seq). ``Regulation''
refers to each agency's current final rule.\19\
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\19\ The Agencies' rules are codified at 12 CFR part 22 (OCC),
12 CFR part 208 (Board), 12 CFR part 339 (FDIC), 12 CFR part 614
(FCA), and 12 CFR part 760 (NCUA).
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Section-by-Section Analysis
Section I. Determining the Applicability of Flood Insurance
Requirements for Certain Loans
The heading to proposed section I has been streamlined to provide
greater clarity with no intended change in substance or meaning. This
new proposed general applicability section would include current Q&As
1-7 relating to residential buildings and, for organizational purposes,
would incorporate current section V's Q&As 24 and 25, which address
flood insurance requirements for nonresidential buildings. The Agencies
propose to re-designate current Q&A 1 as proposed Q&A Applicability 1
with only minor language modifications, with no intended change in
substance or meaning. Current Q&A 24 would be re-designated as proposed
Q&A Applicability 2 and revised so that the proposed answer depends on
whether buildings with limited utility meet the detached structure
exemption for purposes of mandating flood insurance for such buildings.
Current Q&A 25 would be re-designated as proposed Q&A Applicability 3
and current Q&As 2, 3, 5-7 would be re-designated as proposed Q&As
Applicability 4, 5, 6-8, respectively. Current Q&A 4 would be re-
designated as proposed Q&A Applicability 9.
The Agencies are proposing revisions to proposed Q&A Applicability
3 to include an example to provide greater clarity and to improve
readability, with no intended change in substance or meaning. Proposed
Q&A Applicability 4 would be revised from current Q&A 2 to also address
a lender's responsibility if a building or mobile home that secures a
loan is not located within an SFHA. The proposed answer would be
expanded to state that a lender may, at its discretion and subject to
applicable State law, require flood insurance for property outside of
SFHAs for risk management purposes as a condition of a loan being made.
Proposed Q&As Applicability 5, 7, 8, and 9 would have only minor
language modifications for greater clarity, with no intended change in
substance or meaning. Proposed Q&A Applicability 6 would remain
unchanged from current Q&A 5.
Lastly, the Agencies propose to add three new Q&As, Applicability
10, 11, and 12. Proposed new Q&A Applicability 10 would address a
lender's obligations when participating in a multi-tranche credit
facility, specifically whether a lender is expected to consider any
triggering event and any cashless roll of which it becomes aware in any
tranche. The proposed answer would provide that a multi-tranche credit
facility is analogous to a loan syndication or participation and that
the Agencies do not expect a lender participating in one tranche in a
multi-tranche credit facility to be responsible for taking action to
comply with flood insurance requirements in connection with a
triggering event or cashless roll that occurs in a tranche in which the
lender does not participate. Furthermore, the proposed answer clarifies
that the Agencies expect a lender participating in a multi-tranche
credit facility to perform upfront due diligence to determine whether
the lead lender has adequate controls to monitor the loan on an ongoing
basis for compliance with flood insurance requirements. Proposed new
Q&A Applicability 11 would clarify that an automatic extension of a
credit facility agreed upon by the borrower and lender in the original
loan agreement would not constitute a triggering event for purposes of
the federal flood insurance requirements. Proposed new Q&A
Applicability 12, which would be based on guidance previously issued by
the Agencies,\20\ would address the applicability of the mandatory
purchase requirement during a period of time when coverage under the
NFIP is unavailable, such as due to a lapse in authorization or in
appropriations. The proposed answer would clarify that during a period
when NFIP coverage is not available, lenders may continue to make loans
subject to the Regulation without flood insurance coverage, but must
continue to make flood determinations, provide timely, complete and
accurate notices to borrowers, and comply with other aspects of the
Regulation. Lenders also should evaluate the safety and soundness and
legal risks, and prudently manage those risks, during such periods when
the NFIP is unavailable.
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\20\ 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).
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Section II. Exemptions From the Mandatory Flood Insurance Purchase
Requirements
Current section III would be moved to proposed section II and
significantly expanded with the addition of six new
[[Page 40447]]
proposed Q&As pertaining to the exemption from the mandatory flood
insurance purchase requirements for certain detached structures created
by HFIAA. The heading to proposed section II has been revised to
provide greater clarity with no intended change in substance or
meaning. Current Q&A 18 would be included in this section, re-
designated as proposed Q&A Exemptions 1, and would be revised to
include the detached structure exemption in addition to the exemptions
for State-owned property, and loans with a principal balance of less
than $5,000 and an original repayment term of one year or less. The
revised Q&A also would note that although an exemption may apply, a
borrower may still elect to purchase flood insurance or a lender may
still require flood insurance as a condition of making the loan for
purposes of safety and soundness, depending on its risk analysis.
As stated above, the Agencies propose to add six new Q&As to
address the application of the detached structure exemption and related
lender obligations. The new proposed Q&As would be designated as
Exemptions 2-7. This set of Q&As on the detached structure exemption
responds to a request for more guidance related to this exemption in
the EGRPRA report. Proposed new Q&A Exemptions 2 would be added to
address whether a lender must take a security interest in the primary
residential structure for a detached structure to be eligible for the
detached structure exemption. The proposed answer would provide that
although a lender does not have to take a security interest in the
primary residential structure, it would need to evaluate the uses of
the detached structures to confirm each is eligible for the exemption.
Proposed new Q&A Exemptions 3 would clarify that a flood hazard
determination is required for a detached structure even though flood
insurance coverage is not required on such structure because it is used
to identify the number and type of structures present on the property.
Proposed new Q&A Exemptions 4 would provide that a lender or its
servicer may cancel its flood insurance requirement on an eligible
detached structure that is currently insured, but that a lender
alternatively may want to continue to require flood insurance coverage
for detached structures of relatively high value if such coverage would
be beneficial to the borrower and the lender. Proposed new Q&A
Exemptions 5 would address whether a property being re-mapped into an
SFHA triggers a review of the intended use of each detached structure.
Specifically, the proposed answer states that although there is no duty
to monitor the status of a detached structure following the lender's
initial determination, sound risk management practices may lead a
lender to conduct scheduled periodic reviews that track the need for
flood insurance on properties securing loans in its portfolio.
Proposed new Q&A Exemptions 6 would discuss whether a lender,
following a review of its loan portfolio, may determine it would no
longer require flood insurance on a detached structure in an SFHA if
the structure does not provide contributory value. The Agencies propose
to clarify that, while a lender or servicer could initiate such a
review, the Regulation does not permit the exemption of structures from
the mandatory flood insurance purchase requirement based solely on
their contributory value, but instead on whether a specific exemption
applies. Lastly, proposed new Q&A Exemptions 7 would address whether a
building would qualify as a detached structure if it is joined to
another building by a stairway or covered walkway. The proposed answer
would provide that for purposes of the detached structure exemption, a
structure is ``detached'' from the primary residential structure if it
is not joined by any structural connection to that structure.
Section III. Coverage (NFIP/Private Flood Insurance)
For organizational purposes, current section XI would be moved to
proposed section III, logically following the discussions of
applicability and exemptions from flood insurance requirements. The
heading to proposed section III would be expanded to cover the various
types of flood insurance policies available to borrowers. Proposed
section III would cover questions related to flood insurance policy
coverage issues under the NFIP and private flood insurance. Current Q&A
63 would be deleted because it is inconsistent with the Agencies' final
rule implementing the private flood insurance provision of the Biggert-
Waters Act.\21\ A new proposed Q&A Coverage 1 would be included to
assist lenders in complying with the discretionary acceptance provision
and mutual aid societies provision in the Agencies' final rule
implementing the private flood insurance provision of the Biggert-
Waters Act. Current Q&A 64, addressing the use of private flood
insurance for portfolio-wide coverage, would be re-designated as
proposed Coverage 2 and revised given that FEMA withdrew the Mandatory
Purchase of Flood Insurance Guidelines, which is cross-referenced in
current Q&A 64, with no intended change in substance or meaning.
Additionally, a new proposed Q&A Coverage 3 would address when
mandatory flood insurance is required to be in place.
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\21\ 84 FR 4953 (Feb. 20, 2019).
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Specifically, proposed new Coverage 1 would list several factors a
lender may consider in determining whether a flood insurance policy
issued by a private insurer or mutual aid plan provides sufficient
protection of the loan. These factors may include whether: (1) A
policy's deductibles are reasonable based on the borrower's financial
condition; (2) the insurer provides adequate notice of cancellation to
the mortgagor and mortgagee to allow for timely force placement of
flood insurance, if necessary; (3) the terms and conditions of the
policy with respect to payment per occurrence or per loss and aggregate
limits are adequate to protect the regulated lending institution's
interest in the collateral; (4) the flood insurance policy complies
with applicable State insurance laws; and (5) the private insurance
company has the financial solvency, strength, and ability to satisfy
claims. A lender may include its analysis of such factors in
documenting its conclusion of sufficient protection of the loan when
accepting flood insurance coverage issued by a private insurer or
mutual aid society in satisfaction of the mandatory purchase
requirement.
Proposed Q&A Coverage 2 would be slightly revised to address when a
lender may rely on a private insurance policy providing portfolio-wide
coverage. The proposed answer would be revised by removing the
reference to criteria set forth by FEMA and including language
addressing a lender's reliance on a policy that provides portfolio-wide
coverage. Lastly, proposed new Q&A Coverage 3 would explain when
mandatory flood insurance on a designated loan needs to be in place
during the closing process. The proposed answer would clarify that a
lender should use the loan ``closing date'' to determine the date by
which flood insurance should be in place for a designated loan. FEMA
deems the ``closing date'' as the date the ownership of the property
transfers to the new owner based on State law. The proposed answer
further explains the difference between ``wet funding'' and ``dry
funding'' States and how it impacts the ``closing date'' for purposes
of flood insurance.
[[Page 40448]]
IV. Required Use of Standard Flood Hazard Determination Form (SFHDF)
For organizational purposes, current section XII would be moved to
proposed section IV. Accordingly, current Q&As 65-68 would be re-
designated as proposed Q&As SFHDF 1-4, respectively, with only minor
language modifications and no intended change in substance or meaning.
V. Flood Insurance Determination Fees
For organizational purposes, current section XIII would be moved to
proposed section V. Current Q&As 69 and 70 would be re-designated as
proposed Q&As Fees 1 and 2 with only minor changes and no intended
change in substance or meaning.
VI. Flood Zone Discrepancies
For organizational purposes, current section XIV would be moved to
proposed section VI. Current Q&As 71 and 72 would be re-designated as
proposed Q&As Zone 1 and 2. The Agencies propose to revise current Q&A
71, re-designated as proposed Q&A Zone 1, to reflect a change in the
Agencies' expectations regarding a lender's obligation when there is a
discrepancy between the flood determination form and the flood
insurance policy. A lender no longer would be required to attempt to
resolve the discrepancy, but the lender should consider documenting the
discrepancy in the loan file. If the flood determination form indicates
that the building securing the loan is in an SFHA, the lender must
require the appropriate amount of insurance coverage and would not
otherwise be required to attempt to resolve the discrepancy as
previously indicated in current Q&A 71. The Agencies note in the
proposed answer that the issue of flood zone discrepancies is an
insurance rating issue, not a coverage issue. Proposed Q&A Zone 2 would
clarify that a lender is not in violation of the Regulation if there is
a discrepancy between the flood zone on the flood determination form
and the flood zone on the policy declarations page. Lastly, proposed
new Q&A Zone 3 would explain what a lender should do when a borrower
disputes the lender's flood zone determination that a building securing
the loan is located in an SFHA requiring mandatory flood insurance
coverage.
VII. Notice of Special Flood Hazards and Availability of Federal
Disaster Relief
For organizational purposes, current section XV would be moved to
proposed section VII. This section would include current Q&As 73-76 and
78-80 and would be re-designated as proposed Q&As Notice 1-7,
respectively. Proposed Q&A Notice 1 would have minor language
modifications for purposes of clarity with no change in meaning or
substance. Proposed Q&A Notice 2 would be amended to conform more
closely to the Regulation. As modified, the answer to proposed Q&A
Notice 2 would state that a lender must provide the Notice of Special
Flood Hazards to the borrower within a reasonable time before the
completion of the transaction, even if the lender only learns where the
mobile home will be located just prior to closing and delivery of the
Notice of Special Flood Hazards would delay closing. Proposed Q&A
Notice 3 would remain unchanged from current Q&A 75. For organizational
purposes, current Q&As 76 and 77 would be consolidated, with no
substantive changes, into proposed Q&A Notice 4 in this section.
Current Q&A 78 would be re-designated as Notice 5 and revised to list
examples of what constitutes an acceptable record of receipt. Current
Q&As 79 and 80 would be re-designated as Q&As Notice 6 and 7,
respectively, and would be revised nonsubstantively to provide
additional clarity.
Section VIII. Determining the Appropriate Amount of Flood Insurance
Required
The Agencies propose to move current section II to proposed section
VIII. The heading to proposed section VIII would be amended for
streamlining purposes. Current Q&As 8, 9, and 11-17 would be re-
designated as Amount 1, Amount 2, and Amount 3-9 respectively. Proposed
Q&A Amount 1 would discuss NFIP coverage limits more fully to include
coverage for condominiums and contents coverage. The proposed answer
would provide that for single-family and two-to-four family or
individually-owned condominium units insured under the Dwelling Form
policy, the maximum limit is $250,000. For a residential condominium
building insured under the Residential Condominium Building Association
Policy (RCBAP) form, the maximum amount of insurance available is
$250,000 multiplied by the number of units. For all other buildings
insured under the General Property Form, the maximum limit of building
coverage available is $500,000. The maximum limit for contents insured
under the Dwelling Form and RCBAP is $100,000 total (not per unit) and
$500,000 for contents insured under the General Property Form. Proposed
Q&A Amount 2, which defines ``insurable value,'' would be revised to
remove references to the rescinded FEMA Mandatory Purchase of Flood
Insurance Guidelines and to provide greater clarity with no intended
change in substance or meaning.
Proposed Q&A Amount 3 would be revised to include more detailed
definitions from the NFIP Flood Insurance Manual of the terms: Single
family dwelling, 2-4 family residential building, and other residential
building. Proposed Q&A Amount 4 would similarly be revised to provide a
more detailed definition of nonresidential building as defined in the
NFIP Flood Insurance Manual. Proposed Q&As Amount 5-9 would be revised
to provide greater clarity with no intended change in substance or
meaning.
IX. Flood Insurance Requirements for Construction Loans
Current section IV would be moved to proposed section IX and would
include current Q&As 19-23, which would be re-designated as proposed
Q&As Construction 1-5, respectively. The Agencies propose minor changes
to proposed Q&As Construction 1 and Construction 2 for purposes of
clarification. The Agencies would revise proposed Q&A Construction 3 to
accurately cite to the NFIP Flood Insurance Manual. Proposed Q&A
Construction 4 would address when a lender must require flood insurance
in connection with a loan secured by a building in the course of
construction and would be revised to incorporate the NFIP's change in
policy regarding the 30-day waiting period. In particular, the Agencies
propose that if a lender requires a borrower to have flood insurance in
place at the time of loan origination, a borrower should obtain a
provisional rating based on the construction designs and intended use
of the building to enable the placement of coverage prior to receipt of
the Elevation Certificate (EC), based on FEMA guidance. The proposed
Q&A would state that in accordance with the NFIP requirement, it is
expected that an EC will be secured and a full-risk rating completed
within 60 days of the policy effective date. Under the proposed Q&A,
failure to obtain the EC could result in reduced coverage limits at the
time of loss. Alternatively, if the lender requires the borrower to
have flood insurance in place before the lender disburses funds to pay
for building construction, the lender should have adequate controls in
place to ensure the borrower obtains flood insurance no later than 30
days prior to disbursement of funds to the borrower due to FEMA's
removal of the 30-day waiting period waiver. Proposed
[[Page 40449]]
Q&A Construction 5, addressing the 30-day waiting period in connection
with a construction loan, also would be revised to reflect this change.
Proposed new Q&A Construction 6 would explain that if a lender allows a
borrower to defer the purchase of flood insurance until either the
foundation slab has been poured and/or an EC has been issued, or if the
building to be constructed will have its lowest floor below Base Flood
Elevation when the building is walled and roofed, the lender will need
to begin escrowing flood insurance premiums and fees at the time of
purchase of the flood insurance.
X. Flood Insurance Requirements for Residential Condominiums and Co-Ops
The heading to proposed section X would be expanded to include
other multi-family dwellings such as cooperatives. This section would
include current Q&As 26-33, which would be re-designated as proposed
Q&As Condo and Co-Op 1-8, respectively. Proposed Q&As Condo and Co-Op
1, Condo and Co-Op 2, and Condo and Co-Op 7 would remain generally
unchanged. Proposed Q&As Condo and Co-Op 3, 4, 5, 6, and 8 would have
minor revisions to provide greater clarity or accurate references with
no intended changes in substance or meaning. A new proposed Q&A Condo
and Co-Op 9 would be added to proposed section X to address flood
insurance requirements for loans secured by a unit in a cooperative
building located in an SFHA. The proposed answer provides that a loan
to a cooperative unit owner is not a designated loan subject to the Act
or Regulation because the unit owner does not own a title to the
building but simply the right to occupy a particular unit based on the
cooperative ownership structure.
XI. Flood Insurance Requirements for Home Equity Loans, Lines of
Credit, Subordinate Liens, and Other Security Interests in Collateral
(Contents) Located in an SFHA
The heading to section XI would be amended for purposes of clarity.
This section would include current Q&As 34, 35 and 36-43, which would
be re-designated as Other Security Interests 1, Other Security
Interests 2, and Other Security Interests 4-9 and 11-12, respectively.
Proposed Q&As Other Security Interests 1, 2, 5, 6, 8, 11, and 12 would
remain substantively unchanged. A new proposed Q&A Other Security
Interests 3 would be added to address flood insurance coverage
requirements for a line of credit secured by improved real property
located in an SFHA. The proposed answer would provide alternative
approaches depending on when the lender requires flood insurance to be
in place. Proposed Q&A Other Security Interests 4 would be amended
slightly with no intended changes in substance or meaning. Proposed Q&A
Other Security Interests 7 would be revised to clarify the application
of Federal flood insurance requirements when both a building and its
contents secure a loan. Proposed Q&A Other Security Interests 9 would
be revised to clarify the impact of including language regarding
contents taken as security for a loan in the loan agreement. Proposed
new Q&A Other Security Interests 10 would indicate that flood insurance
is required if the lender takes a security interest in contents
regardless of whether that security interest is perfected.
XII. Requirement to Escrow Flood Insurance Premiums and Fees--General
With the passage of HFIAA, the escrow requirements for flood
insurance premiums have been significantly revised through the
introduction of new escrow requirements that are not dependent on
whether other insurance or taxes are escrowed, lender and loan-related
exceptions to those requirements, and the requirement for an escrow
notice. Accordingly, the Agencies propose to revise the discussion of
escrow requirements by designating four sections to address escrow
considerations. The first section, proposed section XII, would include
Q&As covering the general escrow requirement for flood insurance
premiums and fees. The second section, proposed section XIII, would
include Q&As related to the small lender exception to flood insurance
escrow requirements. Proposed section XIV, the third section, would
include Q&As related to loan-related exceptions to the requirement to
escrow flood insurance premiums and fees. These sets of Q&As on the
escrow of flood insurance premiums and fees respond to a request for
more guidance related to the escrow requirement in the EGRPRA report.
Proposed new section XII would contain two Q&As from current
section IX and five new proposed Q&As. Specifically, current Q&As 51
and 52 would be included in proposed section XII and re-designated as
Escrow 5 and Escrow 1, respectively. Proposed Q&A Escrow 1 would be
significantly revised from current Q&A 52 to address the general
question of when escrow accounts for flood insurance premiums and fees
must be established. The proposed revised answer would explain that the
new escrow requirement applies only upon a triggering event and would
not apply if either the small lender exception or any of the loan-
related exceptions apply. The proposed revised answer also would
address a lender's escrow obligations if the lender no longer qualifies
for the small lender exception. Proposed new Q&A Escrow 2 would clarify
that a lender must escrow flood insurance premium payments even if it
does not escrow for taxes or homeowner's insurance. Proposed new Q&A
Escrow 3 would state that a lender must escrow force-placed flood
insurance premium payments because there is no exception for force-
placed insurance under the Act or Regulation. Proposed new Q&A Escrow 4
would discuss whether flood insurance premium payments must be escrowed
when a loan has not experienced a triggering event (a making, increase,
renewal, or extension) but the loan has experienced a non-triggering
event, such as a loan modification, a FEMA remapping, or the assumption
of the loan by a new borrower. The Agencies explain in the proposed
answer that, subject to certain exceptions, until a loan experiences a
triggering event, the lender is not required to escrow flood insurance
premiums and fees unless: (i) A borrower requests the escrow in
connection with the requirement that the lender provide an option to
escrow for outstanding loans; or (ii) the lender determines that a loan
exception to the escrow requirement no longer applies.
The Agencies propose revisions to current Q&A 51, which has been
re-designated as proposed Q&A Escrow 5, to reflect updates to clarify
that multi-family buildings or mixed-use properties are included in the
definition of ``residential improved real estate'' and therefore are
subject to the escrow requirement unless an exception applies. New
proposed Q&A Escrow 6 would address the situation in which a junior
lienholder determines that the primary lienholder does not have
sufficient flood insurance coverage in place and is also not escrowing
for flood insurance. The proposed answer would clarify that if the
primary lienholder has not obtained adequate flood insurance, the
junior lienholder would need to ensure adequate flood insurance is in
place and also would need to escrow for that flood insurance. The
proposed answer also would indicate that the escrow requirements would
not apply to a junior lien that is a home equity line of credit
(HELOC), since HELOCs have a separate escrow exception under the Act
and Regulation. New proposed Q&A Escrow 7 addresses whether a lender or
its servicer must escrow when real
[[Page 40450]]
property securing the loan is not located in an SFHA, but the borrower
chooses to buy flood insurance, by clarifying that a lender or its
servicer is not required to escrow premium payments but may choose to
do so. Current Q&As 53 and 54 would be removed because they are no
longer applicable.
XIII. Requirement to Escrow Flood Insurance Premiums and Fees--Small
Lender Exception
As previously discussed, new section XIII would include seven new
proposed Q&As related to the small lender exception to the requirement
to escrow flood insurance premiums. New proposed Q&A Small Lender
Exception 1 would specify that the $1 billion threshold for the small
lender exception would be based on assets held at the regulated
financial institution level and not at the holding company level. New
proposed Q&A Small Lender Exception 2 would discuss whether a
qualifying lender must escrow flood insurance premiums if it was
previously required to escrow only under the Higher-Priced Mortgage
Loan (HPML) rules \22\ or under specific Federal housing programs prior
to July 6, 2012. The proposed answer would clarify that the
applicability of the first criterion of the small lender exception is
dependent on whether the Federal or State law requirement to escrow was
for the entire term of the loan. New proposed Q&A Small Lender
Exception 3 would address whether a lender would be disqualified from
the exemption if it escrowed funds on behalf of a third party. The
Agencies' proposed answer would draw a distinction based on whether the
lender established an individual escrow account for the loan.
Specifically, the proposed answer would provide that if a lender
collected escrow funds at closing and servicing of the loan was
maintained by the lender, the lender would not qualify for the small
lender exception because the lender would have had a policy of
consistently and uniformly requiring the deposit of funds in an escrow
account by establishing escrow accounts that the lender would service.
However, if the lender collected the escrow funds at closing at the
behest of a third party and then transferred those funds to the third
party servicing that loan, the lender would qualify for the small
lender exception under the proposed answer, provided the lender did not
establish an individual escrow account and the lender transferred the
escrow funds to the third party as soon as reasonably practicable. New
proposed Q&A Small Lender Exception 4 would cover whether a lender
would be eligible for the exception if it only escrows upon a
borrower's request. As noted in the preamble to the 2015 Final Rule,
the proposed answer would reiterate that a lender maintaining escrow
accounts only on a borrower's request does not constitute a consistent
or uniform policy of requiring escrow and therefore a lender could be
eligible for the small lender exception if the other requirements are
met.
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\22\ Pursuant to the Dodd-Frank Act, an HPML loan is one where
the Annual Percentage Rate exceeds certain specified thresholds with
the result that certain consumer protections must be observed, such
as the escrow of property taxes and insurance premiums. See section
129D of the Truth in Lending Act as amended by section 1461(a) of
the Dodd-Frank Act, 15 U.S.C. 1639D. See also HPML escrow rules at
12 CFR 226.35(b)(3) (Board) and 12 CFR 1026.35(b) (Bureau of
Consumer Financial Protection).
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New proposed Q&A Small Lender Exception 5 would discuss whether the
option to escrow is required for: (1) All outstanding loans not
excepted from the escrow requirement and secured by residential real
estate and (2) outstanding loans not secured by buildings located in an
SHFA. The proposed answer would clarify that the option to escrow
notice requirement only applies to lenders who have a change in status
and no longer qualify for the small lender exception. Such lenders will
be required to provide the option to escrow notice by September 30 of
the first calendar year in which the lender has had a change in status
for all outstanding designated loans secured by residential improved
real estate or a mobile home as of July 1 of the first calendar year in
which the lender no longer qualifies for the small lender exception.
The proposed answer would also clarify that the option to escrow
requirement does not apply to loans or lenders that are excepted by the
Regulation from the escrow requirement nor does the notice requirement
apply to loans not subject to the mandatory flood insurance purchase
requirement. New proposed Q&A Small Lender Exception 6 would explain
that a lender must send to a borrower a notice of the option to escrow
flood insurance premium payments when the borrower has previously
waived escrow for flood insurance because it is possible the borrower's
circumstances have changed and, if offered another chance to escrow,
the borrower may desire to do so. Lastly, new proposed Q&A Small Lender
Exception 7 would make clear that lenders who qualify for the small
lender exception are not required to provide borrowers with either the
escrow notice or the option to escrow notice.
XIV. Requirement to Escrow Flood Insurance Premiums and Fees--Loan
Exceptions
New section XIV would include five Q&As regarding the loan-related
exceptions to the escrow requirement. Current Q&A 55 would be re-
designated as proposed Q&A Loan Exceptions 1 and revised to address
whether escrow accounts must be set up for commercial loans secured by
residential buildings based on the new loan-related exceptions.
Specifically, the proposed answer would clarify that extensions of
credit primarily for business, commercial, or agricultural purposes are
not subject to the escrow requirement even if such loans are secured by
residential improved real estate or a mobile home. New proposed Q&A
Loan Exceptions 2 would indicate that construction-permanent loans that
have a construction phase before the loan converts into permanent
financing do not qualify for the 12-month exception from escrow even if
one phase of the loan is for 12 months or less. New proposed Q&A Loan
Exceptions 3 would clarify that a subordinate lienholder must begin to
escrow as soon as reasonably practicable after it becomes aware that it
has moved into the primary lien position on a designated loan subject
to the escrow requirement. Current Q&A 56 would be re-designated as
proposed Q&A Loan Exceptions 4 and revised to address an escrow account
for insured real property covered by an RCBAP. The proposed answer
would note that while escrow is not required for property covered by an
RCBAP, if the RCBAP coverage is inadequate and the borrower obtains a
separate dwelling policy, escrow would be required for such a policy
unless an escrow exception applies. Lastly, new proposed Q&A Loan
Exceptions 5 would discuss whether there is an exception to the escrow
requirement for loans secured by multi-family buildings. The Agencies
would make clear in the proposed answer that escrow requirements do not
apply to a loan that is an extension of credit primarily for business,
commercial, or agricultural purposes, even if the loan is secured by
residential real estate such as a multi-family building, nor would it
apply to a loan secured by a particular unit in a multi-family
residential building if a condominium association, cooperative,
homeowners association, or other applicable group provides an adequate
policy and pays for the insurance as a common expense. Otherwise, under
the proposed answer, the escrow requirements generally would apply to
[[Page 40451]]
loans for units in multi-family residential buildings.
XV. Force Placement of Flood Insurance
For organizational purposes, the Agencies propose to move current
section X to proposed section XV. This section would include current
Q&As 57-62 and add ten new Q&As. This set of Q&As responds to a request
for more guidance related to force placement of flood insurance from
commenters through the EGRPRA process. Current Q&A 57, re-proposed in
2011 but not finalized, would be re-designated as proposed Q&A Force
Placement 1 and would discuss the requirements that must be fulfilled
before force placement can occur, as well as the notice requirements a
lender must follow prior to force placing flood insurance. The Agencies
explain in the proposed answer that if a lender, or a servicer acting
on its behalf, determines at any time during the term of a designated
loan, that the building or mobile home and any personal property
securing the designated loan is not covered by flood insurance or is
covered by flood insurance in an amount less than the amount required,
then the lender or its servicer must notify the borrower that the
borrower should obtain flood insurance, at the borrower's expense, in
an amount at least equal to the amount required. The proposed answer
further provides that before the lender or service must force place
insurance, if the lender or servicer is aware that a borrower has
obtained insurance that otherwise satisfies the flood insurance
requirements but in an insufficient amount, the lender or servicer
should inform the borrower an additional amount of insurance is needed
in order to comply with the Regulation. Finally, the proposed answer
would specify that if the borrower fails to obtain flood insurance
within 45 days after notification, then the lender or its servicer must
purchase insurance on the borrower's behalf at that time. The proposed
answer explains that the lender must force place flood insurance for
the full amount required under the Regulation, or if the borrower
purchases flood insurance that otherwise satisfies the flood insurance
requirements, but in an insufficient amount, the lender would be
required to force place only for the ``insufficient amount,'' that is,
the difference between the amount the borrower insured and the amount
of flood insurance required under the Regulation.
Additionally, while not required under the Act or the Regulation,
the Agencies indicate that a lender or its servicer could include in
the notice to the borrower the amount of flood insurance needed to
satisfy the statutory requirement. By providing this information, the
lender or its servicer can help ensure that a borrower obtains the
appropriate amount of insurance.
New proposed Q&A Force Placement 2 would clarify that the
Regulation requires the lender, or its servicer, to send the borrower
the force-placement notice upon making a determination that the
building or mobile home and any personal property securing the
designated loan is not covered by flood insurance or is covered by
flood insurance in an amount less than the amount required under the
Regulation.
Current Q&A 58 would be re-designated as proposed Q&A Force
Placement 3 and would remain unchanged. Proposed Q&A 60, re-proposed in
2011 but not finalized, would be re-designated as proposed Q&A Force
Placement 4 and would discuss whether a lender can satisfy its notice
requirement by sending the force-placement notice to the borrower prior
to the expiration of the flood insurance policy. The Agencies would
specifically state in the proposed answer that a lender or servicer
must send a notice upon determining that the collateral property
securing the loan is either not covered by flood insurance or the
insurance is inadequate. Although the proposed answer provides that a
lender may send notice prior to the expiration date as a courtesy, the
lender or servicer is still required to send notice upon determining
the flood insurance policy has actually lapsed or is determined to be
insufficient in order to meet the statutory requirement. Current Q&A 61
would be re-designated as proposed Q&A Force Placement 5 and would
contain minor revisions for clarity with no change in meaning or
substance. New proposed Force Placement 6 would clarify that, once a
lender makes a determination that a designated loan has no or
insufficient flood insurance coverage, the lender must notify the
borrower and, if the borrower fails to obtain sufficient flood
insurance coverage within 45 days after the original notice, the lender
must purchase coverage on the borrower's behalf and may not extend the
period for obtaining force-placed coverage by sending another force-
placement notice during that time. New proposed Q&A Force Placement 7
would address when a force-placed policy should begin to provide
coverage and give an example. Specifically, the proposed answer would
state that a lender's new force-placed policy should begin to provide
coverage the day after the borrower's existing policy expires. The
proposed answer would also state that a lender or its servicer may not
require the borrower to pay for double coverage and that the Regulation
requires a lender or servicer to refund the borrower for any periods of
overlap between the borrower's policy and the force-placed policy.
Current Q&A 59 would be re-designated as proposed Q&A Force
Placement 8 and would be significantly revised to discuss more fully
the minimum amount of flood insurance coverage that is statutorily
required and to illustrate this point through a hypothetical example.
Specifically, the proposed answer would illustrate that if the
outstanding principal balance is the basis for the minimum amount of
required flood insurance, the lender must ensure that the force-placed
policy amount covers the existing loan balance plus any additional
force-placed premium and fees that will be added to the loan balance.
Current Q&A 62 would be re-designated as proposed Q&A Force
Placement 9 and would clarify that a lender or servicer may charge a
borrower for the cost of force-placed insurance beginning on the date
of lapse or insufficient coverage, and would not have to wait 45 days
after providing notification to force place insurance. Lenders that
monitor loans secured by property located in an SFHA for continuous
coverage of flood insurance help ensure that they complete the force
placement of flood insurance in a timely manner and minimize any gaps
in coverage and any charge to the borrower for coverage for a timeframe
prior to the lender's or its servicer's date of discovery and force
placement. The proposed answer would explain that if a lender or its
servicer, despite its monitoring efforts, discovers a loan with no or
insufficient coverage, it may charge for the cost of premiums and fees
incurred by the lender or servicer in purchasing the flood insurance on
the borrower's behalf, including premiums and fees incurred for
coverage beginning on the date of lapse, if the lender has purchased a
policy on the borrower's behalf and that policy was effective as of the
date of the insufficient coverage.
The Agencies propose to add new Q&A Force Placement 10 to discuss
whether the addition of the amount of force-placed insurance policy
premiums and fees to the outstanding balance of a loan would constitute
an ``increase'' that would trigger the applicability of flood insurance
regulatory requirements. In the answer to proposed Q&A Force Placement
10, the Agencies discuss three options that the Agencies understand
lenders currently use to
[[Page 40452]]
charge a borrower for force-placed flood insurance and the impact of
each option on the amount of coverage. Under the proposed Q&A, the
subsequent treatment of the flood insurance premiums and fees would
depend on which method the lender chooses. Specifically, the proposed
answer provides that if the lender chooses to add the premium and fees
to the mortgage balance and the lender's loan contract includes a
provision permitting the lender or servicer to advance funds to pay for
flood insurance premiums and fees as additional debt, such an
advancement would be considered part of the loan and not an
``increase'' in the loan amount, and therefore would not be considered
a triggering event. The proposed Q&A continues to explain that if,
however, there is no explicit provision permitting such advancement in
the loan contract, the addition of the force-placed premiums and fees
would be considered an ``increase'' in the loan amount and would be a
triggering event because no advancement of funds was contemplated as
part of the loan. If the premiums and fees are added to an unsecured
account or billed directly to the borrower, the proposed Q&A states
that these approaches would not result in an increase in the loan
balance and therefore would not be considered triggering events.
New proposed Q&A Force Placement 11 would address the sufficiency
of evidence of flood insurance in connection with refunding premiums
paid by a borrower for force-placed insurance during any period of
overlap with borrower-purchased insurance. The proposed answer would
provide that as stated in the Regulation, a lender is required to
refund premiums paid by a borrower for force-placed insurance during
any period of overlap with borrower-purchased insurance. The proposed
answer would state that in that scenario, a lender must accept a policy
declarations page that includes the existing flood insurance policy
number and the identity of and contact information for, the insurance
company or its agent and that the Regulation does not require that the
declarations page include any additional information. In addition, the
proposed answer would note that in situations not involving a lender's
refund of premiums for force-placed insurance, the Regulation does not
specify what documentation would be sufficient. The proposed answer
also provides that generally, it is appropriate, although not required
by the Regulation, for lenders to accept a copy of the flood insurance
application and premium payment as evidence of proof of purchase for
new policies.
New proposed Q&A Force Placement 12 would reinforce the requirement
that a lender is to refund any premiums and fees paid for by the
borrower for force-placed insurance for any overlap period within 30
days of receipt of a confirmation of a borrower's existing flood
insurance coverage without exception. Such refund is required even in
situations in which a lender cannot obtain a refund from the insurance
company because the borrower did not provide proof of coverage in a
timely manner, or when the insurance company fails to provide the
refund within 30 days.
New proposed Q&A Force Placement 13 would explain that a lender can
rely on a force-placed insurance policy to satisfy the mandatory
purchase requirement for a refinance or loan modification if the
borrower does not purchase his or her own policy. Assuming the force-
placed policy is in effect and otherwise satisfies the regulatory
coverage standards, then that policy may satisfy the mandatory purchase
requirement. The Agencies suggest in the proposed answer that lenders
could encourage the borrower to purchase his or her own policy, likely
at a reduced cost, prior to the loan closing.
In response to an issue raised in the EGRPRA report, new proposed
Q&A Force Placement 14 would explain the process for renewal of force-
placed coverage by requiring the lender to follow its normal
communications practice with its insurance provider to renew the flood
insurance policy on the borrower's behalf to ensure that flood
insurance coverage remains in place. Under the proposed answer, the
lender is not required to send a notice prior to force-placing
insurance at the expiration of a force-placed policy. However, the
proposed answer provides that the lender or its servicer, at its
discretion, may notify the borrower about its plan to renew the force-
placed policy.
New proposed Q&A Force Placement 15 would indicate that, although
there is no explicit duty to monitor flood insurance coverage over the
life of the loan in the Act or Regulation, for purposes of safety and
soundness, many lenders obtain ``life-of-loan'' monitoring. The
Agencies believe such a practice could help ensure that lenders
complete the force placement of flood insurance in a timely manner upon
lapse of a policy, that there is continuous coverage, and that lenders
are promptly made aware of flood map changes.
New proposed Q&A Force Placement 16 would address what the Act and
Regulation require a lender or its servicer to do if a lender or
servicer receives a notice of remapping that states that a property
will be remapped into an SFHA as of a future effective date. The
proposed answer would clarify that if a lender or its servicer
determines at any time during the term of a designated loan that the
building or mobile home and any personal property securing the loan is
uninsured or underinsured, the lender or servicer must begin the force-
placement process. For a loan secured by a property subject to a
remapping that was not previously located in an SFHA, such a loan does
not become a designated loan until the effective date of the map
change. Therefore, when a lender or its servicer receives advance
notice of a map change, the effective date of the map change is the
date the lender or servicer must determine whether the property is
covered by sufficient flood insurance. If the borrower does not
purchase a flood insurance policy that begins on the effective date of
the map change, the lender or its servicer must send the force-
placement notice to the borrower.
XVI. Flood Insurance Requirements in the Event of the Sale or Transfer
of a Designated Loan and/or Its Servicing Rights
The Agencies propose to move current section VIII to proposed
section XVI as part of the overall reorganization of the Interagency
Questions and Answers. Current Q&As 44 through 50 would be re-
designated as proposed Q&As Servicing 1-7, respectively, with minor
nonsubstantive modifications to account for the change in the title of
the head of FEMA from ``Director'' to ``Administrator'' and for
purposes of clarity.
XVII. Mandatory Civil Money Penalties
For organizational purposes, the Agencies propose to move current
section XVI to proposed section XVII. Current Q&As 81 and 82 would be
included in this section and re-designated as proposed Q&As Penalty 1
and 2, respectively. The changes proposed to the Q&As are for purposes
of clarity and accuracy with no intended change in meaning or
substance.
The Agencies solicit comments on all aspects of the revised and new
proposed Q&As.
The following re-designation table is provided as an aid to assist
the public in reviewing the proposed revisions to the 2009 and 2011
Interagency Questions and Answers.
[[Page 40453]]
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2009 & 2011 Interagency Q&A Proposed Interagency Q&A
------------------------------------------------------------------------
Section I. Determining When Certain Section I. Determining the
Loans Are Designated Loans for Which Applicability of Flood
Flood Insurance Is Required Under the Insurance Requirements for
Act and Regulation. Certain Loans.
Section 1, Question 1.............. Section I, Applicability 1.
Section 1, Question 2.............. Section I, Applicability 4.
Section 1, Question 3.............. Section I, Applicability 5.
Section 1, Question 4.............. Section I, Applicability 9.
Section 1, Question 5.............. Section I, Applicability 6.
Section 1, Question 6.............. Section I, Applicability 7.
Section 1, Question 7.............. Section I, Applicability 8.
Section II. Determining the Appropriate Section VIII. Determining the
Amount of Flood Insurance Required Appropriate Amount of Flood
Under the Act and Regulation. Insurance Required.
Section II, Question 8................. Section VIII, Amount 1.
Section II, Question 9................. Section VIII, Amount 2.
Section II, Question 10................ Deleted.
Section II, Question 11................ Section VIII, Amount 3.
Section II, Question 12................ Section VIII, Amount 4.
Section II, Question 13................ Section VIII, Amount 5.
Section II, Question 14................ Section VIII, Amount 6.
Section II, Question 15................ Section VIII, Amount 7.
Section II, Question 16................ Section VIII, Amount 8.
Section II, Question 17................ Section VIII, Amount 9.
Section III. Exemptions from the Section II. Exemptions from the
Mandatory Flood Insurance Requirements. Mandatory Flood Insurance
Purchase Requirements.
Section III, Question 18............... Section II, Exemptions 1.
Section IV. Flood Insurance Section IX. Flood Insurance
Requirements for Construction Loans. Requirements for Construction
Loans.
Section IV, Question 19................ Section IX. Construction 1.
Section IV, Question 20................ Section IX. Construction 2.
Section IV, Question 21................ Section IX. Construction 3.
Section IV, Question 22................ Section IX. Construction 4.
Section IV, Question 23................ Section IX. Construction 5.
Section V. Flood Insurance Requirements
for Nonresidential Buildings.
Section V, Question 24............. Section I, Applicability 2.
Section V, Question 25............. Section I, Applicability 3.
Section VI. Flood Insurance Section X. Flood Insurance
Requirements for Residential Requirements for Residential
Condominiums. Condominiums and Co-Ops.
Section VI, Question 26................ Section X, Condo and Co-Op 1.
Section VI, Question 27................ Section X, Condo and Co-Op 2.
Section VI, Question 28................ Section X, Condo and Co-Op 3.
Section VI, Question 29................ Section X, Condo and Co-Op 4.
Section VI, Question 30................ Section X, Condo and Co-Op 5.
Section VI, Question 31................ Section X, Condo and Co-Op 6.
Section VI, Question 32................ Section X, Condo and Co-Op 7.
Section VI, Question 33................ Section X, Condo and Co-Op 8.
Section VII. Flood Insurance Section XI. Flood Insurance
Requirements for Home Equity Loans, Requirements for Home Equity
Lines of Credit, Subordinate Liens, Loans, Lines of Credit,
and Other Security Interests in Subordinate Liens, and Other
Collateral Located in an SHFA. Security Interests in
Collateral Located in an SFHA.
Section VII, Question 34............... Section XI, Other Security
Interests 1.
Section VII, Question 35............... Section XI, Other Security
Interests 2.
Section VII, Question 36............... Section XI, Other Security
Interests 4.
Section VII, Question 37............... Section XI, Other Security
Interests 5.
Section VII, Question 38............... Section XI, Other Security
Interests 6.
Section VII, Question 39............... Section XI, Other Security
Interests 7.
Section VII, Question 40............... Section XI, Other Security
Interests 8.
Section VII, Question 41............... Section XI, Other Security
Interests 9.
Section VII, Question 42............... Section XI, Other Security
Interests 11.
Section VII, Question 43............... Section XI, Other Security
Interests 12.
Section VIII. Flood Insurance Section XVI. Flood Insurance
Requirements in the Event of the Sale Requirements in the Event of
or Transfer of a Designated Loan and/ the Sale or Transfer of a
or Its Servicing Rights. Designated Loan and/or Its
Servicing Rights.
Section VII, Question 44............... Section XVI, Servicing 1.
Section VII, Question 45............... Section XVI, Servicing 2.
Section VII, Question 46............... Section XVI, Servicing 3.
Section VII, Question 47............... Section XVI, Servicing 4.
Section VII, Question 48............... Section XVI, Servicing 5.
Section VII, Question 49............... Section XVI, Servicing 6.
Section VII, Question 50............... Section XVI, Servicing 7.
Section IX. Escrow Requirements........ Section XII-VX. Requirement to
Escrow Flood Insurance
Premiums and Fees.
Section IX, Question 51................ Section XII, Escrow 5.
Section IX, Question 52................ Section XII, Escrow 1.
Section IX, Question 53................ Deleted.
Section IX, Question 54................ Deleted.
Section IX, Question 55................ Section XIV, Loan Exception 1.
Section IX, Question 56................ Section XIV, Loan Exception 4.
Section X. Force Placement............. Section XV. Force Placement of
Flood Insurance.
[[Page 40454]]
Section X, Question 57................. Section XV, Force Placement 1.
Section X, Question 58................. Section XV, Force Placement 3.
Section X, Question 59................. Section XV, Force Placement 8.
Section X, Question 60................. Section XV, Force Placement 4.
Section X, Question 61................. Section XV, Force Placement 5.
Section X, Question 62................. Section XV, Force Placement 9.
Section XI. Private Flood Insurance.... Section III, Coverage--NFIP/
Private Flood Insurance.
Section XI, Question 63................ Section III, Coverage 1.
Section XI, Question 64................ Section III, Coverage 2.
Section XII. Required Use of Standard Section IV. Required Use of
Flood Hazard Determination Form Standard Flood Hazard
(SFHDF). Determination Form (SFHDF).
Section XII, Question 65............... Section IV, SFHDF 1.
Section XII, Question 66............... Section IV, SFHDF 2.
Section XII, Question 67............... Section IV, SFHDF 3.
Section XII, Question 68............... Section IV, SFHDF 4.
Section XIII. Flood Determination Fees. Section V. Flood Insurance
Determination Fees.
Section XIII, Question 69.............. Section V, Fees 1.
Section XIII, Question 70.............. Section V, Fees 2.
Section XIV. Flood Zone Discrepancies.. Section VI. Flood Zone
Discrepancies.
Section XIV, Question 71............... Section VI, Zone 1.
Section XIV, Question 72............... Section VI, Zone 2.
Section XV. Notice of Special Flood Section VII. Notice of Special
Hazards and Availability of Federal Flood Hazards and Availability
Disaster Relief. of Federal Disaster Relief.
Section XV, Question 73................ Section VII, Notice 1.
Section XV, Question 74................ Section VII, Notice 2.
Section XV, Question 75................ Section VII, Notice 3.
Section XV, Question 76................ Section VII, Notice 4.
Section XV, Question 77................ Section VII, Notice 4.
Section XV, Question 78................ Section VII, Notice 5.
Section XV, Question 79................ Section VII, Notice 6.
Section XV, Question 80................ Section VII, Notice 7.
Section XVI. Mandatory Civil Money Section XVII. Mandatory Civil
Penalties. Money Penalties.
Section XVI, Question 81............... Section XVI, Question 82.
Section XVII, Penalty 1................ Section XVII, Penalty 2.
------------------------------------------------------------------------
Interagency Questions and Answers Regarding Flood Insurance
The Interagency Questions and Answers are organized by topic. Each
topic addresses a major area of flood insurance law and regulations.
For ease of reference, the following terms are used throughout this
document: ``Act'' refers to the National Flood Insurance Act of 1968
and the Flood Disaster Protection Act of 1973, as revised.
``Regulation'' refers to each agency's current final rule.\23\
``Lenders'' refers only to regulated lending institutions as defined in
the Act.\24\ ``Designated loan'' means a loan secured by a building or
mobile home that is located or to be located in a special flood hazard
area in which flood insurance is available under the Act. The OCC,
Board, FDIC, FCA, and NCUA, (collectively, ``the Agencies'') are
providing answers to questions pertaining to the following topics:
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\23\ The Agencies' rules are codified at 12 CFR part 22 (OCC),
12 CFR 208.25 (Board), 12 CFR part 339 (FDIC), 12 CFR part 614,
subpart S (FCA), and 12 CFR part 760 (NCUA).
\24\ 42 U.S. Code 4003 (a)(10).
I. Determining the Applicability of Flood Insurance Requirements for
Certain Loans
II. Exemptions from the Mandatory Flood Insurance Purchase
Requirements
III. Coverage--NFIP/Private Flood Insurance
IV. Required Use of Standard Flood Hazard Determination Form (SFHDF)
V. Flood Insurance Determination Fees
VI. Flood Zone Discrepancies
VII. Notice of Special Flood Hazards and Availability of Federal
Disaster Relief
VIII. Determining the Appropriate Amount of Flood Insurance Required
IX. Flood Insurance Requirements for Construction Loans
X. Flood Insurance Requirements for Residential Condominiums and Co-
Ops
XI. Flood Insurance Requirements for Home Equity Loans, Lines of
Credit, Subordinate Liens, and Other Security Interests in
Collateral Located in an SFHA
XII. Requirement to Escrow Flood Insurance Premiums and Fees--
General
XIII. Requirement to Escrow Flood Insurance Premiums and Fees--Small
Lender Exception
XIV. Requirement to Escrow Flood Insurance Premiums and Fees--Loan
Exceptions
XV. Force Placement of Flood Insurance
XVI. Flood Insurance Requirements in the Event of the Sale or
Transfer of a Designated Loan and/or Its Servicing Rights
XVII. Mandatory Civil Money Penalties
I. Determining the Applicability of Flood Insureance Requirements for
Certain Loans
APPLICABILITY 1. Does the Regulation apply to a loan where the building
or mobile home securing such loan is located in a community that does
not participate in the National Flood Insurance Program (NFIP)?
Yes, the Regulation does apply; however, a lender need not require
borrowers to obtain flood insurance for a building or mobile home
located in a community that does not participate in the NFIP, even if
the building or mobile home securing the loan is located in a Special
Flood Hazard Area (SFHA). Nonetheless, a lender, using the standard
Special Flood Hazard Determination Form (SFHDF), must still determine
whether the building or mobile home is located in an SFHA.\25\ If the
building or mobile home is determined to be located in an SFHA, a
lender is required to mail or deliver a written notice to the
borrower.\26\ In this
[[Page 40455]]
case, a lender, generally, may make a conventional loan without
requiring flood insurance. However, because Federal agencies such as
the Small Business Administration, Veterans Administration, or Federal
Housing Administration are prohibited from guaranteeing or insuring a
loan secured by a building or mobile home located in an SFHA in a
community that does not participate in the NFIP, a lender would not be
able to make a federally guaranteed or insured loan. See 42 U.S.C.
4106(a). Also, a lender is responsible for exercising sound risk
management practices to avoid making a loan secured by a building or
mobile home located in an SFHA where no flood insurance is available,
if doing so would pose an unacceptable risk to the lender.
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\25\ 12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR
339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a)
(NCUA).
\26\ 12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR
339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a)
(NCUA).
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APPLICABILITY 2. Some borrowers have buildings with limited utility or
value and, in many cases, the borrower would not replace them if lost
in a flood. Must a lender require flood insurance for such buildings?
Lenders must require flood insurance on a building or mobile home
when those structures are part of the property securing the loan and
are located in an SFHA in a participating community.\27\ However, flood
insurance is not required on a structure that is part of a residential
property but is detached from the primary residential structure of such
property and does not serve as a residence.\28\ If the limited utility
or value structure does not qualify for the detached structure
exemption, a lender may consider ``carving out'' the building from the
security it takes on the loan to avoid having to require flood
insurance on the structure. However, the lender should fully analyze
the risks of this option. In particular, a lender should consider
whether and how it would be able to market and sell the property
securing its loan in the event of foreclosure.
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\27\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
\28\ 12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR
339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c)
(NCUA).
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APPLICABILITY 3. What are a lender's requirements under the
Regulation for a loan secured by multiple buildings when some of the
buildings are located in an SFHA in which flood insurance is available
and other buildings are not? What if the buildings are located in
different communities and some of the communities participate in the
NFIP and others do not?
A lender must determine whether any improved real property securing
the loan is in an SFHA.\29\ In cases in which the loan is secured by
multiple buildings and some of the buildings are located in an SFHA in
which flood insurance is available under the Act, but other buildings
are not located in an SFHA (or are located in an SFHA, but not in a
participating community), a lender is required to obtain flood
insurance only on the buildings securing the loan that are located in
an SFHA in which flood insurance is available under the Act.\30\ For
example, assume a loan is secured by five buildings as follows:
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\29\ 12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR
339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a)
(NCUA).
\30\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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Buildings 1 and 2 are located in an SFHA and the community
participates in the NFIP;
Building 3 is not located in an SFHA; and
Buildings 4 and 5 are located in an SFHA, but the
communities do not participate in the NFIP.
In this scenario, the lender is required to obtain insurance only
on buildings 1 and 2. As a matter of safety and soundness, however, a
lender may decide to require the purchase of flood insurance (from a
private insurer) on buildings 4 and 5 because these buildings are
located in an SFHA. Further, depending on the risk factors of building
3, the lender may elect to require flood insurance as a matter of
safety and soundness, even if the building is not located in an SFHA.
APPLICABILITY 4. What is a lender's responsibility if a particular
building or mobile home that secures a loan is not located within an
SFHA, or is no longer located within an SFHA due to a map change?
Although a lender is not obligated to require mandatory flood
insurance on a building or mobile home securing a loan that is not
located within an SFHA or is no longer located within an SFHA, a lender
may, at its discretion and taking into consideration State law, as
appropriate, require flood insurance for property outside of SFHAs for
safety and soundness purposes as a condition of a loan being made. Each
lender should tailor its own flood insurance policies and procedures to
suit its business needs and protect its ongoing interest in the
collateral. For loans in which the property is no longer located in an
SFHA, the borrower can elect to convert the existing NFIP standard-
rated policy to a lower cost NFIP Preferred Risk Policy, if available.
APPLICABILITY 5. Does a lender's purchase from another lender of a loan
secured by a building or mobile home located in an SFHA in which flood
insurance is available under the Act trigger any requirements under the
Regulation?
No. A lender's purchase of a loan, secured by a building or mobile
home located in an SFHA in which flood insurance is available under the
Act, alone, is not an event that triggers the Regulation's
requirements, such as making a new flood determination or requiring a
borrower to purchase flood insurance. Requirements under the Regulation
are triggered when a lender makes, increases, extends, or renews a
designated loan.\31\ A lender's purchase of a loan does not fall within
any of those categories.
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\31\ 12 CFR 22.2(e), 22.3(a) (OCC); 12 CFR 208.25(b)(5) and
(c)(1) (Board); 12 CFR 339.2, 339.3(a) (FDIC); 12 CFR 614.4925,
614.4930 (FCA); and 12 CFR 760.2, 760.3(a) (NCUA).
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However, if a lender becomes aware at any point during the life of
a designated loan that flood insurance is required, the requirements of
the Regulation apply, including force placing insurance, if
necessary.\32\ Depending on the circumstances, the lender may need to
conduct due diligence for safety and soundness reasons, which could
include determining whether flood insurance on purchased loans is
required. Additionally, if the purchasing lender subsequently
refinances, extends, increases, or renews a designated loan, it must
comply with the Regulation.\33\
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\32\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
\33\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930 (FCA); and 12 CFR 760.3(a) (NCUA).
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APPLICABILITY 6. Does the Regulation apply to loans that are being
restructured or modified?
It depends. If the loan otherwise meets the definition of a
designated loan and if the lender increases the amount of the loan, or
extends or renews the terms of the original loan, then the Regulation
applies.\34\
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\34\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930 (FCA); and 12 CFR 760.3(a) (NCUA).
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APPLICABILITY 7. Are table funded loans treated as new loan
originations?
Yes. Table funding, as defined in the Regulation, means a
settlement at which a loan is funded by a contemporaneous advance of
loan funds and an assignment of the loan to the person
[[Page 40456]]
advancing the funds.\35\ A loan made through a table funding process is
treated as though the party advancing the funds has originated the
loan.\36\ The funding party is required to comply with the Regulation.
The table funding lender can meet the administrative requirements of
the Regulation by requiring the party processing and underwriting the
application to perform those functions on its behalf.
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\35\ 12 CFR 22.2(m) (OCC); 12 CFR 208.25(b)(11) (Board); 12 CFR
339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).
\36\ 12 CFR 22.3(b) (OCC); 12 CFR 208.25(c)(2) (Board); 12 CFR
339.3(b) (FDIC); 12 CFR 614.4930(b) (FCA); and 12 CFR 760.3(b)
(NCUA).
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APPLICABILITY 8. Is a lender required by the Act or the Regulation to
perform a review of its, or of its servicer's, existing loan portfolio
for compliance with the flood insurance requirements under the Act and
Regulation?
No. Apart from the requirements mandated when a loan is made,
increased, extended, or renewed, a lender need only review and take
action on any part of its existing portfolio for safety and soundness
purposes, or if it knows or has reason to know of the need for NFIP
coverage.\37\ Regardless of the lack of such requirement in the Act and
Regulation, however, sound risk management practices may lead a lender
to conduct scheduled periodic reviews that track the need for flood
insurance on a loan portfolio.
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\37\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
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APPLICABILITY 9. Do the mandatory purchase requirements under the Act
and Regulation apply when a lender participates in a loan syndication
or participation?
The acquisition by a lender of an interest in a loan either by
participation or syndication after that loan has been made does not
trigger the requirements of the Act or the Regulation, such as making a
new flood determination or requiring a borrower to purchase flood
insurance.
Nonetheless, as with purchased loans, depending upon the
circumstances, the lender may undertake due diligence for safety and
soundness purposes to protect itself against the risk of flood or other
types of loss.
Lenders who pool or contribute funds that will be simultaneously
advanced to a borrower or borrowers as a loan secured by improved real
estate would be making a loan that triggers the requirements of the Act
and Regulation.\38\ Federal flood insurance requirements also would
apply when a group of lenders refinances, extends, renews or increases
a loan.\39\ Although the agreement among the lenders may assign
compliance duties to a lead lender or agent, and include clauses in
which the lead lender or agent indemnifies participating lenders
against flood losses, each participating lender remains individually
responsible for compliance with the Act and Regulation. Therefore, the
Agencies will examine whether the regulated institution/participating
lender has performed upfront due diligence to determine whether the
lead lender or agent has undertaken the necessary activities to ensure
that the borrower obtains appropriate flood insurance and that the lead
lender or agent has adequate controls to monitor the loan(s) on an
ongoing basis for compliance with the flood insurance requirements.
Further, the Agencies expect the participating lender to have adequate
controls to monitor the activities of the lead lender or agent for
compliance with flood insurance requirements over the term of the loan.
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\38\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
\39\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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Applicability 10. Is a lender expected to consider any triggering event
or any cashless roll of which it becomes aware in any tranche of a
multi-tranche credit facility, regardless of whether the lender
participates in the affected tranche?
No. Consistent with Q&A Applicability 9, the Agencies expect that a
lender participating in a multi-tranche credit facility will perform
upfront due diligence to determine whether the lead lender has adequate
controls to monitor the loan on an ongoing basis for compliance with
the flood insurance requirements. Even though each lender participating
in a tranche in a multi-tranche credit facility remains individually
responsible for compliance with the flood insurance requirements
relating to structures securing the tranche in which it participates,
this obligation can be achieved through the upfront due diligence
process when determining the lead lender/administrative agent's ongoing
monitoring for compliance with flood insurance requirements.
A multi-tranche credit facility is analogous in many respects to a
loan syndication or participation. Q&A Applicability 9 addresses
applicability of the mandatory purchase requirements when a lender
participates in a loan syndication or participation. Similar to a loan
syndication or participation, a multi-tranche credit facility involves
one credit agreement that describes and governs all the tranches. In
addition, similar to a loan syndication or participation, a multi-
tranche credit facility typically has one lead lender that acts as the
administrative agent for the credit facility and its tranches. Thus,
the Agencies do not expect a lender participating in one tranche in a
multi-tranche credit facility to be responsible for taking direct steps
to comply with flood insurance requirements in connection with a
triggering event (i.e., making, increasing, extending or renewing) or
cashless roll that occurs in a tranche in which the lender does not
participate.
A multi-tranche commercial credit facility is a loan arrangement
containing more than one type of loan or tranche. Each loan within the
overall credit facility is made to the same borrower or group of
related borrowers, but the loans may have different lenders and
different terms and conditions. For example, a credit facility might
have one tranche that is a revolving line of credit with a one-year
maturity date and one or more additional tranches that are fixed rate
loans with different interest rates and different maturity dates.
Various lenders may participate in each tranche. Generally, the
tranches share the same collateral and there is one credit agreement
that describes and governs all the tranches.
Under most multi-tranche credit facility agreements, a triggering
event can occur within a particular tranche without any requirement to
notify and obtain the consent of the lenders not participating in that
tranche. Lenders may also participate in a ``cashless roll,'' which is
an exchange of an existing loan for a new or amended loan without any
transfer of cash. A cashless roll may be used to replace or supplement
existing tranches, but not to increase the total amount of committed
debt; therefore, this is not considered a triggering event.
Applicability 11. Does an automatic extension of a credit facility,
that was agreed upon by the borrower and the lender at loan origination
and memorialized in the loan agreement, constitute a triggering event
(i.e., making, increasing, extending or renewing) that would trigger
the federal flood insurance requirements?
No. An automatic extension of a credit facility that was agreed
upon by the lender and the borrower at loan origination and
memorialized in the loan agreement does not constitute a
[[Page 40457]]
triggering event (i.e., making, increasing, extending or renewing) that
would trigger the federal flood insurance requirements, because the
automatic extension was agreed to in the original loan contract.
Applicability 12. What is the applicability of the mandatory purchase
requirement during a period of time when coverage under the NFIP is not
available?
During a period when coverage under the NFIP is not available, such
as due to a lapse in authorization or in appropriations, lenders may
continue to make loans subject to the Regulation without requiring
flood insurance coverage. However, lenders must continue to make flood
determinations,\40\ provide timely, complete, and accurate notices to
borrowers,\41\ and comply with other applicable parts of the
Regulation.
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\40\ 12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR
339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a)
(NCUA).
\41\ 12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR
339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a)
(NCUA).
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In addition, lenders should evaluate safety and soundness and legal
risks and prudently manage those risks during a period when coverage
under the NFIP is not available. Lenders should take appropriate
measures or consider possible options in consultation with the borrower
to mitigate loss exposures in the event of a flood during such periods.
For example,
Lenders may determine the risk of loss is sufficient to
justify a postponement in closing the loan until the NFIP coverage is
available again.
Lenders may require the borrower to obtain private flood
insurance if available, as a condition of closing the loan. However,
after considering the cost of the private flood policy, a lender or the
borrower may decide to postpone closing rather than incur a long-term
obligation to address a possible short-term lapse.
Lenders may make the loan without requiring the borrower
to apply for flood insurance and pay the premium while NFIP coverage is
unavailable. However, this option poses a number of risks that should
be carefully evaluated. Moreover, once NFIP coverage becomes available
again, the Agencies expect that flood insurance will be obtained for
these loans, including, if necessary, by force placement.\42\ Before
making such loans, lenders should make borrowers aware of the flood
insurance requirements and that force-placed insurance is typically
more costly than borrower-obtained insurance. Lenders also should have
a process to identify these loans to ensure that insurance is promptly
purchased when NFIP coverage becomes available subsequent to their
closing.
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\42\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
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II. Exemptions From the Mandatory Flood Insurance Purchase Requirements
Exemptions 1. What are the exemptions from the mandatory purchase
requirement?
There are only three exemptions from the mandatory requirement to
purchase flood insurance on a designated loan. The first applies to
State-owned property covered under a policy of self-insurance
satisfactory to the Administrator of FEMA.\43\ The second applies if
both the original principal balance of the loan is $5,000 or less, and
the original repayment term is one year or less.\44\ The third applies
to any structure that is a part of any residential property but is
detached from the primary residential structure of such property and
does not serve as a residence. For purposes of the detached structure
exemption, a ``structure that is a part of residential property'' is a
structure used primarily for personal, family, or household purposes,
and not used primarily for agricultural, commercial, industrial, or
other business purposes. In addition, a structure is ``detached'' from
the primary residential structure if it is not joined by any structural
connection to that structure. Furthermore, whether a structure ``does
not serve as a residence'' is based upon the good faith determination
of the lender that the structure is not intended for use or actually
used as a residence, which generally includes sleeping, bathroom, or
kitchen facilities.\45\ If one of these exemptions applies, a borrower
may still elect to purchase flood insurance. Also, a lender may require
flood insurance as a condition of making the loan, as a matter of
safety and soundness.
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\43\ 12 CFR 22.4(a) (OCC); 12 CFR 208.25(d)(1) (Board); 12 CFR
339.4(a) (FDIC); 12 CFR 614.4932(a) (FCA); and 12 CFR 760.4(a)
(NCUA).
\44\ 12 CFR 22.4(b) (OCC); 12 CFR 208.25(d)(2) (Board); 12 CFR
339.4(b) (FDIC); 12 CFR 614.4932(b) (FCA); and 12 CFR 760.4(b)
(NCUA).
\45\ 12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR
339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c)
(NCUA).
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Exemptions 2. Does a lender have to take a security interest in the
primary residential structure for detached structures to be eligible
for the detached structure exemption? For example, suppose the house on
a farm is not collateral, but all of the outbuildings including the
barn, the equipment storage shed, and the silo (which are used for farm
production), and a detached garage where the homeowner keeps his car,
are taken as collateral. May the lender apply the detached structure
exemption to the outbuildings?
The lender does not have to take a security interest in the primary
residential structure for detached structures to be eligible for the
exemption, but the lender needs to evaluate the uses of detached
structures to determine if they are eligible.\46\ The term ``a
structure that is part of a residential property'' in the detached
structure exemption applies only to structures for which there is a
residential use and not to structures for which there is a commercial,
agricultural, or other business use.\47\ In this example, only the
garage is serving a residential use, so it could qualify for the
exemption. The barn, equipment storage shed, and silo, which are used
for farm production, would not qualify for the exemption.
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\46\ 12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR
339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c)
(NCUA).
\47\ 12 CFR 22.4(c)(1) (OCC); 12 CFR 208.25(d)(3)(i) (Board); 12
CFR 339.4(c)(1) (FDIC); 12 CFR 614.4932(c)(1) (FCA); and 12 CFR
760.4(c)(1) (NCUA).
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Exemptions 3. Do detached structures require a flood hazard
determination to be performed even if coverage is not required?
Because a flood hazard determination is often needed to identify
the number and types of structures on the property, conducting a flood
hazard determination remains necessary for the lender to be able to
comply with the flood insurance requirements.\48\
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\48\ 12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR
339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a)
(NCUA).
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Exemptions 4. If a borrower currently has a flood insurance policy on a
detached structure that is part of residential property and the
detached structure does not serve as a residence, may the lender or its
servicer cancel its requirement to carry flood insurance on that
structure?
Yes. If a borrower has a flood insurance policy on a detached
structure that is part of a residential
[[Page 40458]]
property and does not serve as a residence, the lender is no longer
mandated by the Act to require flood insurance on that structure.\49\
The lender may allow the borrower to cancel the policy. If warranted as
a matter of safety and soundness, the lender may continue to require
flood insurance coverage on the detached structure.
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\49\ 12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR
339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c)
(NCUA).
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Exemptions 5. If a property is remapped into an SFHA, does that trigger
a review of the intended use of each detached structure?
No. A lender must examine the status of a detached structure upon a
qualifying triggering event--i.e., making, increasing, extending, or
renewing a loan.\50\ A remapping is not a triggering event. There is no
duty to monitor the status of a detached structure following the
lender's initial determination. However, regardless of the absence of
such requirement in the Regulation, sound risk management practices may
lead a lender to conduct scheduled periodic reviews that track the need
for flood insurance on a loan portfolio. Consistent with existing
obligations under the Regulation, if a lender determines at any time
that a property has become subject to the mandatory flood insurance
purchase requirement and, as a result, the collateral is uninsured or
underinsured, the lender has a duty to inform the borrower of the
obligation to obtain or increase insurance coverage and to purchase
flood insurance on the borrower's behalf, as necessary.\51\
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\50\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
\51\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
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Exemptions 6. May a lender review current loans in its portfolio as the
flood insurance policies renew and determine that it will no longer
require flood insurance on a detached structure in an SFHA if the
structure does not contribute to the value of the property securing the
loan?
A lender or servicer could initiate such a review; however, the
Regulation does not permit the exemption of structures from the
mandatory flood insurance purchase requirement based solely on whether
the detached structure contributes value to the overall residential
property securing the loan.\52\ In the case of any residential
property, flood insurance is not required on any structure that is part
of such property as long as it is detached from the primary residential
structure and does not serve as a residence.\53\ In addition, there are
other exemptions that could apply: The exemption for State-owned
property covered under a policy of self-insurance satisfactory to the
Administrator of FEMA or the exemption for property securing any loan
with an original principal balance of $5,000 or less and a repayment
term of one year or less.\54\
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\52\ 12 CFR 22.4 (OCC); 12 CFR 208.25(d) (Board); 12 CFR 339.4
(FDIC); 12 CFR 614.4932 (FCA); and 12 CFR 760.4 (NCUA).
\53\ 12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR
339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c)
(NCUA).
\54\ 12 CFR 22.4(a) and (b) (OCC); 12 CFR 208.25(d)(1) and (2)
(Board); 12 CFR 339.4(a) and (b) (FDIC); 12 CFR 614.4932(a) and (b)
(FCA); and 12 CFR 760.4(a) and (b) (NCUA).
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Exemptions 7. If a loan is secured by a residential property and is
joined to another building by a stairway or covered walkway, for
purposes of Federal flood insurance requirements, would the other
building qualify as a detached structure?
For purposes of the detached structure exemption, a structure is
``detached'' from the primary residential structure if it is not joined
by any structural connection to that structure.\55\ That is, a
structure is ``detached'' if it stands alone. This definition is
consistent with the coverage provision of the NFIP's Standard Flood
Insurance Policy (SFIP) for additions and extensions to the dwelling
unit. In this case, the connected structure would not qualify as a
detached structure because it is attached to the primary residence.
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\55\ 12 CFR 22.4(c)(2) (OCC); 12 CFR 208.25(d)(3)(ii) (Board);
12 CFR 339.4(c)(2) (FDIC); 12 CFR 614.4932(c)(2) (FCA); and 12 CFR
760.4(c)(2) (NCUA).
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For purposes of insurance coverage under the NFIP, FEMA provides
that if one building is attached to another through a covered breezeway
or similar connection, it may be insured as one building under one
policy or may be insured separately under two policies. See the FEMA
NFIP Flood Insurance Manual for guidance.
III. Coverage--NFIP/Private Flood Insurance
Coverage 1. What are some factors to consider when determining whether
a flood insurance policy issued by a private insurer provides
sufficient protection of a loan secured by improved real property
located in an SFHA, consistent with general safety and soundness
principles?
Some factors, among others, that a lender could consider in
determining whether a policy provides sufficient protection of a loan
include whether: (1) A policy's deductibles are reasonable based on the
borrower's financial condition; (2) the insurer provides adequate
notice of cancellation to the mortgagor and mortgagee to allow for
timely force placement of flood insurance, if necessary; (3) the terms
and conditions of the policy with respect to payment per occurrence or
per loss and aggregate limits are adequate to protect the regulated
lending institution's interest in the collateral; (4) the flood
insurance policy complies with applicable State insurance laws; and (5)
the private insurance company has the financial solvency, strength, and
ability to satisfy claims.
Coverage 2. May a lender rely on a private insurance policy providing
portfolio-wide coverage to meet the flood insurance purchase
requirement or the force placement requirement under the Regulation?
No. A private insurance policy that provides a lender portfolio-
wide coverage may provide protection to the lender in certain
circumstances. For example, when a flood insurance policy has expired
and the borrower has failed to renew coverage, private insurance
policies providing portfolio-wide coverage may be useful protection for
the lender for a gap in coverage in the period of time before a force-
placed policy takes effect. However, even if a lender has portfolio-
wide coverage to address gaps, the lender must still ensure the flood
insurance purchase requirement is satisfied at the time a loan is made,
increased, renewed or extended, and the lender must still force place
coverage on the borrower's behalf in a timely manner, as required,\56\
and may not rely on a private insurance policy that provides portfolio-
wide coverage as a substitute for a force-placed policy.
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\56\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
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Coverage 3. When does mandatory flood insurance on a designated loan
need to be in place during the closing process?
The Regulation states that a lender cannot ``make'' a loan secured
by a property in an SFHA without adequate flood insurance coverage
being in place.\57\ A lender should use the loan ``closing date'' to
determine the date by which flood insurance must be in place for a
designated loan. FEMA deems the ``closing date'' as the day the
ownership
[[Page 40459]]
of the property transfers to the new owner based on State law.
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\57\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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``Wet funding'' and ``dry funding,'' which varies by State, refer
to when a mortgage is considered officially closed. In a ``wet''
settlement State, the signing of closing documents, funding, and
transfer of title occur all on the same day. By contrast, in a ``dry''
settlement State, documents are signed on one date, but loan funding
and/or transfer of title/recording occur on subsequent date(s).
Therefore, in ``dry'' settlement States, the ``closing date'' is the
date of property transfer, regardless of loan signing or funding date.
It is also important to note that the application and premium
payment for NFIP flood insurance must be provided at or prior to the
closing date since this impacts the FEMA flood insurance effective date
and any resulting 30-day waiting period for new policies not made in
connection with a triggering event. This application requirement
applies for properties located in both dry and wet settlement States.
See NFIP Flood Insurance Manual.
IV. Required Use of Standard Flood Hazard Determination Form (SFHDF)
SFHDF 1. Does the SFHDF replace the borrower notification form?
No. The SFHDF is used by the lender to determine whether the
building or mobile home offered as collateral security for a loan is or
will be located in an SFHA in which flood insurance is available under
the Act.\58\ The notification form, on the other hand, is used to
notify the borrower(s) that the building or mobile home is or will be
located in an SFHA and to inform the borrower(s) about flood insurance
requirements and the availability of Federal disaster relief
assistance.\59\
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\58\ 12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR
339.6 (FDIC); 12 CFR 614.4940 (FCA); and 12 CFR 760.6 (NCUA).
\59\ 12 CFR 22.9 (OCC); 12 CFR 208.25(i) (Board); 12 CFR 339.9
(FDIC); 12 CFR 614.4955 (FCA); and 12 CFR 760.9 (NCUA).
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SFHDF 2. May a lender provide the SFHDF to the borrower?
Yes. Although not a statutory requirement, a lender may provide a
copy of the flood determination to the borrower so they can better
understand their flood risk. The Agencies note that under the FEMA
process for a Letter of Determination Review (LODR), a lender would
also need to make the determination available to the borrower. FEMA
requires that the lender and the borrower request the LODR jointly
within 45-days of the notification of the requirement to purchase flood
insurance for a fee. In the event a lender provides the SFHDF to the
borrower, the signature of the borrower is not required to acknowledge
receipt of the form.
SFHDF 3. May the SFHDF be used in electronic format?
Yes.\60\ In the final rule adopting the SFHDF, FEMA stated: ``If an
electronic format is used, the format and exact layout of the Standard
Flood Hazard Determination Form is not required, but the fields and
elements listed on the form are required. Any electronic format used by
lenders must contain all mandatory fields indicated on the form.'' It
should be noted that the lender must be able to reproduce the form upon
receiving a document request by its Federal supervisory agency.
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\60\ 12 CFR 22.6(b) (OCC); 12 CFR 208.25(f)(2) (Board); 12 CFR
339.6(b) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(b)
(NCUA).
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SFHDF 4. May a lender rely on a previous determination for a
refinancing or assumption of a loan or multiple loans to the same
borrower secured by the same property?
It depends. The Act (42 U.S.C. 4104b(e)) permits a lender to rely
on a previous flood determination using the SFHDF when it increases,
extends, renews, or purchases a loan secured by a building or a mobile
home. Under the Act, the ``making'' of a loan is not listed as a
permissible event that permits a lender to rely on a previous
determination. When the loan involves a refinancing or assumption by
the same lender who obtained the original flood determination on the
same property, the lender may rely on the previous determination only
if the original determination was made not more than seven years before
the date of the transaction, the basis for the determination was set
forth on the SFHDF, and there were no map revisions or updates
affecting the security property since the original determination was
made. Further, if the same lender makes multiple loans to the same
borrower secured by the same improved real estate, the lender may rely
on its previous determination if the original determination was made
not more than seven years before the date of the transaction, the basis
for the determination was set forth on the SFHDF, and there were no map
revisions or updates affecting the security property since the original
determination was made. These loans are extended by the same lender, to
the same borrower, and are secured by the same improved real estate,
and, therefore, these types of transactions are the functional
equivalent of an increase of a loan.
When the loan involves a refinancing or assumption made by a lender
different from the one who obtained the original determination, this
would constitute the making of a new loan, thereby requiring a new
determination.
V. Flood Insurance Determination Fees
Fees 1. When can lenders or servicers charge the borrower a fee for
making a determination?
There are four instances under the Act and Regulation when the
borrower can be charged a fee for a flood determination:
When the determination is made in connection with the
making, increasing, extending, or renewing of a loan that is initiated
by the borrower;
When the determination reflects a revision or updating by
FEMA of floodplain areas or flood-risk zones;
When the determination reflects FEMA's publication of a
notice or compendium that affects the area in which the security
property is located, or FEMA requires a determination as to whether the
building securing the loan is located in an SFHA; or
When the determination results in force placement of
insurance.\61\
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\61\ 12 CFR 22.8(b) (OCC); 12 CFR 208.25(h)(2) (Board); 12 CFR
339.8(b) (FDIC); 12 CFR 614.4950(b) (FCA); and 12 CFR 760.8(b)
(NCUA).
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Loan or other contractual documents between the parties may also
permit the imposition of fees.
Fees 2. May charges made for life-of-loan reviews by flood
determination firms be passed along to the borrower?
Yes, with limitations noted below. In addition to the initial
determination at the time a loan is made, increased, renewed, or
extended, many flood determination firms provide a service to the
lender to review and report changes in the flood status of a dwelling
for the entire term of the loan (i.e., life-of-loan monitoring). The
fee charged for the service at loan closing is a composite fee for
conducting both the original and subsequent reviews. Charging a fee for
the original determination is clearly authorized by the Act. The
Agencies agree that a determination fee may include, among other
things, reasonable fees for a lender, servicer, or third party to
monitor the flood hazard status of property securing a loan in order to
make determinations on an ongoing basis.
However, the life-of-loan fee is based on the authority to charge a
determination fee and, therefore, the composite determination/life-of-
loan
[[Page 40460]]
monitoring fee may be charged only if the events specified in the
answer to Q&A Fees 1 occur.\62\ Further, a lender may not charge a
composite determination and life-of-loan fee if the loan does not
close, because such life-of loan fee would be an unearned fee in
violation of the Real Estate Settlement Procedures Act.\63\
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\62\ 12 CFR 22.8 (OCC); 12 CFR 208.25(h) (Board); 12 CFR 339.8
(FDIC); 12 CFR 614.4950 (FCA); and 12 CFR 760.8 (NCUA).
\63\ 12 U.S.C. 2607. See 12 CFR 1024.14(c).
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VI. Flood Zone Discrepancies
Zone 1. What should a lender do when there is a discrepancy between the
flood hazard zone designation on the flood determination form and the
flood insurance policy?
If a lender receives a policy declarations page that has a flood
zone designation that is different from the flood zone shown on the
SFHDF, it should consider documenting the discrepancy in the loan file.
If the SFHDF indicates that the building securing the loan is in an
SFHA, the lender must require the appropriate amount of insurance
coverage in accordance with the Act and Regulation,\64\ but the lender
is not otherwise required to resolve a discrepancy between the flood
zone designation on the SFHDF and the designation on the flood
insurance policy declarations page provided by the borrower. This
guidance applies to any flood zone discrepancy that arises in
connection with a mortgage loan that is made, increased, extended or
renewed. In addition, the guidance applies to any building that has
been rated in accordance with NFIP procedures.
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\64\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
---------------------------------------------------------------------------
For a policy issued under the NFIP, if a misrating is discovered at
the time of loss resulting from an incorrect flood zone, and a
policyholder has underpaid the flood insurance premium, a policyholder
may keep the contracted coverage limits if an additional premium is
paid. Once paid, a revised declarations page will be issued showing the
corrected flood zone. The lender will receive a copy of the
declarations page and may receive a copy of the underpayment notice.
If the borrower does not pay the additional premium, resulting in
inadequate coverage, lenders must proceed with force-placement
procedures.\65\ On the other hand, if a policyholder has overpaid the
flood insurance premium as a result of a misrating, FEMA may allow a
refund of insurance premiums under certain circumstances. See NFIP
Flood Insurance Manual for specific instructions. Private policies may
resolve flood zone discrepancies differently.
---------------------------------------------------------------------------
\65\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a)(FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
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Zone 2. Is a lender in violation of the Regulation if there is
discrepancy between the flood zone on the SFHDF and the flood insurance
policy declarations page?
No, a lender is not in violation of the Regulation if there is a
discrepancy between the flood zone on the SFHDF and the flood zone on
the policy declarations page. As provided in Q&A Zone 1, a lender
should consider documenting any zone discrepancy in the loan file.
Zone 3. What should a lender do when the lender's flood zone
determination specifies that a building securing the loan is located in
an SFHA requiring mandatory flood insurance coverage, but the borrower
disputes that determination?
If a borrower disputes a lender's determination that the building
securing the loan is located in an SFHA requiring mandatory flood
insurance coverage, the parties involved in making the determination
are encouraged to resolve the flood zone discrepancy before contacting
FEMA for a final determination. If the flood zone discrepancy cannot be
resolved, an appeal may be filed with FEMA. Depending on the nature of
the dispute, FEMA has different options for review, including:
Letters of Determination Review (LODR), and
Letters of Map Change (LOMC), which include Letters of Map
Amendment (LOMA), Letters of Map Revision (LOMR), and Letters of Map
Revision Based on Fill (LOMR-F).
Lenders and borrowers should consult FEMA guidance on the
appropriate process to follow, any applicable fees, and any deadlines
by which the request to review must be made. However, as long as the
lender's flood determination specifies that a building securing the
loan is located in an SFHA and requires mandatory flood insurance
coverage, sufficient coverage must be in place in accordance with the
Act and the Regulation until FEMA has determined that the building is
not in an SFHA.\66\ As noted in Q&A Zone 1, if there is sufficient
insurance coverage in place, lenders are not required to resolve flood
zone discrepancies between the flood zone determination form and the
flood insurance policy.
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\66\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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VII. Notice of Special Flood Hazards and Availability of Federal
Disaster Relief
Notice 1. Does the Notice of Special Flood Hazards have to be provided
to each borrower for a real estate related loan?
No. The Notice of Special Flood Hazards must be provided to one
borrower when the lender determines that the property securing the loan
is or will be located in an SFHA.\67\ In a transaction involving
multiple borrowers, the lender need only provide the Notice of Special
Flood Hazards to any one of the borrowers in the transaction. Lenders
may provide multiple notices if they choose. The lender and borrower(s)
typically designate the borrower to whom the Notice of Special Flood
Hazards will be provided.
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\67\ 12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR
339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a)
(NCUA).
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Notice 2. Lenders making loans on mobile homes may not always know
where the home is to be located until just prior to, or sometimes
after, the time of loan closing. How is the requirement to provide the
Notice of Special Flood Hazards applied in these situations?
As required by the Regulation, a lender must provide the Notice of
Special Flood Hazards to the borrower within a reasonable time before
the completion of the transaction.\68\ If a lender determines that a
mobile home securing a designated loan will be located in an SFHA just
prior to closing, the lender may need to delay the closing until the
Notice of Special Flood Hazards has been provided in accordance with
the Regulation.
---------------------------------------------------------------------------
\68\ 12 CFR 22.9(c) (OCC); 12 CFR 208.25(i)(2) (Board); 12 CFR
339.9(c) (FDIC); 12 CFR 614.4955(c) (FCA); and 12 CFR 760.9(c)
(NCUA).
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In the case of loan transactions secured by mobile homes not
located on a permanent foundation, the Agencies note that such ``home
only'' transactions are excluded from the definition of mobile home and
the notice requirements would not apply to these transactions. However,
the Agencies encourage a lender to advise the borrower that if the
mobile home is later located on a permanent foundation in an SFHA,
flood insurance will be
[[Page 40461]]
required. If the lender, when notified of the location of the mobile
home subsequent to the loan closing, determines that it has been placed
on a permanent foundation and is located in an SFHA in which flood
insurance is available under the Act, flood insurance coverage becomes
mandatory and a force-placement notice must be given to the borrower
under those provisions.\69\ If the borrower fails to purchase flood
insurance coverage within 45 days after notification, the lender must
force place the insurance.\70\
---------------------------------------------------------------------------
\69\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
\70\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
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Notice 3. When is the lender required to provide notice to the servicer
of a loan that flood insurance is required?
Because the servicer of a loan is often not identified prior to the
closing of a loan, the Regulation requires that notice be provided no
later than the time the lender transmits other loan data, such as
information concerning hazard insurance and taxes, to the servicer.\71\
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\71\ 12 CFR 22.9(c) (OCC); 12 CFR 208.25(i)(2) (Board); 12 CFR
339.9(c) (FDIC); 12 CFR 614.4955(c) (FCA); and 12 CFR 760.9(c)
(NCUA).
---------------------------------------------------------------------------
Notice 4. What will constitute appropriate form of notice to the
servicer?
Delivery to the servicer of a copy of the notice given to the
borrower is appropriate notice. The Regulation also provides that the
notice can be made either electronically or by a written copy.\72\
---------------------------------------------------------------------------
\72\ 12 CFR 22.9(c) (OCC); 12 CFR 208.25(i)(2) (Board); 12 CFR
339.9(c) (FDIC); 12 CFR 614.4955(c) (FCA); and 12 CFR 760.9(c)
(NCUA).
---------------------------------------------------------------------------
In the case of a servicer affiliated with the lender, the Act
requires the lender to notify the servicer of special flood hazards and
the Regulation reflects this requirement. Neither the Act nor the
Regulation contains an exception for affiliates.\73\
---------------------------------------------------------------------------
\73\ 12 U.S.C. 4104a(a)(1); 12 CFR 22.9(c) (OCC); 12 CFR
208.25(i)(2) (Board); 12 CFR 339.9(c) (FDIC); 12 CFR 614.4955(c)
(FCA); and 12 CFR 760.9(c) (NCUA).
---------------------------------------------------------------------------
Notice 5. How long must the lender maintain the record of receipt by
the borrower of the Notice of Special Flood Hazards?
The record of receipt provided by the borrower must be maintained
for the period of time that the lender owns the loan.\74\ Examples of a
record of receipt include: The borrower's signed acknowledgment of
receipt of the Notice of Special Flood Hazards; the borrower's initials
on a form that acknowledges receipt; or a certified return receipt if
the Notice of Special Flood Hazards was mailed to the borrower. Lenders
may keep the record in the form that best suits the lender's business
practices. Lenders may retain the record electronically, but they must
be able to retrieve the record within a reasonable time pursuant to a
document request from their Federal supervisory agency.
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\74\ 12 CFR 22.9(d) (OCC); 12 CFR 208.25(i)(3) (Board); 12 CFR
339.9(d) (FDIC); 12 CFR 614.4955(d) (FCA); and 12 CFR 760.9(d)
(NCUA).
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Notice 6. Can a lender rely on a previous Notice of Special Flood
Hazards if it is less than seven years old, and it is the same
property, same borrower, and same lender?
The Regulation does not address waiving the requirement to provide
the Notice of Special Flood Hazards to the borrower. Although
subsequent transactions by the same lender with respect to the same
property are the functional equivalent of a renewal and do not require
a new determination, the lender must still provide a new Notice of
Special Flood Hazards to the borrower.\75\
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\75\ 12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR
339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a)
(NCUA).
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Notice 7. Is use of the sample form of Notice of Special Flood Hazards
mandatory?
Although lenders are required to provide a Notice of Special Flood
Hazards to a borrower when they make, increase, extend, or renew a loan
secured by an improved structure located in an SFHA,\76\ use of the
sample form of Notice of Special Flood Hazards provided in Appendix A
of the Regulation is not mandatory. It should be noted that the sample
form includes other information in addition to what is required by the
Act and the Regulation. Lenders may personalize, change the format of,
and add information to the sample form of notice, if they choose.
However, a lender-revised Notice of Special Flood Hazards must provide
the borrower with at least the minimum information required by the Act
and Regulation.\77\ Therefore, lenders should consult the Act and
Regulation to determine the information needed.
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\76\ 12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR
339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a)
(NCUA).
\77\ 12 U.S.C. 4104a(a)(3); 12 CFR 22.9(b) (OCC); 12 CFR
208.25(i)(1) (Board); 12 CFR 339.9(b) (FDIC); 12 CFR 614.4955(b)
(FCA); and 12 CFR 760.9(b) (NCUA).
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VIII. Determining the Appropriate Amount of Flood Insurance Required
Amount 1. The Regulation states that the amount of flood insurance
required ``must be at least equal to the lesser of the outstanding
principal balance of the designated loan or the maximum limit of
coverage available for the particular type of property under the Act.''
What is meant by the ``maximum limit of coverage available for the
particular type of property under the Act''?
``The maximum limit of coverage available for the particular type
of property under the Act'' depends on the value of the secured
collateral. First, under the NFIP, there are maximum caps on the amount
of insurance available for buildings located in a participating
community under the Regular Program. For single-family and two-to-four
family dwellings and individually owned condominium units insured under
the Dwelling Form policy, the maximum limit is $250,000. For a
residential condominium building insured under the Residential
Condominium Building Association Policy (RCBAP) form, the maximum
amount of insurance available is $250,000 multiplied by the number of
units. For all other buildings insured under the General Property Form,
the maximum limit of building coverage available is $500,000. This
includes all non-residential buildings, mixed-use condominium buildings
not eligible for coverage under the RCBAP, and other residential
buildings of five or more families, such as cooperatives or apartment
buildings in the non-condominium form of ownership. (In participating
communities that are under the emergency program phase, the maximum
limits of insurance are different.) The maximum limit for contents
insured under the Dwelling Form and RCBAP is $100,000 ($100,000 total,
not per unit) and $500,000 for contents insured under the General
Property Form. See NFIP Flood Insurance Manual.
In addition to the maximum caps under the NFIP, the Regulation also
provides that ``flood insurance coverage under the Act is limited to
the building or mobile home and any personal property that secures a
loan and not the land itself,'' which is commonly referred to as the
``insurable value'' of a structure.\78\ The NFIP does not insure
[[Page 40462]]
land; therefore, land values are not included in the calculation.\79\
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\78\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
\79\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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An NFIP policy will not cover an amount exceeding the ``insurable
value'' of the structure, so the maximum amount of insurance coverage
is the applicable limit available under the NFIP or the insurable
value, whichever is less. In determining coverage amounts for flood
insurance, lenders often follow the same practice used to establish
other hazard insurance coverage amounts. However, unlike the insurable
valuation used to underwrite most other hazard insurance policies, the
insurable value of improved real estate for flood insurance purposes
also includes the repair or replacement cost of the foundation and
supporting structures. It is very important to calculate the correct
insurable value of the property; otherwise, the lender might
inadvertently require the borrower to purchase too much or too little
flood insurance coverage. For example, if the lender fails to exclude
the value of the land when determining the insurable value of the
improved real estate, the borrower will be asked to purchase coverage
that exceeds the amount the NFIP will pay in the event of a loss.
(Please note, however, when taking a security interest in improved real
estate where the value of the land, excluding the value of the
improvements, is sufficient collateral for the debt, the lender must
nonetheless require flood insurance to cover the value of the structure
if it is located in a participating community's SFHA.)\80\
---------------------------------------------------------------------------
\80\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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Amount 2. What is the ``insurable value'' of a building and how is it
used to determine the required amount of flood insurance?
The insurable value of the building may generally be the same as
100 percent Replacement Cost Value (RCV), which is the cost to replace
the building with the same kind of material and construction without
deduction for depreciation. In calculating the amount of insurance to
require, the lender and borrower (either by themselves or in
consultation with the flood insurance provider or other appropriate
professional) may choose from a variety of approaches or methods to
establish the insurable value. They may use an appraisal based on a
cost-value (not market-value) approach, a construction-cost
calculation, the insurable value used on a hazard insurance policy
(recognizing that the insurable value for flood insurance purposes may
differ from the coverage provided by the hazard insurance and that
adjustments may be necessary; for example, most hazard policies do not
cover foundations), or any other reasonable approach, so long as it can
be supported.
In cases involving certain residential or condominium properties,
insurance policies under the NFIP should be written to, and the
insurance loss payout usually would be the equivalent of, RCV. However,
lenders should avoid a situation in which the insured borrower pays for
more coverage than the insured would recover in the event of a loss.
Therefore, to strictly link insurable value to RCV is not always
practical. In cases involving nonresidential properties, and even some
residential properties, the insurance loss payout might be based on
actual cash value, which is RCV less physical depreciation. Insurance
policies written at RCV for these properties would require an insured
to pay for coverage that exceeds the amount the NFIP or private insurer
would pay in the event of a loss, and this situation should be avoided.
Therefore, it is reasonable for lenders, in determining the amount of
flood insurance required, to consider the extent of recovery allowed
under the NFIP or private policy for the type of property being
insured. Doing so would allow the lender to assist the borrower in
avoiding situations in which the insured pays for coverage that exceeds
the amount the insured would recover in the event of a loss.
Lenders should be equally mindful of avoiding situations in which,
as a result of insuring at a level below RCV, they underinsure
property.
Amount 3. What are examples of residential buildings?
A residential building is a non-commercial building designed for
habitation by one or more families or a mixed-use building that
qualifies as a single-family, 2-4 family, or other residential
building.
The NFIP provides the following definitions:
A single family dwelling is either a residential single-family
building in which the total floor area devoted to non-residential uses
is less than 50 percent of the building's total floor area, or a
single-family residential unit within a 2-4 family building, other-
residential building, business, or non-residential building, in which
commercial uses within the unit are limited to less than 50 percent of
the unit's total floor area.
A 2-4 family residential building is a residential building,
including an apartment building, containing 2-4 residential spaces and
in which commercial uses are limited to less than 25 percent of the
building's total floor area. This category includes apartment buildings
and condominium buildings. This excludes hotels and motels with normal
room rentals for less than 6 months.
An other residential building is a residential building that is
designed for use as a residential space for 5 or more families or a
mixed-use building in which the total floor area devoted to non-
residential uses is less than 25 percent of the total floor area within
the building. This category includes condominium and apartment
buildings as well as hotels, motels, tourist homes, and rooming houses
where the normal occupancy of a guest is 6 months or more. Additional
examples of other residential buildings include dormitories and
assisted-living facilities.
For more complete information, refer to the NFIP Flood Insurance
Manual.
Amount 4. What are examples of nonresidential buildings?
A nonresidential building is one in which the named insured is a
commercial enterprise primarily carried out to generate income and the
coverage is for:
A building designed as a non-habitational building;
A mixed-use building in which the total floor area devoted
to residential uses is 50 percent or less of the total floor area
within the building if the residential building is a single-family
property; or 75 percent or less of the total floor area within the
building for all other residential properties; or
A building designed for use as office or retail space,
wholesale space, hospitality space, or for similar uses.
In addition, the NFIP describes other non-residential buildings as
including, but not limited to, churches, schools, farm buildings
(including grain bins and silos), garages, pool houses, clubhouses, and
recreational buildings.
For more complete information, refer to the NFIP Flood Insurance
Manual.
Amount 5. How much insurance is required on a building located in an
SFHA in a participating community?
The amount of insurance required by the Act and Regulation is the
lesser of:
The outstanding principal balance of the loan(s); or
The maximum amount of insurance available under the NFIP,
which is the lesser of:
[[Page 40463]]
[cir] The maximum limit available for the type of structure; or
[cir] The ``insurable value'' of the structure.\81\
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\81\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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Example: (Calculating insurance required on a nonresidential
building):
Loan security includes one equipment shed located in an SFHA in a
participating community under the Regular Program.
Outstanding loan principal balance is $300,000.
Maximum amount of insurance available under the NFIP:
[cir] Maximum limit available for type of structure is $500,000 per
building (nonresidential building).
[cir] Insurable value of the equipment shed is $30,000.
The minimum amount of insurance required by the Regulation for the
equipment shed is $30,000.
Amount 6. Is flood insurance required for each building when the real
estate security contains more than one building located in an SFHA in a
participating community? If so, how much coverage is required?
Yes. The lender must determine the amount of insurance required on
each building and add these individual amounts together.\82\ The total
amount of required flood insurance is the lesser of:
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\82\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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The outstanding principal balance of the loan(s); or
The maximum amount of insurance available under the NFIP,
which is the lesser of:
[cir] The maximum limit available for the type of structures; or
[cir] The ``insurable value'' of the structures.
The amount of total required flood insurance can be allocated among
the secured buildings in varying amounts, but all buildings in an SFHA
must be covered in accordance with the statutory requirement.
Example: Lender makes a loan in the principal amount of $150,000
secured by five nonresidential buildings, only three of which are
located in SFHAs within participating communities.
Outstanding loan principal is $150,000.
Maximum amount of insurance available under the NFIP.
[cir] Maximum limit available for the type of structure is $500,000
per building for nonresidential buildings (or $1.5 million total); or
[cir] Insurable value ($100,000 for each nonresidential building
for which insurance is required, or $300,000 total).
Amount of insurance required for the three buildings is $150,000.
This amount of required flood insurance could be allocated among the
three buildings in varying amounts, so long as each is covered in
accordance with the statutory requirement.
Amount 7. If the insurable value of a building or mobile home securing
a designated loan is less than the outstanding principal balance of the
loan, must a lender require the borrower to obtain flood insurance up
to the balance of the loan?
No. The Regulation provides that the amount of flood insurance must
be at least equal to the lesser of the outstanding principal balance of
the designated loan or the maximum limit of coverage available for a
particular type of property under the Act. The Regulation also provides
that flood insurance coverage under the Act is limited to the building
or mobile home and any personal property that secures a loan and not
the land itself. \83\ Since the NFIP policy does not cover land value,
lenders determine the amount of insurance necessary based on the
insurable value of the improvements.
---------------------------------------------------------------------------
\83\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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Amount 8. Can a lender require more flood insurance than the minimum
required by the Regulation?
Yes. Lenders are permitted to require more than the minimum amount
of flood insurance required by the Regulation, taking into
consideration applicable State and Federal law and safe and sound
banking practices, as appropriate. However, the borrower or lender may
have to seek such coverage outside the NFIP. Although a lender has the
responsibility to tailor its own flood insurance policies and
procedures to suit its business needs and protect its ongoing interest
in the collateral, it should consider the extent of recovery allowed
under the NFIP or a private policy for the type of property being
insured to assist the borrower in avoiding paying for coverage that
exceeds the amount the insured would recover in the event of a loss.
Amount 9. Can a lender allow the borrower to use the maximum deductible
to reduce the cost of flood insurance?
Yes. However, it may not be a sound business practice for a lender,
as a matter of policy, to always allow the borrower to use the maximum
deductible. A lender should determine the reasonableness of the
deductible on a case-by-case basis, taking into account the risk that
such a deductible would pose to the borrower and lender. A lender may
not allow the borrower to use a deductible amount equal to the
insurable value of the property to avoid the mandatory purchase
requirement for flood insurance.\84\
---------------------------------------------------------------------------
\84\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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IX. Flood Insurance Requirements For Construction Loans
Construction 1. Is a loan secured only by land, which is located in an
SFHA in which flood insurance is available under the Act and that will
be developed into buildable lot(s), a designated loan that requires
flood insurance?
No. A designated loan is a loan secured by a building or mobile
home that is located or to be located in an SFHA in which flood
insurance is available under the Act.\85\ Any loan secured only by land
that is located in an SFHA in which flood insurance is available is not
a designated loan since it is not secured by a building or mobile home.
---------------------------------------------------------------------------
\85\ 12 CFR 22.2(e) (OCC); 12 CFR 208.25(b)(5) (Board); 12 CFR
339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).
---------------------------------------------------------------------------
Construction 2. Is a loan secured or to be secured by a building in the
course of construction that is located or to be located in an SFHA in
which flood insurance is available under the Act a designated loan?
Yes. A lender must always make a flood determination prior to loan
origination to determine whether a building to be constructed that is
security for the loan is located or will be located in an SFHA in which
flood insurance is available under the Act.\86\ If the building or
mobile home is located or will be located in an SFHA, then the loan is
a designated loan and the lender must provide the requisite notice to
the borrower prior to loan origination.\87\ The lender must then comply
with the mandatory purchase
[[Page 40464]]
requirement under the Act and Regulation.\88\
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\86\ 12 CFR 22.6(a) (OCC): 12 CFR 208.25(f)(1) (Board); 12 CFR
339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a)
(NCUA).
\87\ 12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR
339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a)
(NCUA).
\88\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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Construction 3. Is a building in the course of construction that is
located in an SFHA in which flood insurance is available under the Act
eligible for coverage under an NFIP policy?
Yes. Buildings in the course of construction that have yet to be
walled and roofed are eligible for coverage except when construction
has been halted for more than 90 days and/or if the lowest floor used
for rating purposes is below the Base Flood Elevation (BFE). Materials
or supplies intended for use in such construction, alteration, or
repair are not insurable unless they are contained within an enclosed
building on the premises or adjacent to the premises. (NFIP Flood
Insurance Manual).
The NFIP Flood Insurance Manual defines ``start of construction''
in the case of new construction as ``either the first placement of
permanent construction of a building on site, such as the pouring of a
slab or footing, the installation of piles, the construction of
columns, or any work beyond the stage of excavation; or the placement
of a manufactured (mobile) home on a foundation.''
Although an NFIP policy may be purchased prior to the start of
construction, as a practical matter, coverage under an NFIP policy is
not effective until actual construction commences or when materials or
supplies intended for use in such construction, alteration, or repair
are contained in an enclosed building on the premises or adjacent to
the premises.
Construction 4. When must a lender require the purchase of flood
insurance for a loan secured by a building in the course of
construction that is located in an SFHA in which flood insurance is
available?
Under the Act, as implemented by the Regulation, a lender may not
make, increase, extend, or renew any loan secured by a building or a
mobile home, located or to be located in an SFHA in which flood
insurance is available, unless the property is covered by adequate
flood insurance for the term of the loan.\89\ The NFIP rules provide
lenders an option to comply with the mandatory purchase requirement for
a loan secured by a building in the course of construction that is
located in an SFHA by requiring borrowers to have a flood insurance
policy in place at the time of loan origination. Such a policy is
issued based upon the construction designs and intended use of the
building. A borrower should obtain a provisional rating (available only
if certain criteria are met) to enable the placement of coverage prior
to receipt of the Elevation Certificate (EC). In accordance with the
NFIP requirement, it is expected that an EC will be secured and a full-
risk rating completed within 60 days of the policy effective date.
Failure to obtain the EC could result in reduced coverage limits at the
time of a loss. (See NFIP Flood Insurance Manual).
---------------------------------------------------------------------------
\89\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
---------------------------------------------------------------------------
Alternatively, a lender may allow a borrower to defer the purchase
of flood insurance until either a foundation slab has been poured and/
or an EC has been issued or, if the building to be constructed will
have its lowest floor below the Base Flood Elevation, when the building
is walled and roofed. However, in order to comply with the
Regulation,\90\ the lender must require the borrower to have flood
insurance for the security property in place before the lender
disburses funds to pay for building construction (except as necessary
to pour the slab or perform preliminary site work, such as laying
utilities, clearing brush, or the purchase and/or delivery of building
materials). If the lender elects this approach and does not require the
borrower to obtain flood insurance at loan origination, then it should
have adequate internal controls in place at origination to ensure that
the borrower obtains flood insurance no later than 30 days prior to
disbursement of funds to the borrower. (See NFIP Flood Insurance
Manual). (See also Q&A Construction 5).
---------------------------------------------------------------------------
\90\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
---------------------------------------------------------------------------
Construction 5. Does the 30-day waiting period apply when the purchase
of the flood insurance policy is deferred in connection with a
construction loan?
Yes. Under the NFIP, a 30-day waiting period applies anytime a
lender requires flood insurance not in connection with the making,
increasing, renewing or extending of a designated loan. Therefore, a
30-day waiting period will apply if a lender allows a borrower to delay
the purchase of flood insurance in connection with a construction loan.
(NFIP Flood Insurance Manual). (See also Q&A Construction 4).
Construction 6. If a lender allows a borrower to defer the purchase of
flood insurance until either a foundation slab has been poured and/or
an Elevation Certificate has been issued, or if the building to be
constructed will have its lowest floor below Base Flood Elevation when
the building is walled and roofed, when must the lender begin escrowing
flood insurance premiums and fees?
If the lender allows a borrower to defer the purchase of flood
insurance until either the foundation slab has been poured and/or an
Elevation Certificate has been issued, or if the building to be
constructed will have its lowest floor below Base Flood Elevation when
the building is walled and roofed, a lender must escrow flood insurance
premiums and fees at the time of purchase of the flood insurance,
unless one of the escrow exceptions applies.\91\
---------------------------------------------------------------------------
\91\ 12 CFR 22.5(a)(1) (OCC); 12 CFR 208.25(e)(1)(i) (Board); 12
CFR 339.5(a)(1) (FDIC); 12 CFR 614.4935(a)(1) (FCA); and 12 CFR
760.5(a)(1) (NCUA).
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X. Flood Insurance Requirements for Residential Condominiums and Co-Ops
Condo and Co-Op 1. Are residential condominiums, including multi-story
condominium complexes, subject to the statutory and regulatory
requirements for flood insurance?
Yes. The mandatory flood insurance purchase requirements under the
Act and Regulation apply to loans secured by individual residential
condominium units, including those located in multi-story condominium
complexes, located in an SFHA in which flood insurance is available
under the Act.\92\ The mandatory purchase requirements also apply to
loans secured by other residential condominium property, such as loans
to a developer for construction of the condominium or loans to a
condominium association.
---------------------------------------------------------------------------
\92\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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Condo and Co-Op 2. What is an NFIP Residential Condominium Building
Association Policy (RCBAP)?
The RCBAP is a master policy for residential condominiums issued by
FEMA. A residential condominium building is defined as having 75
percent or more of the building's floor area in residential use. It may
be purchased only by condominium owners associations. The RCBAP covers
both the common and individually owned building elements within the
units, improvements within the units, and contents owned in common (if
contents coverage is purchased). The maximum
[[Page 40465]]
amount of building coverage that can be purchased under an RCBAP is
either 100 percent of the replacement cost value of the building,
including amounts to repair or replace the foundation and its
supporting structures, or the total number of units in the condominium
building times $250,000, whichever is less. RCBAP coverage is available
only for residential condominium buildings in Regular Program
communities.
Condo and Co-Op 3. What is the amount of flood insurance coverage that
a lender must require with respect to residential condominium units,
including those located in multi-story residential condominium
complexes, to comply with the mandatory purchase requirements under the
Act and the Regulation?
To comply with the Regulation, the lender must ensure that the
minimum amount of flood insurance covering the condominium unit is the
lesser of:
The outstanding principal balance of the loan(s); or
The maximum amount of insurance available under the NFIP,
which is the lesser of:
[cir] The maximum limit available for the residential condominium
unit; or
[cir] The ``insurable value'' allocated to the residential
condominium unit, which is the replacement cost value of the
condominium building divided by the number of units.\93\
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\93\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA) and 12 CFR 760.3(a)
(NCUA).
---------------------------------------------------------------------------
FEMA requires agents to provide on the declarations page of the
RCBAP the replacement cost value of the condominium building and the
number of units. Lenders may rely on the replacement cost value and
number of units on the RCBAP declarations page in determining insurable
value unless they have reason to believe that such amounts clearly
conflict with other available information. If there is a conflict, the
lender should notify the borrower of the facts that cause the lender to
believe there is a conflict. If the lender determines that the borrower
is underinsured, it must require the purchase of supplemental
coverage.\94\ However, coverage under the supplemental policy may be
limited depending on other coverage that may be applicable including
the RCBAP insuring the condominium building and the terms and
conditions of the policy.
---------------------------------------------------------------------------
\94\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA) and 12 CFR 760.3(a)
(NCUA).
---------------------------------------------------------------------------
Assuming that the maximum amount of coverage available under the
NFIP is less than the outstanding principal balance of the loan, the
lender must require a borrower whose loan is secured by a residential
condominium unit to either:
Ensure the condominium owners association has purchased an
NFIP Residential Condominium Building Association Policy (RCBAP)
covering either 100 percent of the insurable value (replacement cost)
of the building, including amounts to repair or replace the foundation
and its supporting structures, or the total number of units in the
condominium building times $250,000, whichever is less; or
Obtain flood insurance coverage if there is no RCBAP, as
explained in proposed Q&A Condo and Co-Op 4, or if the RCBAP coverage
is less than 100 percent of the replacement cost value of the building
or the total number of units in the condominium building times
$250,000, whichever is less, as explained in Q&A Condo and Co-Op 5.
Example: Lender makes a loan in the principal amount of $300,000
secured by a condominium unit in a 50-unit condominium building, which
is located in an SFHA within a participating community, with a
replacement cost of $15 million and insured by an RCBAP with $12.5
million of coverage.
Outstanding principal balance of loan is $300,000.
Maximum amount of coverage available under the NFIP, which
is the lesser of:
[cir] Maximum limit available for the residential condominium unit
is $250,000; or
[cir] Insurable value of the unit based on 100 percent of the
building's replacement cost value ($15 million / 50 = $300,000).
The lender does not need to require additional flood insurance
since the RCBAP's $250,000 per unit coverage ($12.5 million / 50 =
$250,000) satisfies the Regulation's mandatory flood insurance purchase
requirement. (This is the lesser of the outstanding principal balance
($300,000), the maximum coverage available under the NFIP ($250,000),
or the insurable value ($300,000)). (NFIP Flood Insurance Manual)
The requirement discussed in this Q&A applies to any loan that is
made, increased, extended, or renewed after October 1, 2007. This
requirement does not apply to any loans made prior to October 1, 2007,
until a triggering event occurs (that is, the loan is refinanced,
extended, increased, or renewed) in connection with the loan. Absent a
new triggering event, loans made prior to October 1, 2007, will be
considered compliant if the lender complied with the Agencies' previous
guidance that an RCBAP with 80 percent RCV coverage was sufficient.
FEMA issued guidance effective October 1, 2007, requiring NFIP insurers
to add the RCV of the condominium building and the number of units to
the RCBAP declarations page of all new and renewed policies.
Condo and Co-Op 4. What action must a lender take for an individual
unit owner/borrower if there is no RCBAP coverage?
If there is no RCBAP on the residential condominium building, then
the lender must require the individual unit owner/borrower to obtain
coverage in an amount sufficient to meet the requirements outlined in
Q&A Condo and Co-Op 3.\95\
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\95\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
---------------------------------------------------------------------------
Under the NFIP, a Dwelling Policy is available for condominium unit
owners' purchase when there is no or inadequate RCBAP coverage.
Example: The lender makes a loan in the principal amount of
$175,000 secured by a residential condominium unit in a 50-unit
residential condominium building, which is located in an SFHA within a
participating community, with a replacement cost value of $10 million;
however, there is no RCBAP.
Outstanding principal balance of loan is $175,000.
Maximum amount of coverage available under the NFIP, which
is the lesser of:
[cir] Maximum limit available for the residential condominium unit
is $250,000; or
[cir] Insurable value of the unit based on 100 percent of the
building's replacement cost value ($10 million / 50 = $200,000).
The lender must require the individual unit owner/borrower to
purchase flood insurance coverage in the amount of at least $175,000,
since there is no RCBAP, to satisfy the Regulation's mandatory flood
insurance purchase requirement. (This is the lesser of the outstanding
principal balance ($175,000), the maximum coverage available under the
NFIP ($250,000), or the insurable value ($200,000).)
Condo and Co-Op 5. What action must a lender take if the RCBAP coverage
is insufficient to meet the Regulation's mandatory purchase
requirements for a loan secured by an individual residential
condominium unit?
If the lender determines that flood insurance coverage purchased
under the
[[Page 40466]]
RCBAP is insufficient to meet the Regulation's mandatory purchase
requirements, then the lender should request that the individual unit
owner/borrower ask the condominium association to obtain additional
coverage that would be sufficient to meet the Regulation's requirements
(See Q&A Condo and Co-Op 3). If the condominium association does not
obtain sufficient coverage, then the lender must require the individual
unit owner/borrower to purchase supplemental coverage in an amount
sufficient to meet the Regulation's flood insurance requirements.\96\
The amount of supplemental coverage required to be purchased by the
individual unit owner would be the difference between the RCBAP's
coverage allocated to that unit and the Regulation's mandatory flood
insurance purchase requirements (See Q&A Condo and Co-Op 4).
---------------------------------------------------------------------------
\96\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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Example: Lender makes a loan in the principal amount of $300,000
secured by a condominium unit in a 50-unit condominium building, which
is located in an SFHA within a participating community, with a
replacement cost value of $10 million; however, the RCBAP is at 80
percent of replacement cost value ($8 million or $160,000 per unit).
Outstanding principal balance of loan is $300,000.
Maximum amount of coverage available under the NFIP, which
is the lesser of:
[cir] Maximum limit available for the residential condominium unit
($250,000); or
[cir] Insurable value of the unit based on 100 percent of the
building's replacement value ($10 million / 50 = $200,000).
The lender must require the individual unit owner/borrower to
purchase supplemental flood insurance coverage in the amount of $40,000
to satisfy the Regulation's mandatory flood insurance purchase
requirement of $200,000. (This is the lesser of the outstanding
principal balance ($300,000), the maximum coverage available under the
NFIP ($250,000), or the insurable value ($200,000).) The RCBAP fulfills
only $160,000 of the Regulation's flood insurance requirement.
While the individual unit owner's purchase of a separate policy
that provides for adequate flood insurance coverage under the
Regulation will satisfy the Regulation's mandatory flood insurance
purchase requirements, the lender and the individual unit owner/
borrower may still be exposed to additional risk of loss. Lenders are
encouraged to apprise borrowers of this risk. For example, the NFIP
Dwelling Policy provides individual unit owners with supplemental
building coverage that is in excess to the RCBAP. The policies are
coordinated such that the Dwelling Policy purchased by the unit owner
responds to shortfalls on building coverage pertaining either to
improvements owned by the insured unit owner or to assessments.
However, the Dwelling Policy does not extend the RCBAP limits, nor does
it enable the condominium association to fill in gaps in coverage.
Condo and Co-Op 6. What must a lender do when a loan secured by a
residential condominium unit is in a complex whose condominium
association allows its existing RCBAP to lapse?
If a lender determines at any time during the term of a designated
loan that the loan is not covered by flood insurance or is covered by
such insurance in an amount less than that required under the Act and
the Regulation, the lender must notify the individual unit owner/
borrower of the requirement to maintain flood insurance coverage
sufficient to meet the Regulation's mandatory requirements.\97\ The
lender should encourage the individual unit owner/borrower to work with
the condominium association to acquire a new RCBAP in an amount
sufficient to meet the Regulation's mandatory flood insurance purchase
requirement (See Q&A Condo and Co-Op 3). Failing that, the lender must
require the individual unit owner/borrower to obtain a flood insurance
policy in an amount sufficient to meet the Regulation's mandatory flood
insurance purchase requirement (See Q&As Condo and Co-Op 4 & 5). If the
borrower/unit owner or the condominium association fails to purchase
flood insurance sufficient to meet the Regulation's mandatory
requirements within 45 days of the lender's notification to the
individual unit owner/borrower of inadequate insurance coverage, the
lender must force place the necessary flood insurance on the borrower's
behalf.\98\
---------------------------------------------------------------------------
\97\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
\98\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
---------------------------------------------------------------------------
Condo and Co-Op 7. How does the RCBAP's co-insurance penalty apply in
the case of residential condominiums, including those located in multi-
story condominium complexes?
In the event the RCBAP's coverage on a condominium building at the
time of loss is less than 80 percent of either the building's
replacement cost or the maximum amount of insurance available for that
building under the NFIP (whichever is less), then the loss payment,
which is subject to a coinsurance penalty, is determined as follows
(subject to all other relevant conditions in the policy, including
those pertaining to valuation, adjustment, settlement, and payment of
loss):
A. Divide the actual amount of flood insurance carried on the
condominium building at the time of loss by 80 percent of either its
replacement cost or the maximum amount of insurance available for the
building under the NFIP, whichever is less.
B. Multiply the amount of loss, before application of the
deductible, by the figure determined in A above.
C. Subtract the deductible from the figure determined in B above.
The policy will pay the amount determined in C above, or the amount
of insurance carried, whichever is less.
Example 1: (Inadequate Insurance Amount To Avoid Penalty)
Replacement value of the building: $250,000.
80% of replacement value of the building: $200,000.
Actual amount of insurance carried: $180,000.
Amount of the loss: $150,000.
Deductible: $500.
Step A: 180,000 / 200,000 = .90
(90% of what should be carried to avoid coinsurance penalty)
Step B: 150,000 x .90 = 135,000
Step C: 135,000-500 = 134,500
The policy will pay no more than $134,500. The remaining $15,500 is
not covered due to the co-insurance penalty ($15,000) and application
of the deductible ($500).
Example 2: (Adequate Insurance Amount To Avoid Penalty)
Replacement value of the building: $250,000.
80% of replacement value of the building: $200,000.
Actual amount of insurance carried: $200,000.
Amount of the loss: $150,000.
Deductible: $500.
Step A: 200,000 / 200,000 = 1.00
(100% of what should be carried to avoid coinsurance penalty)
[[Page 40467]]
Step B: 150,000 x 1.00 = 150,000
Step C: 150,000-500 = 149,500
In this example there is no co-insurance penalty, because the
actual amount of insurance carried meets the 80 percent requirement to
avoid the co-insurance penalty. The policy will pay no more than
$149,500 ($150,000 amount of loss minus the $500 deductible). This
example also assumes a $150,000 outstanding principal loan balance.
Condo and Co-Op 8. What are the major factors involved with the
individual unit owner's NFIP Dwelling Policy's coverage limitations
with respect to the condominium association's RCBAP coverage?
The following examples demonstrate how the unit owner's NFIP
Dwelling Policy may cover in certain loss situations:
Example 1: RCBAP
If the unit owner purchases building coverage under the Dwelling
Policy and if there is an RCBAP covering at least 80 percent of the
building replacement cost value, the loss assessment coverage under the
Dwelling Policy will pay that part of a loss that exceeds 80 percent of
the association's building replacement cost allocated to that unit.
The loss assessment coverage under the Dwelling Policy will not
cover the association's policy deductible purchased by the condominium
association.
If building elements within units have also been damaged, the
Dwelling Policy pays to repair building elements after the RCBAP limits
that apply to the unit have been exhausted. Coverage combinations
cannot exceed the total limit of $250,000 per unit.
Example 2: No RCBAP
If the unit owner purchases building coverage under the Dwelling
Policy and there is no RCBAP, the Dwelling Policy covers assessments
against unit owners for damages to common areas up to the Dwelling
Policy limit.
However, if there is damage to the building elements of the unit
(e.g., inside the individual unit) as well, the combined payment of
unit building damages, which would apply first, and the loss assessment
may not exceed the building coverage limit under the Dwelling Policy.
Condo and Co-Op 9. What flood insurance requirements apply to a loan
secured by a share in a cooperative building that is located in an
SFHA?
It is important to recognize the difference between ownership of a
condominium and a cooperative. Although an owner of a condominium owns
title to real property, a cooperative unit holder holds stock in a
corporation with the right to occupy a particular unit, but owns no
title to the building. As a result, a loan to a cooperative unit owner,
secured by the owner's share in the cooperative, is not a designated
loan that is subject to the Act or the Regulation.
Although there is no requirement under the Act or Regulation to
purchase flood insurance on the cooperative building if the loan is
secured by the unit owner's share in the cooperative, for safety and
soundness purposes, residential or nonresidential cooperative buildings
may be insured by the association or corporation under the General
Property Form. The entity that owns the cooperative building, not the
individual unit members, is the named insured.
XI. Flood Insurance Requirements for Home Equity Loans, Lines of
Credit, Subordinate Liens, and Other Security Interests in Collateral
(Contents) Located in an SFHA
Other Security Interests 1. Is a home equity loan considered a
designated loan that requires flood insurance?
Yes. A home equity loan is a designated loan, regardless of the
lien priority, if the loan is secured by a building or a mobile home
located in an SFHA in which flood insurance is available under the
Act.\99\
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\99\ 12 CFR 22.2(e) (OCC); 12 CFR 208.25(b)(5) (Board); 12 CFR
339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).
---------------------------------------------------------------------------
Other Security Interests 2. Does a draw against an approved line of
credit secured by a building or mobile home, which is located in an
SFHA in which flood insurance is available under the Act, require a
flood determination under the Regulation?
No. While a line of credit secured by a building or mobile home
located in an SFHA in which flood insurance is available under the Act
is a designated loan and, therefore, requires a flood determination
before the loan is made, draws against an approved line do not require
further determinations.\100\ However, a request made for an increase in
an approved line of credit may require a new determination, depending
upon whether a previous determination was done. (See Q&A SFHDF 4).
---------------------------------------------------------------------------
\100\ 12 CFR 22.2(e) and 22.3(a) (OCC); 12 CFR 208.25(b)(5) and
(c)(1) (Board); 12 CFR 339.2 and 339.3(a) (FDIC); 12 CFR 614.4925
and 614.4930(a) (FCA); and 12 CFR 760.2 and 760.3(a) (NCUA).
---------------------------------------------------------------------------
Other Security Interests 3. What is the amount of flood insurance
coverage required on a line of credit secured by a residential improved
real estate?
A lender may take the following alternative approaches:
For administrative convenience in complying with the flood
insurance requirements, upon origination, a lender may require the
purchase of flood insurance for the total amount of all loans or the
maximum amount of flood insurance coverage available, whichever is
less; \101\ or
---------------------------------------------------------------------------
\101\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
---------------------------------------------------------------------------
A lender may actively review its records throughout the
year to determine whether the appropriate amount of flood insurance
coverage is maintained, considering the draws made against the line or
repayments made to the account. In those instances in which there is no
policy on the collateral at time of origination, the borrower must, at
a minimum, obtain a policy as a requirement for drawing on the line.
Lenders that choose to actively review the line should inform the
borrower that this option may have more risks, such as inadequate flood
insurance coverage during the 30-day waiting period for an NFIP flood
policy to become effective. Lenders should be prepared to initiate
force-placement procedures if at any time the lender determines a lack
of adequate flood insurance coverage for a designated line of credit,
as required under the Regulation.\102\
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\102\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
---------------------------------------------------------------------------
Other Security Interests 4. When a lender makes, increases, extends or
renews a second mortgage secured by a building or mobile home located
in an SFHA, how much flood insurance must the lender require?
The lender must ensure that adequate flood insurance is in place or
require that additional flood insurance coverage be added to the flood
insurance policy in the amount of the lesser of either the combined
total outstanding principal balance of the first and second loan, the
maximum amount available under the Act (currently $250,000 for most
residential buildings and $500,000 for other buildings), or the
insurable value of the building or mobile home.\103\ The junior
lienholder should also have the borrower add the junior lienholder's
name as mortgagee/loss payee to the
[[Page 40468]]
existing flood insurance policy. Given the provisions of NFIP policies,
a lender cannot comply with the Act and Regulation by requiring the
purchase of an NFIP flood insurance policy only in the amount of the
outstanding principal balance of the second mortgage without regard to
the amount of flood insurance coverage on a first mortgage.
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\103\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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A junior lienholder should work with the senior lienholder, the
borrower, or with both of these parties, to determine how much flood
insurance is needed to cover improved real estate collateral. A junior
lienholder should obtain the borrower's consent in the loan agreement
or otherwise for the junior lienholder to obtain information on balance
and existing flood insurance coverage on senior lien loans from the
senior lienholder.
Junior lienholders also have the option of pulling a borrower's
credit report and using the information from that document to establish
how much flood insurance is necessary upon increasing, extending, or
renewing a junior lien, thus protecting the interests of the junior
lienholder, the senior lienholder(s), and the borrower. In the limited
situation in which a junior lienholder or its servicer is unable to
obtain the necessary information about the amount of flood insurance in
place on the outstanding balance of a senior lien (for example, in the
context of a loan renewal), the lender may presume that the amount of
insurance coverage relating to the senior lien in place at the time the
junior lien was first established (provided that the amount of flood
insurance relating to the senior lien was adequate at the time)
continues to be sufficient.
Example 1: Lender A makes a first mortgage with a principal balance
of $100,000, but improperly requires only $75,000 of flood insurance
coverage, which the borrower satisfied by obtaining an NFIP policy.
Lender B issues a second mortgage with a principal balance of $50,000.
The insurable value of the residential building securing the loans is
$200,000. Lender B must ensure that flood insurance in the amount of
$150,000 is purchased and maintained. If Lender B were to require
additional flood insurance only in an amount equal to the principal
balance of the second mortgage ($50,000), its interest in the secured
property would not be fully protected in the event of a flood loss
because Lender A would have prior claim on $100,000 of the loss payment
towards its principal balance of $100,000, while Lender B would receive
only $25,000 of the loss payment toward its principal balance of
$50,000.
Example 2: Lender A, who is not directly covered by the Act or
Regulation, makes a first mortgage with a principal balance of $100,000
and does not require flood insurance. Lender B, who is directly covered
by the Act and Regulation, issues a second mortgage with a principal
balance of $50,000. The insurable value of the residential building
securing the loans is $200,000. Lender B must ensure that flood
insurance in the amount of $150,000 is purchased and maintained. If
Lender B were to require flood insurance only in an amount equal to the
principal balance of the second mortgage ($50,000) through an NFIP
policy, then its interest in the secured property would not be
protected in the event of a flood loss because Lender A would have
prior claim on the entire $50,000 loss payment towards its principal
balance of $100,000.
Example 3: Lender A made a first mortgage with a principal balance
of $100,000 on improved real estate with a fair market value of
$150,000. The insurable value of the residential building on the
improved real estate is $90,000; however, Lender A improperly required
only $70,000 of flood insurance coverage, which the borrower satisfied
by purchasing an NFIP policy. Lender B later takes a second mortgage on
the property with a principal balance of $10,000. Lender B must ensure
that flood insurance in the amount of $90,000 (the insurable value) is
purchased and maintained on the secured property to comply with the Act
and Regulation. If Lender B were to require flood insurance only in an
amount equal to the principal balance of the second mortgage ($10,000),
its interest in the secured property would not be protected in the
event of a flood loss because Lender A would have prior claim on the
entire $80,000 loss payment towards the insurable value of $90,000.
Other Security Interests 5. If a borrower requesting a loan secured by
a junior lien provides evidence that flood insurance coverage is in
place, does the lender have to make a new determination? Does the
lender have to adjust the insurance coverage?
It depends. Assuming the requirements in Section 528 of the Act (42
U.S.C. 4104b) are met and the same lender made the first mortgage, then
a new determination may not be necessary when the existing
determination is not more than seven years old, there have been no map
changes, and the determination was recorded on an SFHDF. If, however, a
lender other than the one that made the first mortgage loan is making
the junior lien loan, a new determination would be required because
this lender would be deemed to be ``making'' a new loan.\104\ In either
situation, the lender will need to determine whether the amount of
insurance in effect is sufficient to cover the lesser of the combined
outstanding principal balance of all loans (including the junior lien
loan), the insurable value, or the maximum amount of coverage available
on the improved real estate. This will hold true whether the
subordinate lien loan is a home equity loan or some other type of
junior lien loan.
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\104\ 12 CFR 22.3(a), 22.6(a) (OCC); 12 CFR 208.25(c)(1) and
(f)(1) (Board); 12 CFR 339.3(a), 339.6(a) (FDIC); 12 CFR
614.4930(a), 614.4940(a) (FCA); and 12 CFR 760.3(a), 760.6(a)
(NCUA).
---------------------------------------------------------------------------
Other Security Interests 6. If the loan request is to finance inventory
stored in a building located within an SFHA, but the building is not
security for the loan, is flood insurance required?
No. The Act and the Regulation provide that a lender shall not
make, increase, extend, or renew a designated loan, that is, a loan
secured by a building or mobile home located or to be located in an
SFHA, ``unless the building or mobile home and any personal property
securing the loan is covered by flood insurance for the term of the
loan.'' \105\ In this example, the loan is not a designated loan
because it is not secured by a building or mobile home; rather, the
collateral is the inventory alone.
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\105\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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Other Security Interests 7. Is flood insurance required if a building
and its contents both secure a loan, and the building is located in an
SFHA in which flood insurance is available?
Yes. Flood insurance is required for the building located in the
SFHA and any personal property securing the loan.\106\ The method for
allocating flood insurance coverage among multiple buildings, as
described in Q&A Amount 6, would be the same method for allocating
flood insurance coverage among contents and buildings. That is, both
contents and building will be considered to have a sufficient amount of
flood insurance coverage for regulatory purposes so long as some
reasonable amount of insurance is allocated to each category.
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\106\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
---------------------------------------------------------------------------
Example: Lender A makes a loan for $200,000 that is secured by a
warehouse with an insurable value of $150,000 and
[[Page 40469]]
inventory in the warehouse worth $100,000. The Act and Regulation
require that flood insurance coverage be obtained for the lesser of the
outstanding principal balance of the loan or the maximum amount of
flood insurance that is available under the NFIP. The maximum amount of
insurance that is available for both building and contents is $500,000
for each category. In this situation, Federal flood insurance
requirements could be satisfied by placing $150,000 worth of flood
insurance coverage on the warehouse, thus insuring it to its insurable
value, and $50,000 worth of contents flood insurance coverage on the
inventory, thus providing total coverage in the amount of the
outstanding principal balance of the loan. Note that this holds true
even though the inventory is worth $100,000.
Other Security Interests 8. If a loan is secured by Building A, which
is located in an SFHA, and contents, which are located in Building B,
is flood insurance required on the contents securing a loan?
No. If collateral securing the loan is stored in Building B, which
does not secure the loan, then flood insurance is not required on those
contents whether or not Building B is located in an SFHA.
Other Security Interests 9. Does the Regulation apply when the lender
takes a security interest in improved real estate and contents located
in an SFHA only as an ``abundance of caution''?
Yes. The Act and Regulation look to the collateral securing the
loan. If the lender takes a security interest in improved real estate
and contents located in an SFHA, then flood insurance is required.\107\
---------------------------------------------------------------------------
\107\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
---------------------------------------------------------------------------
The language in the loan agreement determines whether the contents
are taken as security for the loan. If a lender intends to take a
security interest in the contents, the loan agreement should include
language indicating that the contents are security for the loan. If the
lender does not intend to take a security interest in the contents, the
loan agreement should not include language to this effect, including
language inserted out of an ``abundance of caution.''
Other Security Interests 10. Is flood insurance required if the lender
takes a security interest in contents located in a building in an SFHA
securing the loan but does not perfect the security interest?
Yes, flood insurance is required. The language in the loan
agreement determines whether the contents are taken as security for the
loan. If the lender takes a security interest in contents located in a
building in an SFHA securing the loan, flood insurance is required for
the contents, regardless of whether that security interest is
perfected.\108\
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\108\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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Other Security Interests 11. If a borrower offers a note on a single-
family dwelling as collateral for a loan but the lender does not take a
security interest in the dwelling itself, is this a designated loan
that requires flood insurance?
No. A designated loan is a loan secured by a building or mobile
home that is located or to be located in an SFHA in which flood
insurance is available under the Act.\109\ In this example, the lender
did not take a security interest in the building; therefore, the loan
is not a designated loan.
---------------------------------------------------------------------------
\109\ 12 CFR 22.2(e) (OCC); 12 CFR 208.25(b)(5) (Board); 12 CFR
339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).
---------------------------------------------------------------------------
Other Security Interests 12. If a lender makes a loan that is not
secured by real estate, but is made on the condition of a personal
guarantee by a third party who gives the lender a security interest in
improved real estate owned by the third party that is located in an
SFHA in which flood insurance is available, is it a designated loan
that requires flood insurance?
Yes. In this scenario, a loan is made on condition of a personal
guarantee by a third party and further secured by improved real estate,
which is located in an SFHA and owned by that third party. Under these
circumstances, the security of improved real estate in an SFHA is so
closely tied to the making of the loan that it is considered a
designated loan that requires flood insurance.\110\
---------------------------------------------------------------------------
\110\ 12 CFR 22.2(e) (OCC); 12 CFR 208.25(b)(5) (Board); 12 CFR
339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).
---------------------------------------------------------------------------
XII. Requirement to Escrow Flood Insurance Premiums and Fees--General
Escrow 1. When must escrow accounts be established for flood insurance
purposes?
A lender, or a servicer acting on its behalf, must escrow all
premiums and fees for any flood insurance required under the mandatory
purchase of flood insurance requirement for any designated loan secured
by residential improved real estate or a mobile home that is made,
increased, extended, or renewed on or after January 1, 2016. The escrow
must be payable with the same frequency as payments on the designated
loan are required to be made for the duration of the loan, unless the
loan or lender is subject to one of the exceptions.\111\
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\111\ 12 CFR 22.5(a) (OCC); 12 CFR 208.25(e)(1) (Board); 12 CFR
339.5(a)(1) (FDIC); 12 CFR 614.4935(a)(1) (FCA); and 12 CFR
760.5(a)(1) (NCUA).
---------------------------------------------------------------------------
A lender is not required to escrow for flood insurance if it
qualifies for the small lender exception \112\ or the loan qualifies
for one of the following loan-related exceptions \113\ in the
Regulation:
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\112\ 12 CFR 22.5(c) (OCC); 12 CFR 208.25(e)(3) (Board); 12 CFR
339.5(c) (FDIC); 12 CFR 614.4935(c) (FCA); and 12 CFR 760.5(c)
(NCUA).
\113\ 12 CFR 22.5(a)(2) (OCC); 12 CFR 208.25(e)(1)(ii) (Board);
12 CFR 339.5(a)(2) (FDIC); 12 CFR 614.4935(a)(2) (FCA); and 12 CFR
760.5(a)(2) (NCUA).
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A loan that is an extension of credit primarily for
business, commercial, or agricultural purposes;
A loan that is in a subordinate position to a senior lien
secured by the same property for which the borrower has obtained
adequate flood insurance coverage;
A loan that is covered by a condominium association,
cooperative, homeowners association or other applicable group's
adequate flood insurance policy;
A loan that is a home equity line of credit;
A loan that is a nonperforming loan that is 90 or more
days past due; or
A loan that has a term not longer than 12 months.
If a lender no longer qualifies for the small lender exception, it
must escrow all premiums and fees for any flood insurance required
under the mandatory purchase of flood insurance requirement for any
designated loan secured by residential improved real estate or a mobile
home that is made, increased, extended, or renewed on or after July 1
of the first calendar year in which a lender has a change in status,
unless a loan qualifies for another exception.\114\
[[Page 40470]]
If a lender, other than a lender that qualifies for the small lender
exception, determines at any time during the term of a designated loan
secured by residential improved real estate or a mobile home that an
exception from the escrow requirement that previously applied to a
particular loan no longer applies to the loan, the lender must escrow
flood insurance premiums and fees as soon as reasonably
practicable.\115\
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\114\ 12 CFR 22.5(c)(2) (OCC); 12 CFR 208.25(e)(3)(ii) (Board);
12 CFR 339.5(c)(2) (FDIC); 12 CFR 614.4935(c)(2) (FCA); and 12 CFR
760.5(c)(2) (NCUA).
\115\ 12 CFR 22.5(a)(3) (OCC); 12 CFR 208.25(e)(1)(iii) (Board);
12 CFR 339.5(a)(3) (FDIC); 12 CFR 614.4935(a)(3) (FCA); and 12 CFR
760.5(a)(3) (NCUA).
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Escrow 2. If a lender does not escrow for taxes or homeowner's
insurance, is it required to escrow for flood insurance under the
Regulation? If yes, is the lender obligated to escrow for taxes and
other insurance because it escrows for flood insurance pursuant to the
rule?
If a lender or its servicer is required to escrow for flood
insurance under the Regulation, it must do so even if it does not
escrow for taxes or other insurance.\116\ A lender or servicer is not,
however, obligated to escrow for taxes and other insurance solely
because it must escrow for flood insurance pursuant to the Regulation,
though there may be other laws or regulations that require that
additional escrow.
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\116\ 12 CFR 22.5(a)(1) (OCC); 12 CFR 208.25(e)(1)(i) (Board);
12 CFR 339.5(a)(1) (FDIC); 12 CFR 614.4935(a)(1) (FCA); and 12 CFR
760.5(a)(1) (NCUA).
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Escrow 3. Are lenders required to escrow force-placed insurance?
Yes, the Regulation requires lenders or their servicers to escrow
flood insurance premiums for any residential designated loan made,
increased, extended, or renewed on or after January 1, 2016, unless the
lender or the loan qualifies for an exception from the escrow
requirement.\117\ The Act and Regulation do not include an exception to
the escrow requirement for force-placed insurance.
---------------------------------------------------------------------------
\117\ 12 CFR 22.5(a) (OCC); 12 CFR 208.25(e)(1) (Board); 12 CFR
339.5(a)(1) (FDIC); 12 CFR 614.4935(a)(1) (FCA); and 12 CFR
760.5(a)(1) (NCUA).
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Escrow 4. Does the requirement to escrow flood insurance premiums and
fees apply when a loan does not experience a triggering event, such as
when the loan is modified without being increased, extended, or
renewed; the loan is assumed by another borrower; or the building
securing the loan is remapped into a Special Flood Hazard Area (SFHA)?
No, subject to certain exceptions. The Regulation provides that a
lender or its servicer is required to escrow flood insurance premiums
and fees when a designated loan is made, increased, extended, or
renewed (a triggering event), unless either the lender or the loan is
excepted from the escrow requirement.\118\ Until the loan experiences a
triggering event, the lender is not required to escrow flood insurance
premiums and fees, unless: (i) A borrower requests the escrow in
connection with the requirement that the lender provide an option to
escrow for outstanding loans; \119\ or (ii) the lender determines that
a loan exception to the escrow requirement no longer applies.\120\
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\118\ 12 CFR 22.5(a) (OCC); 12 CFR 208.25(e)(1) (Board); 12 CFR
339.5(a) (FDIC); 12 CFR 614.4935(a) (FCA); and 12 CFR
760.5(a)(NCUA).
\119\ 12 CFR 22.5(d) (OCC); 12 CFR 208.25(e)(4) (Board); 12 CFR
339.5(d) (FDIC); 12 CFR 614.4935(d) (FCA); and 12 CFR 760.5(d)
(NCUA).
\120\ 12 CFR 22.5(a)(3) (OCC); 12 CFR 208.25(e)(1)(iii) (Board);
12 CFR 339.5(a)(3) (FDIC); 12 CFR 614.4935(a)(3) (FCA); and 12 CFR
760.5(a)(3) (NCUA).
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Escrow 5. Are multi-family buildings or mixed-use properties included
in the definition of ``residential improved real estate'' under the
Regulation for which escrows are required (unless an exception
applies)?
Yes. For the purposes of the Act and the Regulation, the definition
of residential improved real estate does not make a distinction between
whether a building is single- or multi-family, or whether a building is
owner- or renter-occupied.\121\ Single-family dwellings (including
mobile homes), two-to-four family dwellings, and multi-family
properties containing five or more residential units are considered
residential improved real estate.
---------------------------------------------------------------------------
\121\ 12 CFR 23.2(j) (OCC); 12 CFR 208.25(b)(8) (Board); 12 CFR
339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).
---------------------------------------------------------------------------
However, with regard to mixed-use properties, the lender should
look to the primary use of a building to determine whether it meets the
definition of ``residential improved real estate.'' (See Q&As Amount 3
and 4 for guidance on residential and nonresidential buildings.) A loan
secured by residential improved real estate is not subject to the
escrow requirement if the loan is an extension of credit primarily for
business, commercial or agricultural purposes.\122\
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\122\ 12 CFR 22.5(a)(2)(i) (OCC); 12 CFR 208.25(e)(1)(ii)(A)
(Board); 12 CFR 339.5(a)(2) (FDIC); 12 CFR 614.4935(a)(2) (FCA); and
12 CFR 760.5(a)(2) (NCUA).
---------------------------------------------------------------------------
Escrow 6. If a borrower obtains a second mortgage loan for a property
located in an SFHA, and it is determined that the first lienholder does
not have sufficient flood insurance coverage for both liens and is not
currently escrowing for flood insurance, does the junior lienholder
have to escrow for the additional amount of flood insurance coverage?
Under the Regulation, for a closed-end second mortgage loan, junior
lienholders are not required to escrow for flood insurance as long as
the borrower has obtained flood insurance coverage that meets the
mandatory purchase requirement. Thus, the junior lender or its servicer
must ensure that adequate flood insurance is in place (See Q&A Other
Security Interests 4 for junior lienholder requirements).\123\ Q&A
Other Security Interests 4 explains the requirements for junior
lienholders. If adequate flood insurance has not been obtained by the
first lienholder and insurance must be purchased in connection with the
second mortgage loan to meet the mandatory purchase requirement, the
junior lender or its servicer would need to escrow the insurance
obtained in connection with the second mortgage loan.\124\ However, the
escrow requirements do not apply to a junior lien that is a home equity
line of credit (HELOC) since HELOCs have a separate escrow exception
under the Act and Regulation.\125\
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\123\ 12 CFR 22.5(a)(2)(ii) (OCC); 12 CFR 208.25(e)(1)(ii)(B)
(Board); 12 CFR 339.5(a)(2) (FDIC); 12 CFR 614.4935(a)(2) (FCA); and
12 CFR 760.5(a)(2) (NCUA).
\124\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
\125\ 12 CFR 22.5(a)(2)(iv) (OCC); 12 CFR 208.25(e)(1)(ii)(D)
(Board); 12 CFR 339.5(a)(2) (FDIC); 12 CFR 614.4935(a)(2) (FCA); and
12 CFR 760.5(a)(2) (NCUA).
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Escrow 7. Does a lender or servicer have to escrow for loans when the
security property is not located in an SFHA, but the borrower chooses
to buy flood insurance?
Under the Regulation, lenders and servicers are only required to
escrow for loans that are secured by residential improved real estate
or a mobile home located or to be located in SFHAs where flood
insurance is available under the NFIP and that experience a triggering
event (made, increased, extended, or
[[Page 40471]]
renewed) on or after January 1, 2016, unless either the lender or the
loan qualifies for an exception.\126\ If the property securing the loan
is not located in an SFHA, it is not a designated loan, and the lender
or its servicer is not required to escrow, although the lender or
servicer may offer escrow service to the borrower.
---------------------------------------------------------------------------
\126\ 12 CFR 22.5(a)(1) (OCC); 12 CFR 208.25(e)(1)(i) (Board);
12 CFR 339.5(a)(1) (FDIC); 12 CFR 614.4935(a) (FCA); and 12 CFR
760.5(a)(1) (NCUA).
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XIII. Requirement to Escrow Flood Insurance Premiums and Fees--Small
Lender Exception
Small Lender Exception 1. Is the $1B small lender exception for the
mandatory escrow of flood insurance premiums at the lending institution
level or bank holding company level?
By its own terms, the small lender exception to the flood insurance
escrow requirement applies to lenders rather than holding
companies.\127\ Therefore, the $1 billion requirement is calculated
based on the assets held at the lending institution level, rather than
at the holding company level.
---------------------------------------------------------------------------
\127\ 12 CFR 22.5(c)(1) (OCC); 12 CFR 208.25(e)(3)(i) (Board);
12 CFR 339.5(c) (FDIC); 12 CFR 614.4935(c) (FCA); and 12 CFR
760.5(c) (NCUA).
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Small Lender Exception 2. If a lender was required to escrow for taxes
and hazard insurance solely under the (a) Higher-Priced Mortgage Loan
(HPML) rules or (b) USDA or FHA programs on or before July 6, 2012, is
such a lender, who otherwise qualifies for the small lender exception,
required to escrow the premiums and fees for flood insurance?
The Act and Regulation provide that a small lender is eligible for
the exception only if, on or before July 6, 2012, the lender: (1) Was
not required under Federal or State law to deposit taxes, insurance
premiums, fees, or any other charges in an escrow account for the
entire term of any loan secured by residential improved real estate or
a mobile home; and (2) did not have a policy of consistently and
uniformly requiring the deposit of taxes, insurance premiums, fees, or
other charges in an escrow account for any loans secured by residential
improved real estate or a mobile home.\128\
---------------------------------------------------------------------------
\128\ 12 CFR 22.5(c)(1) (OCC); 12 CFR 208.25(e)(3)(i) (Board);
12 CFR 339.5(c) (FDIC); 12 CFR 614.4935(c) (FCA); and 12 CFR
760.5(c) (NCUA).
---------------------------------------------------------------------------
(a) With respect to an HPML, Federal law in effect on or before
July 6, 2012, permitted a borrower to request cancellation of the
escrow rather than have it apply for the entire term of the loan.
Therefore, HPML escrow requirements would not result in the loss of the
escrow exception for a small lender that made an HPML-covered loan
prior to July 6, 2012, because the lender was not required under
Federal law to escrow for the entire term of the loan. Note that the
phrase ``entire term'' applies only with respect to the Federal or
State law requirements criterion of the exception. In addition, if a
lender required escrow for an HPML solely to comply with Federal law, a
lender complying with that law would not be considered to have its own
separate policy of consistently and uniformly requiring escrow.
(b) With respect to loans under the USDA or FHA programs, under
Federal law, such loans require the deposit of taxes, insurance
premiums, fees and other charges in an escrow account for the entire
term of the loan. Therefore, the first criterion of the exception would
not be met and would disqualify the lender from the small lender
exception under the Act and the Regulation.
Small Lender Exception 3. Is a lender disqualified from the small
lender escrow exception if it is required to collect escrowed funds on
a mortgage loan on behalf of a third party?
To qualify for the small lender exception, one requirement is the
lender must not have had a policy on or before July 6, 2012, of
consistently and uniformly requiring the deposit of taxes, insurance
premiums, fees, or any other charges in an escrow account for any loans
secured by residential improved real estate or a mobile home.\129\
---------------------------------------------------------------------------
\129\ 12 CFR 22.5(c)(1)(ii)(B) (OCC); 12 CFR
208.25(e)(3)(i)(B)(2) (Board); 12 CFR 339.5(c)(1)(ii)(B) (FDIC); 12
CFR 614.4935(c)(1)(ii)(B) (FCA); and 12 CFR 760.5(c)(1)(ii)(B)
(NCUA).
---------------------------------------------------------------------------
With regard to mortgage loans for which the lender had a
policy on or before July 6, 2012, of collecting escrow funds at closing
and the lender maintained servicing of the loan, the lender would not
qualify for the exception because the lender established an individual
escrow account for the loan it would then service.
With regard to mortgage loans for which the lender did not
have a policy on or before July 6, 2012, of collecting the escrow funds
on its own behalf at closing, but escrowed funds on behalf of a third
party and then transferred those escrow funds to the third party
servicing that loan, the lender would be able to qualify for the small
lender exception provided the lender did not establish an individual
escrow account and the lender transferred the funds to the third party
as soon as reasonably practicable. The small lender must also satisfy
the other requirements for the exception, but because no individual
escrow account was established for the loan whose servicing rights were
transferred pursuant to a third party's requirements, the lender would
not have had a policy of consistently and uniformly requiring the
deposit of funds in an escrow account.
Small Lender Exception 4. Is a lender eligible for the small lender
exception if it offers escrow accounts only upon a borrower's request?
Yes. If a lender only offers escrow accounts upon the request of
borrowers, this practice does not constitute a consistent or uniform
policy of requiring escrow. The small lender exception does not apply
if, on or before July 6, 2012, the lender had a policy of consistently
and uniformly requiring the deposit of taxes, insurance premiums, fees,
or any other charges in an escrow account for a loan secured by
residential improved real estate or a mobile home.\130\
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\130\ 12 CFR 22.5(c)(1)(ii)(B) (OCC); 12 CFR
208.25(e)(3)(i)(B)(2) (Board); 12 CFR 339.5(c)(1)(ii)(B) (FDIC); 12
CFR 614.4935(c)(1)(ii)(B) (FCA); and 12 CFR 760.5(c)(1)(ii)(B)
(NCUA).
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Small Lender Exception 5. Is the option to escrow notice required for
all outstanding loans secured by residential real estate that are not
excepted from the escrow requirement? What about outstanding loans that
are not secured by buildings located in SFHAs?
Under the Regulation, lenders or their servicers are required to
offer and make available the option to escrow flood insurance premiums
and fees for all outstanding designated loans secured by residential
improved real estate or a mobile home located in an SFHA as of January
1, 2016, or July 1 of the first calendar year in which the lender no
longer qualifies for the small lender exception to the escrow
requirement.\131\ With the expiration of the June 30, 2016, deadline to
comply with the option to escrow notice requirement for outstanding
loans as of January 1, 2016, that requirement currently applies only to
lenders who have a change in status and no longer qualify for the small
lender exception.\132\ Such lenders will be required to provide the
option to escrow notice by September 30 of the first calendar year in
which the lender
[[Page 40472]]
has had a change in status pursuant to the Regulation.\133\ The
requirement to provide the option to escrow notice does not apply to
outstanding loans or to lenders that are excepted from the general
escrow requirement under the Regulation. The option to escrow notice
requirement also does not apply to loans that are not subject to the
mandatory flood insurance purchase requirement.
---------------------------------------------------------------------------
\131\ 12 CFR 22.5(d) (OCC); 12 CFR 208.25(e)(4) (Board); 12 CFR
339.5(d) (FDIC); 12 CFR 614.4935(d) (FCA); and 12 CFR 760.5(d)
(NCUA).
\132\ 12 CFR 22.5(c)(2) (OCC); 12 CFR 208.25(e)(3)(ii) (Board);
12 CFR 339.5(c)(2) (FDIC); 12 CFR 614.4935(c)(2) (FCA); and 12 CFR
760.5(c)(2) (NCUA).
\133\ 12 CFR 22.5(d)(2) (OCC); 12 CFR 208.25(e)(4)(ii) (Board);
12 CFR 339.5(d)(2) (FDIC); 12 CFR 614.4935(d)(2) (FCA); and 12 CFR
760.5(d)(2) (NCUA).
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Small Lender Exception 6. If the borrower has waived escrow of flood
insurance premiums and fees, does the lender or its servicer still need
to send a notice to offer the ability to escrow for the flood
insurance?
Yes, if the small lender exception no longer applies. (See Q&A
Small Lender Exception 5). The Regulation does not exclude loans for
which borrowers have previously waived escrow from the requirement to
offer and make available the option to escrow flood insurance premiums
and fees. Consequently, lenders or their servicers must send a notice
of the option to escrow flood insurance premiums and fees to borrowers
who have previously waived escrow or for whom lenders previously
offered an option to escrow.\134\ Although a borrower may have
previously decided to waive escrow or been offered an option to escrow,
it is possible that the borrower's circumstances have changed, and if
offered another chance to escrow, the borrower may desire to do so.
---------------------------------------------------------------------------
\134\ 12 CFR 22.5(d)(2) (OCC); 12 CFR 208.25(e)(4)(ii) (Board);
12 CFR 339.5(d)(2) (FDIC); 12 CFR 614.4935(d)(2) (FCA); and 12 CFR
760.5(d)(2) (NCUA).
---------------------------------------------------------------------------
Small Lender Exception 7. Is it correct that lenders that qualify for
the small lender exception are not required to provide borrowers the
escrow notice or the option to escrow notice?
Yes. Lenders that qualify for the small lender exception are not
required to provide borrowers either the escrow notice or the option to
escrow notice unless the lender ceases to qualify for the small lender
exception.\135\
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\135\ 12 CFR 22.5(d)(1) (OCC); 12 CFR 208.25(e)(4)(i) (Board);
12 CFR 339.5(d)(1) (FDIC); 12 CFR 614.4935(d)(1) (FCA); and 12 CFR
760.5(d)(1) (NCUA).
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XIV. Requirement to Escrow Flood Insurance Premiums and Fees--Loan
Exceptions
Loan Exceptions 1. Are escrow accounts for flood insurance premiums and
fees required for commercial loans that are secured by multi-family
residential buildings?
No. Extensions of credit primarily for business, commercial or
agricultural purposes are not subject to the escrow requirement for
flood insurance premiums and fees, even if such loans are secured by
residential improved real estate or a mobile home.\136\
---------------------------------------------------------------------------
\136\ 12 CFR 22.5(a)(2) (OCC); 12 CFR 208.25(e)(1)(ii) (Board);
12 CFR 339.5(a)(2) (FDIC); 12 CFR 614.4935(a)(2) (FCA); and 12 CFR
760.5(a)(2) (NCUA).
---------------------------------------------------------------------------
Loan Exceptions 2. Do construction-permanent loans qualify for the 12-
month exception if one phase of the loan is for 12 months or less?
Generally, no. Construction-permanent loans (or C-P loans) are
loans that have a construction phase of approximately one year before
the loan converts into permanent financing. During the construction
phase, the loan is typically interest-only, so the borrower does not
start paying principal until the permanent phase. After the
construction phase, the borrower generally comes in to sign papers to
start the permanent phase, but this is not a true closing. Given that
C-P loans are generally 20- to 30-year term loans, a C-P loan would not
qualify for the 12 month-exception from escrow, even if one phase of
the loan is for 12 months or less.
Loan Exceptions 3. Although a lender is not required to monitor whether
a subordinate lien moves into first lien position for the purpose of
the mandatory escrow requirement, if the lender becomes aware that the
subordinate lien exception no longer applies, when must the lender
begin to escrow?
If at any time during the term of the loan a lender determines that
a subordinate lien exception no longer applies, the lender must begin
escrowing flood insurance premiums and fees as soon as reasonably
practicable (unless another exception applies).\137\ Lenders should
ensure that the loan documents for the subordinate lien permit the
lender to require an escrow if the loan takes a first lien position.
---------------------------------------------------------------------------
\137\ 12 CFR 22.5(a)(3) (OCC); 12 CFR 208.25(e)(1)(iii) (Board);
12 CFR 339.5(a)(3) (FDIC); 12 CFR 614.4935(a)(3) (FCA); and 12 CFR
760.5(a)(3) (NCUA).
---------------------------------------------------------------------------
Loan Exceptions 4. Which requirements for an escrow account apply to a
property covered by an RCBAP?
An RCBAP (Residential Condominium Building Association Policy) is a
policy purchased by the condominium association on behalf of itself and
the individual unit owners in the condominium. Typically, a portion of
the periodic dues paid to the association by the condominium owners
applies to the premiums on the policy. When a lender makes, increases,
renews, or extends a loan secured by a condominium unit that is
adequately covered by an RCBAP and RCBAP premiums are paid by the
condominium association as a common expense, an escrow account is not
required.\138\ However, if the RCBAP coverage is inadequate and the
unit is also covered by a flood insurance policy for supplemental
coverage, premiums for the supplemental policy would need to be
escrowed, provided the lender or the loan did not qualify for any other
exception from the Regulation's escrow requirement.\139\ Lenders should
exercise due diligence with respect to continuing compliance with the
insurance requirements on the part of the condominium association.
---------------------------------------------------------------------------
\138\ 12 CFR 22.5(a)(2)(iii) (OCC); 12 CFR 208.25(e)(1)(ii)(C)
(Board); 12 CFR 339.5(a)(2)(iii) (FDIC); 12 CFR 614.4935(a)(2)(iii)
(FCA); and 12 CFR 760.5(a)(2)(iii) (NCUA).
\139\ 12 CFR 22.5(a) (OCC); 12 CFR 208.25(e)(1) (Board); 12 CFR
339.5(a)(1) (FDIC); 12 CFR 614.4935(a) (FCA); and 12 CFR 760.5(a)(1)
(NCUA).
---------------------------------------------------------------------------
Loan Exceptions 5. Is there an exception to the escrow requirement for
loans secured by multi-family buildings? Is there an exception for
commercial loans?
Under the Regulation, the escrow requirements do not apply to a
loan that is an extension of credit primarily for business, commercial,
or agricultural purposes even if secured by residential real estate,
such as a multi-family building.\140\
---------------------------------------------------------------------------
\140\ 12 CFR 22.5(a)(2)(i) (OCC); 12 CFR 208.25(e)(1)(ii)(A)
(Board); 12 CFR 339.5(a)(2)(i) (FDIC); 12 CFR 614.4935(a)(2)(i)
(FCA); and 12 CFR 760.5(a)(2)(i) (NCUA).
---------------------------------------------------------------------------
In addition, the escrow requirements in the Regulation would not
apply to a loan secured by a particular unit in a multi-family
residential building if a condominium association, cooperative,
homeowners association, or other applicable group provides an adequate
policy and pays for the insurance as a common expense.\141\ Otherwise,
the escrow requirements generally would
[[Page 40473]]
apply to loans for particular units in multi-family residential
buildings.
---------------------------------------------------------------------------
\141\ 12 CFR 22.5(a)(2)(iii) (OCC); 12 CFR 208.25(e)(1)(ii)(C)
(Board); 12 CFR 339.5(a)(2)(iii) (FDIC); 12 CFR 614.4935(a)(2)(iii)
(FCA); and 12 CFR 760.5(a)(2)(iii) (NCUA).
---------------------------------------------------------------------------
XV. Force Placement of Flood Insurance
Force Placement 1. What is the requirement for the force placement of
flood insurance under the Act and the Regulation?
When a lender makes a determination that the collateral securing
the loan is uninsured or underinsured, it must begin the force-
placement process. Specifically, the Act and the Regulation provide
that if a lender, or a servicer acting on its behalf, determines at any
time during the term of a designated loan that a building or mobile
home and any personal property securing the loan is not covered by
flood insurance or is covered by flood insurance in an amount less than
the amount required under the Regulation, the lender or its servicer
must notify the borrower that the borrower must obtain flood insurance,
at the borrower's expense, in an amount at least equal to the minimum
amount required under the Regulation. If the borrower fails to obtain
flood insurance within 45 days of the lender's notification to the
borrower, the lender must purchase flood insurance on the borrower's
behalf at that time. The lender must force place flood insurance for
the full amount required under the Regulation, or if the borrower has
purchased flood insurance that otherwise satisfies the flood insurance
requirements but in an insufficient amount, the lender would be
required to force place only for the ``insufficient amount,'' that is,
the difference between the amount the borrower insured and the required
amount of flood insurance. The Act and the Regulation also provide that
the lender or its servicer may purchase insurance on the borrower's
behalf and may charge the borrower for the cost of premiums and fees
incurred in purchasing the insurance beginning on the date on which
flood insurance coverage lapsed or did not provide a sufficient
coverage amount. (See also Q&A Force Placement 8).\142\
---------------------------------------------------------------------------
\142\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
---------------------------------------------------------------------------
A lender or its servicer may include in the force-placement notice
the amount of flood insurance needed. By providing this information,
the lender or its servicer can help ensure that a borrower obtains the
appropriate amount of insurance. In addition, before the lender or
servicer must force place flood insurance, if the lender or servicer is
aware that a borrower has obtained insurance that otherwise satisfies
the flood insurance requirements but in an insufficient amount, the
lender or servicer should inform the borrower an additional amount of
insurance is needed in order to comply with the Regulation.
Force Placement 2. When must a lender provide the force-placement
notice to the borrower?
The Regulation requires the lender, or its servicer, to send notice
to the borrower upon making a determination that the building or mobile
home and any personal property securing the designated loan is not
covered by flood insurance or is covered by flood insurance in an
amount less than the amount required under the Regulation. The Agencies
expect that such notice will be provided to the borrower at the time of
determination of no or insufficient coverage. If there is a brief delay
in providing the notice, the Agencies will expect the lender or
servicer to provide a reasonable explanation for the delay, for
example, that the lender uses batch processing to send the force-
placement notice to its borrowers.
Force Placement 3. May a servicer force place on behalf of a lender?
Yes. Assuming the statutory prerequisites for force placement are
met, and subject to the servicing contract between the lender and its
servicer, the Act authorizes servicers to force place flood insurance
on behalf of the lender, following the procedures set forth in the
Regulation.\143\
---------------------------------------------------------------------------
\143\ 42 U.S.C. 4012a(e); 12 CFR 22.7(a) (OCC); 12 CFR
208.25(g)(1) (Board); 12 CFR 339.7(a) (FDIC); 12 CFR 614.4945(a)
(FCA); and 12 CFR 760.7(a) (NCUA).
---------------------------------------------------------------------------
Force Placement 4. May a lender satisfy its notice requirement by
sending the force-placement notice to the borrower prior to the
expiration of the flood insurance policy?
No. The Act specifically provides that the lender or servicer for a
loan must send a notice upon its determination that the collateral
property securing the loan is either not covered by flood insurance or
is covered by flood insurance in an amount less than the amount
required.\144\ Although a lender may send notice prior to the
expiration date of the flood insurance policy as a courtesy, the lender
or servicer is still required to send notice upon determining that the
flood insurance policy actually has lapsed or is insufficient in
meeting the statutory requirement. The lender may purchase insurance on
the borrower's behalf beginning on the date of the lapse.\145\
---------------------------------------------------------------------------
\144\ 12 U.S.C. 4012a(e)(1). See also 12 CFR 22.7(a) (OCC); 12
CFR 208.25(g)(1) (Board); 12 CFR 339.7(a) (FDIC); 12 CFR 614.4945(a)
(FCA); and 12 CFR 760.7(a) (NCUA).
\145\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
---------------------------------------------------------------------------
Force Placement 5. When must the lender have flood insurance in place
if the borrower has not obtained adequate insurance within 45 days
after notification?
The Regulation provides that the lender or its servicer shall
purchase insurance on the borrower's behalf if the borrower fails to
obtain flood insurance within 45 days after notification.\146\ If the
borrower fails to obtain flood insurance and the lender does not force
place flood insurance by the end of the force-placement notification
period, the Agencies will expect the lender to provide a reasonable
explanation for the brief delay, for example, that a lender uses batch
processing to purchase force-placed flood insurance policies.
---------------------------------------------------------------------------
\146\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
---------------------------------------------------------------------------
Force Placement 6. Once a lender makes a determination that a
designated loan has no or insufficient flood insurance coverage and
sends the borrower a force-placement notice, may a lender make a
subsequent determination in connection with the initial notification
period that the designated loan has no or insufficient coverage and
send another force-placement notice, effectively providing more than 45
days for the borrower to obtain sufficient coverage?
No. The Act and Regulation state that once a lender makes a
determination that a designated loan has no or insufficient flood
insurance coverage, the lender must notify the borrower and, if the
borrower fails to obtain sufficient flood insurance coverage within 45
days after that notice, the lender must purchase coverage on the
borrower's behalf.\147\ For example, if in response to a force-
placement notice, the borrower obtains flood insurance that is
insufficient in amount, there is no extension of the time period by
which the lender must force place flood insurance.
---------------------------------------------------------------------------
\147\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
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[[Page 40474]]
Force Placement 7. May a lender commence a force-placed insurance
policy on the day the previous policy expires, or must the new policy
begin on the day after?
The Regulation provides that the lender or its servicer may charge
the borrower for the cost of premiums and fees incurred in purchasing
the insurance, including premiums or fees incurred for coverage,
beginning on the date on which flood insurance lapsed or did not
provide a sufficient coverage amount.\148\
---------------------------------------------------------------------------
\148\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
---------------------------------------------------------------------------
A lender, however, may not require the borrower to pay for double
coverage. The Regulation requires the lender or its servicer to refund
to the borrower all premiums paid by the borrower for any force-placed
insurance purchased by the lender or its servicer during any period in
which the borrower's flood insurance coverage and the force-placed
insurance policy were each in effect.\149\
---------------------------------------------------------------------------
\149\ 12 CFR 22.7(b)(1)(ii) (OCC); 12 CFR 208.25(g)(2)(i)(B)
(Board); 12 CFR 339.7(b)(1)(ii) (FDIC); 12 CFR 614.4945(b)(1)(ii)
(FCA); and 12 CFR 760.7(b)(1)(ii) (NCUA).
---------------------------------------------------------------------------
If the previous policy expires at the end of Day 1, the lender's
new force-placed policy should not begin to provide coverage until the
beginning of Day 2. If the lender did force place on Day 1 and the
policy provided overlapping coverage on Day 1, the lender could not
charge the borrower for the period of overlapping coverage on Day 1.
Force Placement 8. When force placement occurs, what is the amount of
insurance required to be placed?
The Regulation states that the minimum amount of flood insurance
required ``must be at least equal to the lesser of the outstanding
principal balance of the designated loan or the maximum limit of
coverage available for the particular type of property under the Act.''
\150\ Therefore, if the outstanding principal balance is the basis for
the minimum amount of required flood insurance, the lender must ensure
that the force-placed policy amount covers the existing loan balance
plus any additional force-placed premium and fees added to the loan
balance.\151\
---------------------------------------------------------------------------
\150\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
\151\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
---------------------------------------------------------------------------
To illustrate this point, assume that there is a loan with an
outstanding principal balance of $200,000, secured by a residential
property located in a special flood hazard area that has an insurable
value of $350,000. The borrower has a $200,000 flood insurance policy
for that property, reflecting the minimum amount required under the
Agencies' regulations. If the $200,000 flood insurance policy lapses,
the lender or its servicer must notify the borrower of the need to
obtain adequate flood insurance. If the borrower fails to obtain
adequate flood insurance within 45 days after notification, then the
lender or its servicer must purchase insurance on the borrower's
behalf.\152\
---------------------------------------------------------------------------
\152\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
---------------------------------------------------------------------------
If the lender intends to add the premium for the force-placed
policy to the loan balance, the lender must ensure that the policy is
issued in an amount sufficient to cover the anticipated higher loan
balance, including the force-placed policy premium, even if the
addition of the force-placed premium is not considered a triggering
event. (See also Q&A Force Placement 10). In this scenario, if the cost
of the force-placed policy is $2,000, the coverage amount of the force-
placed policy must be at least $202,000.
Force Placement 9. When may a lender or its servicer charge the
borrower for the cost of force-placed insurance?
A lender, or a servicer acting on its behalf, may force place
insurance and charge the borrower for the cost of premiums and fees
incurred by the lender or servicer in purchasing the flood insurance on
the borrower's behalf at any time starting from the date on which flood
insurance coverage lapsed or did not provide a sufficient coverage
amount. The lender or servicer would not have to wait 45 days after
providing notification to force place insurance.\153\
---------------------------------------------------------------------------
\153\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
---------------------------------------------------------------------------
Lenders that monitor loans secured by property located in an SFHA
for continuous flood insurance coverage can minimize any gaps in
coverage and any charge to the borrower for coverage for a timeframe
prior to the lender's or its servicer's date of discovery and force
placement. If a lender or its servicer, despite its monitoring efforts,
discovers a loan with no or insufficient coverage, for example, due to
a re-mapping, it may charge the borrower for premiums and fees incurred
by the lender or servicer for a force-placed flood insurance policy
purchased on the borrower's behalf, including premiums and fees for
coverage, beginning on the date of no or insufficient coverage,
provided that the policy was effective as of the date of the
insufficient coverage. When a lender or its servicer purchases a policy
on the borrower's behalf, the lender or its servicer may not charge for
premiums and fees for coverage beginning on the date of lapse or
insufficient coverage if that policy purchased on the borrower's behalf
did not provide coverage for the borrower prior to purchase.
Force Placement 10. Does adding the flood insurance premium to the
outstanding loan balance constitute a triggering event- an ``increase''
that would trigger the applicability of flood insurance regulatory
requirements?
The Act and the Regulation require a lender to notify the borrower
that the borrower should obtain adequate flood insurance when the
lender determines that a building or a mobile home located or to be
located in a Special Flood Hazard Area is not covered by any or
adequate flood insurance.\154\ If the borrower fails to obtain adequate
flood insurance within 45 days, then the lender must purchase insurance
on the borrower's behalf. The lender may charge the borrower for the
premiums and fees incurred by the lender in purchasing the force-placed
flood insurance.\155\
---------------------------------------------------------------------------
\154\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
\155\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
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Among the various methods that a lender might use to charge a
borrower for force-placed flood insurance are: (1) Adding the premium
and fees to the existing mortgage loan balance; (2) adding the premium
and fees to a separate, unsecured account; or (3) billing the borrower
directly for the premiums and fees of the force-placed flood insurance.
The treatment of force-placed flood insurance premiums and fees depends
on the method the lender chooses for charging the borrower.
Premium and Fees Added to Mortgage Loan Balance
If the lender's loan contract with the borrower includes a
provision permitting the lender or servicer to advance funds to pay for
flood insurance premiums and fees as additional debt to be secured by
the building or mobile home, such an advancement would be considered
part of the loan. As such, the addition of the flood insurance premiums
and fees to the loan balance is not considered an ``increase'' in the
loan amount, and thus would not be considered a triggering event. If,
however, there is no explicit provision permitting this type of
[[Page 40475]]
advancement of funds in the loan contract, the addition of flood
insurance premiums and fees to the borrower's loan balance would be
considered an ``increase'' in the loan amount, and, therefore is
considered a triggering event because no advancement of funds was
contemplated as part of the loan. (See also Q&A Force Placement 8).
Premium and Fees Added to an Unsecured Account
If the lender accounts for and tracks the amount owed on the force-
placed flood insurance premium and fees in a separate, unsecured
account, this approach does not result in an increase in the loan
balance and, therefore, is not considered a triggering event.
Premium and Fees Billed Directly to Borrower
If the lender bills the borrower directly for the cost of the
force-placed flood insurance, this approach does not increase the loan
balance and is not considered a triggering event.
Force Placement 11. What documentation is sufficient to demonstrate
evidence of flood insurance in connection with a lender's refund of
premiums paid by a borrower for force-placed insurance during any
period of overlap with borrower-purchased insurance?
With respect to when a lender is required to refund premiums paid
by a borrower for force-placed insurance during any period of overlap
with borrower-purchased insurance, the Regulation specifically
addresses the documentation requirements. The Regulation provides that,
for purposes of confirming a borrower's existing flood insurance
coverage, a lender must accept from the borrower an insurance policy
declarations page that includes the existing flood insurance policy
number and the identity of, and contact information for, the insurance
company or its agent.\156\ The Regulation does not require that the
declarations page contain any additional information in order to be
accepted as fulfilling the mandatory flood insurance purchase
requirement.
---------------------------------------------------------------------------
\156\ 12 CFR 22.7(b)(2) (OCC); 12 CFR 208.25(g)(2)(ii) (Board);
12 CFR 339.7(b)(2) (FDIC); 12 CFR 614.4945(b)(2) (FCA); and 12 CFR
760.7(b)(2) (NCUA).
---------------------------------------------------------------------------
In situations not involving a lender's refund of premiums for
force-placed insurance, the Regulation does not specify what
documentation would be sufficient. Generally, it is appropriate,
although not required by the Regulation, for lenders to accept a copy
of the flood insurance application and premium payment as evidence of
proof of purchase for new policies.
Force Placement 12. If a lender cannot obtain a refund from the
insurance company because the borrower did not provide proof of
coverage in a timely manner or the insurance company fails to provide
the lender the refund within 30 days, is the lender required to refund
the premium to the borrower?
Yes. The Regulation specifically requires the refund of force-
placed insurance premiums and any related fees charged to the borrower
for any overlap period within 30 days of receipt of a confirmation of a
borrower's existing flood insurance coverage without exception.\157\
---------------------------------------------------------------------------
\157\ 12 CFR 22.7(b)(1) (OCC); 12 CFR 208.25(g)(2)(i) (Board);
12 CFR 339.7(b)(1) (FDIC); 12 CFR 614.4945(b)(1) (FCA); and 12 CFR
760.7(b)(1) (NCUA).
---------------------------------------------------------------------------
Force Placement 13. Is a lender permitted to increase, renew, or extend
a designated loan that is currently insured by force-placed insurance?
More specifically, if the borrower is undergoing a refinance or a loan
modification, can the lender rely on the existing force-placed
insurance to meet the mandatory purchase requirement?
A lender can rely on the force-placed insurance to satisfy the
mandatory flood insurance purchase requirement if the borrower does not
purchase his or her own policy. The Regulation states that a lender
``shall not make, increase, extend or renew any designated loan unless
the building or mobile home and any personal property securing the loan
is covered by flood insurance for the term of the loan.'' \158\
Assuming the force-placed policy is in effect and otherwise satisfies
the regulatory coverage standards, then that policy may satisfy the
mandatory purchase requirement.
---------------------------------------------------------------------------
\158\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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When a lender refinances increases, renews, or extends an existing
loan, the lender is required to provide the notice of special flood
hazards, which details the borrower's obligation to obtain a flood
insurance policy for any building in an SFHA securing the loan.\159\ At
that time, the lender could encourage the borrower to purchase his or
her own policy, likely at a reduced cost to the borrower.
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\159\ 12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR
339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a)
(NCUA).
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Force Placement 14. If a borrower's force-placed flood insurance
expires, is the lender required to send a force-placement notification
to the borrower prior to renewing the force-placed flood insurance
coverage?
No. The Regulation does not require the lender to send a notice to
the borrower prior to renewing a force-placed policy. However, the
lender or its servicer, at its discretion, may notify the borrower that
the lender is planning to renew or has renewed the force-placed policy.
Such a notification may encourage the borrower to purchase his or her
own policy, which may be available for a lower premium amount.
Force Placement 15. Are lenders required to have in place ``Life-of-
Loan'' monitoring?
Although there is no explicit duty to monitor flood insurance
coverage over the life of the loan in the Act or Regulation, for
purposes of safety and soundness, many lenders monitor the continuous
coverage of flood insurance for the building or mobile home and any
personal property securing the loan. Such a practice helps to ensure
that lenders complete the force placement of flood insurance in a
timely manner upon lapse of a policy, that there is continuous coverage
to protect both the borrower and the lender, and that lenders are
promptly made aware of flood map changes.
Force Placement 16. If a lender or its servicer receives a notice of
remapping that states that a property will be remapped into an SFHA as
a future effective date, what do the Act and Regulation require the
lender or its servicer to do?
The Act and Regulation provide that if a lender, or its servicer,
determines at any time during the term of a designated loan, that a
building or mobile home and any personal property securing a loan is
uninsured or underinsured, the lender or its servicer must begin the
notice and force-placement process, as detailed in Q&A Force Placement
1.\160\ A loan that is secured by property that was not located in an
SFHA does not become a designated loan until the effective date of the
map change, remapping the property into an SFHA. Therefore, when a
lender or its servicer receives advance notice that a property will be
remapped into an SFHA, the effective date of the remapping becomes the
date on which the lender or its servicer must determine whether the
[[Page 40476]]
property is covered by sufficient flood insurance. If the borrower does
not purchase a flood insurance policy that begins on the effective date
of the map change, the lender or its servicer must send the force-
placement notice to the borrower to purchase adequate flood
insurance.\161\ Similar to the guidance set forth in Q&A Force
Placement 4, a lender also may send notice prior to the effective date
of the map change as a courtesy.
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\160\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
\161\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
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In addition, as of the effective date of the remapping, the lender
or servicer may force place flood insurance and charge the borrower for
the force-placed insurance. However, if the borrower purchases an
adequate flood insurance policy, the lender or servicer would need to
reimburse the borrower for premiums and fees charged for the force-
placed coverage during any period of overlapping coverage.\162\
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\162\ 12 CFR 22.7(b)(1)(ii) (OCC); 12 CFR 208.25(g)(2)(i)(B)
(Board); 12 CFR 339.7(b)(1)(ii) (FDIC); 12 CFR 614.4945(b)(1)(ii)
(FCA); and 12 CFR 760.7(b)(1)(ii) (NCUA).
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XVI. Flood Insureance Requirements in the Event of the Sale or Transfer
of a Designated Loan and/or Its Servicing Rights
Servicing 1. How do the flood insurance requirements under the
Regulation apply to lenders under the following scenarios involving
loan servicing?
Scenario 1: A regulated lender originates a designated loan secured
by a building or mobile home located in an SFHA in which flood
insurance is available under the Act. The regulated lender makes the
initial flood determination, provides the borrower with appropriate
notice, and flood insurance is obtained. The regulated lender initially
services the loan; however, the regulated lender subsequently sells
both the loan and the servicing rights to a nonregulated party. What
are the regulated lender's requirements under the Regulation? What are
the regulated lender's requirements under the Regulation if it only
transfers or sells the servicing rights, but retains ownership of the
loan?
The regulated lender must comply with all requirements of the
Regulation, including making the initial flood determination, providing
appropriate notice to the borrower, and ensuring that the proper amount
of insurance is obtained. In the event the regulated lender sells or
transfers the loan and servicing rights, the regulated lender must
provide notice of the identity of the new servicer to FEMA or its
designee.\163\ Once the regulated lender has sold the loan and the
servicing rights, the lender has no further obligation regarding flood
insurance on the loan.
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\163\ 12 CFR 22.10(b) (OCC); 12 CFR 208.25(j)(2) (Board); 12 CFR
339.10(b) (FDIC); 12 CFR 614.4960(b) (FCA); and 12 CFR 760.10(b)
(NCUA).
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If the regulated lender retains ownership of the loan and only
transfers or sells the servicing rights to a nonregulated party, the
regulated lender must notify FEMA or its designee of the identity of
the new servicer.\164\ The servicing contract should require the
servicer to comply with all the requirements that are imposed on the
regulated lender as owner of the loan, including escrow of insurance
premiums and force placement of insurance, if necessary.
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\164\ 12 CFR 22.10(b) (OCC); 12 CFR 208.25(j)(2) (Board); 12 CFR
339.10(b) (FDIC); 12 CFR 614.4960(b) (FCA); and 12 CFR 760.10(b)
(NCUA).
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Generally, the Regulation does not impose obligations on a loan
servicer independent from the obligations it imposes on the owner of a
loan. Loan servicers are covered by the escrow, force placement, and
flood hazard determination fee provisions of the Act and Regulation
primarily so that they may perform the administrative tasks for the
regulated lender, without fear of liability to the borrower for the
imposition of unauthorized charges. It is the Agencies' longstanding
position that the obligation of a loan servicer to fulfill
administrative duties with respect to the flood insurance requirements
arises from the contractual relationship between the loan servicer and
the regulated lender or from other commonly accepted standards for
performance of servicing obligations. The regulated lender remains
ultimately liable for fulfillment of those responsibilities, and must
take adequate steps to ensure that the loan servicer maintains
compliance with the flood insurance requirements.
Scenario 2: A nonregulated lender originates a designated loan. The
nonregulated lender does not make an initial flood determination or
notify the borrower of the need to obtain insurance. The nonregulated
lender sells the loan and servicing rights to a regulated lender. What
are the regulated lender's requirements under the Regulation? What are
the regulated lender's requirements if it only purchases the servicing
rights?
A regulated lender's purchase of a loan and servicing rights,
secured by a building or mobile home located in an SFHA in which flood
insurance is available under the Act, is not an event that triggers
certain requirements under the Regulation, such as making a new flood
determination or requiring a borrower to purchase flood insurance.\165\
Those requirements only are triggered when a regulated lender makes,
increases, extends, or renews a designated loan.\166\ A regulated
lender's purchase of a loan does not fall within any of those
categories. However, if a regulated lender becomes aware at any point
during the life of a designated loan that flood insurance is
required,\167\ then the regulated lender must comply with the
Regulation, including force placing insurance, if necessary.\168\
Depending upon the circumstances, as a matter of safety and soundness,
the lender may undertake due diligence upon the purchase of a loan,
which would make the lender aware of the lack of adequate flood
insurance and trigger flood insurance compliance requirements. Further,
if the purchasing lender subsequently extends, increases, or renews a
designated loan, it must also comply with the Act and Regulation.\169\
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\165\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
\166\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
\167\ 42 U.S.C. 4012a(e)(1).
\168\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a)
(NCUA).
\169\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a)
(NCUA).
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When a regulated lender purchases only the servicing rights to a
loan originated by a nonregulated lender, the regulated lender is
obligated to follow the terms of its servicing contract with the owner
of the loan. In the event the regulated lender subsequently sells or
transfers the servicing rights on that loan, the regulated lender must
notify FEMA or its designee of the identity of the new servicer, if
required to do so by the servicing contract with the owner of the
loan.\170\
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\170\ 12 CFR 22.10(b) (OCC); 12 CFR 208.25(j)(2) (Board); 12 CFR
339.10(b) (FDIC); 12 CFR 614.4960(b) (FCA); and 12 CFR 760.10(b)
(NCUA).
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Servicing 2. When a lender makes a designated loan and will be
servicing that loan, what are the requirements for notifying the
Administrator of FEMA or the Administrator's designee, i.e. the
insurance provider?
The Regulation states that the Administrator's designee is the
insurance company issuing the flood insurance policy.\171\ The
borrower's purchase of an NFIP policy (or the
[[Page 40477]]
lender's force placement of an NFIP policy) will constitute notice to
FEMA when the lender is servicing that loan.
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\171\ 12 CFR 22.10(a) (OCC); 12 CFR 208.25(j)(1) (Board); 12 CFR
339.10(a) (FDIC); 12 CFR 614.4960(a) (FCA); and 12 CFR 760.10(a)
(NCUA).
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In the event the servicing is subsequently transferred to a new
servicer, the lender must provide notice to the insurance company of
the identity of the new servicer no later than 60 days after the
effective date of such a change.\172\
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\172\ 12 CFR 22.10(b) (OCC); 12 CFR 208.25(j)(2) (Board); 12 CFR
339.10(b) (FDIC); 12 CFR 614.4960(b) (FCA); and 12 CFR 760.10(b)
(NCUA).
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Servicing 3. Would a Real Estate Settlement Procedures Act (RESPA)
Notice of Transfer sent to the Administrator of FEMA (or the
Administrator's designee, i.e., the insurance provider) satisfy the
regulatory provisions of the Act?
Yes. The delivery of a copy of the Notice of Transfer or any other
form of notice is sufficient if the sender includes, on or with the
notice, the following information that FEMA has indicated is needed by
its designee:
Borrower's full name;
Flood insurance policy number;
Property address (including city and State);
Name of lender or servicer making notification;
Name and address of new servicer; and
Name and telephone number of contact person at new
servicer.
Servicing 4. Can delivery of the notice be made electronically,
including batch transmission?
Yes. The Regulation specifically permits transmission by electronic
means.\173\ A timely batch transmission of the notice would also be
permissible, if it is acceptable to the Administrator's designee, i.e.,
the insurance provider.
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\173\ 12 CFR 22.10(a) (OCC); 12 CFR 208.25(j)(1) (Board); 12 CFR
339.10(a) (FDIC); 12 CFR 614.4960(a) (FCA); and 12 CFR 760.10(a)
(NCUA).
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Servicing 5. If the loan and its servicing rights are sold by the
lender, is the lender required to provide notice to the Administrator
or the Administrator's designee (i.e., the insurance provider)?
Yes.\174\ Failure to provide such notice would defeat the purpose
of the notice requirement because FEMA would have no record of the
identity of either the owner or servicer of the loan.
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\174\ 12 CFR 22.10 (OCC); 12 CFR 208.25(j) (Board); 12 CFR
339.10 (FDIC); 12 CFR 614.4960 (FCA); and 12 CFR 760.10 (NCUA).
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Servicing 6. Is a lender required to provide notice when the servicer,
not the lender, sells or transfers the servicing rights to another
servicer?
No. After servicing rights are sold or transferred, subsequent
notification obligations are the responsibility of the new
servicer.\175\ The obligation of the lender is to notify the
Administrator or the Administrator's designee (i.e., the insurance
provider) of the identity of the servicer transfers to the new
servicer. The duty to notify the insurance provider of any subsequent
sale or transfer of the servicing rights and responsibilities belongs
to that servicer.\176\ For example, if a lender makes and services a
loan and then sells the loan in the secondary market and also sells the
servicing rights to a mortgage company, then the lender must notify the
insurance provider of the identity of the new servicer and the other
information requested by FEMA so that flood insurance transactions can
be properly administered by the insurance provider. If the mortgage
company later sells the servicing rights to another firm, the mortgage
company, not the lender, is responsible for notifying the insurance
provider of the identity of the new servicer.
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\175\ 12 CFR 22.10 (OCC); 12 CFR 208.25(j) (Board); 12 CFR
339.10 (FDIC); 12 CFR 614.4960 (FCA); and 12 CFR 760.10 (NCUA).
\176\ 12 U.S.C. 4104a(b)(1).
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Servicing 7. In the event of a merger or acquisition of one lender with
another, what are the responsibilities of the parties for notifying the
Administrator's designee (i.e., the insurance provider)?
If a lender is acquired by or merges with another lender, the duty
to provide notice for the loans being serviced by the acquired lender
will fall to the successor lender in the event that notification is not
provided by the acquired lender prior to the effective date of the
acquisition or merger.
XVII. Mandatory Civil Money Penalties
Penalty 1. Which violations of the Act can result in a mandatory civil
money penalty?
A pattern or practice of violations of any of the following
requirements of the Act and its implementing Regulation triggers a
mandatory civil money penalty:
Purchase of flood insurance where available (42 U.S.C.
4012a(b));
Escrow of flood insurance premiums (42 U.S.C. 4012a(d));
Failure to provide force-placement notice or purchase
force-placed flood insurance coverage, as appropriate (42 U.S.C.
4012a(e));
Notice of special flood hazards and the availability of
Federal disaster relief assistance (42 U.S.C. 4104a(a)); and
Notice of servicer and any change of servicer (42 U.S.C.
4104a(b)).
The Act provides that any regulated lending institution found to
have a pattern or practice of the violations ``shall be assessed a
civil penalty'' by its Federal supervisory agency in an amount not to
exceed $2,000 per violation (42 U.S.C. 4012a(f)(5)). There is no
ceiling on the total penalty amount that a Federal supervisory agency
can assess for a pattern or practice of violations. Each Agency adjusts
the limit pursuant to the Federal Civil Penalties Inflation Adjustment
Act of 1990 (28 U.S.C. 2461 note).\177\ As required by the Act, the
penalties must be paid into the National Flood Mitigation Fund.
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\177\ Please refer to 12 CFR 19.240(b) & 12 CFR 109.103(c)(2)
(OCC); 12 CFR 263.65(b) (Board); 12 CFR 308.132(d)(18) (FDIC); 12
CFR 622.61(b) (FCA); and 12 CFR 747.1001 (NCUA) for the Agencies'
current civil penalty limits.
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Penalty 2. What constitutes a ``pattern or practice'' of violations for
which civil money penalties must be imposed under the Act?
The Act does not define ``pattern or practice.'' The Agencies make
a determination of whether a pattern or practice exists by weighing the
individual facts and circumstances of each case. In making the
determination, the Agencies look both to guidance and experience with
determinations of pattern or practice under other regulations (such as
Regulation B (Equal Credit Opportunity) and Regulation Z (Truth in
Lending)), as well as Agencies' precedents in considering the
assessment of civil money penalties for flood insurance violations.
The Policy Statement on Discrimination in Lending (Policy
Statement) provided the following guidance on what constitutes a
pattern or practice: Isolated, unrelated, or accidental occurrences
will not constitute a pattern or practice. However, repeated,
intentional, regular, usual, deliberate, or institutionalized practices
will almost always constitute a pattern or practice. The totality of
the circumstances must be considered when assessing whether a pattern
or practice is present.
In determining whether a lender has engaged in a pattern or
practice of flood insurance violations, the Agencies' considerations
may include, but are not limited to, the presence of one or more of the
following factors:
[[Page 40478]]
Whether the conduct resulted from a common cause or source
within the lender's control;
Whether the conduct appears to be grounded in a written or
unwritten policy or established process;
Whether the noncompliance occurred over an extended period
of time;
The relationship of the instances of noncompliance to one
another (for example, whether the instances of noncompliance occurred
in the same area of a lender's operations);
Whether the number of instances of noncompliance is
significant relative to the total number of applicable transactions.
(Depending on the circumstances, however, violations that involve only
a small percentage of a lender's total activity could constitute a
pattern or practice);
Whether a lender was cited for violations of the Act and
Regulation at prior examinations and the steps taken by the lender to
correct the identified deficiencies;
Whether a lender's internal and/or external audit process
had not identified and addressed deficiencies in its flood insurance
compliance; and
Whether the lender lacks generally effective flood
insurance compliance policies and procedures and/or a training program
for its employees.
Although these considerations are not dispositive of a final
resolution, they do serve as a reference point in assessing whether
there may be a pattern or practice of violations of the Act and
Regulation in a particular case. As previously stated, the presence or
absence of one or more of these considerations may not eliminate a
finding that a pattern or practice exists.
Brian P. Brooks,
Acting Comptroller of the Currency.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
Dated at Washington, DC, on June 12, 2020.
Robert E. Feldman,
Executive Secretary.
Dated at McLean, VA, this 10th day of February 2020.
Dale Aultman,
Secretary, Farm Credit Administration Board.
Gerard Poliquin,
Secretary of the Board, National Credit Union Administration.
[FR Doc. 2020-14015 Filed 7-2-20; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 7535-01-P; 6705-01-P
