[Federal Register Volume 74, Number 138 (Tuesday, July 21, 2009)]
[Notices]
[Pages 35914-35947]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-17129]
[[Page 35913]]
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Part II
Department of the Treasury
Office of the Comptroller of the Currency
Federal Reserve System
Federal Deposit Insurance Corporation
Department of the Treasury
Office of Thrift Supervision
Farm Credit Administration
National Credit Union Administration
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Loans in Areas Having Special Flood Hazards; Interagency Questions and
Answers Regarding Flood Insurance; Notice
Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 /
Notices
[[Page 35914]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket ID OCC 2009-0014]
FEDERAL RESERVE SYSTEM
[Docket No. R-1311]
FEDERAL DEPOSIT INSURANCE CORPORATION
RIN 3064-ZA00
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[Docket ID OTS-2009-0005]
FARM CREDIT ADMINISTRATION
RIN 3052-AC46
NATIONAL CREDIT UNION ADMINISTRATION
RIN 3133-AD41
Loans in Areas Having Special Flood Hazards; Interagency
Questions and Answers Regarding Flood Insurance
AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); Office of Thrift Supervision,
Treasury (OTS); Farm Credit Administration (FCA); National Credit Union
Administration (NCUA).
ACTION: Notice and request for comment.
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SUMMARY: The OCC, Board, FDIC, OTS, FCA, and NCUA (collectively, the
Agencies) are issuing final revisions to the Interagency Questions and
Answers Regarding Flood Insurance (Interagency Questions and Answers).
The Agencies are also soliciting comments on proposed revisions to the
Interagency Questions and Answers. To help financial institutions meet
their responsibilities under Federal flood insurance legislation and to
increase public understanding of the flood insurance regulation, the
Agencies are finalizing new and revised guidance, as well as proposing
new and revised guidance that address the most frequently asked
questions about flood insurance. The revised Interagency Questions and
Answers contain staff guidance for agency personnel, financial
institutions, and the public.
DATES: Effective date: September 21, 2009. Comment due date: Comments
on the proposed questions and answers must be submitted on or before
September 21, 2009.
ADDRESSES: OCC: Because paper mail in the Washington, DC area and at
the Agencies is subject to delay, commenters are encouraged to submit
comments by e-mail, 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:
E-mail: [email protected].
Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 2-3, Washington, DC 20219.
Fax: (202) 874-5274.
Hand Delivery/Courier: 250 E Street, SW., Attn:
Communications Division, Mail Stop 2-3, Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket Number OCC-2009-0014'' in your comment. In general, OCC will
enter all comments received into the docket and publish them on the
Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, e-mail 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 enclose 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 notice by any of the following methods:
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC's Communications Division, 250 E
Street, SW., Washington, DC. For security reasons, the OCC requires
that visitors make an appointment to inspect comments. You may do so by
calling in advance (202) 874-4700. Upon arrival, visitors will be
required to present valid government-issued photo identification and
submit to security screening in order to inspect and photocopy
comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
Board: You may submit comments, identified by Docket No. R-1311, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.Regulation.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site 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 in
Room MP-500 of the Board's Martin Building (20th and C Streets, NW.)
between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit comments, identified by RIN number 3064-ZA00
by any of the following methods:
Agency Web Site: http://www.fdic.gov/Regulation/laws/federal/propose.html. Follow instructions for submitting comments on
the ``Agency Web Site.''
E-mail: [email protected]. Include the RIN number in the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m.
Instructions: All submissions received must include the agency name
and RIN number. All comments received will be posted without change to
http://www.fdic.gov/Regulation/laws/federal/propose.html including any
personal information provided.
OTS: You may submit comments, identified by OTS-2009-0005, by any
of the following methods:
E-mail: [email protected]. Please include ID
OTS-2009-0005 in the subject line of the message and include your name
and telephone number in the message.
Fax: (202) 906-6518.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: OTS-2009-0005.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G
[[Page 35915]]
Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: OTS-2009-0005.
Instructions: All submissions received must include the agency name
and docket number for this rulemaking. All comments received will be
posted without change, including any personal information provided.
Comments, including attachments and other supporting materials received
are part of the public record and subject to public disclosure. Do not
enclose any information in your comment or supporting materials that
you consider confidential or inappropriate for public disclosure.
Viewing Comments Electronically: OTS will post comments on the OTS
Internet Site at http://www.ots.treas.gov/?p=opencomment1.
Viewing Comments On-Site: You may inspect comments at the Public
Reading Room, 1700 G Street, NW., by appointment. To make an
appointment for access, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-6518. (Prior notice identifying the materials you will be
requesting will assist us in serving you.) We schedule appointments on
business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
request.
FCA: We offer a variety of methods for you to submit comments. For
accuracy and efficiency reasons, we encourage commenters to submit
comments by e-mail or through the Agency's Web site or the Federal
eRulemaking Portal. You may also send comments by mail or by facsimile
transmission. 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:
E-mail: Send us an e-mail at [email protected].
Agency Web Site: http://www.fca.gov. Once you are at the
Web site, select ``Legal Info,'' then ``Pending Regulation and
Notices.''
Federal eRulemaking Portal: http://www.Regulation.gov.
Follow the instructions for submitting comments.
Mail: Gary K. Van Meter, Deputy Director, Office of
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive,
McLean, VA 22102-5090.
Fax: (703) 883-4477. Posting and processing of faxes may
be delayed. Please consider another means to comment, if possible.
You may review copies of comments we receive at our office in
McLean, Virginia, or from our Web site at http://www.fca.gov. Once you
are in the Web site, select ``Legal Info,'' and then select ``Public
Comments.'' We will show your comments as submitted, 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 e-mail addresses to help reduce Internet spam.
NCUA: You may submit comments by any of the following methods
(Please send comments by one method only):
Federal eRulemaking Portal: http://www.Regulation.gov.
Follow the instructions for submitting comments.
NCUA Web Site: http://www.ncua.gov/RegulationOpinionsLaws/proposed_regs/proposed_regs.html. Follow the instructions for
submitting comments.
E-mail: Address to [email protected]. Include ``[Your
name] Comments on Flood Insurance, Interagency Questions & Answers'' in
the e-mail subject line.
Fax: (703) 518-6319. Use the subject line described above
for e-mail.
Mail: Address to Mary Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
Public Inspection: All public comments are available on the
agency's Web site at http://www.ncua.gov/RegulationOpinionsLaws/comments as submitted, except as may not be possible for technical
reasons. Public comments will not be edited to remove any identifying
or contact information. Paper copies of comments may be inspected in
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment,
call (703) 518-6546 or send an e-mail to [email protected].
FOR FURTHER INFORMATION CONTACT:
OCC: Pamela Mount, National Bank Examiner, Compliance Policy, (202)
874-4428; or Margaret Hesse, Special Counsel, Community and Consumer
Law Division, (202) 874-5750, Office of the Comptroller of the
Currency, 250 E Street, SW., Washington, DC 20219.
Board: Vivian Wong, Senior Attorney, Division of Consumer and
Community Affairs, (202) 452-2412; Tracy Anderson, Senior Supervisory
Consumer Financial Services Analyst (202) 736-1921; or Brad Fleetwood,
Senior Counsel, Legal Division, (202) 452-3721, Board of Governors of
the Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551. For the deaf, hard of hearing, and speech
impaired only, teletypewriter (TTY), (202) 263-4869.
FDIC: Mira N. Marshall, Chief, Compliance Policy Section, Division
of Supervision and Consumer Protection, (202) 898-3912; or Mark Mellon,
Counsel, Legal Division, (202) 898-3884, Federal Deposit Insurance
Corporation, 550 17th Street, NW., Washington, DC 20429. For the
hearing impaired only, telecommunications device for the deaf TDD: 800-
925-4618.
OTS: Ekita Mitchell, Consumer Regulation Analyst, (202) 906-6451;
or Richard S. Bennett, Senior Compliance Counsel, (202) 906-7409,
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.
FCA: Mark L. Johansen, Senior Policy Analyst, Office of Regulatory
Policy, (703) 993-4498; or Mary Alice Donner, Attorney Advisor, Office
of General Counsel, (703) 883-4033, Farm Credit Administration, 1501
Farm Credit Drive, McLean, VA 22102-5090. For the hearing impaired
only, TDD (703) 883-4444.
NCUA: Justin M. Anderson, Staff Attorney, Office of General
Counsel, (703) 518-6540; or Pamela Yu, Staff Attorney, Office of
General Counsel, (703) 518-6593, National Credit Union Administration,
1775 Duke Street, Alexandria, VA 22314-3428.
SUPPLEMENTARY INFORMATION:
Background
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 two Federal flood insurance
statutes, the National Flood Insurance Act of 1968 and the Flood
Disaster Protection Act of 1973. The Reform Act required the OCC,
Board, FDIC, OTS, and NCUA to revise their flood insurance regulations
and required the FCA to promulgate a flood insurance regulation for the
first time. The OCC, Board, FDIC, OTS, NCUA, and FCA (collectively,
``the Agencies'') fulfilled these requirements by issuing a joint final
rule in the summer of 1996. See 61 FR 45684 (August 29, 1996).
In connection with the 1996 joint rulemaking process, the Agencies
received a number of requests 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
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number, level of detail, and diversity of the requests, guidance
addressing the technical compliance issues would be helpful and
appropriate. Consequently, the Agencies decided to issue guidance to
address these technical issues subsequent to the promulgation of the
final rule (61 FR at 45685-86). The Federal Financial Institutions
Examination Council (FFIEC) fulfilled that objective through the
initial release of the Interagency Questions and Answers in 1997 (1997
Interagency Questions and Answers). 62 FR 39523 (July 23, 1997).
In response to issues that had been raised, the Agencies, in
coordination with the Federal Emergency Management Agency (FEMA),
released for public comment proposed revisions to the 1997 Interagency
Questions and Answers. 73 FR 15259 (March 21, 2008) (March 2008
Proposed Interagency Questions and Answers). Among the changes the
Agencies proposed were the introduction of new questions and answers in
a number of areas, including second lien mortgages, the imposition of
civil money penalties, and loan syndications/participations. The
Agencies also proposed substantive modifications to questions and
answers previously adopted in the 1997 Interagency Questions and
Answers pertaining to construction loans and condominiums. Finally, the
Agencies proposed to revise and reorganize certain of the existing
questions and answers to clarify areas of potential misunderstanding
and to provide clearer guidance to users.
The Agencies received and considered comments from 59 public
commenters, and are now adopting the Interagency Questions and Answers,
comprising 77 questions and answers, revised as appropriate based on
comments received. The Agencies made nonsubstantive revisions to
certain answers upon further consideration either to more directly
respond to the question asked or to provide additional clarity. The
Agencies are also proposing five new questions and answers for public
comment. These Interagency Questions and Answers supersede the 1997
Interagency Questions and Answers and supplement other guidance or
interpretations issued by the Agencies and FEMA.
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 (codified at 42 U.S.C. 4001
et seq.). ``Regulation'' refers to each agency's current final flood
insurance rule.\1\
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\1\ The Agencies' rules are codified at 12 CFR part 22 (OCC), 12
CFR part 208 (Board), 12 CFR part 339 (FDIC), 12 CFR part 572 (OTS),
12 CFR part 614 (FCA), and 12 CFR part 760 (NCUA).
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Section-by-Section Analysis
Section I. Determining When Certain Loans Are Designated Loans for
Which Flood Insurance Is Required Under the Act and Regulation
The Agencies proposed this new section to address specific
circumstances a lender may encounter when deciding whether a loan
should be a designated loan for purposes of flood insurance. The
proposed new section was intended to replace the previous section I in
the 1997 Interagency Questions and Answers entitled ``Definitions'' and
to incorporate existing questions from other sections addressing this
topic and two new questions.
Proposed question and answer 1 addressed the applicability of the
Regulation to loans made in a nonparticipating community. One commenter
suggested the Agencies mention that a lender may choose to require
private flood insurance per its loan agreement with the borrower, for
buildings or mobile homes located outside a community in the National
Flood Insurance Program (NFIP). The Agencies agree that lenders have
such discretion, but do not believe that the question and answer
requires further elaboration. Another commenter suggested the Agencies
mention that Government Sponsored Enterprises (GSEs), such as Fannie
Mae and Freddie Mac, may not purchase loans made on properties in a
Special Flood Hazard Area (SFHA) in communities that do not participate
in the NFIP. The Act does require GSEs to have procedures in place to
ensure that purchased loans are in compliance with the mandatory
purchase requirements. The Agencies do not believe that further
elaboration is necessary and adopt the question and answer as proposed.
Proposed question and answer 2 explained that, upon a FEMA map
change that results in a building or mobile home securing a loan being
removed from an SFHA, a lender is no longer obligated to require
mandatory flood insurance. However, the lender may choose to continue
to require flood insurance for risk management purposes. The Agencies
received one comment from an industry group suggesting the guidance in
proposed question and answer 2 be amended to add language encouraging
lenders to promptly remove the flood insurance requirement from a loan
when the building or mobile home securing the loan is removed from an
SFHA by way of a map change. The decision to require flood insurance in
these instances is typically made on a case-by-case basis, depending on
a lender's risk management practices. The Agencies do not believe that
a blanket statement encouraging lenders to remove flood insurance in
such instances is an appropriate position; therefore, the question and
answer is adopted as proposed.
Proposed question and answer 3 addressed whether a lender's
purchase of a loan, secured by a mobile home or building located in an
SFHA in which flood insurance is available under the Act, from another
lender triggers any requirements under the Regulation. The Agencies
received several comments opposing the reference to safety and
soundness necessitating a due diligence review prior to purchasing the
loan. The Agencies note that although lenders are not required to
review loans for flood insurance compliance prior to purchase,
depending upon the circumstances, safety and soundness considerations
may sometimes necessitate such due diligence. As such, the Agencies do
not concur with the commenter's opposition and adopt question and
answer 3 as proposed.
The Agencies are adopting a new question and answer 4 addressing
syndicated and participation loans following question and answer 3,
which deals with purchased loans, to emphasize the need for similar
treatment of purchased loans and syndicated and participation loans.
The new question and answer was initially proposed as question and
answer 40 under section VIII. Proposed section VIII on loan
syndications and participations and the accompanying question and
answer are removed and the remaining sections are renumbered
accordingly.
Proposed question and answer 40 explained that, with respect to
loan syndications and participations, individual participating lenders
are responsible for ensuring compliance with flood insurance
requirements. The proposed answer further explained that participating
lenders may fulfill this obligation by performing upfront due diligence
to ensure that the lead lender or agent has undertaken the necessary
activities to make sure that appropriate flood insurance is obtained
and has adequate controls to monitor the loan(s) on an on-going basis.
The Agencies received several comments from financial institutions
and industry trade groups opposing the
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differences between the guidance in proposed question and answer 3
regarding the purchase of a loan and the guidance in proposed question
and answer 40. A majority of the commenters argued that loan
participations and syndications should be treated the same as other
loan purchases for purposes of flood insurance. Several of these
commenters suggested that the Agencies' proposed treatment of loan
syndications and participations appeared to be inconsistent with
proposed question and answer 3 pertaining to purchased loans.
In response to these comments, the Agencies are revising the
relevant question and answer to reflect that, as with purchased loans,
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 and 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, safety and soundness considerations may sometimes
necessitate that the lender undertake due diligence to protect itself
against the risk of flood or other types of loss.
If a regulated lender is involved in the making of the underlying
loan, but does not purchase a loan participation or syndication after
the loan has been made, the flood requirements of the Act and
Regulation would apply to the lender. The Agencies believe that lenders
who pool or contribute funds that will be advanced simultaneously to a
borrower as a loan secured by improved real estate would all be
considered to have ``made'' the loan under the Act and Regulation. In
such circumstances, each participating lender in a loan participation
or syndication is responsible for compliance with the Act and
Regulation. This does not mean that each participating lender must
separately obtain a flood determination or monitor whether flood
insurance premiums are paid. Rather, it means that each participating
lender subject to Federal flood insurance requirements should perform
upfront due diligence to ensure both that the lead lender or agent has
undertaken the necessary activities to make sure that the borrower
obtains appropriate flood insurance and that the lead lender or agent
has adequate controls to monitor the loan(s) on an on-going basis for
compliance with the flood insurance requirements. The participating
lender should require as a condition to the loan-sharing agreement that
the lead lender or agent will provide participating lenders with
sufficient information on an ongoing basis to monitor compliance with
flood insurance requirements. A written representation provided by the
lead lender or syndication agent certifying that the borrower has
obtained appropriate flood insurance would be sufficient.
Alternatively, the lead lender or syndication agent could provide
participants and syndication lenders with a copy of the declaration
page or other proof of insurance. The Agencies have incorporated minor
revisions to the question and answer to clarify this guidance.
Proposed question and answer 4 (final question and answer 5)
addressed the applicability of the Regulation to loans being
restructured because of the borrower's default on the original loan. In
light of the many loan modifications being made, the Agencies have
revised the question to address loan modifications as well as loans
being restructured because of the borrower's default on the original
loan. The guidance provided in the answer is applicable to either
situation. The Agencies received one comment asking whether
capitalization of a loan in the event of a default would constitute an
increase in the loan, triggering the requirements of the Regulation. If
the capitalization results in an increase in the outstanding principal
balance of the loan, then the requirements of the Regulation will
apply. Conversely, a loan restructure that does not result in an
increase in the amount to the loan (or an extension of the term of the
loan) will not trigger the requirements of the Regulation. The Agencies
do not believe further elaboration addressing this comment is
necessary. The Agencies adopt the question and answer as proposed with
the changes made to include loan modifications, as well as
restructuring of loans.
Proposed question and answer 5 (final question and answer 6),
addressed whether table funded loans are treated as new loan
originations. The Agencies did not receive any substantive comments and
adopt the question and answer as proposed.
Proposed question and answer 6 (final question and answer 7)
explained that a lender is not required to perform a review of its
existing loan portfolio for purposes of the Act or Regulation; however,
sound risk management practices may lead a lender to conduct periodic
reviews. The Agencies received several comments opposing the reference
to safety and soundness necessitating a due diligence review of a
lender's portfolio. Although lenders are not required to review
existing loan portfolios for flood insurance compliance under the Act
or Regulation, the Agencies believe safety and soundness considerations
may sometimes necessitate such due diligence and therefore adopt the
question and answer as proposed.
Section II. Determining the Appropriate Amount of Flood Insurance
Required Under the Act and Regulation
The Agencies proposed this section to provide guidance on how
lenders should determine the appropriate amount of flood insurance to
require the borrower to purchase. The Agencies received numerous
comments on this proposed section. As a result of these comments, the
Agencies have made both significant revisions to proposed questions and
answers as well as proposed new questions and answers submitted for
comment to provide greater clarity on this important area. The proposed
new questions and answers are addressed in the SUPPLEMENTARY
INFORMATION immediately following the Redesignation Table.
Proposed question and answer 7 (final question and answer 8)
addressed what is meant by the ``maximum limit of coverage available
for the particular type of property under the Act.'' The first part of
the question and answer discussed the maximum caps on insurance
available under the Act. The Agencies did not receive any substantive
comments on this part of the question and answer and adopt it as
proposed in final question and answer 8. The second part of the
question and answer discussed the maximum limits on the coverage in the
context of the regulation that provides that ``flood insurance coverage
under the Act is limited to the overall value of the property securing
the designated loan minus the value of the land on which the property
is located,'' commonly referred to as insurable value. In response to
the numerous comments received on the insurable value part of the
proposed question and answer, the Agencies are proposing new questions
and answers 9 and 10 for public comment. The Agencies otherwise adopt
question and answer 7 (final question and answer 8) as proposed.
Proposed questions and answers 8 and 9 (final questions and answers
11 and 12 respectively) more fully defined the terms ``residential
building'' and ``nonresidential building.'' One commenter suggested
that the Agencies define residential and nonresidential buildings based
on the percentage of the building used in a certain way to account for
mixed use buildings.
[[Page 35918]]
Proposed question and answer 8 (final question and answer 11) provides
that a residential building may have incidental nonresidential use as
long as such incidental use is limited to less than 25 percent of the
square footage of the building. A mixed use residential building where
greater than 25 percent of the square footage of the building is
devoted to incidental nonresidential use will be considered a
nonresidential building. Proposed question and answer 9 (final question
and answer 12) provides that a mixed use nonresidential building with
less than 75 percent of the square footage of the building used for
residential purposes will still be considered nonresidential. The
commenter also asked whether a farm house is residential or
nonresidential. If the farmhouse is used as a dwelling, then it will be
considered residential.
Another commenter asked whether a lender is obligated to determine
the amount of nonresidential use in a residential building and whether
there are any record maintenance requirements. Typically, whether a
building is nonresidential or residential is of most importance in
determining the maximum limits of a general property form NFIP policy.
A residential building covered under a general property form will have
a maximum coverage limit of $250,000, while a nonresidential building
covered under the same type of policy will have a maximum coverage
limit of $500,000. Therefore, the lender needs to know whether the
building is considered residential or nonresidential when it determines
the amount of flood insurance coverage to require. Finally, a commenter
asked whether a designated loan, secured by a residential building and
a detached nonresidential building, such as a garage, would require
separate nonresidential coverage on the detached nonresidential
building. If the residential building is a one-to-four family dwelling
that is covered by a dwelling form NFIP policy, that policy will cover
a detached garage at the same location as the dwelling, up to 10
percent of the limit of liability on the dwelling, so long as the
detached garage is not used or held for use as a residence, a business
or for farming purposes. In other cases, the lender must require the
borrower to obtain coverage for each building securing the loan. The
Agencies believe no further clarification is necessary and adopt the
questions and answers as proposed.
Proposed question and answer 10 (final question and answer 13)
illustrated how to apply the ``maximum limit of coverage available for
the particular type of building under the Act.'' The majority of the
comments received are addressed in the discussion below pertaining to
new proposed questions and answers 9 and 10. The Agencies adopt
question and answer 10 (final question and answer 13) as proposed.
Proposed questions and answers 11 and 12 (final questions and
answers 14 and 15 respectively) were originally adopted in the 1997
Interagency Questions and Answers. The changes proposed by the Agencies
in March 2008 were designed to provide greater clarity with no intended
change in substance and meaning.
Four commenters addressed proposed question and answer 11, which
dealt with flood insurance requirements where a designated loan is
secured by more than one building. One commenter supported the proposed
question and answer, but suggested that where the collateral is
worthless and would not be replaced, lenders should not have to require
the borrower to obtain flood insurance. The Agencies are proposing
questions 9 and 10 for public comment to address the issue of
determining insurable value for certain nonresidential buildings that
include certain low-value nonresidential buildings. Another commenter
asked whether a lender would be liable if the lender allocates the
overall required flood insurance over several buildings and one
building suffers flood damage and is underinsured. In such a
circumstance, the lender would have complied with the Act and the
Regulation. Of course, the lender has the option to require the
borrower to obtain more flood insurance coverage than the minimum
amount required if the lender believes there is a high risk of flood
loss (see final question and answer 16). Two commenters suggested that
the Agencies should explain how the lender should allocate the required
amount of coverage for multiple buildings of different values that
secure a single loan. One of these commenters suggested that allocation
could be made by a square footage method. The Agencies agree that this
is one reasonable method that could be used. Other methods may include
a value-based method, splitting the total coverage pro rata based on
replacement cost value, or a functionality method, requiring a higher
proportional share of coverage to those buildings that are most
important to the ongoing operation of the borrower. The apportionment
of the required coverage in any particular situation should reflect
consideration by both the lender and borrower of their needs and risks.
The Agencies believe no further clarification is necessary but revised
the answer to address the technical issue that single-family dwellings
are considered residential if less than 50 percent of the square
footage is used for an incidental nonresidential purpose.
Twenty commenters addressed proposed question and answer 12, which
addressed the flood insurance requirements where the insurable value of
a building securing a designated loan is less than the outstanding
principal balance of the loan. The comments generally raised concerns
about the lack of a definition of ``insurable value,'' discussed above
in connection with proposed question and answer 7. As previously
mentioned, the Agencies are proposing new questions and answers 9 and
10 for public comment to address the issue of insurable value. One
commenter also asked whether the Agencies will require a lender to
review flood insurance policies annually at renewal and increase
coverage as the replacement cost value increases. The Agencies
typically will not require such a review. However, if at any time
during the term of the loan, the lender determines that flood insurance
coverage is insufficient, the lender must comply with the force
placement procedures in the Regulation. The Agencies believe no further
clarification is necessary and adopt the question and answer as
proposed.
Proposed question and answer 13 (final question and answer 16)
clarified that a lender can require more flood insurance than the
minimum required by the Regulation. The Regulation requires a minimum
amount of flood insurance; however, lenders may require more coverage,
if appropriate. Two commenters asked the Agencies to specify that
lenders may never require coverage that exceeds the insurable value of
a building. As stated in the question and answer, lenders should avoid
creating situations where a building is over-insured. Further, the
Agencies state in final question and answer 8 that ``an NFIP policy
will not cover an amount exceeding the insurable value of the
structure.'' Another commenter asked what penalties, if any, would be
imposed on a lender that requires over insurance. The Agencies note
that there are no penalties for over insurance under the Act and
Regulation. However, there may be penalties for over-insurance under
applicable State law. Finally, a commenter suggested that flood
insurance should not be required where the collateral building is
worthless and would not be replaced. The Agencies are proposing
questions 9 and 10 for public comment to address the issue of
[[Page 35919]]
determining insurable value for certain nonresidential buildings that
include certain low value nonresidential buildings. Other than a
nonsubstantive revision to provide additional clarity, the Agencies
adopt the question and answer as proposed.
Proposed question and answer 14 (final question and answer 17)
addressed lender considerations regarding the amount of the deductible
on a flood insurance policy purchased by a borrower. Generally, the
proposed guidance advised a lender to 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. The
Agencies received nine comments addressing proposed question and answer
14. Four commenters suggested that borrowers with low-value buildings
should be able to choose a deductible that exceeds the value of the
building with a result that flood insurance would not be required. The
Act and Regulation require flood insurance on all buildings at the
lesser of the outstanding principal balance of the loan or the maximum
amount available under the Act. A high deductible does not provide a de
facto waiver of this requirement. One commenter suggested that the
Agencies' position regarding not allowing a de facto waiver of the
flood insurance requirement on low-value buildings based on the
deductible amount contradicts the NFIP's policy of following the
standard practice in the financial industry of allowing lenders to
dictate the amount of the deductible according to the authority found
in the loan agreement. Other commenters stated that a lender should not
be required to determine deductibles on a case-by-case basis but rather
through adoption of credit guidelines that apply across-the-board to
all loans. In general, the Agencies agree that lenders may adopt credit
guidelines that apply to most loans. However, such guidelines cannot
work to waive the flood insurance requirements of the Act and
Regulation. Finally, one commenter suggested that the Agencies should
mention that the GSEs may have maximum allowable deductibles. The
Agencies decline to revise the question and answer based on this
comment because information about GSE requirements is outside the scope
of this guidance. The Agencies adopt the question and answer as
proposed.
Section III. Exemptions From the Mandatory Flood Insurance Requirements
This section contains only one question and answer, which describes
the statutory exemptions from the mandatory flood insurance
requirements. Proposed question and answer 15 (final question and
answer 18) was revised from the 1997 Interagency Questions and Answers
to provide greater clarity, with no intended change in substance or
meaning. The Agencies did not receive any substantive comments and
adopt the question and answer as proposed.
Section IV. Flood Insurance Requirements for Construction Loans
The Agencies proposed this new section to clarify the requirements
regarding the mandatory purchase of flood insurance for construction
loans to erect buildings that will be located in an SFHA in light of
concerns raised by some regulated lenders regarding borrowers'
difficulties in obtaining flood insurance for construction loans at the
time of loan origination. The Agencies received a number of comments on
the proposed questions and answers concerning construction loans.
Several commenters asked for guidance in determining the appropriate
amount of flood insurance for a loan secured by a building during the
course of construction. This guidance is provided in the discussion of
the proposed new questions and answers 9 and 10 for public comment that
addresses insurable value.
Proposed question and answer 16 (final question and answer 19)
revises existing guidance to limit its scope and explained that a loan
secured only by land located in an SFHA is not a designated loan that
would require flood insurance coverage. The Agencies received one
comment addressing this question and answer from a financial
institution commenter that asked whether a loan secured by developed
land without a structure on it, which, during the course of the loan,
will not have any structure on it, necessitates a flood determination
as it is considered residential real estate. The Agencies believe that
the commenter has raised a valid point and have revised the proposed
question and answer by removing the reference to ``raw'' land. The
revised question and answer discusses loans secured only by ``land.''
Since a designated loan is a loan secured by a building or mobile home
that is located or to be located in an SFHA, any loan secured only by
land that is located in an SFHA is not a designated loan since it is
not secured by a building or mobile home. In the case of this
particular comment, the loan is not secured by either a building or
mobile home; therefore, it is not a designated loan. The Agencies adopt
the question and answer as proposed with the modification described
above.
Proposed question and answer 17 (final question and answer 20)
addressed whether 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 is a designated loan.
The proposed answer provided that a lender must make a flood
determination prior to loan origination for a construction loan. If the
flood determination shows that the building securing the loan will be
located in an SFHA, the lender must provide notice to the borrower, and
must comply with the mandatory purchase requirements.
One financial institution commenter asked whether the lender/
servicer must provide continuing flood insurance coverage where a
structure in an SFHA covered by flood insurance is considered a total
loss/demolished and only the land remains and the structure is to be
rebuilt. The Agencies believe that if there is remaining insurable
value in the building, flood insurance should continue to be
maintained. If the building has no remaining insurable value, then
flood insurance is not required. Under these circumstances, the total
loss situation is akin to a loan secured only by land located in an
SFHA, which is addressed in final question and answer 19 discussed
above, and is not a designated loan that would require flood insurance
coverage. If the building is a total loss/demolished and has no
remaining insurable value, but a new structure is going to be built in
its place, it should be treated like a new construction loan as
discussed below in proposed question and answer 19 (final question and
answer 22). To the extent that any new structure that will be built is,
or will be, located in an SFHA, then the lender must provide notice to
the borrower, and must comply with the mandatory purchase requirements
as outlined in proposed questions and answers 18 and 19 (final
questions and answers 21 and 22). The lender can, of course, elect to
maintain the flood insurance that had previously been in place on the
prior demolished structure to avoid having to monitor the
reconstruction as discussed below.
Another financial institution commenter asked whether a building in
the course of construction that will be a condominium building when
finished can be insured under a Residential Building Condominium
Association Policy (RCBAP) during the construction period. The RCBAP
can be sold to a condominium association only. Therefore, unless the
building is under
[[Page 35920]]
the condominium form of ownership with a condominium association formed
at the time of construction, no RCBAP can be written. If there is no
condominium association, the lender should require the builder/
developer to obtain flood insurance under the NFIP General Property
form or private equivalent. If the building will be a residential
condominium, then the lender must require flood insurance to meet the
statutory requirements, up to the $250,000 flood insurance limit under
the NFIP for an ``other residential'' building.
Finally, a loan servicer commenter asked the Agencies to clarify
when flood insurance coverage takes effect when a lender opts to
require flood insurance at origination of a construction loan. This
comment is addressed in final question and answer 21. The Agencies
adopt the final question and answer 20 as proposed.
Proposed question and answer 18 (final question and answer 21)
explained that, generally, a building in the course of construction is
eligible for coverage under an NFIP policy, and that coverage may be
purchased prior to the start of construction. One financial institution
commenter asked whether the definition of a ``building'' in the
proposed question and answer has the same meaning as FEMA's definition
in its Mandatory Purchase of Flood Insurance Guidelines.\2\ The
Agencies believe that the definitions of ``building,'' as well as the
definition of ``building in the course of construction,'' used by FEMA
are fully consistent with the definition in the Regulation. The
Agencies adopt the question and answer as proposed with only minor
clarifications to the citation of FEMA's Flood Insurance Manual.
---------------------------------------------------------------------------
\2\ FEMA, Mandatory Purchase of Flood Insurance Guidelines
(September 2007) at GLS--1-2. FEMA has made this booklet available
electronically at http://www.fema.gov/library/viewRecord.do?id=2954.
Hard copies are available by calling FEMA's Publication Warehouse at
(800) 480-2520.
---------------------------------------------------------------------------
Proposed question and answer 19 (final question and answer 22),
addressed when flood insurance must be purchased for buildings under
the course of construction. The answer provided lenders with
flexibility regarding the timing of the mandatory purchase requirement
for construction loans in response to concerns raised by lenders that
borrowers have encountered difficulties in obtaining flood insurance
for construction loans at the time of origination. Specifically, the
Agencies proposed to permit lenders to allow borrowers to defer the
purchase of flood insurance until a foundation slab has been poured
and/or an elevation certificate has been issued. Lenders choosing this
option, however, must require the borrower to have flood insurance in
place before funds are disbursed to pay for building construction on
the property securing the loan (except as necessary to pour the slab or
perform preliminary site work). A lender who elects this approach and
does not require flood insurance at loan origination must have adequate
internal controls in place to ensure compliance. Moreover, lenders must
still ensure that the required flood determination is completed at
origination and that notice is given to borrowers if the property is
located in an SFHA.
A financial institution and a financial institution membership
organization commented that requiring lenders to have monitoring
procedures in place to ensure that the borrower obtains flood insurance
as soon as the foundation is complete or the elevation certificate
issued is too burdensome. The Agencies note that if a lender determines
that this option is too burdensome they may continue the practice of
requiring flood insurance at origination. The monitoring procedures are
only necessary in the event that lenders choose to require flood
insurance at the time the foundation pad is completed and/or the
elevation certificate is obtained. Therefore, the Agencies believe that
no revision to the proposed question and answer is necessary.
Several commenters, including four financial institutions and a law
firm that advises financial institutions, asked the Agencies for
clarification regarding the ``timing'' options available for
determining whether flood insurance is required for buildings in the
course of construction, that is, the foundation alone and/or the
issuance of an elevation certificate. Either the pouring of the
foundation slab or the issuance of an elevation certificate provides
sufficient information for a lender to determine whether the collateral
building is located in an SFHA for which flood insurance is required.
The Agencies believe that no further elaboration is necessary to
address this issue in the question and answer.
Finally, one individual commenter indicated that it is unclear
whether an NFIP policy can be purchased before two walls and a roof
have been erected. FEMA guidance provides that buildings yet to be
walled and roofed are generally eligible for coverage after an
elevation certificate is obtained or a foundation slab is poured,
except where either construction is halted for more than 90 days or if
the lowest floor used for rating purposes is below Base Flood Elevation
(BFE). If the lowest floor is under BFE, then the building must be
walled and roofed before flood insurance coverage is available.\3\ The
Agencies believe that the commenter has raised a valid point and have
clarified the proposed question and answer accordingly. The Agencies
otherwise adopt the question and answer as proposed.
---------------------------------------------------------------------------
\3\ FEMA, Mandatory Purchase of Flood Insurance Guidelines, at
30-31.
---------------------------------------------------------------------------
The Agencies also proposed new question and answer 20 (final
question and answer 23) to clarify whether the 30-day waiting period
for an NFIP policy applies when the purchase of flood insurance is
deferred in connection with a construction loan since there has been
confusion among lenders on this issue in the past. Per guidance from
FEMA, the answer provided that the 30-day waiting period would not
apply in such cases.\4\ The NFIP would rely on the insurance agent's
representation that the exception applies unless a loss has occurred
during the first 30 days of the policy period. The Agencies did not
receive any substantive comments and adopt the question and answer as
proposed.
---------------------------------------------------------------------------
\4\ FEMA, Mandatory Purchase of Flood Insurance Guidelines, at
30.
---------------------------------------------------------------------------
Section V. Flood Insurance Requirements for Nonresidential Buildings
The Agencies proposed this new section to address the flood
insurance requirements for agricultural buildings that are taken as
security for a loan, but that have limited utility to a farming
operation, and loans secured by multiple buildings where some are
located in an SFHA and others are not. Six commenters suggested that
this section should be broadened to include all nonresidential
buildings, including multiple nonresidential buildings over a large
geographic area, not just those related to agriculture. The Agencies
concur and have changed the title to section V to read ``Flood
Insurance Requirements for Nonresidential Buildings'' and modified
proposed questions and answers 21 and 22 (final question and answers 24
and 25) accordingly. Several commenters asked for guidance in
determining the appropriate amount of flood insurance for loans secured
by a nonresidential building, particularly for nonresidential buildings
of low to no value. The Agencies are proposing questions 9 and 10 for
public comment to address the issue of determining insurable value for
certain nonresidential buildings that include certain low value
nonresidential buildings.
[[Page 35921]]
Proposed question and answer 21 (final question and answer 24)
explained that all buildings taken as security for a loan and located
in an SFHA require flood insurance. The question and answer also
explained that lenders may consider ``carving out'' a building from the
security for a loan; however, it may be inappropriate for credit risk
management reasons to do so. One commenter questioned whether lenders
need to require flood insurance when the collateral is only a building
(in the commenter's case, a grain bin) and not the real property where
the building is located. Further, the commenter stated that they only
use a UCC fixture filing to secure the building. Flood insurance is
required for any building taken as collateral when that building is
located in an SFHA in a participating community. This requirement is
not predicated on whether the underlying real estate is also included
in the loan collateral or the method used by the lender to secure its
collateral. FEMA answered the question of whether a grain bin is a
building by specifically including a grain bin in its definition of a
nonresidential building, therefore flood insurance is required.\5\
---------------------------------------------------------------------------
\5\ FEMA, Flood Insurance Manual, GR 2.
---------------------------------------------------------------------------
A commenter stated that if the value of a building is worthless or
nearly zero then flood insurance should not be required. The Act
requires all buildings located in an SFHA and in a participating
community to have flood insurance with only two exemptions--when a
building is State-owned and covered by self-insurance satisfactory to
the Director of FEMA; and when the original loan balance is $5,000 or
less and the original repayment term is one year or less. All other
buildings are required to be covered by flood insurance. The Agencies
are proposing questions 9 and 10 for public comment to address the
issue of determining insurable value for certain nonresidential
buildings that include certain low value nonresidential buildings.
Another commenter suggested that in determining ``insurable
value,'' institutions should be permitted to place good faith reliance
on insurance agents who are better equipped to make these
determinations. Federally regulated lenders may solicit assistance when
evaluating insurable value and this assistance could include an
insurance professional. However, it is ultimately the lender's
responsibility to determine the insurable value of a building and, as
such, it must concur with the determination. The same commenter also
asked the Agencies to explain the rationale for treating hazard
insurance and flood insurance differently. The reason for treating
flood insurance and hazard insurance differently is that flood
insurance includes coverage for the repair or replacement cost of the
foundation and supporting structures whereas hazard insurance typically
does not include coverage of the foundation. Therefore, the calculation
of insurable value for flood insurance includes these repair or
replacement costs while the calculation of insurable value for hazard
insurance does not.
Lastly, a commenter suggested that the Agencies include additional
questions and answers about other problems that arise between lenders
and insurance companies, such as insurance companies requiring higher
amounts of coverage than the appraised value of a structure of minimal
value. The amount of flood insurance required by the Act is the lesser
of the outstanding principal balance of the loan, the maximum allowed
under the Act, or the insurable value. The appraised market value of
the structure is not a factor in determining the amount of required
insurance. The Agencies adopt question and answer 21 with the changes
made to include all nonresidential buildings and not just agricultural
buildings.
Proposed question and answer 22 (final question and answer 25)
addressed the flood insurance requirements for multiple agricultural
buildings located throughout a large geographic area, some in an SFHA
and some not. One commenter suggested that the Agencies modify the
first sentence in the proposed answer to refer to ``improved property''
rather than ``property.'' The Agencies concur with this recommendation
and have inserted ``improved real estate'' in the place of the term
``property'' throughout the answer. The term ``improved real estate,''
instead of the suggested ``improved property,'' was added because it is
the term used in the Act.
A commenter asked the Agencies to address the situation where an
insurance company requires flood insurance on all buildings on the
property, not just those inside an SFHA and another commenter asked the
Agencies to mention that a lender can require flood insurance on
buildings not located in an SFHA. The Act does not prohibit a lender
from requiring more flood insurance than the minimum required by the
Act; a lender may have legitimate business reasons for requiring more
flood insurance than that required by the Act and neither the Act nor
the Regulation prohibits this additional flood insurance. Finally, a
commenter suggested that the Agencies modify the second to last
sentence in the answer to refer to ``improved property securing the
loan'' rather than ``designated loan.'' The Agencies have deleted this
sentence entirely as it is not needed to answer the question. The
Agencies adopt the question and answer with the modifications discussed
above.
Section VI. Flood Insurance Requirements for Residential Condominiums
The Agencies proposed this new section to address flood insurance
requirements for residential condominiums. The proposed section
contained two previously existing questions and answers, which were
modified and expanded, and five new questions and answers. The Agencies
received numerous comments addressing this section.
A number of commenters addressed the 2007 FEMA requirement that
insurance companies providing a Residential Building Association Policy
(RCBAP) include the replacement cost value of the condominium building
and the number of units in the building on the declaration page.\6\ Two
commenters suggested that the Agencies should enforce this requirement
over all insurance companies. The Agencies strongly support this FEMA
requirement; however, the Agencies may only enforce the requirement
against those entities over which the Agencies have jurisdiction.
---------------------------------------------------------------------------
\6\ FEMA Memorandum for Write Your Own (WYO) Principal
Coordinators and NFIP Servicing Agent (Apr. 18, 2004) (subject: Oct.
1, 2007 Program changes).
---------------------------------------------------------------------------
Proposed question and answer 23 (final question and answer 26)
explained that residential condominiums were subject to the statutory
and regulatory requirements for flood insurance. The Agencies received
only one comment addressing this question and answer, which was in
agreement with the guidance. The Agencies adopt the question and answer
as proposed.
One commenter suggested that an RCBAP should be described in a
separate question and answer in this section. Although the RCBAP was
described within the proposed questions and answers, the Agencies have
compiled the information from proposed questions and answers 24 and 25
into new question and answer 27 to specifically describe an RCBAP, and
renumbered the remaining questions and answers accordingly.
Proposed question and answer 24 (final question and answer 28)
[[Page 35922]]
discussed the amount of flood insurance that a lender must require with
respect to residential condominium units to comply with the mandatory
purchase requirements under the Act and the Regulation. The Agencies
received a number of comments addressing various aspects of this
question and answer.
Several commenters suggested that lenders should be able to rely on
the replacement cost value and number of units provided on the
declaration page of the RCBAP in determining the insurable value of a
condominium unit. The Agencies generally agree that a lender may rely
on the replacement cost value and number of units provided on the
declaration page unless it has reason to believe that such amounts
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 believes that the borrower
is underinsured, it should require the purchase of a Dwelling Policy
for supplemental coverage. The Agencies have modified the question and
answer accordingly.
Several commenters asked about other types of valuation information
that may be appropriate to use in determining the insurable value of a
condominium unit when the insurance provider does not include the
replacement cost value and number of units on the RCBAP's declaration
page. While the Agencies believe that the question and answer does not
require further elaboration on this point, the Agencies note that
consistent with safe and sound lending practices, lenders should
maintain information about the value of their collateral. Even if the
insurance provider does not include the replacement cost value of the
condominium building and the total number of units on the declaration
page, lenders typically have other sources of valuation information,
including cost-approach appraisals, automated valuation systems, and
tax assessments. Further, many lenders' policies and procedures include
obtaining specific documentation related to condominium collateral that
may provide information about the condominium's insurable value,
including copies of condominium master insurance policies or the
declaration pages of such policies. The Agencies generally will not
criticize a lender that, in good faith, has used a reasonable method to
determine the insurable value.
Several commenters agreed that RCBAP coverage written at
replacement cost value, assuming that value is less than the
outstanding principal amount of the loan or the maximum available under
the Act, is the appropriate insurable value for a condominium building
and that an RCBAP with that coverage would meet the mandatory purchase
requirement for an individual unit borrower. The 1997 Interagency
Questions and Answers stated that RCBAP coverage of 80 percent of
replacement cost value was sufficient to meet the mandatory purchase
requirement. Because of this change in policy, commenters urged the
Agencies to ensure that the new guidance will apply only prospectively.
Consistent with the stated intention in the March 2008 Proposed
Interagency Questions and Answers, the Agencies intend that this
guidance will apply to any loan that is made, increased, extended, or
renewed on or after the effective date of these Interagency Questions
and Answers.
The Agencies had previously indicated in the SUPPLEMENTARY
INFORMATION to the March 2008 Proposed Interagency Questions and
Answers that the new guidance would apply to a loan made prior to the
effective date of this guidance, but only as of the first flood
insurance policy renewal following the effective date of the guidance.
Three commenters asked the Agencies to reconsider this position. The
commenters asserted that lenders making loans secured by individual
condominium units generally do not receive RCBAP renewal notifications
from the insurance providers; therefore, the lender may not be in a
position to make a determination at the first RCBAP renewal period
following the effective date of this guidance.
Lenders are required to ensure that designated loans are covered by
flood insurance for their term. However, the Agencies recognize that
lenders made loans and required coverage amounts in reliance on the
previous guidance. Therefore, the Agencies have agreed that the revised
guidance will not apply to any loan made prior to the effective date of
this guidance unless a trigger event occurs in connection with the loan
(that is, the loan is refinanced, extended, increased, or renewed).
Because the Agencies provided supervisory guidance that stated that an
RCBAP with coverage at 80 percent of replacement cost value was
sufficient, any loan for a condominium unit relying on an RCBAP with
coverage that complied with that guidance was in compliance at the time
it was made. Absent a new trigger event, the Agencies, therefore, will
not require lenders to ensure that RCBAP coverage is increased to 100
percent on previously compliant loans made prior to the effective date
of this new guidance. The Agencies have revised the proposed question
and answer accordingly. The Agencies anticipate that the universe of
loans affected by this policy will be relatively small and diminishing
due to refinancing and other loan prepayments that typically occur in
the first five years of a home mortgage.
Proposed question and answer 25 (final question and answer 29)
addressed what a lender that makes a loan on an individual condominium
unit must do if there is no RCBAP coverage. Three commenters addressed
this question and answer. One commenter suggested that, in the example,
the Agencies should clarify that the amount of insurance required is
the ``minimum amount'' because that value ($175,000) is based on the
principal amount of the loan, which is less than either the insurable
value of the unit ($200,000) or the maximum amount available in a
dwelling policy ($250,000). In response to this comment, the Agencies
have added the qualifier ``at least'' before the amount of $175,000 to
clarify that $175,000 is the minimum amount of insurance that must be
required. As in other situations, a lender may require additional
coverage.
Another commenter asked whether a unit owner's dwelling policy will
respond at all if there is no RCBAP on the condominium building.
Although this is a general insurance question that is outside the
Agencies' purview, FEMA guidance provides that, when there is no RCBAP
coverage on the condominium building, the unit owner's dwelling policy
will respond to losses to improvements owned by the insured and to
assessments charged by the condominium association, up to the building
coverage limits of the dwelling policy purchased.\7\ Finally, one other
commenter suggested that, when a condominium association refuses to
purchase an RCBAP, the lender should refuse to make a loan to a unit
owner because the unit owner's dwelling policy is not adequate to
protect the lender. The Agencies agree that there is risk to the lender
in accepting a dwelling policy as protection for the collateral.
However, this is a risk that the lender must weigh. Such policy,
however, does fulfill the mandatory purchase requirement. The Agencies
have amended the proposed question and answer to include additional
discussion on dwelling policies in response to these comments. The
[[Page 35923]]
Agencies otherwise adopt the question and answer as proposed.
---------------------------------------------------------------------------
\7\ See FEMA, Mandatory Purchase of Flood Insurance Guidelines
at 48-49; FEMA Flood Insurance Manual at p. POL 8 (FEMA's Flood
Insurance Manual is updated every six months).
---------------------------------------------------------------------------
Proposed question and answer 26 (final question and answer 30)
discussed what a lender must do if the condominium association's RCBAP
coverage is insufficient to meet the mandatory purchase requirements
for a loan secured by an individual residential condominium unit.
Several commenters suggested changes to FEMA's flood insurance
policies. It is beyond the Agencies' jurisdiction to address these
suggestions, which are within the purview of FEMA. Interested parties
should appropriately consult with FEMA concerning the actual operation
of flood insurance policies.
Several other commenters noted that the purchase of a unit owner's
dwelling policy may not provide adequate coverage to the unit owner or
the lender as a supplement to an RCBAP providing insufficient coverage
to meet the mandatory purchase requirement. As noted in the proposed
question and answer, a dwelling policy may contain claim limitations;
therefore, it is incumbent upon a lender to understand these
limitations.
Several commenters also suggested that the Agencies should not put
forth guidance encouraging lenders to apprise borrowers that there is
risk involved when flood coverage is maintained under a unit owner
dwelling policy along with an RCBAP that does not provide replacement
cost coverage. The Agencies believe that although insurance
professionals are in the best position to adequately explain the
implications of such coverage, lenders should still be encouraged to
alert their borrowers to the risk. FEMA's brochure, National Flood
Insurance Program: Condominium Coverage, may provide some helpful
information for borrowers. The Agencies adopt the question and answer
as proposed.
Proposed question and answer 27 (final question and answer 31)
discussed what a lender must do when it determines that a loan secured
by a residential condominium unit is in a complex with a lapsed RCBAP.
One commenter requested that the Agencies provide more guidance on the
steps a lender should take to determine if there is a lapse in existing
RCBAP coverage. As mentioned above, the Agencies are aware that,
generally, a lender that is the mortgagee of a unit owner's loan would
not receive notice that the condominium association's RCBAP has
expired. However, if a trigger event occurs (that is, the lender makes,
increases, extends, or renews a loan to the borrower secured by the
unit) or if the lender otherwise makes a determination that the RCBAP
has expired, then the lender will be required to follow the procedure
outlined in final question and answer 28 and discussed above. The
Agencies adopt the question and answer as proposed.
Proposed question and answer 28 (final question and answer 32)
provided examples of how the co-insurance penalty applies when an RCBAP
is purchased at less than 80 percent of replacement cost value, unless
the amount of coverage meets the maximum coverage of $250,000 per unit.
Two commenters asked about the purpose of this question and answer. The
Agencies intended this question and answer to provide information on
the topic to lenders. The Agencies adopt the question and answer as
proposed.
Proposed question and answer 29 (final question and answer 33)
addressed the major factors that are involved with coverage limitations
of the individual unit owner's dwelling policy with respect to the
condominium association's RCBAP coverage. One commenter asked the
purpose of this question and answer and further asserted that lenders
should not be required to explain to borrowers about the limitations in
coverage. The Agencies intended this question and answer to be
informative in nature and agree that insurance professionals are in a
better position to explain policy limitations to their policyholders.
The Agencies adopt the question and answer as proposed.
Section VII. Flood Insurance Requirements for Home Equity Loans, Lines
of Credit, Subordinate Liens, and Other Security Interests in
Collateral Located in an SFHA
Proposed Section VII addressed flood insurance requirements for
home equity loans, lines of credit, subordinate liens, and other
security interests in collateral located in an SFHA. The proposed
questions and answers primarily proposed only minor wording changes or
clarifications to questions and answers in the 1997 Interagency
Questions and Answers without any change in the substance or meaning.
Several commenters addressed questions and answers in this section.
Proposed question and answer 30 (final question and answer 34),
addressed when a home equity loan is considered a designated loan that
requires flood insurance. The Agencies did not receive any substantive
comments and adopt the question and answer as proposed.
Proposed question and answer 31 (final question and answer 35),
addressed when a draw against an approved line of credit secured by
property located in an SFHA requires flood insurance. Nine commenters
questioned the statement that a designated loan requires a flood
determination when application is made for that loan. The commenters
noted that under the Act and Regulation, a lender or its servicer is
responsible for performing a flood determination upon the making,
increase, extension, or renewal of a loan, and not when a loan
application is submitted. They further noted that applications are
often withdrawn and that lenders usually have a flood determination
performed when they are reasonably certain that one of the previously
listed ``trigger'' events (e.g., the making or increasing) will occur.
The commenters requested that this point be clarified. The Agencies
agree with the commenters and are deleting the statement that a
designated loan requires a flood determination when application is made
for that loan. The Agencies otherwise adopt the question and answer as
proposed.
Proposed question and answer 32 (final question and answer 36)
addressed how much flood insurance is required when a lender makes a
second mortgage secured by property located in an SFHA. Six commenters
argued that a junior lienholder should not have to take senior liens
into account when determining the required amount of flood insurance
coverage. They asserted that the current requirement causes substantial
cost and delay, resulting in an undue burden due to the need for either
the junior lienholder or its servicer to engage in an expensive, time-
consuming search for prior liens. One commenter contended that the
question and answer should state that the amount of coverage for a
junior lien would be 100 percent of the insurable value of the
property. Alternatively, the same commenter suggested multiple flood
insurance policies on buildings with multiple liens as a means to
address the problem. On the other hand, one commenter believed that the
question and answer should remind lenders to add secondary loans to any
existing flood insurance policy's mortgagee clause. Three commenters
requested more guidance on how and when a lienholder should determine
the value of any other liens on improved collateral property. One of
these mentioned closing or upon renewal of a loan as two possible dates
for such activity.
The Agencies believe that, given the provisions of an NFIP policy,
a lender cannot comply with Federal flood insurance requirements when
it makes,
[[Page 35924]]
increases, extends, or renews a loan by requiring the borrower to
obtain NFIP flood insurance solely in the amount of the outstanding
principal balance of the lender's junior lien without regard to the
flood insurance coverage on any liens senior to that of the lender. As
illustrated in the examples in the question and answer, a junior
lienholder's failure to take such a step can leave that lienholder
partially or even fully unprotected by the borrower's NFIP policy in
the event of a flood loss.
The final question and answer provides that a junior lienholder
should work with the borrower, senior lienholder, or both these
parties, to determine how much flood insurance is needed to adequately
cover the improved real estate collateral to the lesser of the total of
the outstanding principal balances on the junior loan and any senior
loans, the maximum available under the Act, or the insurable value of
the structure. The junior lienholder should also ensure that the
borrower adds the junior lienholder's name as mortgagee/loss payee to
an existing flood insurance policy.
The final question and answer also provides that 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. Commenters also contended that privacy concerns make
it difficult for junior lienholders to obtain information from
servicers or lenders about loan balances and existing flood insurance
coverage. However, the Agencies have determined that the privacy
provisions of the Gramm-Leach-Bliley Act, as implemented in the
Agencies' regulations, do not prohibit sharing of the loan and flood
insurance information between two lenders with liens on the same
property, even without the borrower's consent.
One commenter noted that it is sometimes difficult to obtain
information about the outstanding principal balance of other liens once
a loan has been closed, such as at loan renewal, and asked what steps
might be taken in that regard. The final question and answer states
that junior lienholders have the option of obtaining a borrower's
credit report to establish the outstanding balances of senior liens on
property to aid in determining how much flood insurance is necessary
upon increasing, extending or renewing a junior lien.
In the limited situation where 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 final question and
answer provides that the junior lienholder 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 coverage relating to the senior lien was adequate at
the time) continues to be sufficient.
The Agencies have revised the proposed question and answer to
respond to these comments. The question and answer also provides
examples illustrating the application of these methods of dealing with
adequate flood insurance coverage for junior and senior liens.
Specifically, the examples illustrate how a junior lienholder should
handle situations such as: when a senior lienholder has obtained an
inadequate amount of flood insurance coverage, when a senior lienholder
is not subject to the Act's and Regulation's requirements; and when
insurance coverage in the amount of the improved real estate's
insurable value must be obtained by the junior lienholder.
Commenters also raised other issues related to ongoing flood
insurance coverage on existing second lien loans in the context of
force placement. The final question and answer addresses the triggering
events of making, increasing, extending, and renewing a second lien
loan.
Proposed question and answer 33 (final question and answer 37)
addressed flood insurance requirements in connection with home equity
loans secured by junior liens. Ten commenters requested that the
question and answer be clarified to address other subordinate lien
loans, not just junior lien home equity loans. The Agencies agree with
the commenters and, therefore, have revised the question and answer to
clarify that it applies to all subordinate lien loans.
Another commenter recommended that the ``same lender'' exception
also apply to a lender's affiliates. The Act provides that a person who
increases, extends, renews, or purchases a loan secured by improved
real estate or a mobile home may rely on a previous determination of
whether the building or mobile home is located in an area having
special flood hazards, if the previous determination was made no more
than seven years before the date of the transaction and there have been
no subsequent map revisions. 42 U.S.C. 4104b(e). The Act further
defines the term ``person'' to include any individual or group of
individuals, corporation, partnership, association, or any other
organized group of persons, including State and local governments and
agencies thereof. 42 U.S.C. 4121(a)(5). The Agencies do not interpret
the definition as providing for the inclusion of affiliates within a
corporate entity as constituting a single ``person'' except for
treating a regulated lending institution and its operating subsidiaries
as a single entity. The Agencies believe that no further revision of
the question and answer is appropriate on this point. The Agencies
adopt the question and answer as proposed subject to the revisions
discussed above.
Proposed question and answer 34 (final question and answer 38)
addressed the issue of whether a loan secured by inventory stored in a
building located in an SFHA, when the building is not collateral for
the loan, requires flood insurance. One commenter asked what sort of
legal instrument would have to be filed by a lender to result in the
need for flood insurance coverage for a borrower's contents. The
Agencies decline to respond to this inquiry because it involves a
business and legal decision beyond the interpretation of the Act and
Regulation. The Agencies adopt the question and answer as proposed.
Proposed question and answer 35 (final question and answer 39)
addressed flood insurance requirements when building contents are
security for a loan. Seven commenters requested further guidance and
clarification on how to calculate flood insurance contents coverage in
compliance with Federal regulation. Five commenters specifically
requested that the Agencies give examples to illustrate how flood
insurance coverage works for building and contents. Two commenters
asked whether a lender should consider the total amount of coverage for
both contents and building together or should consider the two
separately. One commenter asked whether a lender could do the same with
contents and building coverage as is the practice with coverage for
multiple buildings, that is, the contents and building will be
considered to have a sufficient amount of flood insurance coverage for
regulatory purposes as long as some amount of insurance is allocated to
each category.
The Agencies agree that the practice for flood insurance coverage
for multiple buildings would also be applicable to coverage for both
contents and building. That is, both contents and building will be
considered to have a sufficient amount of flood insurance coverage for
regulatory purposes as long as some reasonable amount of insurance
[[Page 35925]]
is allocated to each category. The Agencies have added an example to
this question and answer to illustrate this point. The Agencies
otherwise adopt the question and answer as proposed.
Proposed question and answer 36 (final question and answer 40),
addressed the flood insurance requirements applicable to collateral or
contents that do not secure a loan. The Agencies did not receive any
substantive comments and adopt it as proposed.
Proposed question and answer 37 (final question and answer 41)
addressed the Regulation's application where a lender places a lien on
property out of an ``abundance of caution.'' One commenter recommended
that flood insurance coverage should not be required when an interest
is taken by a lender in improved real estate in a flood hazard zone out
of an ``abundance of caution.''
The Agencies decline to accept this recommendation. The Act
provides that a lender may not make, increase, extend, or renew any
loan secured by improved real estate or a mobile home in a flood hazard
area unless the building or mobile home is covered for the term of the
loan by flood insurance. 40 U.S.C. 4012a(b)(1). The statute makes no
exception for property taken as collateral by a lender out of an
abundance of caution. The Agencies adopt the question and answer as
proposed.
Proposed question and answer 38 (final question and answer 42)
addressed loans secured by a note on a single-family dwelling, but not
the dwelling itself. Proposed question and answer 39 (final question
and answer 43) pertained to loans personally guaranteed by a third
party who gave the lender a security interest in improved real estate
owned by the guarantor. One commenter stated that the two proposed
questions and answers conflicted. The Agencies do not believe there is
a conflict between the two questions and answers. In the former
question and answer, the Agencies concluded that Federal flood
insurance requirements did not apply because the loan was not secured
by improved real estate, but was instead secured by a note. In the
latter question and answer, the lender was given a security interest in
improved real estate by a third party in connection with the third
party providing a personal guarantee on a loan. In each situation, the
absence or presence of a security interest in improved real estate
determined whether Federal flood insurance requirements would apply.
The Agencies believe that no further elaboration is necessary and adopt
these questions and answers as proposed.
Section VIII. Flood Insurance Requirements in the Event of the Sale or
Transfer of a Designated Loan and/or Its Servicing Rights
Proposed Section IX (final Section VIII) addressed flood insurance
requirements in the event of the sale or transfer of a designated loan
and/or its servicing rights. This section and the accompanying
questions and answers were originally adopted in the 1997 Interagency
Questions and Answers, and any changes proposed by the Agencies in the
March 2008 Proposal were designed to provide greater clarity with no
intended change in substance and meaning. The comments received by the
Agencies regarding the questions and answers in this section were
generally supportive.
Proposed question and answer 41 (final question and answer 44)
addressed the application of the flood insurance requirements under the
Regulation to lenders/loan servicers under different scenarios. Upon
consideration of the various comments, the Agencies have clarified the
question and answer to apply to both regulated and nonregulated
lenders. One commenter was supportive of the guidance, but recommended
that lenders be allowed to assign a certain level of responsibility for
flood insurance compliance through contractual arrangements to the
servicer. The commenter asserted that this approach would not absolve
lenders of liability and ultimate responsibility, but would make for a
less burdensome and logical approach. The Agencies believe that the
lender's responsibilities are sufficiently clear in the question and
answer and that further elaboration on this point is unnecessary.
Another commenter asked that the Agencies expressly indicate that
no servicing obligations need be followed by a lender who has sold both
the loan and the servicing rights to a nonregulated party. The Agencies
have elected to clarify in the answer that once the regulated lender
has sold the loan and the servicing rights, the lender has no further
obligation regarding flood insurance on the loan. The Agencies have
also elected to clarify in the answer that, depending upon the
circumstances, safety and soundness considerations may sometimes
necessitate that the lender undertake sufficient due diligence upon
purchase of a loan as to put the lender on notice of lack of adequate
flood insurance. Moreover, if the purchasing lender subsequently
extends, increases, or renews a designated loan, it must also comply
with the Act and Regulation. The Agencies otherwise adopt the question
and answer as proposed.
Proposed question and answer 42 (final question and answer 45),
addressed when a lender is required to notify FEMA or the Director's
designee. Proposed question and answer 43 (final question and answer
46), addressed whether a RESPA Notice of Transfer sent to the Director
of FEMA satisfies the Act and Regulation. The Agencies received one
comment that was supportive of these proposed questions and answers.
The Agencies adopt the questions and answers as proposed.
Proposed question and answer 44 (final question and answer 47),
indicated that delivery of the notice can be made electronically,
including by batch transmission if acceptable to the Director or the
Director's designee. The Agencies did not receive any substantive
comments and adopt this question and answer as proposed.
Proposed question and answer 45 (final question and answer 48)
indicated that if a loan and its servicing rights are sold by the
lender, the lender is required to provide notice to the FEMA Director
or the Director's designee. The Agencies received one comment that was
supportive of the proposed question and answer. The Agencies adopt the
question and answer as proposed.
Proposed question and answer 46 (final question and answer 49),
indicated that a lender is not required to provide notice when the
servicer, not the lender, sells or transfers the servicing rights to
another servicer; rather the servicer is obligated to provide the
notice. Proposed question and answer 47 (final question and answer 50)
indicated that in the event one institution is acquired by or merges
with another institution, the duty to provide the notice for loans
being serviced by the acquired institution falls to the successor
institution if notification is not provided by the acquired institution
prior to the effective date of the acquisition or merger. The Agencies
received one comment that was supportive of these proposed questions
and answers. The Agencies adopt the questions and answers as proposed.
Section IX. Escrow Requirements
Proposed Section X (final Section IX) addressed escrow requirements
for flood insurance premiums. This section and the accompanying
questions and answers were originally adopted in the 1997 Interagency
Questions and Answers, and any changes proposed by the Agencies were
designed to provide
[[Page 35926]]
greater clarity with no intended change in substance and meaning. The
Agencies received few comments on this section.
Proposed question and answer 48 (final question and answer 51),
addressed when multifamily buildings and mixed-use properties are
considered residential real estate. A financial institution commenter
requested two clarifications. First, the commenter noted that the
proposed answer indicated that lenders are required to escrow flood
insurance premiums and fees for any mandatory flood insurance for
designated loans if the lender requires the escrow of taxes, hazard
insurance premiums, ``or other loan charges'' for loans secured by
residential improved real estate. The commenter questioned whether
lenders are required to escrow flood insurance premiums and fees for
any mandatory flood insurance for designated loans if the lender
requires the escrow of mortgage insurance premiums. The Agencies
believe that escrowing flood insurance premiums and fees for mandatory
flood insurance for designated loans is required by the Act and
Regulation where the lender requires the escrowing of mortgage
insurance premiums. The Act and Regulation require escrowing if a
regulated lending institution requires the escrowing of ``taxes,
insurance premiums, fees, or any other charges.'' Mortgage insurance is
a form of insurance. It is also an ``other charge'' under the
Regulation. To provide greater consistency with the Act and Regulation,
the Agencies are inserting the word ``any'' into the answer so that it
refers to taxes, insurance premiums, fees, ``or any other charges.''
The commenter also asked the Agencies to expressly state in the
answer that a lender is not required to escrow flood insurance premiums
if it chooses to make an exception on a loan-by-loan basis not to
escrow other items such as taxes, hazard insurance premiums, or other
loan charges. In response, the Agencies have added a sentence to the
answer providing that a lender is not required to escrow flood
insurance premiums and fees for a particular loan if it does not
require escrowing of any other charges for that loan.
Finally, because the Agencies are adopting questions and answers
providing examples of residential and nonresidential properties, the
discussion of mixed-use properties has been revised to refer the reader
to those questions and answers. If the primary use of a mixed-use
property is for residential purposes, the Regulation's escrow
requirements apply. The Agencies otherwise adopt the question and
answer as proposed.
Proposed question and answer 49 (final question and answer 52)
addressed when escrow accounts must be established for flood insurance
purposes and indicated that escrow accounts should look to the
definition of ``Federally related mortgage loan'' contained in the Real
Estate Settlement Procedures Act (RESPA) to see whether a particular
loan is subject to RESPA's escrow requirements. The Agencies did not
receive any substantive comments on the proposed question and answer;
however, the Agencies made nonsubstantive revisions to the answer to
more directly respond to the question asked and to provide additional
clarity.
The Agencies received no comments on proposed questions and answers
50 and 51 (final questions and answers 53 and 54 respectively).
Proposed question and answer 50 (final question and answer 53)
indicated that voluntary escrow accounts established at the request of
the borrower do not trigger a requirement for the lender to escrow
premiums for required flood insurance. Proposed question and answer 51
(final question and answer 54) indicated that premiums paid for credit
life insurance, disability insurance, or similar insurance programs
should not be viewed as escrow accounts requiring the escrowing of
flood insurance premiums. The Agencies did not receive any substantive
comments on these questions and answers and adopt them as proposed.
Proposed question and answer 52 (final question and answer 55)
advised that only certain escrow-type accounts for commercial loans
secured by multifamily residential buildings trigger the escrow
requirement for flood insurance premiums. The Agencies did not receive
any substantive comments and adopt this question and answer as
proposed.
Proposed question and answer 53 (final question and answer 56)
addressed escrow requirements for condominium units covered by RCBAPs.
The Agencies received several comments on this question and answer. Two
financial institution commenters reiterated their comments pertaining
to proposed question and answer 24 (final question and answer 28) that
lenders or servicers of a loan to a condominium unit owner do not
receive a copy of the RCBAP renewal information because they are not
loss payees on the policy. This comment was addressed in the
SUPPLEMENTARY INFORMATION pertaining to Section VI above. A financial
institution requested clarification that regardless of whether the
lender makes a loan for the purchase or refinance of a condominium
unit, an escrow account is not required if dues to the condominium
association apply to the RCBAP premiums. The proposed question and
answer only addressed purchase loans; however, the Agencies agree with
the commenter that the same principle should apply to refinancings. The
Agencies, therefore, are clarifying the question and answer to provide
that when a lender makes, increases, renews, or extends a loan secured
by condominium unit that is adequately covered by an RCBAP, and dues to
the condominium association apply to the RCBAP premiums, an escrow
account is not required. However, if the RCBAP coverage is inadequate
and the unit is also covered by a dwelling form policy, premiums for
the dwelling form policy would need to be escrowed. The Agencies
otherwise adopt the question and answer as proposed.
X. Force Placement of Flood Insurance
Proposed Section XI (final Section X) addressed issues concerning
the force placement of flood insurance. This section and the
accompanying questions and answers were originally adopted in the 1997
Interagency Questions and Answers and any changes proposed by the
Agencies in March 2008 were designed to provide greater clarity with no
intended change in substance and meaning.
The Agencies received several comments on proposed question and
answer 54 (final question and answer 57), which provided general
guidance on the force placement requirement under the Act and
Regulation. Six commenters requested further guidance regarding the
exact point at which lenders must commence the force placement process.
Similarly, commenters requested clarification as to precisely when the
45-day notice period begins after which a lender or its servicer must
force place insurance. One of these commenters specifically asked the
Agencies to clarify whether insurance is required 45 days from the date
the institution received the cancellation notice, the date of
cancellation on that notice, or the date that the borrower receives
notice from the lender or servicer. One commenter requested
clarification from the Agencies whether the 45-day notice could be sent
prior to the actual date of expiration of flood insurance coverage.
As discussed in the proposed question and answer, the Act and
Regulation require the lender, or its servicer, to send notice to the
borrower upon making a determination that the
[[Page 35927]]
improved real estate collateral's insurance coverage has expired or is
less than the amount required for that particular property, such as
upon receipt of the notice of cancellation or expiration from the
insurance provider. The notice to the borrower must also state that if
the borrower does not obtain the insurance within the 45-day period,
the lender will purchase the insurance on behalf of the borrower and
may charge the borrower for the cost of premiums and fees to obtain the
coverage. The Act does not permit a lender or its servicer to send the
required 45-day notice to the borrower prior to the institution's
making a determination that flood insurance is insufficient or lacking
(for example, the actual expiration date of the flood insurance
policy). If adequate insurance is not obtained by the borrower within
the 45-day period, then the insurance must be obtained by the lender on
behalf of the borrower.
Another commenter stated that if a lender decides to pay a
borrower's current policy premium, this should not be considered to be
purchasing a force placed policy. The Agencies agree that it is within
a lender's discretion to absorb the costs of a borrower's flood
insurance policy anytime during the term of the designated loan. This
should not, however, eliminate the borrower's opportunity to obtain
appropriate flood insurance coverage, especially during the 45-day
period after receiving a force placement notice from the lender. The
Agencies revised proposed question and answer 54 (final question and
answer 57) to address these commenters' points.
The Agencies also received questions from commenters regarding
coverage during the 45-day notice period. Two commenters asked how to
ensure that collateral property is protected against flood damage
during the 45-day notice period prior to actual force placement.
Another commenter asked for more explanation about the coverage that
continues in effect for 30 days after the date that a Standard Flood
Insurance Policy (SFIP) expires under the NFIP.
Coverage under FEMA's SFIP continues in effect for 30 days from the
date that the SFIP lapses. An SFIP specifically provides that, if the
insurer decides to cancel or not renew a policy, it will continue in
effect for the benefit of only the mortgagee for 30 days after the
insurer notifies the mortgagee of the cancellation or nonrenewal. No
coverage will be provided for a borrower under the SFIP during this 30-
day period. If a lender monitors a mortgage loan with respect to the
need for flood insurance coverage, the lender can time the 45-day
period to start with the lapse of insurance coverage. Assuming
notification is made immediately upon policy cancellation or
nonrenewal, coverage will continue in place for the lender/mortgagee's
benefit for 30 days of the 45-day notice period. To cover the risk
during the remaining 15-day ``gap,'' lenders may purchase private flood
insurance to cover the collateral property, as discussed further in
section XI below regarding private insurance policies. Lenders in these
situations, often purchase what is known in the insurance industry as a
``30-day binder,'' a form of temporary private insurance. The insurance
provided by such a binder will cover the 15-day gap and the 15 days
subsequent to the end of the notice period. Because these issues lie
outside the scope of the Agencies' purview, however, the Agencies
decline to include this guidance in the question and answer.
One commenter contended that one of the criteria for force
placement in proposed question and answer 54 (final question and answer
57) should be changed from ``[t]he community in which the property is
located participates in the NFIP'' to ``flood insurance under the Act
is available for improved property securing the loan,'' because
properties may also be in Coastal Barrier Resource Areas, Otherwise
Protected Areas, or areas designated under section 1316 of the Flood
Act. The Agencies have revised final question and answer 57 to reflect
this requested change. Another commenter asked whether the citation to
``Appendix A of the FEMA publication'' in proposed question and answer
54 was a reference to the immediately previously cited FEMA procedures
that were published in the Federal Register. The Agencies have revised
final question and answer 57 to clarify the citation.
Proposed question and answer 55 (final question and answer 58),
addressed whether a servicer can force place insurance on behalf of a
lender. The Agencies did not receive any substantive comments and adopt
the question and answer as proposed.
Proposed question and answer 56 (final question and answer 59)
addressed the amount of insurance required when force placement occurs.
The Agencies received one comment suggesting that the proposed answer
to proposed question 56 not only cross-reference Section II of the
Interagency Questions and Answers, but also refer to Section VII,
because proposed question and answer 36 in that section pertains to the
required amount of flood insurance for home equity loans. The Agencies
have made minor clarifications based upon this comment, but otherwise
adopt the question and answer as proposed.
The Agencies received comments regarding terminology used in this
section. Specifically, two commenters took exception to the use of the
term ``force placement,'' arguing that the term conveys an incorrect
impression that the borrower is being forced to accept the purchase of
flood insurance coverage when the reverse of the situation applies.
These commenters suggested that the alternative term ``lender placed''
should be used instead. The current term ``force placement'' is used in
the Regulation. Moreover, the term has been widely used since the
enactment of the National Flood Insurance Reform Act of 1994. Changing
the term may cause confusion. For this reason, the Agencies decline to
accept this suggested change.
Another commenter recommended that ``lender single interest
policies'' should not be allowed and should be considered in violation
of the legal requirements of the Act and Regulation since they are not
purchased on the borrower's behalf and do not offer the same or better
policy terms to the borrower. As discussed in further detail in the
discussion to section XI below, private insurance policies may only be
considered an adequate substitute for an SFIP if the policy meets the
criteria set forth by FEMA, including the requirement that the coverage
be as broad as an SFIP. The Agencies have declined to address this
comment specifically because it is believed that the comment is
addressed by the general guidance in section XI.
In response to comments received regarding the force placement of
flood insurance, the Agencies are proposing three new questions and
answers (60, 61, and 62), which are discussed in the SUPPLEMENTARY
INFORMATION immediately following the Redesignation Table, to be added
to Section VII to address the following force-placement issues: when
the 45-day notice period should begin, how soon a lender should take
action after learning that improved real estate that secures a loan is
uninsured or underinsured, and whether a borrower may be charged for
the cost of flood insurance coverage during the 45-day notice period.
XI. Private Insurance Policies
Proposed Section XII (final Section XI) addressed the
appropriateness of gap or blanket insurance policies, often purchased
by lenders to ensure adequate life-of-loan flood insurance coverage for
designated loans. The proposed answer to question 57 (final
[[Page 35928]]
question and answer 63) explained, generally, that gap or blanket
insurance is not an adequate substitute for NFIP insurance. The
proposed answer, however, did acknowledge that in limited
circumstances, a gap or blanket policy may satisfy flood insurance
obligations in instances where NFIP and private insurance for the
borrower are otherwise unavailable.
The Agencies received several comments regarding the proposed
question and answer. Some industry commenters argued that gap or
blanket insurance is a cost-effective alternative to NFIP insurance and
should be permitted as a substitute for NFIP insurance in all cases.
Other industry commenters argued that gap or blanket insurance should
be permitted as a substitute for NFIP insurance under certain
circumstances, such as for construction loans or underinsured
properties. Still other industry commenters asked the Agencies to
clarify the use of the terms ``gap'' and ``blanket'' policies, noting
that the common industry understanding is that ``gap'' policies are
distinguishable from ``blanket'' policies. In particular, these
commenters requested that the Agencies eliminate the prohibition on
``gap'' policies that are meant to cover the deficiency between a
borrower's coverage and the amount of insurance required under the Act
and Regulation. One industry commenter also noted that there are
different types of ``gap'' policies and suggested that the Agencies
clarify its intentions to prohibit only certain types of ``gap''
policies. Lastly, commenters also requested general guidance on whether
non-NFIP private insurance policies were permitted.
Based on these comments, the Agencies have decided to modify the
question and answer to address broader issues of the appropriateness of
private insurance. Instead of focusing on whether a policy is called a
``gap'' insurance policy or a ``blanket'' insurance policy, which may
depend on how the policy is marketed by the insurer, the Agencies have
decided that it is more appropriate to provide guidance to lenders on
private insurance policies in general.
The Agencies have revised the answer to the question to provide
that a private insurance policy may be an adequate substitute for an
NFIP policy if it meets the criteria set forth by FEMA in its Mandatory
Purchase of Flood Insurance Guidelines.\8\ As FEMA has stated in its
Mandatory Purchase of Flood Insurance Guidelines, to the extent there
are any differences between the private insurance policy and an NFIP
Standard Flood Insurance Policy, those differences must be evaluated
carefully by the lender to determine whether the policy would provide
sufficient protection under the Act and Regulation. Lenders must
consider the suitability of a private insurance policy only when the
mandatory purchase requirements apply. Therefore, if the Act or
Regulation does not require the purchase of flood insurance, the lender
need not evaluate the policy to determine whether it meets the criteria
set forth by FEMA.
---------------------------------------------------------------------------
\8\ FEMA, Mandatory Purchase of Flood Insurance Guidelines, at
57-58.
---------------------------------------------------------------------------
The guidance proposed in March 2008 on the limited circumstances
when gap or blanket policies are permissible has been revised and is
being addressed in a new separate question and answer 64. The answer to
final question 64 provides that in the event that a flood insurance
policy has expired and the borrower has failed to renew coverage, a
private insurance policy that does not meet the criteria set forth by
FEMA may nevertheless be useful in protecting the lender during a gap
in coverage in the period of time before a force placed policy takes
effect. However, the answer further states that the lender must force
place NFIP-equivalent coverage in a timely manner and may not rely on
non-equivalent coverage on an on-going basis. This is consistent with
guidance proposed in March 2008, though the language has been modified
in response to commenters who thought this guidance was confusing as
worded in the proposal.
Section XII. Required Use of the Standard Flood Hazard Determination
Form (SFHDF)
Proposed Section XIII (final Section XII) addressed the required
use of the Special Flood Hazard Determination Form (SFHDF). This
section and the accompanying questions and answers were originally
adopted in the 1997 Interagency Questions and Answers. The changes
proposed by the Agencies in March 2008 were designed to provide greater
clarity with no intended change in substance and meaning. The agencies
received a number of comments on this section.
Proposed question and answer 58 (final question and answer 65),
addressed whether the SFHDF replaces the borrower notification form.
One commenter suggested the answer clarify the SFHDF's use to the
lender and the notification form's use to benefit the borrower. The
Agencies agree with the commenter and have revised the proposed answer
to be more responsive to the question and to more clearly set out the
respective uses of the SFHDF and the borrower notification form.
Information about the notice of special flood hazards may be found in
section XV. The commenter also suggested that the Agencies should amend
the proposed answer to provide that the SFHDF must be used by the
lender to determine if the ``improved'' property securing the loan is
located in an SFHA. The Regulation specifically provides that a lender
must make a flood hazard determination and use the SFHDF when
determining whether the ``building or mobile home offered as collateral
security for a loan is or will be located in an SFHA in which flood
insurance is available under the Act.'' The Agencies agree that it is
appropriate to revise the proposed question and answer to conform to
the language of the Regulation and have done so.
Proposed question and answer 59 (final question and answer 66),
addressed whether a lender is required to provide a copy of the SFHDF
to the applicant/borrower. The Agencies received two comments
concerning the proposed question and answer. The commenters suggested
that the answer should state that the Act does not require that the
lender provide the borrower with a copy of the SFHDF. The Agencies have
revised the proposed question and answer to note that, while not a
statutory requirement, a lender may provide a copy of the flood
determination to the borrower so the borrower can provide it to the
insurance agent in order to minimize flood zone discrepancies between
the lender's determination and the borrower's policy. A lender would
also need to make the determination available to the borrower in case
of a special flood hazard determination review, which must be requested
jointly by the lender and the borrower. 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.
Proposed question and answer 60 (final question and answer 67)
addressed the use of the SFHDF in electronic format. The Agencies did
not receive any substantive comment and adopt the question and answer
as proposed.
Proposed question and answer 61 (final question and answer 68)
addressed the circumstances when a lender may rely on a previous
special flood hazard determination. The Agencies received several
comments concerning this question and answer. One commenter suggested
that, if a lender maintains life-of-loan tracking, there is little
benefit in obtaining a new special flood hazard determination
[[Page 35929]]
when renewing, refinancing, or extending a loan if the original
determination is older than seven years. The authority to rely on a
previous determination made within the previous seven years if that
determination meets certain requirements is statutory (42 U.S.C.
4104b(e)). Accordingly, seven years is the maximum period during which
a lender may rely on a previous determination, even if the lender has
maintained life-of-loan tracking.
Two commenters suggested that the proposed question and answer
should also address whether a lender may rely on one determination if a
lender makes multiple loans to one borrower, all of which are secured
by the same improved property. For example, it should address when a
lender may rely on a single determination when making a home purchase
loan and a subsequent home equity loan, both secured by the same
residence. The situation described by the commenters is similar to the
example of a refinancing or assumption by a lender, which obtained the
original flood determination on the same security property. In that
case, the question and answer states that the lender may rely on the
original determination if the original determination was made not more
than seven years before the date of the transaction, the basis of 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. The Agencies based this interpretation on the
premise that a refinancing would be the functional equivalent of either
a loan extension or renewal. Subsequent loans to the same borrower
secured by the same improved real estate could be deemed to be the
functional equivalent of increasing the amount of the original loan.
Therefore, if the original determination was made not more than seven
years before the date of the transaction, the basis of 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, a lender may similarly rely on a previous
determination if the lender makes multiple loans that are secured by
the same building or mobile home. The Agencies have revised the
proposed question and answer to also address subsequent loans by the
same lender secured by the same improved real estate.
Section XIII. Flood Determination Fees
Proposed Section XIV (final Section XIII) consisted of proposed
questions and answers 62 and 63 (final questions and answers 69 and 70
respectively), which addressed fees charged when making a flood
determination and charging fees to cover life-of-loan monitoring of a
loan, respectively. The Agencies received two comments on these
questions and answers. One commenter supported them; the other
commenter asked whether a lender could charge an up-front,
nonrefundable, composite determination and life-of-loan fee regardless
of whether the loan application closes. The Act and Regulation allow a
lender to charge a reasonable fee for determining whether a building or
mobile home securing a loan is located or will be located in a special
flood hazard area if the determination is made in connection with the
making, increasing, extending, or renewing of a loan that is initiated
by the borrower. In the commenter's situation, the Agencies would agree
that a fee for an initial determination could be charged when the
determination is procured in connection with an application initiated
by an applicant, even if the application does not close. However, a
lender cannot charge a life-of-loan fee if the application does not
close. Such a fee would be an unearned fee and, as such, charging such
a fee would be prohibited by section 8 of RESPA. Therefore, a lender
may not charge a nonrefundable, composite determination and life-of-
loan fee when a loan application does not close. The Agencies have
adopted the former question and answer as proposed. The Agencies have
revised the latter question and answer in response to the comment.
Section XIV. Flood Zone Discrepancies
Proposed Section XV (final Section XIV) addressed flood zone
discrepancies between the flood hazard designation documented by the
lender on the SFHDF and the one documented on the flood insurance
policy and used to rate the policy. There were numerous negative
comments concerning the Agencies' proposed guidance for dealing with
such discrepancies.
Proposed question and answer 64 (final question and answer 71)
addressed lenders' recourse when confronted with a flood zone
discrepancy. Nineteen commenters were generally opposed to the proposed
treatment of a discrepancy as set forth in the proposed question and
answer. Several of these commenters argued that the Act does not
require lenders to identify and resolve flood zone discrepancies and
ensure that a flood insurance policy is properly rated. Other
commenters argued that it is an undue burden to expect financial
institutions to resolve discrepancies between the SFHDF and the flood
insurance policy. Six commenters maintained that it is an insurance
agent's responsibility to determine the correct flood zone and that a
lender should not be responsible for auditing an NFIP-authorized
insurance agent. These commenters argued that requiring lenders to
document every flood zone discrepancy would be costly and burdensome
and require extensive loan servicing system changes.
Two commenters stated that the Agencies need to clearly define
``zone discrepancy.'' Another commenter asked what action would be
required to correct any ``violation'' and further inquired how much
flood insurance should be force placed in such a situation if a lender
wants to correct a discrepancy by means of force placement. Two other
commenters said that a borrower will not want to obtain a Letter of
Determination Review from FEMA at a cost of $80 when there is a dispute
between the lender and insurance company over a flood zone discrepancy,
while three other commenters noted that it is unreasonable to expect
the parties to wait 45 days for a FEMA determination review. Finally,
two commenters noted that if a coverage error occurs, the borrower or
lender may reconcile this through payment of the premium differential
(the amount of premium that would have been charged if the policy had
been correctly rated) or FEMA may reduce the amount of claim payment.
The Agencies disagree with those commenters who argued against a
lender being responsible for resolving flood zone designation
discrepancies, either as a legal matter or because the requirement
would be burdensome and costly. The Agencies agree, and FEMA concurs,
that Federal law places the ultimate responsibility to ensure
appropriate flood insurance coverage on the lender. The Agencies note
that, although coverage errors can be mitigated after a flood loss by
paying premium differentials or reducing the claim payment, these
mitigation techniques do not relieve a lender of the responsibility to
ensure that an appropriate amount of flood insurance coverage is in
place when a loan is made.
Commenters, however, raised valid points with respect to the
proposed process for resolving flood zone
[[Page 35930]]
discrepancies. To address these points, the Agencies have revised final
question and answer 71 to specify that lenders need only address
discrepancies between high-risk zones (Zones A or V) and moderate- or
low-risk zones (Zones B, C, D, or X). The revised question and answer
further specifies the actions a lender should take if such a zone
discrepancy is found to exist. Those steps continue to include
attempting to determine whether the discrepancy is a result of a
legitimate reason, such as grandfathering, or is a mistake. In certain
circumstances, submitting a request for a Determination Review to FEMA
may be an appropriate means of resolving discrepancies; however, it is
not required in all situations. The question and answer explains that
if the discrepancy is not resolved, the lender should send a letter to
the insurance agent and/or the insurance company reminding them of
FEMA's April 16, 2008, instruction that, in cases of determination
discrepancies, the policy should be written to cover the higher risk
zone. Beyond that, no further action by the lender is required. If, for
its own purposes, the lender believes force placement is appropriate,
then it should consult the guidance on that topic found in Sections II
and X.
Proposed question and answer 65 (final question and answer 72),
addressed whether lenders can be found in violation of the Act and
Regulation for flood zone discrepancies. Seven commenters either
registered their opposition to the proposed question and answer or
recommended that it be deleted outright. These commenters argued,
similar to their comments on proposed question and answer 64, that the
lender is the wrong person to resolve flood zone discrepancies, that it
is instead the responsibility of the insurance agent and the company
issuing the flood insurance policy to ensure that the flood zone is
correct, and that imposing this requirement on lenders is an
unnecessary burden not mandated by law. Another commenter argued that
by sanctioning lenders for not successfully identifying and resolving
flood zone discrepancies, the two proposed questions and answers would
create a duty to ensure that the flood policy is rated properly that
does not presently exist under the Act or the Regulation.
As noted above, the Act and the Regulation require lenders to
ensure that an appropriate amount of flood insurance coverage is
purchased; lenders, therefore, should take steps to identify and
address flood zone discrepancies. If a pattern or practice of
unresolved discrepancies is found in a lender's loan portfolio, due to
a lack of effort on the lender's part to resolve such discrepancies
using the process outlined in final question and answer 71, the
Agencies may cite the lender for a violation of the mandatory purchase
requirements.
Section XV. Notice of Special Flood Hazards and Availability of Federal
Disaster Relief
Proposed Section XVI (final Section XV) addressed the notice of
special flood hazards and the availability of Federal disaster relief
that lenders are generally required to provide to borrowers. The
proposed questions and answers primarily proposed only minor wording
changes or clarifications to questions and answers in the 1997
Interagency Questions and Answers without any change in the substance
or meaning.
Proposed question and answer 66 (final question and answer 73),
addressed whether the notice had to be provided to each borrower for
each real estate related loan. The proposed answer explained that in a
transaction involving multiple borrowers, the lender is only required
to send notice to one borrower, but may provide multiple notices if the
lender chooses. The Agencies received a comment on a related issue
asking who should receive the notice if, at the time of increase, real
estate collateral has been hypothecated by a guarantor as security on
the borrower's loan. If a lender takes a security interest in improved
real estate owned by a guarantor (not simply pledged by a guarantor)
located in an SFHA, then flood insurance is required and the notice
should be sent to both the borrower and the guarantor.
Another commenter asked when borrowers have to be notified that
their secured property is in a flood zone. The commenter noted that
their examiners have previously said ten days prior to loan closing. As
noted in the Regulation, lenders are required to provide notice within
a reasonable time before completion of the transaction (loan closing).
What constitutes ``reasonable'' notice will necessarily vary according
to the circumstances of particular transactions. Regulated lending
institutions should bear in mind, however, that a borrower should
receive notice timely enough to ensure that (1) the borrower has the
opportunity to become aware of the borrower's responsibilities under
the NFIP; and (2) where applicable, the borrower can purchase flood
insurance before completion of the loan transaction. In light of these
considerations, the final question and answer does not establish a
fixed time period during which a lender must provide the notice to the
borrower. The Agencies generally continue to regard ten days as a
``reasonable'' time interval. The Agencies adopt the question and
answer as proposed.
Proposed question and answer 67 (final question and answer 74)
addressed how the notice requirement applied to loans secured by mobile
homes where the location of the mobile home may not be known until just
prior to, or sometimes after, the loan closing. The Agencies did not
receive any substantive comments and adopt the question and answer as
proposed.
Proposed question and answer 68 (final question and answer 75),
addressed when the lender is required to provide notice to the loan
servicer that flood insurance is required. Proposed question and answer
69 (final question and answer 76) addressed what constitutes
appropriate notice to the loan servicer. Proposed question and answer
70 (final question and answer 77) addressed whether it was necessary
for the lender to provide notice to a loan servicer affiliated with the
lender. Proposed question and answer 71 (final question and answer 78)
addressed how long a lender has to maintain the record of receipt by
the borrower of the notice. The Agencies received one comment that was
supportive of these proposed questions and answers. The Agencies adopt
the questions and answers as proposed.
Proposed question and answer 72 (final question and answer 79),
addressed whether a lender can rely on a previous notice that is less
than seven years old and was given to the same borrower for the same
property by the same lender. Two commenters stated that lenders should
be able to waive a notice to a borrower when they already have adequate
flood insurance and one commenter said that notice should not be
required when there has not been a change in the flood map. The Act and
Regulation require lenders to send notice when a lender makes,
increases, extends, or renews a loan secured by a building or a mobile
home located or to be located in a special flood hazard area.
Therefore, as a statutory requirement, the notice may not be waived.
The Agencies adopt the question and answer as proposed.
Proposed question and answer 73 (final question and answer 80),
addressed whether the use of the sample form of notice is mandatory.
The Agencies received one comment that was supportive of the proposed
question and answer; however, another commenter asked whether lenders
[[Page 35931]]
should use the revised version of the Sample Form of the Notice
provided by FEMA in 2007 or the sample notice that accompanies the
Regulation. The Agencies do not require the use of a specific form so
long as the form contains the required information as specified by the
Act and Regulation. The Agencies revised the answer, to reflect that
the sample form of the notice provided by FEMA in its Mandatory
Purchase of Flood Insurance Guidelines is also not required to be used.
Section XVI. Mandatory Civil Money Penalties
Proposed Section XVII (final Section XVI) addressed the imposition
of mandatory civil money penalties for violations of the flood
insurance requirements. Proposed question and answer 74 (final question
and answer 81) listed the sections of the Act that trigger mandatory
civil money penalties when examiners find a pattern or practice of
violations of those sections and included information about statutory
limits on the amount of such penalties. The Agencies did not receive
any comments and adopt the question and answer as proposed.
Proposed question and answer 75 (final question and answer 82)
addressed the general standards the Agencies consider when determining
whether violations constitute a pattern or practice for which civil
money penalties are mandatory. The Agencies received one industry trade
group comment suggesting that proposed question and answer 75 be
amended to clarify that the assessment of civil money penalties be
based on an overall assessment of the entire loan portfolio and not
randomly selected representations. The Agencies believe that the
guidance in this question and answer properly sets forth the general
standards the Agencies consider when determining whether a pattern or
practice of violations has occurred. As discussed in the March 2008
Proposed Interagency Questions and Answers, the considerations listed
in the proposed question and answer are not dispositive of individual
cases, but serve as a reference point for reviewing the particular
facts and circumstances. The Agencies adopt the question and answer as
proposed.
Redesignation Table
The following redesignation table is provided as an aid to assist
the public in reviewing the revisions to the 1997 Interagency Questions
and Answers.
------------------------------------------------------------------------
Current questions and
1997 Interagency questions and answers answers
------------------------------------------------------------------------
Section I. Definitions.................... ............................
Section I, Question 1..................... Section IV, Question 20.
Section I, Question 2..................... Section IV, Question 19.
Section I, Question 3..................... Section VII, Question 34.
Section I, Question 4..................... Section VII, Question 35.
Section I, Question 5..................... Section VII, Question 38.
Section I, Question 6..................... Section VII, Question 39;
and Section VII, Question
40.
Section I, Question 7..................... Section VII, Question 41.
Section I, Question 8..................... Section VII, Question 42.
Section I, Question 9..................... Section I, Question 5.
Section I, Question 10.................... Section VII, Question 43.
Section II. Requirement to Purchase Flood ............................
Insurance Where Available.
Section II, Question 1.................... Section I, Question 1.
Section II, Question 2.................... Section I, Question 3.
Section II, Question 3.................... Section I, Question 6.
Section II, Question 4.................... Deleted as obsolete.
Section II, Question 5.................... Section II, Question 15.
Section II, Question 6.................... Section VIII, Question 44.
Section II, Question 7.................... Section II, Question 14; and
Section V, Question 25.
Section II, Question 8.................... Section VI, Question 28.
Section II, Question 9.................... Section VI, Question 31.
Section III. Exemptions................... Section III. Exemptions from
the mandatory flood
insurance requirements.
Section III, Question 1................... Section III, Question 18.
Section IV. Escrow Requirements........... Section IX. Escrow
requirements.
Section IV, Question 1.................... Deleted as obsolete.
Section IV, Question 2.................... Section IX, Question 51.
Section IV, Question 3.................... Section IX, Question 52.
Section IV, Question 4.................... Section IX, Question 53.
Section IV, Question 5.................... Section IX, Question 54.
Section IV, Question 6.................... Section IX, Question 55.
Section IV, Question 7.................... Section IX, Question 56.
Section V. Required Use of Standard Flood Section XII. Required use of
Hazard Determination Form (SFHDF). Standard Flood Hazard
Determination Form (SFHDF).
Section V, Question 1..................... Section XII, Question 65.
Section V, Question 2..................... Section XII, Question 66.
Section V, Question 3..................... Section XII, Question 67.
Section V, Question 4..................... Section XII, Question 68.
Section V, Question 5..................... Section VII, Question 36;
and Section VII, Question
37
Section VI. Force Placement of Flood Section X. Force placement
Insurance. of flood insurance.
Section VI, Question 1.................... Section X, Question 57.
Section VI, Question 2.................... Section X, Question 58.
Section VI, Question 3.................... Section X, Question 59.
Section VII. Determination Fees........... Section XIII. Flood
determination fees.
Section VII Question 1.................... Section XIII, Question 69.
Section VII Question 2.................... Section XIII, Question 70.
Section VIII. Notice of Special Flood Section XV. Notice of
Hazards and Availability of Federal special flood hazards and
Disaster Relief. availability of Federal
disaster relief.
Section VIII, Question 1.................. Section XV, Question 73
Section VIII, Question 2.................. Section XV, Question 74.
Section VIII, Question 3.................. Section XV, Question 75.
Section VIII, Question 4.................. Section XV, Question 76.
Section VIII, Question 5.................. Section XV, Question 77.
Section VIII, Question 6.................. Section XV, Question 78.
Section IX. Notice of Servicer's Identity. Section VIII. Flood
insurance requirements in
the event of the sale or
transfer of a designated
loan and/or its servicing
rights.
Section IX, Question 1.................... Section VIII, Question 45.
Section IX, Question 2.................... Section VIII, Question 46.
Section IX, Question 3.................... Section VIII, Question 47.
Section IX, Question 4.................... Section VIII, Question 48.
Section IX, Question 5.................... Section VIII, Question 49.
Section IX, Question 6.................... Section VIII, Question 50.
Section X Appendix A to the Regulation-- Section XV. Notice of
Sample Form of Notice of Special Flood special flood hazards and
Hazards and Availability of Federal availability of Federal
Disaster Relief Assistance. disaster relief.
Section X, Question 1..................... Section XV, Question 80.
------------------------------------------------------------------------
Proposed Questions and Answers and Request for Comment
The Agencies are proposing five new questions and answers for
public
[[Page 35932]]
comment upon consideration of various comments received on the March
2008 Proposed Interagency Questions and Answers. The new proposed
questions and answers concern the determination of insurable value in
calculating the maximum limit of coverage available for the particular
type of property under the Act and force placement of required flood
insurance. In anticipation of the possible adoption of these proposed
questions and answers, the applicable question and answer numbers have
been reserved and the remaining questions and answers have been
renumbered accordingly.
Insurable value. The Agencies received numerous comments to
proposed question and answer 7 stating that implementing insurable
value was confusing and that the term needed clear and objective
standards. Commenters asked for guidance on the terms ``overall value''
and ``repair or replacement cost'' as they relate to a lender's
determination of the required amount of flood insurance for a
designated loan. Commenters similarly asked the Agencies to define the
term ``actual cash value.'' In response to these comments, the Agencies
are proposing new questions and answers 9 and 10 for public comment to
address how to calculate insurable value. Calculating insurable value
is important because in addition to the maximum caps under the Act, the
Regulation provides that ``flood insurance coverage under the Act is
limited to the overall value of the property securing the designated
loan minus the value of the land on which the property is located.''
The Agencies use the term ``insurable value'' in the proposed question
and answer to mean the overall value minus the value of the land.
FEMA guidelines state that the full insurable value of a building
is the same as 100 percent replacement cost value (RCV) of the insured
building.\9\ Replacement cost value, according to FEMA's Mandatory
Purchase of Flood Insurance Guidelines, is the cost to replace property
with the same kind of material and construction without deduction for
depreciation.\10\ As such, it is important to make clear that the RCV
of a building is not its contributory value to the overall appraised
value of the collateral and does not include any value for any land
that is also part of collateral. When determining the RCV of a
building, lenders (either by themselves or in consultation with the
flood insurance provider or other professionals) should consider the
replacement cost value under a hazard insurance policy, an appraisal
based on a cost-value before depreciation deductions (not a market-
value) approach, and/or a construction cost calculation.
---------------------------------------------------------------------------
\9\ FEMA, Mandatory Purchase of Flood Insurance Guidelines, at
27.
\10\ FEMA, Mandatory Purchase of Flood Insurance Guidelines, at
GLS10.
---------------------------------------------------------------------------
The statutory and regulatory requirement that flood insurance be
obtained in the amount of the lesser of the principal balance of the
designated loan or the maximum limit of coverage available for the
particular type of building under the Act is separate from the amount
of a recovery if the improved property is destroyed by flood. Insurable
value is replacement cost value and would be the amount required for
adequate insurance coverage assuming that amount does not exceed the
principal balance of the designated loan or the maximum limit of
coverage under the Act. Actual cash value, which would be determined by
a claims adjuster at the time of loss, is the amount that will be paid
by the NFIP for nonresidential properties and certain residential
properties. To lessen the effect of a potential difference between the
two values with certain nonresidential buildings, the Agencies, with
FEMA's concurrence, are proposing new questions and answers 9 and 10.
It is important for lenders to recognize that insurable value is
only relevant to the extent that it is lower than either the
outstanding principal balance of the loan or the maximum amount of
insurance available under the NFIP. Therefore, if the insurable value
of a building is the lesser of the outstanding principal balance of the
loan or the maximum amount of insurance allowable under the NFIP, then
the building must be insured at its insurable value, which for single
family, 2-4 family, other residential or nonresidential buildings, is
equivalent to its RCV. The Agencies are proposing new question and
answer 9 to provide more concrete guidance on insurable value.
[rtrif]9. What is the insurable value of a building?
Answer: Per FEMA guidelines, the insurable value of a building is
the same as 100 percent replacement cost value of the insured building.
FEMA's Mandatory Purchase of Flood Insurance Guidelines defines
replacement cost as ``The cost to replace property with the same kind
of material and construction without deduction for depreciation.'' When
determining replacement cost value of a building, lenders (either by
themselves or in consultation with the flood insurance provider or
other professionals) should consider the replacement cost value used in
a hazard insurance policy (recognizing that replacement cost for flood
insurance will include the foundation), an appraisal based on a cost-
value approach before depreciation deductions (not a market-value),
and/or a construction cost calculation.[ltrif]
In considering the comments submitted on the subject of insurable
value, the Agencies recognized that there are situations when insuring
some nonresidential buildings at RCV would result in the building being
over-insured. The Agencies, in consultation with FEMA, are proposing
two alternatives to determine replacement cost value for nonresidential
buildings used for ranching, farming, or industrial purposes, which the
borrower either would not replace if damaged or destroyed by a flood or
would replace with a structure more closely aligned to the function the
building is providing at the time of the flood. Industrial use, as
opposed to the broader commercial use, is defined as those buildings
not directly engaged in the retail and/or wholesale sale of the
business's goods, such as warehouses or storage, manufacturing, or
maintenance facilities.
The first alternative is the ``functional building cost value,''
which is the cost to repair or replace a building with commonly used,
less costly construction materials and methods that are functionally
equivalent to obsolete, antique, or custom construction materials and
methods used in the original construction of the building. Borrowers
and/or lenders can choose this alternative when the building being
insured is important to the business operation and would be replaced if
damaged or destroyed by a flood, but not to its original condition. The
``functional building cost value'' recognizes that insurance to the
replacement cost is not needed as the borrower would not repair or
replace the building back to its original form but to a condition that
represents the function the building is providing to the business
operation.
The second alternative is the ``demolition/removal cost value,''
which is the cost to demolish the remaining structure and remove the
debris after a flood. Borrowers and/or lenders can choose this
alternative when the building being insured is not important to the
business operation and would not be repaired or replaced if damaged or
destroyed by a flood. The ``demolition/removal cost value'' recognizes
that the building has limited-to-no-value and
[[Page 35933]]
that it does not provide an important enough function to necessitate
that the business repair or replace it.
When a borrower or lender chooses one of these two replacement cost
value alternatives they have determined that the building to be insured
will not be insured to its full replacement cost value. Both the
borrower and the lender should ensure that they consider the impact
this may have on the ongoing nature of the business and the value of
the collateral securing the loan. Full replacement cost is always the
preferred insurance amount. These alternatives are available only for
those situations where full replacement cost would result in a building
used for farming, ranching, or industrial purposes being over-insured.
The Agencies are proposing new question and answer 10 to address this
issue.
[rtrif]10. Are there alternative approaches to determining the
insurable value of a building?
Answer: Yes, in the case of buildings used for ranching, farming,
and industrial purposes, insurable value may also be determined by the
functional building cost value or the demolition/removal cost value.
The Agencies recognize that there are situations where insuring some
nonresidential buildings to the replacement cost value will result in
the building being over-insured. Therefore, borrowers and/or lenders
have two alternative approaches to determine the insurable value for
buildings used in ranching, farming, and for industrial purposes when
the borrower would either not replace the building if damaged or
destroyed by a flood or would replace the building with a structure
more closely aligned with the function the building is presently
providing. Industrial use, as opposed to the broader commercial use,
means those buildings not directly engaged in the retail and/or
wholesale sale of the business's goods, such as warehouses, storage,
manufacturing, or maintenance facilities.
The lender may calculate the insurable value as the
``functional building cost value,'' that is, the cost to replace a
building with a lower-cost functional equivalent. The ``functional
building cost value'' is the cost to repair or replace a building with
commonly used, less costly construction materials and methods that are
functionally equivalent to obsolete, antique, or custom construction
materials and methods used in the original construction of the
building. The determination of the appropriate ``functional building
cost value'' amount of insurance should be made by the lender and/or
borrower. This alternative may be chosen when the building is important
to the ongoing nature of the business and would be replaced if damaged
or destroyed in a flood, but not to its original form. For example, a
farming operation would replace an old dairy barn currently used for
storage with a storage building of pole, or some other type of less
costly construction found currently in storage buildings.
The lender may calculate the insurable value as the
``demolition/removal cost value,'' that is the cost to demolish the
remaining structure and remove the debris. The ``demolition/removal
cost value'' may be used when a building is not important to the
ongoing nature of the business and as such would not be replaced if
damaged or destroyed by a flood. The amount of flood insurance should
be calculated by the lender and/or borrower to be at least the cost of
demolition and removal of the insured debris.
Regardless of what method the lender and/or borrower selects to
determine insurable value (replacement cost value or one of the two
alternatives), all terms and conditions of the Standard Flood Insurance
Policy apply including its Loss Settlement provision.[ltrif]
Force placement. In response to comments received regarding the
force placement of flood insurance, the Agencies are proposing new
questions and answers 60, 61, and 62, which would be added to Section X
to address the following force-placement issues: whether a borrower may
be charged for the cost of flood insurance coverage during the 45-day
notice period, when the 45-day notice period should begin, and how soon
a lender should take action after learning that improved real estate
that secures a loan is uninsured or under-insured.
Several commenters requested clarification regarding timing issues
related to the 45-day notice. One commenter requested clarification on
whether the 45-day notice could be sent prior to the actual date of
expiration of flood insurance coverage. The Act and Regulation require
the lender, or its servicer, to send notice to the borrower upon making
a determination that the improved real estate collateral's insurance
coverage has expired or is less than the amount required for that
particular property, such as upon receipt of the notice of cancellation
or expiration from the insurance provider or as a result of an internal
flood policy monitoring system. The borrower must obtain flood
insurance within 45 days after notification by the lender; however, the
45-day period cannot begin until the lender or servicer has sent notice
to the borrower. Furthermore, the Act does not permit a lender or its
servicer to send the 45-day notice to the borrower prior to the actual
expiration date of the flood insurance policy.
Another commenter suggested that flood insurance be force placed
through private insurers since this would allow flood insurance
coverage to be immediately available instead of having to wait 45 days.
Whether the lender plans to force place coverage through FEMA or
private insurers, lenders must allow the borrower 45 days in which to
obtain flood insurance. The Agencies are proposing new question and
answer 60 to address these commenters' issues.
[rtrif]60. Can the 45-day notice period be accelerated by sending
notice to the borrower prior to the actual date of expiration of flood
insurance coverage?
Answer: No. Although a lender or servicer may send a notice warning
a borrower that flood insurance on the collateral is about to expire,
the Act and Regulation do not allow a lender or its servicer to shorten
the 45-day force-placement notice period by sending notice to the
borrower prior to the actual expiration date of the flood insurance
policy. The Act provides that a lender or its servicer must notify a
borrower if it determines that the improved real estate collateral's
insurance coverage has expired or is less than the amount required for
that particular property. 42 U.S.C. 4012a(e). A lender must send the
notice upon making a determination that the flood insurance coverage is
inadequate or has expired, such as upon receipt of the notice of
cancellation or expiration from the insurance provider or as a result
of an internal flood policy monitoring system. This notice must allow
the borrower 45 days in which to obtain flood insurance.[ltrif]
Three commenters asserted that it would be appropriate for the
Agencies to allow a reasonable period to implement force placement
after the end of the 45-day notice period. 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. Given that the lender is already aware during the
45-day notice period that it may be required to force place insurance
if there is no response from the borrower, any delay should be brief.
Where there is a brief delay in force placing required insurance, the
Agencies will expect the lender to provide a reasonable explanation for
the delay. The Agencies
[[Page 35934]]
are proposing new question and answer 61 to address these commenters'
concern.
One commenter suggested that a lender's procurement of the flood
insurance binder should be acceptable under the Act and Regulation to
satisfy the force placement requirement. The Agencies believe that the
insurance binder may provide a reasonable explanation for a delay in
force placing the formal flood insurance policy. However, an insurance
binder is proof only of temporary coverage for a limited period of time
until the formal insurance policy is either accepted or denied. Lenders
should have sufficient internal controls in place to ensure that if a
formal policy is not issued, it should force place required insurance
immediately.
[rtrif]61. When must the lender have flood insurance in place if the
borrower has not obtained adequate insurance within the 45-day notice
period?
Answer: 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. However,
where there is a brief delay in force placing required insurance, the
Agencies will expect the lender to provide a reasonable explanation for
the delay.[ltrif]
Two commenters asked whether it is permissible to charge a borrower
for the cost of insurance during all or a portion of the 45-day notice
period. Regardless of whether the flood insurance coverage is obtained
through FEMA or by private means, under the Act and Regulation, lenders
may not impose the cost of coverage for that 45-day period at any time.
The Agencies are proposing new question and answer 62 to address this
comment.
[rtrif]62. Does a lender or its servicer have the authority to charge a
borrower for the cost of insurance coverage during the 45-day notice
period?
Answer: No. There is no authority under the Act and Regulation to
charge a borrower for a force-placed flood insurance policy until the
45-day notice period has expired. The ability to impose the costs of
force placed flood insurance on a borrower commences 45 days after
notification to the borrower of a lack of insurance or of inadequate
insurance coverage. Therefore, lenders may not charge borrowers for
coverage during the 45-day notice period. This holds true regardless of
whether the force placed flood insurance is obtained through the NFIP
or a private provider.[ltrif]
Public Comments
The Agencies specifically invite public comment on the proposed new
questions and answers. If financial institutions, bank examiners,
community groups, or other interested parties have unanswered questions
or comments about the Agencies' flood insurance regulation, they should
submit them to the Agencies. The Agencies will consider including these
questions and answers in future guidance.
Solicitation of Comments Regarding the Use of ``Plain Language''
Section 722 of the Gramm-Leach-Bliley Act of 1999, 12 U.S.C. 4809,
requires the Federal banking Agencies to use ``plain language'' in all
proposed and final rules published after January 1, 2000. Although this
document is not a proposed rule, comments are nevertheless invited on
whether the proposed questions and answers are stated clearly and how
they might be revised to be easier to read.
The text of the Interagency Questions and Answers follows:
Interagency Questions and Answers Regarding Flood Insurance
The Interagency Questions and Answers are organized by topic. Each
topic addresses a major area of the Act and Regulation. 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 (codified at 42 U.S.C. 4001 et seq.).
``Regulation'' refers to each agency's current final rule.\11\ The OCC,
Board, FDIC, OTS, NCUA, and FCA (collectively, ``the Agencies'') are
providing answers to questions pertaining to the following topics:
---------------------------------------------------------------------------
\11\ The Agencies' rules are codified at 12 CFR part 22 (OCC),
12 CFR part 208 (Board), 12 CFR part 339 (FDIC), 12 CFR part 572
(OTS), 12 CFR part 614 (FCA), and 12 CFR part 760 (NCUA).
I. Determining When Certain Loans Are Designated Loans for Which
Flood Insurance Is Required Under the Act and Regulation
II. Determining the Appropriate Amount of Flood Insurance Required
Under the Act and Regulation
III. Exemptions From the Mandatory Flood Insurance Requirements
IV. Flood Insurance Requirements for Construction Loans
V. Flood Insurance Requirements for Nonresidential Buildings
VI. Flood Insurance Requirements for Residential Condominiums
VII. Flood Insurance Requirements for Home Equity Loans, Lines of
Credit, Subordinate Liens, and Other Security Interests in
Collateral Located in an SFHA
VIII. Flood Insurance Requirements in the Event of the Sale or
Transfer of a Designated Loan and/or Its Servicing Rights
IX. Escrow Requirements
X. Force Placement of Flood Insurance
XI. Private Insurance Policies
XII. Required Use of Standard Flood Hazard Determination Form
(SFHDF)
XIII. Flood Determination Fees
XIV. Flood Zone Discrepancies
XV. Notice of Special Flood Hazards and Availability of Federal
Disaster Relief
XVI. Mandatory Civil Money Penalties
I. Determining When Certain Loans Are Designated Loans for Which Flood
Insurance Is Required Under the Act and Regulation
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)?
Answer: Yes. The Regulation does apply; however, a lender need not
require borrowers to obtain flood insurance for a building or mobile
home located in a community that does not participate in the NFIP, even
if the building or mobile home securing the loan is located in a
Special Flood Hazard Area (SFHA). Nonetheless, a lender, using the
standard Special Flood Hazard Determination Form (SFHDF), must still
determine whether the building or mobile home is located in an SFHA. If
the building or mobile home is determined to be located in an SFHA, a
lender is required to notify the borrower. In this case, a lender,
generally, may make a conventional loan without requiring flood
insurance, if it chooses to do so. However, a lender may not make a
government-guaranteed or insured loan, such as a Small Business
Administration, Veterans Administration, or Federal Housing
Administration loan secured by a building or mobile home located in an
SFHA in a community that does not participate in the NFIP. See 42
U.S.C. 4106(a). Also, a lender is responsible for exercising sound risk
management practices to ensure that it does not make a loan secured by
a building or mobile home located in an SFHA where no flood insurance
is available, if doing so would be an unacceptable risk.
2. What is a lender's responsibility if a particular building or mobile
home that secures a loan, due to a map change, is no longer located
within an SFHA?
Answer: The lender is no longer obligated to require mandatory
flood insurance; however, the borrower can
[[Page 35935]]
elect to convert the existing NFIP policy to a Preferred Risk Policy.
For risk management purposes, the lender may, by contract, continue to
require flood insurance coverage.
3. Does 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, from another lender trigger any requirements under the Regulation?
Answer: 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, generally, are triggered when a lender makes, increases,
extends, or renews a designated loan. A lender's purchase of a loan
does not fall within any of those categories.
However, if a lender becomes aware at any point during the life of
a designated loan that flood insurance is required, the lender must
comply with the Regulation, including force placing insurance, if
necessary. Depending upon the circumstances, safety and soundness
considerations may sometimes necessitate such due diligence upon
purchase of a loan as to put the lender on notice of lack of adequate
flood insurance. If the purchasing lender subsequently extends,
increases, or renews a designated loan, it must also comply with the
Regulation.
4. How do the Agencies enforce the mandatory purchase requirements
under the Act and Regulation when a lender participates in a loan
syndication or participation?
Answer: As with purchased loans, 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 Act or
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, safety and soundness
considerations may sometimes necessitate that the lender undertake due
diligence 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 all be subject to the requirements of Act or Regulation.
Federal flood insurance requirements would also apply to those
situations where such a group of lenders decides to extend, renew or
increase a loan. Although the agreement among the lenders may assign
compliance duties to a lead lender or agent, and include clauses in
which the lead lender or agent indemnifies participating lenders
against flood losses, each participating lender remains individually
responsible for ensuring compliance with the Act and Regulation.
Therefore, the Agencies will examine whether the regulated institution/
participating lender has performed upfront due diligence to ensure both
that 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 to ensure compliance with flood insurance requirements over the
term of the loan.
5. Does the Regulation apply to loans that are being restructured or
modified?
Answer: 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.
6. Are table funded loans treated as new loan originations?
Answer: Yes. Table funding, as defined under HUD's Real Estate
Settlement Procedure Act (RESPA) rule, 24 CFR 3500.2, is a settlement
at which a loan is funded by a contemporaneous advance of loan funds
and the assignment of the loan to the person advancing the funds. A
loan made through a table funding process is treated as though the
party advancing the funds has originated the loan. The funding party is
required to comply with the Regulation. The table funding lender can
meet the administrative requirements of the Regulation by requiring the
party processing and underwriting the application to perform those
functions on its behalf.
7. Is a lender required 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?
Answer: No. Apart from the requirements mandated when a loan is
made, increased, extended, or renewed, a regulated lender need only
review and take action on any part of its existing portfolio for safety
and soundness purposes, or if it knows or has reason to know of the
need for NFIP coverage. Regardless of the lack of such requirement in
the Act and Regulation, however, sound risk management practices may
lead a lender to conduct scheduled periodic reviews that track the need
for flood insurance on a loan portfolio.
II. Determining the Appropriate Amount of Flood Insurance Required
Under the Act and Regulation
8. 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''?
Answer: ``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 single-family and two-to-four
family dwellings and other residential buildings located in a
participating community under the regular program, the maximum cap is
$250,000. For nonresidential structures located in a participating
community under the regular program, the maximum cap is $500,000. (In
participating communities that are under the emergency program phase,
the caps are $35,000 for single-family and two-to-four family dwellings
and other residential structures, and $100,000 for nonresidential
structures).
In addition to the maximum caps under the NFIP, the Regulation also
provides that ``flood insurance coverage under the Act is limited to
the overall value of the property securing the designated loan minus
the value of the land on which the property is located,'' which is
commonly referred to as the ``insurable value'' of a structure. The
NFIP does not insure land; therefore, land values should not be
included in the calculation.
An NFIP policy will not cover an amount exceeding the ``insurable
value'' of the structure. 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
[[Page 35936]]
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).
9. What is insurable value?
Answer: [Reserved]
10. Are there any alternatives to the definition of insurable value?
Answer: [Reserved]
11. What are examples of residential buildings?
Answer: Residential buildings include one-to-four family dwellings;
apartment or other residential buildings containing more than four
dwelling units; condominiums and cooperatives in which at least 75
percent of the square footage is residential; hotels or motels where
the normal occupancy of a guest is six months or more; and rooming
houses that have more than four roomers. A residential building may
have incidental nonresidential use, such as an office or studio, as
long as the total area of such incidental occupancy is limited to less
than 25 percent of the square footage of the building, or 50 percent
for single-family dwellings.
12. What are examples of nonresidential buildings?
Answer: Nonresidential buildings include those used for small
businesses, churches, schools, farm activities (including grain bins
and silos), pool houses, clubhouses, recreation, mercantile structures,
agricultural and industrial structures, warehouses, hotels and motels
with normal room rentals for less than six months' duration, nursing
homes, and mixed-use buildings with less than 75 percent residential
square footage.
13. How much insurance is required on a building located in an SFHA in
a participating community?
Answer: 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:
[cir] The maximum limit available for the type of structure; or
[cir] The ``insurable value'' of the structure.
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 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.
14. 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?
Answer: Yes. The lender must determine the amount of insurance
required on each building and add these individual amounts together.
The total amount of required flood insurance is the lesser of:
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 have some coverage.
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 (nonresidential buildings); or
[cir] Insurable value (for each nonresidential building for
which insurance is required, which is $100,000, 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 by flood insurance.
15. If the insurable value of a building or mobile home, located in an
SFHA in which flood insurance is available under the Act, 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?
Answer: 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 overall value of the property securing the designated
loan minus the value of the land on which the building or mobile home
is located. Since the NFIP policy does not cover land value, lenders
should determine the amount of insurance necessary based on the
insurable value of the improvements.
16. Can a lender require more flood insurance than the minimum required
by the Regulation?
Answer: Yes. Lenders are permitted to require more flood insurance
coverage than required by the Regulation. The borrower or lender may
have to seek such coverage outside the NFIP. Each 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. However, lenders should avoid creating situations
where a building is ``over-insured.''
17. Can a lender allow the borrower to use the maximum deductible to
reduce the cost of flood insurance?
Answer: Yes. However, it is not a sound business practice for a
lender to allow the borrower to use the maximum deductible amount in
every situation. 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
[[Page 35937]]
the mandatory purchase requirement for flood insurance.
III. Exemptions From the Mandatory Flood Insurance Requirements
18. What are the exemptions from coverage?
Answer: There are only two exemptions from the purchase
requirements. The first applies to State-owned property covered under a
policy of self-insurance satisfactory to the Director of FEMA. The
second applies if both the original principal balance of the loan is
$5,000 or less, and the original repayment term is one year or less.
IV. Flood Insurance Requirements for Construction Loans
19. Is a loan secured only by land that 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?
Answer: No. A designated loan is defined as a loan secured by a
building or mobile home that is located or to be located in an SFHA in
which flood insurance is available under the Act. Any loan secured only
by land that is located in an SFHA in which flood insurance is
available is not a designated loan since it is not secured by a
building or mobile home.
20. 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?
Answer: Yes. Therefore, a lender must always make a flood
determination prior to loan origination to determine whether a building
to be constructed that is security for the loan is located or will be
located in an SFHA in which flood insurance is available under the Act.
If so, then the loan is a designated loan and the lender must provide
the requisite notice to the borrower prior to loan origination that
mandatory flood insurance is required. The lender must then comply with
the mandatory purchase requirement under the Act and Regulation.
21. 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?
Answer: Yes. FEMA's Flood Insurance Manual, under general rules,
states:
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.
FEMA, Flood Insurance Manual at p. GR 4 (FEMA's Flood Insurance
Manual is updated every six months). The definition section of the
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.'' FEMA, Flood Insurance Manual, at p.
DEF 9. While 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.
22. 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?
Answer: 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. One way for lenders 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 is to
require borrowers to have a flood insurance policy in place at the time
of loan origination.
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 elevation certificate 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.\12\ However, the lender must
require the borrower to have flood insurance 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) on the property securing the loan. If the lender elects this
approach and does not require flood insurance to be obtained at loan
origination, then it must have adequate internal controls in place at
origination to ensure that the borrower obtains flood insurance no
later than when the foundation slab has been poured and/or an elevation
certificate has been issued.
---------------------------------------------------------------------------
\12\ FEMA, Mandatory Purchase of Flood Insurance Guidelines, at
30.
---------------------------------------------------------------------------
23. Does the 30-day waiting period apply when the purchase of the flood
insurance policy is deferred in connection with a construction loan?
Answer: No. The NFIP will rely on an insurance agent's
representation on the application for flood insurance that the purchase
of insurance has been properly deferred unless there is a loss during
the first 30 days of the policy period. In that case, the NFIP will
require documentation of the loan transaction, such as settlement
papers, before adjusting the loss.
V. Flood Insurance Requirements for Nonresidential Buildings
24. Some borrowers have buildings with limited utility or value and, in
many cases, the borrower would not replace them if lost in a flood. Is
a lender required to mandate flood insurance for such buildings?
Answer: Yes. Under the Regulation, lenders must require flood
insurance on real estate improvements when those improvements are part
of the property securing the loan and are located in an SFHA and in a
participating community.
The lender may consider ``carving out'' buildings from the security
it takes on the loan. However, the lender should fully analyze the
risks of this option. In particular, a lender should consider whether
it would be able to market the property securing its loan in the event
of foreclosure. Additionally, the lender should consider any local
zoning issues or other issues that would affect its collateral.
[[Page 35938]]
25. What are a lender's requirements under the Regulation for a loan
secured by multiple buildings located throughout a large geographic
area where 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 several jurisdictions or counties where some
of the communities participate in the NFIP and others do not?
Answer: A lender is required to make a determination as to whether
the improved real property securing the loan is in an SFHA. If secured
improved real estate is located in an SFHA, but not in a participating
community, no flood insurance is required, although a lender can
require the purchase of flood insurance (from a private insurer) as a
matter of safety and soundness. Conversely, where secured improved real
estate is located in a participating community but not in an SFHA, no
insurance is required. A lender must provide appropriate notice and
require the purchase of flood insurance for designated loans located in
an SFHA in a participating community.
VI. Flood Insurance Requirements for Residential Condominiums
26. Are residential condominiums, including multi-story condominium
complexes, subject to the statutory and regulatory requirements for
flood insurance?
Answer: 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. The mandatory purchase requirements also apply
to loans secured by other condominium property, such as loans to a
developer for construction of the condominium or loans to a condominium
association.
27. What is an NFIP Residential Condominium Building Association Policy
(RCBAP)?
Answer: 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 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.
28. 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 condominium complexes, to comply with the
mandatory purchase requirements under the Act and the Regulation?
Answer: 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.
Effective October 1, 2007, FEMA required agents to provide on the
declaration 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 declaration
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
believes that the borrower is underinsured, it should require the
purchase of a Dwelling Policy for supplemental coverage.
Assuming that the outstanding principal balance of the loan is
greater than the maximum amount of coverage available under the NFIP,
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 a dwelling policy if there is no RCBAP, as
explained in question and answer 29, 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 question and answer 30.
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
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)).
The guidance in this question and answer will apply to any loan
that is made, increased, extended, or renewed after the effective
date of this revised guidance. This revised guidance will not apply
to any loans made prior to the effective date of this guidance until
a trigger event occurs (that is, the loan is refinanced, extended,
increased, or renewed) in connection with the loan. Absent a new
trigger event, loans made prior to the effective date of this new
guidance will be considered compliant if they complied with the
Agencies' previous guidance, which stated that an RCBAP that
provided 80 percent RCV coverage was sufficient.
29. What action must a lender take if there is no RCBAP coverage?
Answer: If there is no RCBAP, either because the condominium
association will not obtain a policy or because individual unit owners
are responsible for obtaining their own insurance, then the lender must
require the individual unit owner/borrower to obtain a dwelling policy
in an amount sufficient to meet the requirements outlined in Question
28.
A dwelling policy is available for condominium unit owners'
purchase when there is no or inadequate RCBAP
[[Page 35939]]
coverage. When coverage by an RCBAP is inadequate, the dwelling policy
may provide individual unit owners with supplemental building coverage
to the RCBAP. The RCBAP and the dwelling policy 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.
Example: The lender makes a loan in the principal amount of
$175,000 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,
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 a flood insurance dwelling policy in the amount of at least
$175,000, since there is no RCBAP, to satisfy the Regulation's
mandatory flood insurance 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).)
30. 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?
Answer: If the lender determines that flood insurance coverage
purchased under the 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 question and answer 28). If the
condominium association does not obtain sufficient coverage, then the
lender must require the individual unit owner/borrower to purchase a
dwelling policy in an amount sufficient to meet the Regulation's flood
insurance requirements. The amount of coverage under the dwelling
policy 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 requirements (see question
and answer 29).
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 is $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 a flood insurance dwelling policy in the amount of $40,000
to satisfy the Regulation's mandatory flood insurance 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 dwelling
policy that provides for adequate flood insurance coverage under the
Regulation will satisfy the Regulation's mandatory flood insurance
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. The dwelling policy provides individual
unit owners with supplemental building coverage 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.
The risk arises because the individual unit owner's dwelling policy
may contain claim limitations that prevent the dwelling policy from
covering the individual unit owner's share of the co-insurance penalty,
which is triggered when the amount of insurance under the RCBAP is less
than 80 percent of the building's replacement cost value at the time of
loss. In addition, following a major flood loss, the insured unit owner
may have to rely upon the condominium association's and other unit
owners' financial ability to make the necessary repairs to common
elements in the building, such as electricity, heating, plumbing, and
elevators. It is incumbent on the lender to understand these
limitations.
31. 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?
Answer: 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. 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 requirement (see
question and answer 28). Failing that, the lender must require the
individual unit owner/borrower to obtain a flood insurance dwelling
policy in an amount sufficient to meet the Regulation's mandatory flood
insurance requirement (see questions and answers 29 and 30). 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.
32. How does the RCBAP's co-insurance penalty apply in the case of
residential condominiums, including those located in multi-story
condominium complexes?
Answer: 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 co-insurance penalty, is determined as follows
(subject to all other relevant conditions in this 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
[[Page 35940]]
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 co-insurance 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). Unit owners' dwelling policies
will not cover any assessment that may be imposed to cover the costs
of repair that are not covered by the RCBAP.
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 co-insurance penalty)
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.
33. What are the major factors involved with the individual unit
owner's dwelling policy's coverage limitations with respect to the
condominium association's RCBAP coverage?
Answer: The following examples demonstrate how the unit owner's
dwelling policy may cover in certain loss situations:
Example 1: (RCBAP insured to at least 80 percent of building
replacement cost).
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: (RCBAP insured to less than 80 percent of building
replacement cost).
If the unit owner purchases building coverage under the
dwelling policy and there is an RCBAP that was insured to less than
80 percent of the building replacement cost value at the time of
loss, the loss assessment coverage cannot be used to reimburse the
association for its co-insurance penalty.
Loss assessment is available only to cover the building
damages in excess of the 80-percent required amount at the time of
loss. Thus, the covered damages to the condominium association
building must be greater than 80 percent of the building replacement
cost value at the time of loss before the loss assessment coverage
under the dwelling policy becomes available. Under the dwelling
policy, covered repairs to the unit, if applicable, would have
priority in payment over loss assessments against the unit owner.
Example 3: (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 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.
VII. Flood Insurance Requirements for Home Equity Loans, Lines of
Credit, Subordinate Liens, and Other Security Interests in Collateral
Located in an SFHA
34. Is a home equity loan considered a designated loan that requires
flood insurance?
Answer: 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.
35. 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?
Answer: 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. 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 response to question 68
in Section XIII. Required use of Standard Flood Hazard Determination
Form.)
36. 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?
Answer: 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 a residential building and $500,000 for a nonresidential building),
or the insurable value of the building or mobile home. The junior
lienholder should also ensure that the borrower adds the junior
lienholder's name as mortgagee/loss payee to the 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.
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 lienholders, and the borrower. In the limited
situation where a junior lienholder or its servicer is unable to
[[Page 35941]]
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 $70,000
loss payment towards the insurable value of $90,000.
37. 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?
Answer: 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. In either situation, the lender will need to determine whether
the amount of insurance in force 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.
38. 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?
Answer: 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 such loan'' is covered by flood insurance for the term of the
loan. In this example, the collateral is not the type that could secure
a designated loan because it does not include a building or mobile
home; rather, the collateral is the inventory alone.
39. 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?
Answer: Yes. Flood insurance is required for the building located
in the SFHA and any contents stored in that building.
Example: Lender A makes a loan for $200,000 that is secured by a
warehouse with an insurable value of $150,000 and 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 $200,000.
40. 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?
Answer: 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.
41. Does the Regulation apply where the lender takes a security
interest in a building or mobile home located in an SFHA only as an
``abundance of caution''?
Answer: Yes. The Act and Regulation look to the collateral securing
the loan. If the lender takes a security interest in improved real
estate located in an SFHA, then flood insurance is required.
42. 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?
Answer: No. A designated loan is a loan secured by a building or
mobile home. In this example, the lender did not take a security
interest in the building; therefore, the loan is not a designated loan.
43. 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?
Answer: Yes. The making of a loan on condition of a personal
guarantee by a third party and further secured by improved real estate,
which is located in
[[Page 35942]]
an SFHA, owned by that third party is so closely tied to the making of
the loan that it is considered a designated loan that requires flood
insurance.
VIII. Flood Insurance Requirements in the Event of the Sale or Transfer
of a Designated Loan and/or Its Servicing Rights
44. How do the flood insurance requirements under the Regulation apply
to regulated 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?
Answer: 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. Once the regulated lender has sold the loan and the
servicing rights, the lender has no further obligation regarding flood
insurance on the loan.
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. 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.
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, as described in the preamble to the Regulation 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 will maintain compliance with the flood
insurance requirements.
Scenario 2: A nonregulated 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 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?
Answer: 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 any requirements under the Regulation, such as making a new
flood determination or requiring a borrower to purchase flood
insurance. The Regulation's requirements are triggered when a regulated
lender makes, increases, extends, or renews a designated loan. 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,
then the regulated lender must comply with the Regulation, including
force placing insurance, if necessary. Depending upon the
circumstances, safety and soundness considerations may sometimes
necessitate that the lender undertake sufficient due diligence upon
purchase of a loan as to put the lender on notice of lack of adequate
flood insurance. If the purchasing lender subsequently extends,
increases, or renews a designated loan, it must also comply with the
Act and Regulation.
Where a regulated lender purchases only the servicing rights to a
loan originated by a nonregulated lender, the regulated lender is
obligated only 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.
45. When a regulated lender makes a designated loan and will be
servicing that loan, what are the requirements for notifying the
Director of FEMA or the Director's designee?
Answer: FEMA stated in a June 4, 1996, letter that the Director's
designee is the insurance company issuing the flood insurance policy.
The borrower's purchase of a policy (or the regulated lender's force
placement of a policy) will constitute notice to FEMA when the
regulated lender is servicing that loan.
In the event the servicing is subsequently transferred to a new
servicer, the regulated 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.
46. Would a RESPA Notice of Transfer sent to the Director of FEMA (or
the Director's designee) satisfy the regulatory provisions of the Act?
Answer: 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.
47. Can delivery of the notice be made electronically, including batch
transmissions?
Answer: Yes. The Regulation specifically permits transmission by
electronic means. A timely batch transmission of the notice would also
be permissible, if it is acceptable to the Director's designee.
[[Page 35943]]
48. If the loan and its servicing rights are sold by the regulated
lender, is the regulated lender required to provide notice to the
Director or the Director's designee?
Answer: Yes. 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.
49. Is a regulated lender required to provide notice when the servicer,
not the regulated lender, sells or transfers the servicing rights to
another servicer?
Answer: No. After servicing rights are sold or transferred,
subsequent notification obligations are the responsibility of the new
servicer. The obligation of the regulated lender to notify the Director
or the Director's designee of the identity of the servicer transfers to
the new servicer. The duty to notify the Director or the Director's
designee of any subsequent sale or transfer of the servicing rights and
responsibilities belongs to that servicer. For example, a financial
institution makes and services the loan. It then sells the loan in the
secondary market and also sells the servicing rights to a mortgage
company. The financial institution notifies the Director's designee 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 Director's designee. If the mortgage company later sells the
servicing rights to another firm, the mortgage company, not the
financial institution, is responsible for notifying the Director's
designee of the identity of the new servicer.
50. In the event of a merger or acquisition of one lending institution
with another, what are the responsibilities of the parties for
notifying the Director's designee?
Answer: If an institution is acquired by or merges with another
institution, the duty to provide notice for the loans being serviced by
the acquired institution will fall to the successor institution in the
event that notification is not provided by the acquired institution
prior to the effective date of the acquisition or merger.
IX. Escrow Requirements
51. 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?
Answer: ``Residential improved real estate'' is defined under the
Regulation as ``real estate upon which a home or other residential
building is located or to be located.'' A loan secured by residential
improved real estate located or to be located in an SFHA in which flood
insurance is available is a designated loan. Lenders are required to
escrow flood insurance premiums and fees for mandatory flood insurance
for such loans if the lender requires the escrow of taxes, hazard
insurance premiums or any other charges for loans secured by
residential improved real estate. A lender is not required to escrow
flood insurance premiums and fees for a particular loan if it does not
require escrowing of any other charges for that loan.
Multi-family buildings. 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. Single-
family dwellings (including mobile homes), two-to-four family
dwellings, and multi-family properties containing five or more
residential units are covered under the Act's escrow provisions. If the
building securing the loan meets the Regulation's definition of
residential improved real estate and the lender requires the escrow of
any other charges such as taxes or hazard insurance premiums, then the
lender is required to also escrow premiums and fees for flood
insurance.
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 questions and answers 11 and
12 for guidance on residential and nonresidential buildings.) If the
primary use of a mixed-use property is for residential purposes, the
Regulation's escrow requirements apply.
52. When must escrow accounts be established for flood insurance
purposes?
Answer: If a lender requires the escrow of taxes, insurance
premiums, fees, or any other charges for a loan secured by residential
improved real estate or a mobile home, the lender must also require the
escrow of all flood insurance premiums and fees. When administering
loans secured by one-to-four family dwellings, lenders should look to
the definition of ``Federally related mortgage loan'' contained in the
Real Estate Settlement Procedures Act (RESPA) to see whether a
particular loan is subject to the escrow requirements in Section 10 of
RESPA. (This includes individual units of condominiums. Individual
units of cooperatives, although covered by Section 10 of RESPA, are not
insurable under the NFIP and are not covered by the Regulation.) Loans
on multi-family dwellings with five or more units are not covered by
RESPA requirements. Pursuant to the Regulation, however, lenders must
escrow premiums and fees for any required flood insurance if the lender
requires escrows for other purposes, such as hazard insurance or taxes.
53. Do voluntary escrow accounts established at the request of the
borrower trigger a requirement for the lender to escrow premiums for
required flood insurance?
Answer: No. If escrow accounts for other purposes are established
at the voluntary request of the borrower, the lender is not required to
establish escrow accounts for flood insurance premiums. Examiners
should review the loan policies of the lender and the underlying legal
obligation between the parties to the loan to determine whether the
accounts are, in fact, voluntary. For example, when a lender's loan
policies require borrowers to establish escrow accounts for other
purposes and the contractual obligation permits the lender to establish
escrow accounts for those other purposes, the lender will have the
burden of demonstrating that an existing escrow was made pursuant to a
voluntary request by the borrower.
54. Will premiums paid for credit life insurance, disability insurance,
or similar insurance programs be viewed as escrow accounts requiring
the escrow of flood insurance premiums?
Answer: No. Premiums paid for these types of insurance policies
will not trigger the escrow requirement for flood insurance premiums.
55. Will escrow-type accounts for commercial loans, secured by multi-
family residential buildings, trigger the escrow requirement for flood
insurance premiums?
Answer: It depends. Escrow-type accounts established in connection
with the underlying agreement between the buyer and seller, or that
relate to the commercial venture itself, such as ``interest reserve
accounts,'' ``compensating balance accounts,'' ``marketing accounts,''
and similar accounts are not the type of accounts that constitute
escrow accounts for the purpose of the Regulation. However, escrow
accounts established for the protection of the property, such as
escrows for hazard insurance premiums or local real estate taxes, are
the types of escrow accounts that trigger the
[[Page 35944]]
requirement to escrow flood insurance premiums.
56. Which requirements for escrow accounts apply to properties
adequately covered by RCBAPs?
Answer: RCBAPs (Residential Condominium Building Association
Policies) are policies purchased by the condominium association on
behalf of itself and the individual unit owners in the condominium. 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 dues to the condominium
association apply to the RCBAP premiums, an escrow account is not
required. However, if the RCBAP coverage is inadequate and the unit is
also covered by a dwelling form policy, premiums for the dwelling form
policy would need to be escrowed if the lender requires escrow for
other purposes, such as hazard insurance or taxes. Lenders should
exercise due diligence with respect to continuing compliance with the
insurance requirements on the part of the condominium association.
X. Force Placement of Flood Insurance
57. What is the requirement for the force placement of flood insurance
under the Act and Regulation?
Answer: The Act and Regulation require a lender to force place
flood insurance, if all of the following circumstances occur:
The lender determines at any time during the life of the
loan that the property securing the loan is located in an SFHA;
Flood insurance under the Act is available for improved
property securing the loan;
The lender determines that flood insurance coverage is
inadequate or does not exist; and
After required notice, the borrower fails to purchase the
appropriate amount of coverage.
The Act and Regulation require the lender, or its servicer, to send
notice to the borrower upon making a determination that the improved
real estate collateral's insurance coverage has expired or is less than
the amount required for that particular property, such as upon receipt
of the notice of cancellation or expiration from the insurance
provider. The notice to the borrower must also state that if the
borrower does not obtain the insurance within the 45-day period, the
lender will purchase the insurance on behalf of the borrower and may
charge the borrower for the cost of premiums and fees to obtain the
coverage. The Act does not permit a lender or its servicer to send the
required 45-day notice to the borrower prior to making a determination
that flood insurance coverage is inadequate. If adequate insurance is
not obtained by the borrower within the 45-day notice period, then the
lender must purchase insurance on the borrower's behalf. Standard
Fannie Mae/Freddie Mac documents permit the servicer or lender to add
those charges to the principal amount of the loan.
FEMA developed the Mortgage Portfolio Protection Program (MPPP) to
assist lenders in connection with force placement procedures. FEMA
published these procedures in the Federal Register on August 29, 1995
(60 FR 44881). Appendix A of FEMA's September 2007 Mandatory Purchase
of Flood Insurance Guidelines sets out the MPPP Guidelines and
Requirements, including force placement procedures and examples of
notification letters to be used in connection with the MPPP.
58. Can a servicer force place on behalf of a lender?
Answer: Yes. Assuming the statutory prerequisites for force
placement are met, and subject to the servicing contract between the
lender and the servicer, the Act clearly authorizes servicers to force
place flood insurance on behalf of the lender, following the procedures
set forth in the Regulation.
59. When force placement occurs, what is the amount of insurance
required to be placed?
Answer: The amount of flood insurance coverage required is the same
regardless of how the insurance is placed. (See Section II. Determining
the appropriate amount of flood insurance required under the Act and
Regulation and also Section VII. Flood Insurance Requirements for Home
Equity Loans, Lines of Credit, Subordinate Liens, and Other Security
Interests in Collateral Located in an SFHA.)
60. Can the 45-day notice period be accelerated by sending notice to
the borrower prior to the actual date of expiration of flood insurance
coverage?
Answer: [Reserved]
61. Is a reasonable period of time allowed after the end of the 45-day
notice period for a lender or its servicer to implement force
placement?
Answer: [Reserved]
62. Does a lender or its servicer have the authority to charge a
borrower for the cost of insurance coverage during the 45-day notice
period?
Answer: [Reserved]
XI. Private Insurance Policies
63. May a lender rely on a private insurance policy to meet its
obligation to ensure that its designated loans are covered by an
adequate amount of flood insurance?
Answer: It depends. A private insurance policy may be an adequate
substitute for NFIP insurance if it meets the criteria set forth by
FEMA in its Mandatory Purchase of Flood Insurance Guidelines.
Similarly, a private insurance policy may be used to supplement NFIP
insurance for designated loans where the property is underinsured if it
meets the criteria set forth by FEMA in its Mandatory Purchase of Flood
Insurance Guidelines. FEMA states that, to the extent that a private
policy differs from the NFIP Standard Flood Insurance Policy, the
differences should be carefully examined before the policy is accepted
as sufficient protection under the law. FEMA also states that the
suitability of private policies need only be considered when the
mandatory purchase requirement applies.
64. When may a lender rely on a private insurance policy that does not
meet the criteria set forth by FEMA?
Answer: A lender may rely on a private insurance policy that does
not meet the criteria set forth by FEMA only in limited circumstances.
For example, when a flood insurance policy has expired and the borrower
has failed to renew coverage, private insurance policies that do not
meet the criteria set forth by FEMA, such as private insurance policies
providing portfolio-wide blanket 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, the lender must still force place
adequate coverage in a timely manner, as required, and may not rely on
a private insurance policy that does not meet the criteria set forth by
FEMA on an ongoing basis.
XII. Required Use of Standard Flood Hazard Determination Form (SFHDF)
65. Does the SFHDF replace the borrower notification form?
Answer: 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
[[Page 35945]]
insurance is available under the Act. The notification form, on the
other hand, is used to notify the borrower(s) that the building or
mobile home is or will be located in an SFHA and to inform them about
flood insurance requirements and the availability of Federal disaster
relief assistance.
66. May a lender provide the SFHDF to the borrower?
Answer: Yes. While not a statutory requirement, a lender may
provide a copy of the flood determination to the borrower so the
borrower can provide it to the insurance agent in order to minimize
flood zone discrepancies between the lender's determination and the
borrower's policy. A lender would also need to make the determination
available to the borrower in case of a special flood hazard
determination review, which must be requested jointly by the lender and
the borrower. 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.
67. May the SFHDF be used in electronic format?
Answer: Yes. In the final rule adopting the SFHDF, FEMA stated:
``If an electronic format is used, the format and exact layout of the
Standard Flood Hazard Determination Form is not required, but the
fields and elements listed on the form are required. Any electronic
format used by lenders must contain all mandatory fields indicated on
the form.'' It should be noted, however, that the lender must be able
to reproduce the form upon receiving a document request by its Federal
supervisory agency.
68. 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?
Answer: It depends. Section 528 of the Act, 42 U.S.C. 4104b(e),
permits a lender to rely on a previous flood determination using the
SFHDF when it is increasing, extending, renewing, or purchasing 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. A loan refinancing or assumption made by a
lender different from the one who obtained the original determination
constitutes a new loan, thereby requiring a new determination. 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.
XIII. Flood Determination Fees
69. When can lenders or servicers charge the borrower a fee for making
a determination?
Answer: There are four instances under the Act and Regulation when
the borrower can be charged a specific 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 is prompted by a revision or
updating by FEMA of floodplain areas or flood-risk zones;
When the determination is prompted by FEMA's publication
of notices or compendia that affect the area in which the security
property is located; or
When the determination results in force placement of
insurance.
Loan or other contractual documents between the parties may also
permit the imposition of fees.
70. May charges made for life-of-loan reviews by flood determination
firms be passed along to the borrower?
Answer: Yes. 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. The fee
charged for the service at loan closing is a composite one for
conducting both the original and subsequent reviews. Charging a fee for
the original determination is clearly within the permissible purpose
envisioned 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 monitoring fee may be charged
only if the events specified in the answer to Question 69 occur.
Further, a lender may not charge a composite determination and life-of-
loan fee if the loan does not close, because the life-of-loan fee would
be an unearned fee in violation of the Real Estate Settlement
Procedures Act.
XIV. Flood Zone Discrepancies
71. 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?
A lender should only be concerned about a discrepancy on the
Standard Flood Hazard Determination Form (the SFHDF) and the one on the
flood insurance policy if the discrepancy is between a high-risk zone
(A or V) and a low- or moderate-risk zone (B, C, D, or X). In other
words, a lender need not be concerned about subcategory differences
between flood zones on these two documents. Once in possession of a
copy of the flood insurance policy, a lender should systematically
compare the flood zone designation on the policy with the zone shown on
the SFHDF. If the flood insurance policy shows a lower risk zone than
the SFHDF, then lender should investigate. As noted in FEMA's Mandatory
Purchase of Flood Insurance Guidelines, Federal law sets the ultimate
responsibility to place flood insurance on the lender, with limited
reliance permitted on third parties to the extent that the information
that those third parties provide is guaranteed.
A lender should first determine whether the difference results from
the application of the NFIP's ``Grandfather Rule.'' This rule provides
for the continued use of a rating on an insured property when the
initial flood insurance policy was issued prior to changes in the
hazard rating for the particular flood zone where the property is
located. The Grandfather Rule allows policyholders who have maintained
continuous coverage and/or who have built in compliance with the Flood
Insurance Rate Map to continue to benefit from the prior, more
favorable
[[Page 35946]]
rating for particular pieces of improved property. A discrepancy
resulting from application of the NFIP's Grandfather Rule is reasonable
and acceptable, but the lender should substantiate these findings.
A lender should also determine whether a difference in flood zone
designations is the result of a mistake. To do so, a lender should
facilitate communication between itself or the third-party service
provider that performed the flood hazard determination for the lender.
If it appears that the discrepancy is the result of a mistake, a lender
should recheck its determination. If there still appears to be a
discrepancy after this step has been taken, a lender and borrower may
jointly request that FEMA review the determination to confirm or review
the accuracy of the original determination performed by a lender or on
the lender's behalf. However, FEMA will only conduct this review if the
request is submitted within 45 days of the date the lender notified the
borrower that a building or manufactured home is in an SFHA and flood
insurance is required.
If, despite these efforts, the discrepancy is not resolved, or in
the course of attempting to resolve a discrepancy, a borrower or an
insurance company or its agent is uncooperative in assisting a lender
in this attempt, the lender should notify the insurance agent about the
insurer's duty pursuant to FEMA's letter of April 16, 2008 (W-08021),
to write a flood insurance policy that covers the most hazardous flood
zone. When providing this notification, the lender should include its
zone information and it should also notify the insurance company
itself. The lender should substantiate these communications in its loan
file.
72. Can a lender be found in violation of the requirements of the
Regulation if, despite the lender's diligence in making the flood
hazard determination, notifying the borrower of the risk of flood and
the need to obtain flood insurance, and requiring mandatory flood
insurance, there is a discrepancy between the flood hazard zone
designation on the flood determination form and the flood insurance
policy?
Answer: As noted in question and answer 71 above, lenders should
have a process in place to identify and resolve flood zone
discrepancies. A lender is in the best position to coordinate between
the various parties involved in a mortgage loan transaction to resolve
any flood zone discrepancy. If a lender is able to substantiate in its
loan file a bona fide effort to resolve a discrepancy, either by
finding a legitimate reason for such discrepancy or by attempting to
resolve the discrepancy, for example, by contacting FEMA to review the
determination, no violation will be cited. If a pattern or practice of
unresolved discrepancies is found in a lender's loan portfolio due to a
lack of effort on the lender's part to resolve such discrepancies, the
Agencies may cite the lender for a violation of the mandatory purchase
requirements.
XV. Notice of Special Flood Hazards and Availability of Federal
Disaster Relief
73. Does the notice have to be provided to each borrower for a real
estate related loan?
Answer: No. In a transaction involving multiple borrowers, the
lender need only provide the notice 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 will be provided. The notice must be provided to a borrower when
the lender determines that the property securing the loan is or will be
located in an SFHA.
74. 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 notice requirement applied in these
situations?
Answer: When it is not reasonably feasible to give notice before
the completion of the transaction, the notice requirement can be met by
lenders in mobile home loan transactions if notice is provided to the
borrower as soon as practicable after determination that the mobile
home will be located in an SFHA. Whenever time constraints can be
anticipated, regulated lenders should use their best efforts to provide
adequate notice of flood hazards to borrowers at the earliest possible
time. 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, as indicated in the preamble to the Regulation, the
Agencies encourage a lender to advise the borrower that if the mobile
home is later located on a permanent foundation in an SFHA, flood
insurance will be required. If the lender, when notified of the
location of the mobile home subsequent to the loan closing, determines
that it has been placed on a permanent foundation and is located in an
SFHA in which flood insurance is available under the Act, flood
insurance coverage becomes mandatory and appropriate notice must be
given to the borrower under those provisions. If the borrower fails to
purchase flood insurance coverage within 45 days after notification,
the lender must force place the insurance.
75. When is the lender required to provide notice to the servicer of a
loan that flood insurance is required?
Answer: 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.
76. What will constitute appropriate form of notice to the servicer?
Answer: 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.
77. In the case of a servicer affiliated with the lender, is it
necessary to provide the notice?
Answer: Yes. The Act requires the lender to notify the servicer of
special flood hazards and the Regulation reflects this requirement.
Neither contains an exception for affiliates.
78. How long does the lender have to maintain the record of receipt by
the borrower of the notice?
Answer: The record of receipt provided by the borrower must be
maintained for the time that the lender owns the loan. 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.
79. Can a lender rely on a previous notice if it is less than seven
years old, and it is the same property, same borrower, and same lender?
Answer: No. The preamble to the Regulation states that subsequent
transactions by the same lender with respect to the same property will
be treated as a renewal and will require no new determination. However,
neither the Regulation nor the preamble addresses waiving the
requirement to provide the notice to the borrower.
[[Page 35947]]
Therefore, the lender must provide a new notice to the borrower, even
if a new determination is not required.
80. Is use of the sample form of notice mandatory?
Answer: No. Although lenders are required to provide a notice to a
borrower when it makes, increases, extends, or renews a loan secured by
an improved structure located in an SFHA, use of the sample form of
notice provided in Appendix A of the Regulation or in Appendix 4 of
FEMA's Mandatory Purchase of Flood Insurance Guidelines 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 must provide the borrower with at least the
minimum information required by the Act and Regulation. Therefore,
lenders should consult the Act and Regulation to determine the
information needed.
XVI. Mandatory Civil Money Penalties
81. Which violations of the Act can result in a mandatory civil money
penalty?
Answer: A pattern or practice of violations of any of the following
requirements of the Act and their 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));
Force placement of flood insurance (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.
4101a(b)).
The Act states that any regulated lending institution found to have
a pattern or practice of certain violations ``shall be assessed a civil
penalty'' by its Federal supervisor in an amount not to exceed $350 per
violation, with a ceiling per institution of $100,000 during any
calendar year (42 U.S.C. 4012a(f)(5)). Each Agency adjusts these limits
pursuant to the Federal Civil Penalties Inflation Adjustment Act of
1990, as amended by the Debt Collection Improvement Act of 1996, 28
U.S.C. 2461 note.\13\ Lenders pay the penalties into the National Flood
Mitigation Fund held by the Department of the Treasury for the benefit
of FEMA.
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\13\ Please refer to 12 CFR 19.240(a) (OCC); 12 CFR
263.65(b)(10) (Board); 12 CFR 308.132(c)(xvi) (FDIC); 12 CFR
509.103(c) (OTS); 12 CFR 622.61(b) (FCA); and 12 CFR 747.1001(a)
(NCUA) for the Agencies' current civil penalty limits.
---------------------------------------------------------------------------
82. What constitutes a ``pattern or practice'' of violations for which
civil money penalties must be imposed under the Act?
Answer: 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
assessing 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 financial institution 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:
Whether the conduct resulted from a common cause or source
within the financial institution's control;
Whether the conduct appears to be grounded in a written or
unwritten policy or established practice;
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 financial institution'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 an institution's total activity could constitute
a pattern or practice);
Whether a financial institution was cited for violations
of the Act and Regulation at prior examinations and the steps taken by
the financial institution to correct the identified deficiencies;
Whether a financial institution's internal and/or external
audit process had not identified and addressed deficiencies in its
flood insurance compliance; and
Whether the financial institution lacks generally
effective flood insurance compliance policies and procedures and/or a
training program for its employees.
Although these guidelines and 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.
End of text of the Interagency Questions and Answers Regarding
Flood Insurance.
Dated: May 15, 2009.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, July 14, 2009.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 8th day of July, 2009.
Robert E. Feldman,
Executive Secretary, Federal Deposit Insurance Corporation.
Dated: April 2, 2009.
By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
Date: July 8, 2009
Roland E. Smith,
Secretary, Farm Credit Administration Board.
By the National Credit Union Administration Board, on June 5,
2009.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. E9-17129 Filed 7-20-09; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 6720-01-P; 6705-01-P;
7535-01-P