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FDIC Federal Register Citations
[Federal Register: March 21, 2008 (Volume 73, Number 56)]
[Notices]
[Page 15259-15278]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21mr08-133]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket ID OCC-2008-0002]
FEDERAL RESERVE SYSTEM
[Docket No. OP-1311]
FEDERAL DEPOSIT INSURANCE CORPORATION
RIN 3064-ZA00
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[Docket ID OTS-2008-0001]
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 soliciting comment on proposed revisions to the
Interagency Questions and Answers Regarding Flood Insurance
(Interagency Questions and Answers). To help financial institutions
meet their responsibilities under Federal flood insurance legislation
and to increase public understanding of their flood insurance
regulations, the staffs of the Agencies have prepared proposed new and
revised guidance addressing the most frequently asked questions and
answers about flood insurance. The proposed revised Interagency
Questions and Answers contain staff guidance for agency personnel,
financial institutions, and the public.
DATE: Comments must be submitted on or before May 20, 2008.
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: regs.comments@occ.treas.gov.
Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 1-5, Washington, DC 20219.
Fax: (202) 874-4448.
Hand Delivery/Courier: 250 E Street, SW., Attn: Public
Information Room, Mail Stop 1-5, Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2008-0002'' in your comment. 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 Public Information Room, 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 (202) 874-5043. 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. OP-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.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. 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/regulations/laws/
federal/propose.html. Follow instructions for submitting comments on
the Agency Web Site.
E-mail: Comments@FDIC.gov. 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/regulations/laws/federal/propose.html including any
personal information provided.
OTS: You may submit comments, identified by OTS-2007-0001, by any
of the following methods:
E-mail: regs.comments@ots.treas.gov. Please include ID
OTS-2008-0001 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-2008-0001.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation
[[Page 15260]]
Comments, Chief Counsel's Office, Attention: OTS-2008-0001.
Instructions: All submissions received must include the
agency name and docket number for this rulemaking. All comments
received will be entered into the docket and posted on Regulations.gov
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/
pagehtml.cfm?catNumber=67&an=1.
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, 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 regcomm@fca.gov.
Agency Web Site: http://www.fca.gov. Once you are at the
Web site, select ``Legal Info,'' then ``Pending Regulations and
Notices.''
Federal eRulemaking Portal: http://www.regulations.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.regulations.gov.
Follow the instructions for submitting comments,
NCUA Web Site: http://www.ncua.gov/
RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the
instructions for submitting comments.
E-mail: Address to regcomments@ncua.gov. 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/RegulationsOpinionsLaws/
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 OGCMail@ncua.gov.
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; Anjanette Kichline, Senior
Supervisory Consumer Financial Services Analyst, (202) 785-6054; 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, Senior Policy Analyst (Compliance),
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 Regulations Analyst, (202) 906-6451;
Glenn Gimble, Senior Project Manager, (202) 906-7158; 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: Moisette I. Green, Staff Attorney, Office of General Counsel,
(703) 518-6540, 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 flood insurance regulations 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. Many of these requests
were addressed in the preamble to the joint final rule. The Agencies
concluded, however, that given the number, level of detail, and
diversity of subject matter of
[[Page 15261]]
the requests for additional information, guidance addressing the more
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). That objective was fulfilled by the initial release of
the Interagency Questions and Answers in 1997 (1997 Interagency
Questions and Answers) by the Federal Financial Institution Examination
Council (FFIEC). 62 FR 39523 (July 23, 1997).
In response to issues that have been brought to the attention of
the Agencies in coordination with the Federal Emergency Management
Agency (FEMA), the Agencies are releasing for public comment proposed
revisions to the 1997 Interagency Questions and Answers.\1\ Among the
changes the Agencies are proposing are 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 are also proposing
substantive modifications to questions and answers previously adopted
in the 1997 Interagency Questions and Answers pertaining to
construction loans and condominiums. Finally, the Agencies are
proposing to revise and reorganize certain of the existing questions
and answers to clarify areas of potential misunderstanding and to
provide clearer guidance to users. It is the intention of the Agencies
that after public comment has been received and considered, and the
Interagency Questions and Answers have been adopted in final form, they
will supersede the 1997 Interagency Questions and Answers and
supplement other guidance or interpretations issued by the Agencies and
FEMA.
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\1\ The proposed Interagency Questions and Answers have been
prepared by staff from the OCC, Board, FDIC, OTS, NCUA and FCA in
consultation with and with the assistance of the FFIEC pursuant to
12 U.S.C. 3305(g).
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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.\2\
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\2\ The Agencies' rules are codified at 2 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 propose to eliminate current section I entitled
``Definitions'' and replace it with new proposed section I to address
more specific circumstances a lender may encounter when deciding
whether a loan should be a designated loan for purposes of flood
insurance. The Agencies are proposing to move the questions and answers
currently in section I into subsequent sections for better
organization. Meanwhile, questions and answers currently in other
sections of the 1997 Interagency Questions and Answers that deal with
determining when a loan is a designated loan under the Act and
Regulation would be included in new section I.
Specifically, proposed question 1, which covers the applicability
of the Regulation to a loan in a nonparticipating community, would be
moved from current question 1 of section II. Further, the Agencies
propose to move current question 2 of section II, discussing whether a
loan is a designated loan when a lender purchases a whole loan, to
question 3 of new section I. Current question 9 of section I,
discussing whether a loan is a designated loan when a lender
restructures a loan, would be moved to question 4 of this new section
I, and proposed question 5, which addresses table funded loans, would
be moved from question 3 of current section II. In addition, minor
nonsubstantive changes have been made to these moved questions and
answers to provide additional clarity.
The Agencies are also proposing to add two new questions and
answers to this section in response to questions the Agencies have
received from lenders. Proposed new question 2 explains that, upon a
FEMA map change that results in a building or mobile home securing a
loan being removed from a special flood hazard area (SFHA), the lender
no longer must require mandatory flood insurance; however, the lender
may choose to continue to require flood insurance for risk management
purposes.
Proposed new question 6 explains that portfolio reviews of existing
loans are not required by the Act or Regulation; however, sound risk
management practices may lead a lender to conduct periodic reviews.
These two new questions and answers are based on current guidance the
Agencies have provided to lenders.
Section II. Determining the Appropriate Amount of Flood Insurance
Required Under the Act and Regulation
Proposed section II would provide guidance on how lenders should
determine the appropriate amount of flood insurance to require the
borrower to purchase. The Agencies are proposing to retain existing
questions 5 and 7 of section II in new section II and renumbering them
as proposed questions 12 and 11, respectively. Although minor changes
have been made to these two questions and answers for purposes of
clarity, the changes are not substantive. Furthermore, part of the
guidance currently provided in existing question 7 would be moved to
proposed question 22 in section V, as discussed below.
Proposed new question 7 would discuss what is meant by the
``maximum limit of coverage available for the particular type of
property under the Act.'' This concept is important because 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.'' Proposed question 7 would
introduce and define the insurance term, ``insurable value,'' as it
relates to the determination of the maximum limit of coverage available
under the Act. Proposed question 7 would also introduce the terms,
``residential building'' and ``nonresidential building.'' These terms
would be more fully defined in proposed new questions 8 and 9 of this
section, respectively.
Proposed new question 10 would discuss how much flood insurance is
required on a building located in an SFHA in a participating community.
It would also provide an example showing how to calculate the amount of
required flood insurance on a nonresidential building.
Proposed new question 13 would clarify 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.
Proposed new question 14 would address lender considerations
regarding the amount of the deductible on a flood insurance policy
purchased by a borrower. Generally, the guidance advises a lender to
determine the reasonableness of the deductible on a case-by-case basis,
taking into account
[[Page 15262]]
the risk that such a deductible would pose to the borrower and lender.
Section III. Exemptions from the mandatory flood insurance requirements
As with current section III, proposed section III would contain
only one question and answer, which describes the statutory exemptions
from the mandatory flood insurance requirements. Proposed question and
answer 15 under section III would be revised to provide greater
clarity, with no intended change in substance or meaning.
Section IV. Flood insurance requirements for construction loans
The Agencies are proposing a series of new and revised questions
and answers to clarify the requirements regarding the mandatory
purchase of flood insurance for construction loans to erect buildings
that will be located in an SFHA. The Agencies believe that these
questions and answers are necessary in light of recent concerns raised
by some regulated lenders regarding borrowers' difficulties in
obtaining flood insurance for construction loans at the time of loan
origination.
Existing question 2 in section I would be revised to provide
greater clarity and would be moved to proposed question 16 under
proposed section IV. The proposed answer to question 16 would revise
the existing guidance to limit its scope and explain that a loan
secured by raw land located in an SFHA is not a designated loan that
would require flood insurance coverage. The remaining guidance
currently in the answer to existing question 2 in section I would be
discussed in subsequent questions and answers in section IV in the
proposed document, as detailed below.
Proposed question 17, derived from current question 1 in section I,
would address 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 answer would provide 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. Proposed question
18 would explain that, generally, a building in the course of
construction is eligible for coverage under a National Flood Insurance
Program (NFIP) policy, and that coverage may be purchased prior to the
start of construction.
Proposed question 19 would address the timing of when flood
insurance must be purchased for buildings under the course of
construction. The Act and Regulation provide that lenders may not make,
increase, extend, or renew any loan secured by improved real estate or
a mobile home that is located or to be located in an SFHA unless the
building is covered by adequate flood insurance. 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.
Recently, lenders have informed agency staff, however, that
borrowers have been encountering difficulties in obtaining flood
insurance for construction loans at the time of loan origination due to
insurers' refusals to write policies on undeveloped land until either
an elevation certificate has been issued for the structure or at least
two walls and a roof for the building have been erected. The Agencies
have also received reports that borrowers who are able to obtain flood
insurance for construction loans at loan origination often pay the
highest premiums possible because elevations for the insured property
have not yet been established.
To address these concerns, the Agencies, in the answer to proposed
question 19, would provide lenders with flexibility regarding the
timing of the mandatory purchase requirement for construction loans by
permitting 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, 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.
The Agencies also propose to add new question 20 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 would provide that the 30-day
waiting period would not apply in such cases.\3\ 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.
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\3\ FEMA, Mandatory Purchase of Flood Insurance Guidelines,
(September 2007) at 30. FEMA has made available a new version of
this booklet 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.
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Section V. Flood insurance requirements for agricultural buildings
The Agencies are proposing a new section V 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. The section would also address loans secured by multiple
buildings where some buildings are located in a flood hazard area and
some buildings are not.
The proposed answer to new question 21 would explain that all
buildings taken as security for a loan and located in an SFHA require
flood insurance. Lenders have the option of carving a building from the
security for a loan; however, the Agencies believe that it is typically
inappropriate for credit risk management reasons to do so.
The guidance in current question 7 under section II would be split
between question 11 under proposed section II, as discussed above, and
question 22 under proposed section V. The proposed answer to question
22 would explain that a lender is always required to determine whether
a building securing a loan is located in an SFHA, but that only those
buildings located in an SFHA and within a participating community are
required to have flood insurance. Flood insurance need not be required
on those properties that (1) are not located in a special flood hazard
area (whether or not within a participating community) or (2) are
located in a special flood hazard area that is not within a
participating community.
Section VI. Flood insurance requirements for residential condominiums
For organizational purposes, the Agencies are proposing to
consolidate questions and answers relating to the Regulation's flood
insurance requirements for residential condominiums into a new section
VI. In addition to modifying and expanding the two existing questions
in the 1997 Interagency Questions and Answers on residential
condominiums, the Agencies are proposing to add five additional
[[Page 15263]]
questions and answers to provide better clarity on the requirements.
Proposed question and answer 24 would modify and expand current
question 8 under section II to more completely address the Regulation's
flood insurance requirements for residential condominium units. The
proposed answer would first explain that the amount of flood insurance
coverage on the condominium unit required by the Regulation is the
lesser of the outstanding principal balance of the loan or the maximum
amount of coverage available under the NFIP.
The proposed answer would then explain that if 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 an amount equal to the total number
of units in the condominium building times $250,000, whichever is less;
or
Obtain an individual unit owner's dwelling policy in an
amount sufficient to meet the Regulation's flood insurance
requirements, if there is no RCBAP or the RCBAP coverage is less than
either 100 percent of the insurable value (replacement cost) of the
building or the amount equal to the total number of units in the
condominium building times $250,000, whichever is less.
The proposed answer revises and clarifies the current answer to
question 8 under section II. The current answer provides that ``to meet
federal flood insurance requirements, an RCBAP should be purchased in
an amount of at least 80 percent of the replacement value of the
building or the maximum amount available under the NFIP (currently
$250,000 multiplied by the number of units), whichever is less.''
The proposed question and answer recognizes that neither the Act
nor the Regulation addresses explicitly the appropriate level of RCBAP
coverage; rather, they address the general purchase requirement
applicable to all types of buildings and mobile homes: The lesser of
the outstanding principal balance of the loan or the maximum amount of
insurance available under the NFIP. The proposed question and answer
acknowledges the standard set forth in the Regulation, and clarifies
that the maximum amount of insurance available under the NFIP for a
residential condominium unit is the lesser of the maximum limit
available for a residential condominium unit (currently, $250,000) or
the insurable value of the unit (the replacement value of the building
divided by the number of units).\4\ The proposed question and answer
would also reflect that where the outstanding principal balance of the
loan is greater than the maximum amount of coverage available under the
NFIP, an RCBAP written at 80 percent of the replacement cost value of
the building does not meet the Regulation's flood insurance
requirements (unless that amount were equal to the maximum amount of
insurance available under the NFIP, which is $250,000 multiplied by the
number of units), whereas the current answer suggested that such a
coverage level was adequate. While FEMA's recent guidance prescribes 80
percent replacement cost value coverage as the minimum amount necessary
to avoid imposition of a co-insurance penalty at the time of loss,\5\
proposed answer 24 clarifies that this amount of insurance is
insufficient to comply with the Act's and Regulation's minimum
requirements. The proposed answer would provide that where the
outstanding principal balance of the loan is greater than the maximum
amount of coverage available under the NFIP and the RCBAP is written at
less than 100 percent of the insurable value (replacement cost) of the
building or an amount equal to $250,000 multiplied by the number of
units, whichever is less, the lender must require the borrower to
obtain an individual unit owner's dwelling policy to meet the
Regulation's flood insurance requirements.
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\4\ In recent guidance, FEMA expressly discusses the statutory
standard for determining the required amount of flood insurance for
a condominium. FEMA Mandatory Purchase of Flood Insurance
Guidelines, at 46.
\5\ FEMA's recent guidance encourages condominium associations
to obtain 100 percent coverage. Id. at 47.
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The Agencies are proposing the modification contained in proposed
question 24 and its answer to be in accordance with the general
mandatory purchase requirement in the Regulation. As FEMA has noted:
Although unit owners have a shared interest in the common areas
of the condominium building, as well as in their own unit, unit
owners are unable to individually protect such common areas.
Therefore, the RCBAP, insured to its full replacement cost value
(RCV) to the extent possible under the NFIP, is the correct way to
insure a residential condominium building against flood loss. A
properly placed RCBAP protects the financial interests of the
association, unit owners, and lenders and also satisfies the
statutory requirements.\6\
---------------------------------------------------------------------------
\6\ See id. at 46.
The Agencies plan that any guidance adopted as final in question
and answer 24 would apply to any loan that is made, increased,
extended, or renewed after the effective date of the revised guidance.
The Agencies further plan that the revised guidance would apply to any
loan made prior to the effective date of the revised guidance, which a
lender determines to be covered by flood insurance in an amount less
than required by the Regulation, as set forth in proposed question and
answer 24, at the first flood insurance policy renewal period following
the effective date of the revised guidance.
Proposed question 27 would modify and expand current question 9
under section II to address lenders' options when a loan secured by a
residential condominium unit is in a multi-unit complex whose
condominium association allows its existing flood insurance policy to
lapse. Specifically, if the borrower/unit owner or the condominium
association fails to purchase adequate flood insurance within 45 days
of the lender's notification of inadequate insurance coverage, the
lender must force place flood insurance to cover the unit owner's
dwelling in an amount adequate to meet the Regulation's flood insurance
requirements.
The Agencies are also proposing five new questions and answers to
address additional issues regarding flood insurance requirements for
residential condominiums. Proposed new question 23 would be added to
specifically affirm that the mandatory flood insurance purchase
requirements under the Act and Regulation apply to loans secured by
individual residential condominium units, including those in multi-
story condominium complexes located in an SFHA in which flood insurance
is available under the Act.
Proposed new question 25 would address lenders' options when a loan
secured by a residential condominium unit is in a multi-unit complex
whose condominium association does not obtain or maintain the amount of
flood insurance coverage required under the Regulation. Specifically,
it would provide that a lender must require the borrower to purchase an
individual unit owner's dwelling policy in an amount sufficient to meet
the Regulation's flood insurance requirements. The proposed answer
would also detail what is considered an adequate amount of flood
insurance under the Regulation and provide an example.
[[Page 15264]]
Proposed new question 26 would address the steps a lender must 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. The proposed answer would also summarize
some of the risks to which the lender and the individual unit owner/
borrower may be exposed should a loss occur where the condominium
association did not maintain adequate flood insurance coverage under an
RCBAP.
Proposed new question 28 would be added to explain how the RCBAP's
co-insurance penalty applies when, at the time of loss, the RCBAP's
coverage amount is less than 80 percent of either the building's
replacement cost or the maximum amount of flood insurance available for
that building under the NFIP (whichever is less). Examples of how to
calculate the penalty would also be provided. Proposed new question 29
would be added to explain the interplay between the individual unit
owner's dwelling policy coverage limitations and the RCBAP.
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 new Section VII, which addresses flood insurance
requirements for home equity loans, lines of credit, subordinate liens,
and other security interests in collateral located in an SFHA, would
include seven questions from current section I and parts of two
questions from current section V. Specifically, current questions 3, 4,
5, 6, 7, 8, and 10 would be renumbered as questions 30, 31, 34, 35 and
36, 37, 38, and 39 respectively. Current question 5 in section V would
be split into proposed questions 32 and 33.
Proposed questions and answers 30, 31, and 39 would include minor
wording changes without any intended change in substance or meaning.
Proposed question 32 would expand on part of current section V,
question 5, but would not change the substance of the answer. New
question 34 would be revised to clarify the issue discussed in current
question 5 of section I without any change in substance or meaning. New
questions 35 and 36 would be added to clarify the issues discussed in
current question 6 of section I.
Section VIII. Flood insurance requirements for loan syndications/
participations
The Agencies are proposing to include a new section VIII and new
question 40 in response to questions from lenders. The proposed
question and answer would explain that, with respect to loan
syndications and participations, individual participating lenders are
responsible for ensuring compliance with flood insurance requirements.
The Agencies believe that the risk of flood loss can be a significant
threat to the value of improved real property securing loans,
especially in light of many recent catastrophic flood-related events
such as Hurricane Katrina. Therefore, the Agencies believe that each
lender in a loan participation/syndication arrangement that is secured
by improved real property located in a special flood hazard area should
be responsible for ensuring that the respective interest of the lender
in the collateral that secures the lender's portion of the loan is
protected against the risk of flood loss, at least to the amount
required by the Regulation. This does not mean that each lender in a
syndication or participant in a loan must individually undertake such
activities as obtaining a flood determination or monitoring whether
flood insurance premiums are paid. Rather, it means that the
participating lender should perform 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 on-going basis for compliance with the flood
insurance requirements. The participating lender should require as a
condition to the participation, syndication or other credit risk
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.
Section IX. Flood insurance requirements in the event of the sale or
transfer of a designated loan and/or its servicing rights
The heading to proposed section IX has been modified to provide
greater clarity with no intended change in substance or meaning. The
current questions 1, 2, 3, 4, 5, and 6 under current section IX would
be renumbered as proposed questions 42, 43, 44, 45, 46, and 47,
respectively, with minor revisions to questions and answers 42 and 46
to provide greater clarity, with no intended change in substance or
meaning. Proposed section IX would also incorporate and expand current
question 6 under section II as proposed question and answer 41.
Proposed question 41 would expound on the two scenarios from current
question 6 to provide greater clarity, with no intended change in
substance or meaning.
Section X. Escrow requirements
Current section IV on escrow requirements would be moved to
proposed section X but would remain largely unchanged. Question 1 under
current section IV, relating to the date loan originations were subject
to the escrow requirement, would be deleted, as it is now obsolete.
Questions 2 through 7 under current section IV would be renumbered as
proposed questions 48 through 53, respectively, with minor changes for
greater clarity with no intended change in substance or meaning.
Section XI. Forced placement of flood insurance
For organizational purposes, the Agencies are proposing to move
existing questions 1, 2, and 3 in Part VI to questions 54, 55, and 56
in section XI of the proposed document, respectively. The Agencies are
proposing minor revisions to proposed question and answer 54 to provide
greater clarity, with no intended change in substance or meaning.
Section XII. Gap insurance policies
The Agencies are proposing to add a new section and question and
answer on the appropriateness of gap or blanket insurance policies,
often purchased by lenders to ensure adequate life-of-loan flood
insurance coverage for designated loans, as a result of questions
received by the Agencies on such policies. Gap or blanket insurance
policies are lender-paid private policies that are meant to cover a
lender's entire portfolio of loans for insurance shortfalls or expired
policies.
The proposed answer to question 57 of section XII would explain
that, generally, gap or blanket insurance is not an adequate substitute
for NFIP insurance, as a gap or blanket policy typically protects only
the lender's, not the borrower's interest, and cannot be transferred
when a loan is sold. The question and answer would acknowledge,
however, 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.
Section XIII: Required use of the Standard Flood Hazard Determination
Form (SFHDF)
Current section V would be moved to proposed section XIII, and
questions 1,
[[Page 15265]]
2, 3, and 4 of current section V would be renumbered as proposed
questions 58, 59, 60, and 61, respectively. The Agencies are proposing
some minor changes to the answers for these questions to provide
additional clarity with no intended change in substance or meaning. For
organizational purposes, the guidance found in question 5 of current
section V would be moved to proposed questions 32 and 33 under proposed
section VII, as discussed above.
Section XIV. Flood determination fees
Current section VII would be moved to proposed section XIV.
Questions 1 and 2 in current section VII would be renumbered as
questions 62 and 63, respectively, with only minor language
modifications, with no intended change in substance or meaning.
Section XV. Flood zone discrepancies
The Agencies are proposing a new section and two new questions
concerning issues where there is a discrepancy between the flood hazard
zone designation on a flood hazard determination form and the flood
hazard zone designation on the flood insurance policy. Proposed new
question 64 would address how lenders should respond when confronted
with a discrepancy between the flood hazard zone designations on the
flood hazard determination form and the flood insurance policy. The
question discusses the legitimate reasons why such discrepancies may
exist and describes how to resolve differences if there is no
legitimate reason for them. Proposed question 65 discusses when such
flood zone discrepancies in a loan portfolio will result in a finding
that the lender violated federal flood insurance requirements. If there
are repeated instances in the lender's loan portfolio of discrepancies
between the flood hazard zone listed on a flood hazard determination
and the flood hazard zone listed on a flood insurance policy, and the
lender has not taken steps to resolve such discrepancies, then an
agency may find that the lender has violated the mandatory purchase
requirements.
Section XVI. Notice of special flood hazards and availability of
Federal disaster relief
The Agencies propose to move current section VIII to proposed
section XVI. Therefore, questions 1, 2, 3, 4, 5, and 6 under current
section VIII would be renumbered as proposed questions 66, 67, 68, 69,
70, and 71, respectively, with nonsubstantive changes made to provide
additional clarity to the answers. For organizational purposes,
question 1 under current section X would be consolidated under this new
section XVI and renumbered as question 73. Furthermore, a new question
72 is proposed to be added to clarify that the Notice of Special Flood
Hazards must be provided to the borrower each time a loan is made,
increased, extended, or renewed, even when a new determination is not
required.
Section XVII. Mandatory civil money penalties
The Agencies are proposing a new section and two new questions
concerning the imposition of mandatory civil money penalties for
violations of the flood insurance requirements. Proposed new question
74 would list the sections of the Act that trigger mandatory civil
money penalties when examiners find a pattern or practice of violations
of those sections. The question would also include information about
statutory limits on the amount of such penalties. Proposed new question
75 would discuss the general standards the Agencies consider when
determining whether violations constitute a pattern or practice for
which civil money penalties are mandatory. These considerations are not
dispositive of individual cases, but serve as a reference point for
reviewing the particular facts and circumstances.
Redesignation Table
The following redesignation table is provided as an aide to assist
the public in reviewing the proposed revisions to the 1997 Interagency
Questions and Answers.
------------------------------------------------------------------------
Current Proposed
------------------------------------------------------------------------
Section I. Definitions:
Section I, Question 1..... Section IV, Question 17.
Section I, Question 2..... Section IV, Question 16.
Section I, Question 3..... Section VII, Question 30.
Section I, Question 4..... Section VII, Question 31.
Section I, Question 5..... Section VII, Question 34.
Section I, Question 6..... Section VII, Question 35; and Section
VII, Question 36.
Section I, Question 7..... Section VII, Question 37.
Section I, Question 8..... Section VII, Question 38.
Section I, Question 9..... Section I, Question 4.
Section I, Question 10.... Section VII, Question 39.
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 5.
Section II, Question 4.... Deleted as obsolete.
Section II, Question 5.... Section II, Question 12.
Section II, Question 6.... Section IX, Question 41.
Section II, Question 7.... Section II, Question 11; and Section V,
Question 22.
Section II, Question 8.... Section VI, Question 24.
Section II, Question 9.... Section VI, Question 27.
Section III. Exemptions....... Section III. Exemptions from the
mandatory flood insurance requirements.
Section III, Question 1... Section III, Question 15.
Section IV. Escrow Section X. Escrow requirements.
Requirements.
Section IV, Question 1.... Deleted as obsolete.
Section IV, Question 2.... Section X, Question 48.
Section IV, Question 3.... Section X, Question 49.
[[Page 15266]]
Section IV, Question 4.... Section X, Question 50.
Section IV, Question 5.... Section X, Question 51.
Section IV, Question 6.... Section X, Question 52.
Section IV, Question 7.... Section X, Question 53.
Section V. Required Use of Section XIII. Required use of Standard
Standard Flood Hazard Flood Hazard Determination Form
Determination Form (SFHDF). (SFHDF).
Section V, Question 1..... Section XIII, Question 58.
Section V, Question 2..... Section XIII, Question 59.
Section V, Question 3..... Section XIII, Question 60.
Section V, Question 4..... Section XIII, Question 61.
Section V, Question 5..... Section VII, Question 32; and Section
VII, Question 33.
Section VI. Forced Placement Section XI. Forced placement of flood
of Flood Insurance. insurance.
Section VI, Question 1.... Section XI, Question 54.
Section VI, Question 2.... Section XI, Question 55.
Section VI, Question 3.... Section XI, Question 56.
Section VII. Determination Section XIV. Flood determination fees.
Fees.
Section VII, Question 1... Section XIV, Question 62.
Section VII, Question 2... Section XIV, Question 63.
Section VIII. Notice of Section XVI. Notice of special flood
Special Flood Hazards and hazards and availability of Federal
Availability of Federal disaster relief.
Disaster Relief.
Section VIII, Question 1.. Section XVI, Question 66.
Section VIII, Question 2.. Section XVI, Question 67.
Section VIII, Question 3.. Section XVI, Question 68.
Section VIII, Question 4.. Section XVI, Question 69.
Section VIII, Question 5.. Section XVI, Question 70.
Section VIII, Question 6.. Section XVI, Question 71.
Section IX. Notice of Section IX. Flood insurance requirements
Servicer's Identity. in the event of the sale or transfer of
a designated loan and/or its servicing
rights.
Section IX, Question 1.... Section IX, Question 42.
Section IX, Question 2.... Section IX, Question 43.
Section IX, Question 3.... Section IX, Question 44.
Section IX, Question 4.... Section IX, Question 45.
Section IX, Question 5.... Section IX, Question 46.
Section IX, Question 6.... Section IX, Question 47.
Section X Appendix A to the Section XVI. Notice of special flood
Regulation-Sample Form of hazards and availability of Federal
Notice of Special Flood disaster relief.
Hazards and Availability of
Federal Disaster Relief
Assistance.
Section X, Question 1..... Section XVI, Question 73.
------------------------------------------------------------------------
Public Comments
The Agencies invite public comment on the proposed new and revised
Interagency Questions and Answers. If financial institutions, bank
examiners, community groups, or other interested parties have
unanswered questions or comments about the Agencies' flood insurance
regulations, they should submit them to the Agencies. The Agencies will
consider including these questions and answers in the final 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
proposed guidance is not a proposed rule, comments are nevertheless
invited on whether the proposed interagency questions and answers are
stated clearly and effectively organized, and how the guidance might be
revised to make it easier to read.
The text of the proposed 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 revised flood insurance law and
regulations. For ease of reference, the following terms are used
throughout this document: ``Act'' refers to the National Flood
Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as
revised 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.\7\ The OCC, Board, FDIC, OTS, NCUA, and FCA (collectively,
``the Agencies'') are providing answers to questions pertaining to the
following topics:
---------------------------------------------------------------------------
\7\ 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 agricultural buildings.
VI. Flood insurance requirements for
[[Page 15267]]
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 for loan syndications/
participations.
IX. Flood insurance requirements in the event of the sale or
transfer of a designated loan and/or its servicing rights.
X. Escrow requirements.
XI. Forced placement of flood insurance.
XII. Gap insurance policies.
XIII. Required use of Standard Flood Hazard Determination Form
(SFHDF).
XIV. Flood determination fees.
XV. Flood zone discrepancies.
XVI. Notice of special flood hazards and availability of Federal
disaster relief.
XVII. 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 an SBA, VA, or FHA, 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 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. Does the Regulation apply to loans that are being restructured
because of the borrower's default on the original loan?
Answer: Yes, 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.
5. 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.
6. Is a lender required to perform a review of its, or 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
7. 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
[[Page 15268]]
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 property 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 property, 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 property 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).
8. 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 non-residential 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.
9. What are examples of nonresidential buildings?
Answer: Nonresidential buildings include small business concerns,
churches, schools, farm buildings (including grain bins and silos),
pool houses, clubhouses, recreational buildings, 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.
10. 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 (see Question 7).
Example: (calculating insurance required on a non-residential
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 (non-residential 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.
11. Is flood insurance required for each building when the real
estate secu rity 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 (see Question 7).
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 (non-residential buildings); or
[cir] Insurable value (for each non-residential 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.
12. 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.
13. 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. Lenders should avoid creating situations where a
building is being ``over-insured''.
14. 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
[[Page 15269]]
insurable value of the property to avoid the mandatory purchase
requirement for flood insurance.
III. Exemptions From the Mandatory Flood Insurance Requirements
15. 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
16. Is a loan secured by raw 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 by
only raw 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.
17. 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.
18. 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.
Flood Insurance Manual at p. GR 4 (October 2006). 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.'' 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.
19. 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 a foundation slab has been poured and/or an
elevation certificate has been issued, provided that the lender
requires 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.
20. 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 Agricultural Buildings
21. Some agricultural operations have buildings on their farms with
limited utility to the farming operation and, in many cases, the farmer
would not replace such buildings 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 in a
participating community. The Act does not differentiate agricultural
lending from other types of lending.
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.
22. What are a lender's requirements under the Regulation for a
loan secured by multiple agricultural 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 property securing the loan is in an SFHA. If secured property is
located in an SFHA, but not in a participating
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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 a secured property 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. Agricultural buildings that are part of the
loan's security and are located in an SFHA in a participating community
are required to have flood insurance.
VI. Flood Insurance Requirements for Residential Condominiums
23. 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.
24. 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.
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 25, 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 26.
The RCBAP, which is a master policy for condominiums issued by
FEMA, may only be purchased by the condominium owners association. The
RCBAP covers both the common and individually owned building elements
within the units, improvements within the units, and contents owned in
common. 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.
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 coverages 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: 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 question and answer 24 will apply to any loan that
is made, increased, extended, or renewed after the effective date of
the revised guidance. Further, the guidance will apply to any loan made
prior to the effective date of the guidance, which a lender determines
to be covered by flood insurance in an amount less than required by the
Regulation, and as set forth in proposed question and answer 24, at the
first flood insurance policy renewal period following the effective
date of the revised guidance.
25. 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
24.
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 $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
[[Page 15271]]
($175,000), the maximum coverage available under the NFIP ($250,000),
or the insurable value ($200,000).)
26. 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 the
individual unit owner/borrower to ask the condominium association to
obtain additional coverage that would be sufficient to meet the
Regulation's requirements (see Question 24). 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 24).
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 coverages 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,
elevators, etc. It is incumbent on the lender to understand these
limitations.
27. 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 24). 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 25 and 26). 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.
28. 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 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
[[Page 15272]]
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.
29. 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
30. 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.
31. 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 when application is made for the loan, 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 the response to Question 61 in Section XIII. Required use of
Standard Flood Hazard Determination Form).
32. When a lender makes a second mortgage secured by a building or
mobile home located in an SFHA, how much flood insurance must the
lender require?
Answer: A 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 lender on
the second mortgage cannot comply with the Act and Regulation by
requiring flood insurance 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.
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. 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 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 the entire $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
[[Page 15273]]
mortgage ($50,000), 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 $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 real property with a fair market value of $150,000. The
insurable value of the residential building on the real property is
$90,000; however, Lender A improperly required only $70,000 of flood
insurance coverage. 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 is purchased and maintained on
the secured property to comply with the Act and Regulation.
33. If a borrower requesting a home equity 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 home equity 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
home equity loan), the insurable value, or the maximum amount of
coverage available on the improved real estate.
34. 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.
35. 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.
36. 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.
37. 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.
38. 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.
39. 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 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 for Loan Syndications/Participations
40. How do the Agencies enforce the mandatory purchase requirements
under the Act and Regulation when a lender participates in a loan
syndication/participation?
Answer: Although a syndication/participation agreement may assign
compliance duties to the 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 on-going 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.
IX. Flood Insurance Requirements in the Event of the Sale or Transfer
of a Designated Loan and/or its Servicing Rights
41. How do the flood insurance requirements under the Regulation
apply to lenders under the following scenarios involving loan
servicing?
Scenario 1: A regulated lender originates a designated loan secured
by a building or mobile home located in an SFHA in which flood
insurance is available under the Act. The lender makes the initial
flood determination, provides the borrower with appropriate notice, and
flood insurance is obtained. The lender initially services the loan;
however, the lender subsequently sells both the loan and the servicing
rights to a non-regulated 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 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 lender sells or transfers
the loan and servicing rights, the lender must provide notice of the
identity of the new servicer to FEMA or its designee.
[[Page 15274]]
If the lender retains ownership of the loan and only transfers or
sells the servicing rights to a non-regulated party, the 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 lender as owner of the loan,
including escrow of insurance premiums and forced 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, forced placement, and
flood hazard determination fee provisions of the Act and Regulation
primarily so that they may perform the administrative tasks for the
lender, without fear of liability to the borrower for the imposition of
unauthorized charges. In addition, the preamble to the Regulation
emphasizes 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 lender or from other commonly accepted standards for performance of
servicing obligations. The 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 non-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 non-regulated lender does not
make an initial flood determination or notify the borrower of the need
to obtain insurance. The non-regulated 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 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 regulated lender becomes aware at any point during the
life of a designated loan that flood insurance is required, then the
lender must comply with the Regulation, including force placing
insurance, if necessary. Similarly, if the lender subsequently extends,
increases, or renews a designated loan, the lender must also comply
with the Regulation.
Where a regulated lender purchases only the servicing rights to a
loan originated by a non-regulated 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 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.
42. When a 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 lender's forced placement
of a policy) will constitute notice to FEMA when the lender is
servicing that loan.
In the event the servicing is subsequently transferred to a new
servicer, the lender must provide notice to the insurance company of
the identity of the new servicer no later than 60 days after the
effective date of such a change.
43. 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.
44. 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.
45. If the loan and its servicing rights are sold by the lender, is
the 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.
46. Is a lender required to provide notice when the servicer, not
the 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 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.
47. In the event of a merger 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.
X. Escrow Requirements
48. 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
[[Page 15275]]
designated loan. Lenders are required to escrow flood insurance
premiums and fees for any mandatory flood insurance for such loans if
the lender requires the escrow of taxes, hazard insurance premiums or
other loan charges for loans secured by residential improved real
estate.
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. The
preamble to the Regulation indicates that 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 other items, 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.'' For example, a building having a
retail store on the ground level with a small upstairs apartment used
by the store's owner generally is considered a commercial enterprise
and consequently would not constitute a residential building under the
definition. If the primary use of a mixed-use property is for
residential purposes, the Regulation's escrow requirements apply. (See
Questions 8 and 9 for examples of residential and nonresidential
buildings.)
49. When must escrow accounts be established for flood insurance
purposes?
Answer: 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
Section 10. Generally, for flood insurance purposes, only loans on one-
to-four family dwellings will be subject to the escrow requirements of
RESPA. (This includes individual units of condominiums. Individual
units of cooperatives, although covered by Section 10 of RESPA, are not
insured for flood insurance purposes.)
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. This requirement pertains to any loan, including
those subject to RESPA. The preceding paragraph addresses the
requirement for administering loans covered by RESPA. The preamble to
the Regulation contains a more detailed discussion of the escrow
requirements.
50. 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.
51. 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.
52. 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 requirement to escrow
flood insurance premiums.
53. What requirements for escrow accounts apply to properties
covered by RCBAPs?
Answer: RCBAPs 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 a loan for the purchase of a condominium unit and when
dues to the condominium association apply to the RCBAP premiums, an
escrow account is not required. Lenders should exercise due diligence
with respect to continuing compliance with the insurance requirements
on the part of the condominium association.
XI. Forced Placement of Flood Insurance
54. What is the requirement for the forced 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;
The community in which the property is located
participates in the NFIP;
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.
A lender must notify the borrower of the required amount of flood
insurance that must be obtained within 45 days after notification. 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 the
cost of premiums and fees to obtain the coverage. If adequate insurance
is not obtained within the 45-day period, then the insurance must be
force placed. 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 forced placement procedures. FEMA
published these procedures in the Federal Register on August 29, 1995
(60 FR 44881). Appendix A of the FEMA publication contains examples of
notification letters to be used in connection with the MPPP.
55. Can a servicer force place on behalf of a lender?
[[Page 15276]]
Answer: Yes. Assuming the statutory prerequisites for forced
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.
56. When forced 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.)
XII. Gap Insurance Policies
57. May a lender rely on a gap or blanket insurance policy to meet
its obligation to ensure that its designated loans are covered by an
adequate amount of flood insurance over the life of the loans?
Answer: Generally no. Gap or blanket insurance typically is not an
adequate substitute for NFIP insurance. Among other things, a gap or
blanket policy typically protects only the lender's, not the
borrower's, interest and, therefore, may not be transferred when a loan
is sold. The presence of a gap or blanket policy may serve as a
disincentive for the lender or its servicer to perform its due
diligence and ensure that there is adequate coverage for a designated
loan. Finally, a lender that substitutes a gap or blanket policy for an
individual flood insurance policy would be unable to sell the loan in
the secondary market, since Fannie Mae and Freddie Mac will not accept
loans that are covered solely by a gap or blanket policy.
In limited circumstances, a gap or blanket policy may satisfy a
lender's flood insurance obligations, when NFIP and private insurance
is otherwise unavailable. For example, when a designated loan does not
have sufficient coverage, but the borrower refuses to increase coverage
under his NFIP insurance, a gap or blanket policy may be appropriate
when the lender is unable to force-place private insurance for some
reason. Similarly, when a policy has expired, and the borrower has
failed to renew coverage, gap or blanket coverage may be adequate
protection for the lender for the 15-day gap in coverage between the
end of the 30-day ``grace'' period after the NFIP policy expiration and
the end of the 45-day force placement notice period. However, the
lender must force place adequate coverage in a timely manner, as
required, and may not rely on the gap or blanket coverage on an on-
going basis.
XIII. Required Use of Standard Flood Hazard Determination Form (SFHDF)
58. Does the SFHDF replace the borrower notification form?
Answer: No. The notification form is used to notify the borrower(s)
that he or she is purchasing improved property located in an SFHA. The
financial regulatory Agencies, in consultation with FEMA, included a
revised version of the sample borrower notification form in Appendix A
to the Regulation. The SFHDF is used by the lender to determine whether
the property securing the loan is located in an SFHA.
59. Is the lender required to provide the SFHDF to the borrower?
Answer: No. While it may be a common practice in some areas for
lenders to provide a copy of the SFHDF to the borrower to give to the
insurance agent, lenders are neither required nor prohibited from
providing the borrower with a copy of the form. In the event a lender
does provide the SFHDF to the borrower, the signature of the borrower
is not required to acknowledge receipt of the form.
60. May the SFHDF be used in electronic format?
Answer: Yes. FEMA, in the final rule adopting the SFHDF 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.
61. 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. May a lender rely on a previous determination
for a refinancing or assumption of a loan?
Answer: It depends. 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.
XIV. Flood Determination Fees
62. 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 forced placement of
insurance.
Loan or other contractual documents between the parties may also
permit the imposition of fees.
63. 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 62 occur.
XV. Flood Zone Discrepancies
64. What should a lender do when there is a discrepancy between the
flood hazard zone designation on the flood
[[Page 15277]]
determination form and the flood insurance policy?
Answer: Lenders should have a process in place to identify and
resolve such discrepancies. In attempting to resolve a particular
discrepancy, a lender should determine whether there may be a
legitimate reason for a discrepancy.
The flood determination form designates a flood hazard zone where
the building or mobile home is actually located based on the latest
FEMA information; the flood insurance policy designates the flood
hazard zone for purposes of rating the degree of flood hazard risk. The
two respective flood hazard zone designations may legitimately differ
by virtue of the NFIP's ``Grandfather Rule,'' which 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 rating
for particular pieces of improved property. A discrepancy caused as a
result of the application of the NFIP's Grandfather Rule is reasonable
and acceptable. In such an event where the lender determines that there
is a legitimate reason for the discrepancy, it should document its
findings.
If the lender is unable to reconcile a discrepancy between the
flood hazard zone designation on the flood determination form and the
flood insurance policy and there is no legitimate reason for the
discrepancy, the lender and borrower may jointly request that FEMA
review the determination. This procedure is intended to confirm or
disprove the accuracy of the original determination. The procedures for
initiating a FEMA review are found at 44 CFR 65.17. This request must
be submitted within 45 days of the lender's notification to the
borrower of the requirement to obtain flood insurance.
65. Can a lender be found in violation of the requirements of
federal flood insurance regulations 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: Yes. As noted in Question 64 above, lenders should have a
process in place to identify and resolve such discrepancies. If a
lender is able to resolve a discrepancy--either by finding a legitimate
reason for such discrepancy or by attempting to resolve the discrepancy
by contacting FEMA to review the determination, then no violation will
be cited. However, if more than occasional, isolated instances of
unresolved discrepancies are found in a lender's loan portfolio, the
Agencies may cite the lender for a violation of the mandatory purchase
requirements. Failure to resolve such discrepancies could result in the
lender's collateral not being covered by the amount of legally required
flood insurance.
XVI. Notice of Special Flood Hazards and Availability of Federal
Disaster Relief
66. 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.
67. 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.
68. 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.
69. 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.
70. 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.
71. 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.
72. 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
[[Page 15278]]
provide the notice to the borrower. Therefore, the lender must provide
a new notice to the borrower, even if a new determination is not
required.
73. 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 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.
XVII. Mandatory Civil Money Penalties
74. What 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 Regulations triggers a
mandatory civil money penalty:
(i) Purchase of flood insurance where available (42 U.S.C.
4012a(b));
(ii) Escrow of flood insurance premiums (42 U.S.C. 4012a(d));
(iii) Forced placement of flood insurance (42 U.S.C. 4012a(e));
(iv) Notice of special flood hazards and the availability of
Federal disaster relief assistance (42 U.S.C. 4104a(a)); and
(v) 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)). This limit has since been raised
to $385 per violation, and the annual ceiling to $125,000 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. Lenders pay the penalties into the National Flood Mitigation Fund
held by the Department of the Treasury for the benefit of FEMA.
75. 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 one 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: March 5, 2008.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, March 12, 2008.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 14th day of March, 2008. Federal
Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
Dated: February 5, 2008.
By the Office of Thrift Supervision.
John M. Reich,
Director.
Dated: March 13, 2008.
Roland E Smith,
Secretary, Farm Credit Administration Board.
By the National Credit Union Administration Board, on March 13,
2008.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. E8-5787 Filed 3-20-08; 8:45 am]
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