[Federal Register Volume 62, Number 141 (Wednesday, July 23, 1997)]
[Notices]
[Pages 39523-39530]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19133]


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FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL


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

AGENCY: Federal Financial Institutions Examination Council.

ACTION: Notice and request for comment.

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SUMMARY: The Consumer Compliance Task Force of the Federal Financial 
Institutions Examination Council (FFIEC) is issuing 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 Office of the Comptroller of the Currency (OCC), the 
Federal Reserve Board (Board), the Federal Deposit Insurance 
Corporation (FDIC), the Office of Thrift Supervision (OTS), the Farm 
Credit Administration (FCA), and the National Credit Union 
Administration (NCUA) (collectively, the agencies) have prepared 
answers to the most frequently asked questions about flood insurance. 
The Interagency Questions and Answers contain informal staff guidance 
for agency personnel, financial institutions, and the public.

DATES: Public comment is invited on a continuing basis.

ADDRESSES: Questions and comments may be sent to Joe M. Cleaver, 
Executive Secretary, Federal Financial Institutions Examination 
Council, 2100 Pennsylvania Avenue NW., Suite 200, Washington, DC 20037, 
or by facsimile transmission to (202) 634-6556.

FOR FURTHER INFORMATION CONTACT:

    OCC: Carol Workman, Compliance Specialist, Compliance Management, 
(202) 874-4858; or Margaret Hesse, Senior Attorney, Community and

[[Page 39524]]

Consumer Law Division, (202) 874-5750, Office of the Comptroller of the 
Currency, 250 E Street, SW., Washington, DC 20219.
    Board: Thomas Grundy, Review Examiner, Division of Consumer and 
Community Affairs, (202) 452-3946; or Lawranne Stewart, Senior 
Attorney, Legal Division, (202) 452-3513, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551. For the hearing impaired only, Telecommunication 
Device for the Deaf (TDD), Earnestine Hill or Dorothea Thompson, (202) 
452-3544.
    FDIC: Ken Baebel, Senior Review Examiner, Division of Compliance 
and Consumer Affairs, (202) 942-3086; or Mark Mellon, Counsel, Legal 
Division, (202) 898-3854; Federal Deposit Insurance Corporation, 550 
17th Street, NW., Washington, DC 20429.
    OTS: Larry Clark, Senior Manager, Compliance and Trust Programs, 
(202) 906-5628; Ronald Dice, Program Analyst, Compliance Policy, (202) 
906-5633; or Catherine Shepard, Senior Attorney, Regulations and 
Legislation Division, (202) 906-7275, Office of Chief Counsel, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.
    FCA: Robert G. Magnuson, Policy Analyst, Regulation Development 
Division, Office of Policy Development and Risk Control, (703) 883-
4498; or William L. Larsen, Senior Attorney, Legal Counsel Division, 
Office of General Counsel, (703) 883-4020, Farm Credit Administration, 
1501 Farm Credit Drive, McLean, VA 22102-5090. For the hearing impaired 
only, TDD, (703) 883-4444.
    NCUA: Kimberly Iverson, Program Officer, Office of Examination and 
Insurance, (703) 518-6375, 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 current flood insurance 
regulations and required the FCA to promulgate flood insurance 
regulations for the first time. The agencies fulfilled these 
requirements by issuing a joint final rule in the summer of 1996. See 
61 FR 45684 (August 29, 1996).
    The agencies received a number of requests in the rulemaking 
process 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, 
given the number, level of detail, and diversity of subject matter of 
the requests for additional information, that informal staff guidance 
addressing the more technical compliance issues would be helpful and 
appropriate. Consequently, the agencies decided to issue informal 
guidance to address these technical issues subsequent to the 
promulgation of the final rule. 61 FR at 45685-45686. This objective is 
fulfilled by the release of the Interagency Questions and Answers.
    The purpose of these Interagency Questions and Answers is to 
consolidate, to the extent possible, useful flood insurance information 
into a comprehensive document. These Interagency Questions and Answers 
supplement other documents that the agencies are not superseding, 
including, for example, interagency staff flood insurance interpretive 
letters.

Comments

    The agencies invite public comment on a continuing basis. The 
agencies intend to update the Interagency Questions and Answers on a 
regular basis. If, after reading the Interagency Questions and Answers, 
financial institutions, 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 in 
future guidance.

Interagency Questions and Answers Format

    The Interagency Questions and Answers are organized by topic. Each 
topic addresses a major area of the revised flood insurance law and 
regulations such as the requirement to purchase flood insurance where 
available, escrow requirements, forced placement, et cetera. The text 
of the Interagency Questions and Answers follows:

Text of the Interagency Questions and Answers Regarding Flood Insurance

Interagency Questions and Answers Regarding Flood Insurance

Table of Contents

    The agencies are providing answers to questions pertaining to 
the following topics of the flood insurance laws and regulations:

I. Definitions.
II. Requirement to purchase flood insurance where available.
III. Exemptions.
IV. Escrow requirements.
V. Required use of Standard Flood Hazard Determination Form (SFHDF).
VI. Forced placement of flood insurance.
VII. Determination fees.
VIII. Notice of special flood hazards and availability of Federal 
disaster relief.
IX. Notice of servicer's identity.
X. Appendix A to the Regulation--Sample Form of Notice of Special 
Flood Hazards and Availability of Federal Disaster Relief 
Assistance.

    The body of the Interagency Questions and Answers Regarding Flood 
Insurance follows:
    This document answers commonly asked questions about the revised 
flood insurance laws and regulations that have been raised by financial 
institutions and other interested parties. It was prepared by staff 
from the Farm Credit Administration, the Federal Deposit Insurance 
Corporation, the Federal Reserve Board, the National Credit Union 
Administration, the Office of the Comptroller of the Currency, and the 
Office of Thrift Supervision under the auspices of the Federal 
Financial Institutions Examination Council.
    The document does not anticipate all circumstances or contingencies 
that may affect particular financial institutions. As experience with 
the application of the revised regulation is gained, the agencies will 
issue further staff guidance.
    For ease of reference the following terms are used throughout the 
document: Act refers to the National Flood Insurance Reform Act of 1994 
(Title V of the Riegle Community Development and Regulatory Improvement 
Act of 1994 [Pub. L. 103-325, title V, 108 Stat. 2160, 2255-2287 
(September 23, 1994)]). Regulation refers to the joint final rule 
adopted by the agencies (61 FR 45684 (August 29, 1996)).

I. Definitions

    Designated Loan--A loan secured by a building or mobile home that 
is located or to be located in a special flood hazard area (SFHA) in 
which flood insurance is available under the Act. . .

[[Page 39525]]

    1. Is an interim loan to construct a commercial building included 
in this definition?
    Answer: Yes. If the purpose of the loan is to construct a building 
(assuming the loan is secured by that building), the Regulation 
applies. If the community in which the property is located participates 
in the National Flood Insurance Program (NFIP), then NFIP policies, 
subject to certain conditions and restrictions, can be purchased to 
provide coverage during the construction period for a building that 
will be located in an SFHA.
    2. Are loans secured by raw land that will be developed into 
buildable lots subject to the Regulation?
    Answer: No. Acquisition and development loans would not be subject 
to the Regulation because they do not meet the definition of a 
``designated loan.'' However, when the final construction phase of an 
ADC (acquisition, development, construction) project is commenced, the 
Regulation becomes effective. This will require lenders to determine 
whether the property is located in an SFHA. If the building securing 
the loan is located or to be located in an SFHA, the other requirements 
of the Regulation will also apply. As noted above, the NFIP permits 
policies (subject to certain conditions and restrictions) to be 
purchased prior to the actual construction of a building.
    3. Is a home equity loan considered a ``designated loan''?
    Answer: Yes, a home equity (or other) loan can be a designated 
loan, regardless of the lien priority if: the loan is secured by a 
building or a mobile home; the collateral is located in an SFHA; and, 
the community where the property is located participates in the NFIP.
    4. Are draws against approved lines of credit a ``triggering 
event'' requiring a flood determination under the Regulation or is it 
only the original application for the line of credit that triggers a 
determination?
    Answer: Assuming that the line of credit is secured by a building 
and is thereby a ``designated loan,'' a determination is required when 
application is made for the loan. Draws against an approved line would 
not require further determinations. However, a request for an increase 
in the line of approved credit is a triggering event and might require 
a new determination, depending upon whether a previous determination 
was done. (See the response to Question 4 in Section V, Required use of 
Standard Flood Hazard Determination Form)
    5. 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 looks to the collateral securing the loan. In 
this example, the collateral does not meet the definition of a 
``designated loan'' because it is not a building or mobile home.
    6. If the building and contents both secure the loan, and the 
building is located in an SFHA, in a community that participates in the 
NFIP, what are the requirements for flood insurance? What if the 
contents securing the loan are located in buildings other than the 
building securing the loan?
    Answer: Flood insurance is required for the building located in the 
SFHA and any contents stored in that building. If collateral securing 
the loan is stored in buildings that do not secure the loan and these 
buildings are not located in an SFHA, then flood insurance is not 
required on those contents.
    7. Does the Regulation apply where the lender is taking a security 
interest only as an ``abundance of caution''?
    Answer: Yes. The Act looks to the collateral securing the loan, not 
to the purpose of the loan. If the lender takes a security interest in 
improved real estate, the Regulation applies without regard to the 
purpose of the loan.
    8. If a borrower offers a note on a single family dwelling as 
collateral for a personal loan but the lender does not take a security 
interest in the dwelling itself, is this a ``designated loan''?
    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.''
    9. Does the Regulation apply to loans that are being restructured 
because of the borrower's default on the original loan?
    Answer: Yes, assuming that 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.
    10. A lender makes a loan (not secured by real estate) on the 
condition that a third party personally guarantees the loan and permits 
the lender to take a security interest in improved real estate owned by 
the third party. Is this a ``designated loan'' to which the Regulation 
applies if the guarantor's property is located in an SFHA in a 
community that participates in the NFIP?
    Answer: Yes. The making of a loan on condition of a personal 
guarantee by a third party and further secured by improved real estate 
owned by that third party is so closely tied to the making of the loan 
that it is considered a ``designated loan'' under the Regulation.

II. Requirement to Purchase Flood Insurance Where Available

    1. If flood insurance is not available because the community in 
which the property securing the loan is located is a non-participating 
community in the NFIP, does the Regulation apply?
    Answer: Yes. The Regulation still applies, although it does not 
require the borrower to obtain flood insurance. The lender must make a 
determination on the Special Flood Hazard Determination Form (SFHDF) to 
determine if the property is located in an SFHA and notify the 
borrower. The lender may make a conventional loan in an SFHA in a non-
participating community if it chooses to do so. Government-guaranteed 
or insured loans (e.g., SBA, VA, FHA), however, are not permitted to be 
made in non-participating communities (see 42 USC Sec. 4106(a)).
    Nevertheless, institutions should exercise good risk management 
practices to ensure that making loans on properties that are in an SFHA 
where no flood insurance is available does not create unacceptable 
risks in an institution's loan portfolio.
    2. Does the Regulation apply to loans purchased from others?
    Answer: No. The Regulation lists certain events that trigger its 
requirements: making, increasing, extending or renewing a designated 
loan. The purchase of a loan is not an event that requires the 
purchaser to make a new determination at the time of purchase. However, 
if the lender becomes aware at some point during the life of the loan 
that flood insurance is required, then the lender must comply with the 
Regulation. Similarly, if the lender extends, increases or renews the 
loan, the Regulation applies.
    3. What about table funding programs? Are they treated as 
originations or as loans purchased from others?
    Answer: Loans made through a table funding process will be treated 
as though the party providing the funds has originated the loan. The 
funding party must 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.
    4. How are loans that are now under-insured because of previous 
insurance limitations to be handled?

[[Page 39526]]

    Answer: In accordance with the Act, the Federal Insurance 
Administration has increased the amount of insurance available under 
the NFIP. Consequently, loans that previously had principal balances in 
excess of the program limits may now be underinsured. The new insurance 
limitations went into effect on March 1, 1995. Lenders and servicers 
must adjust coverage limits at the first renewal date or the first 
anniversary date following March 1, 1995, if the policy is a multi-year 
policy. Loans made after March 1, 1995, are subject to the new limits.
    5. If the insurable value of the building securing the loan is less 
than the outstanding balance of the loan, can a lender require the 
borrower to obtain flood insurance up to the balance of the loan?
    Answer: No. The insurable value of the improvements to the real 
estate that secures the loan governs the amount of insurance that is 
required. The amount of required insurance coverage is the lesser of 
the principal balance of the loan(s) or the maximum coverage available 
under the NFIP. An NFIP policy will not provide insurance coverage for 
losses in excess of the value of the improvements. Since the NFIP 
policy does not cover land value, lenders should determine the amount 
of insurance necessary based on the value of the improvements.
    6. How do the flood insurance requirements apply in situations 
involving loan servicing?
    Scenario 1--Loan is originated by a regulated lender and secured by 
a building on property located in an SFHA in a community in which flood 
insurance is available under the Act. Borrower is provided appropriate 
notice and insurance is obtained. Lender services the loan. Loan is 
subsequently sold to a non-regulated party and servicing is transferred 
to that party. What responsibilities are imposed on the regulated 
lender? What if the regulated lender only transfers or sells the 
servicing rights?
    Answer: The lender must comply with all requirements of the 
Regulation, including making the initial determination, providing 
appropriate notice to the borrower, and ensuring that the proper amount 
of insurance is obtained. When the loan is sold and servicing is 
transferred to the new servicer, the lender must provide notice of the 
identity of the new servicer to FEMA or its designee.
    If the lender retains ownership of the loan and only transfers or 
sells 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 (if 
necessary).
    More 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 to ensure 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--Loan is originated by a non-regulated lender. Property 
is located in an SFHA but the lender did not make an initial 
determination or notify borrower of the need to obtain insurance. Loan 
is purchased by regulated lender who also services the loan. What are 
the responsibilities of the regulated lender? What if the regulated 
lender only purchases the servicing rights?
    Answer: If the loan is purchased by the regulated lender, no 
determination is necessary at that point nor is any notice to FEMA 
required. If, at some time in the future, the lender becomes aware that 
the property is located in an SFHA in a community in which flood 
insurance is available under the Act, it must notify the borrower of 
that fact and require the borrower to purchase flood insurance. If the 
borrower does not voluntarily comply, the lender must force place the 
insurance. If servicing is subsequently sold or transferred, the lender 
must also notify FEMA or its designee of the identity of the new 
servicer.
    If the regulated lender purchases only the servicing rights to the 
loan, the lender is only obligated to follow the terms of its servicing 
contract with the owner of the loan.
    7. A loan is secured by multiple agricultural buildings located 
throughout a large geographic area. Some of the properties are located 
in an SFHA and others are not. In addition, the buildings are located 
in several jurisdictions or counties where some of the communities 
participate in the NFIP, and others do not. What are the flood 
insurance requirements for security properties in this scenario?
    Answer: Flood insurance would be required only on those buildings 
located in an SFHA in which the community participates in the NFIP. A 
notice of special flood hazards is required for those buildings located 
in an SFHA whether or not the community participates in the NFIP. The 
amount of insurance required will depend upon the principal amount of 
the loan, the value of the buildings located in participating 
communities and the amount of insurance available under the NFIP.
    For example, a loan in the principal amount of $150,000 is secured 
by 5 buildings, 3 of which are located in SFHAs within participating 
communities. The properties are non-residential in nature, therefore 
the maximum amount of insurance available under the NFIP is $500,000 
per building. Each of the three buildings located in an SFHA must be 
covered by flood insurance. The total required amount of insurance for 
the three buildings would be the lesser of $150,000 or the value of the 
three buildings with each building insured separately from the other. 
The amount of required flood insurance could be allocated among the 
three buildings in varying amounts, so long as each is covered by flood 
insurance.
    8. What is the appropriate amount of coverage under federal flood 
insurance legislation with respect to condominiums, in particular, 
multi-story condominium complexes?
    Answer: Effective October 1, 1994, the Federal Insurance 
Administration issued a new form of Master Policy for condominiums--the 
Residential Condominium Building Association Policy (RCBAP) . To meet 
federal flood insurance requirements, an RCBAP should be purchased in 
the amount of at least 80% 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. For instance, 
the maximum amount of coverage on a 50 unit condominium building could 
be up to $12,500,000 ($250,000 x 50). However, if the replacement value 
of the building was only $10,000,000, the condominium association could 
purchase a policy of $8,000,000 and not be required to have a co-
insurance payment in the event of a flood. The

[[Page 39527]]

$8,000,000 of coverage would meet the requirements of the Regulation 
for all the units within the condominium. A lender should make a 
similar analysis to determine the amount of coverage for other 
condominium complexes where flood insurance is required.
    When making a loan on a condominium unit located in an SFHA, 
lenders should determine whether a master policy or similar product, 
provides adequate flood insurance coverage and is in place at the time 
the loan is made. Lenders should further ensure that a mechanism is in 
place (possibly a covenant on the part of the condominium association) 
that provides for adequate flood insurance coverage for the term of the 
loan.
    9. A lender has a loan secured by a condominium unit in a multi-
unit complex whose condominium association allows its existing flood 
insurance policy to lapse. As a result, there is no flood insurance 
coverage for the condominium unit. What recourse does the lender have?
    Answer: The NFIP does make an individual condominium unit policy 
available (the Dwelling Form), in addition to association master 
policies. In this instance, the lender after receiving notice that the 
association policy has lapsed, must notify the unit owner according to 
the forced placement procedures to obtain a policy (within 45 days) for 
the amount of the loan or the maximum amount of coverage available, 
whichever is less.

III. Exemptions

    1. 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 the original principal balance of the loan is $5,000 
or less, and the original repayment term is one year or less. Both of 
these conditions must be present for the second exemption to apply.

IV. Escrow Requirements

    1. The effective date of the escrow requirement was October 1, 
1996. Does the escrow requirement apply to applications received before 
October 1, 1996?
    Answer: No. The escrow requirement applies only to loans closed on 
or after October 1, 1996.
    2. Are multi-family buildings or mixed-use properties included in 
the definition of ``residential improved real estate''? Are escrows 
required?
    Answer: The Regulation states that if the collateral securing the 
loan meets the definition of ``residential improved real estate'' and 
the lender requires escrows for other items (e.g., hazard insurance or 
taxes), then the lender is required to also escrow flood insurance 
premiums.
    Multi-family buildings. Neither the Act nor the Regulation 
distinguishes whether residential improved real estate is single or 
multi-family, or whether it 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, 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 if 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 is generally considered a commercial enterprise and consequently 
would not constitute a residential building under the definition. Even 
though the Regulation does not require escrows for flood insurance, the 
lender may impose such a requirement through contract.
    On the other hand, if the primary use of a mixed-use property is 
for residential purposes, the Regulation's escrow requirements apply.
    3. When must escrow accounts established for flood insurance 
purposes be administered in accordance with the escrow rules under 
Section 10 of RESPA?
    Answer: Lenders should look to the definition of ``federally 
related mortgage loan'' contained in RESPA to see if a particular loan 
is subject to Section 10. Generally, only loans on one to four family 
dwellings will be subject to the escrow requirements of RESPA. 
Consequently, only those escrow accounts established for loans subject 
to RESPA are required to conform with Section 10 of RESPA. 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.
    4. 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, If the loan policies of 
the lending institution 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 not made 
pursuant to a voluntary request.
    5. 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.
    6. Will escrow-type accounts for multi-family building commercial 
loans trigger the escrow requirement for flood insurance premiums?
    Answer: Various types of accounts are established in connection 
with commercial purpose real estate loans. These loans typically 
involve multi-family properties and are substantially different in 
purpose and type from escrows accounts on single family residences. 
These involve accounts such as ``interest reserve accounts,'' 
``compensating balance accounts,'' ``marketing accounts,'' and similar 
accounts that may be established by contract between the purchaser and 
seller of the building (although administered by the lender in some 
cases). Accounts established in connection with the underlying 
agreement between the buyer and seller, or that relate to the 
commercial venture itself are not the type of accounts that constitute 
escrow accounts for the purpose of the Regulation. Escrow accounts for 
the protection of the property, such as escrows for hazard

[[Page 39528]]

insurance premiums or local real estate taxes, are the types of escrows 
that trigger the requirement to escrow flood insurance premiums.
    7. What requirements for escrow accounts apply to properties 
covered by Residential Condominium Building Association Policies?
    Answer: RCBAPs are policies purchased by the condominium 
association on behalf of the individual unit owners in the condominium. 
The premiums on the policy are paid by a portion of the periodic dues 
paid to the association by the condominium owners. When a lender makes 
a loan on the purchase of a condominium over which a RCBAP is in place 
and the premiums are paid by dues to the condominium association, the 
escrow requirement is satisfied. Lenders should exercise due diligence 
with respect to continuing compliance with the insurance requirements 
on the part of the condominium association.

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

    1. Does the SFHDF replace the borrower notification form?
    Answer: No. The notification form is used to notify the borrower(s) 
that they are 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.
    2. Must the SFHDF be provided to the borrower? If so, must the 
borrower sign the form acknowledging receipt?
    Answer: 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. Signature of the borrower is not 
required on the SFHDF.
    3. 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.
    4. Section 528 of the Act permits a lender to rely on a previous 
determination using the SFHDF when it is increasing, extending, 
renewing or purchasing a loan secured by a building or a mobile home. 
The Act omits the ``making'' of a loan as a permissible event 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. If a subsequent loan involving a refinancing or 
assumption is made on the same property by the same lender who obtained 
the original determination, and the other requirements contained in 
Section 528 are met, the lender may rely on the previous determination. 
Section 528 of the Act requires that a lender may rely on a previous 
determination only if the original determination was recorded on the 
SFHDF within the previous seven years and there were no map revisions 
or updates affecting the security property since the original 
determination was made. However, a loan refinancing or assumption made 
by a lender other than the lender who obtained the original 
determination would constitute ``making'' a new loan, thereby requiring 
a new determination.
    5. 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 are 
met and the lender made the first mortgage, then a new determination 
would not be necessary. 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 any event, the institution will need to 
determine if the amount of insurance in force is sufficient to cover 
either the principal balance of all loans (including the home equity 
loan) or the maximum amount of coverage available on the improved real 
estate, whichever is less.

VI. Forced Placement of Flood Insurance

    1. Is forced placement allowed? What are the procedures?
    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;
     Flood insurance coverage is inadequate or does not exist; 
and
     The borrower fails to purchase the appropriate amount of 
coverage.
    In order to force place, a lender must notify the borrower of the 
required amount of flood insurance that must be obtained within 45 days 
after notification. The notice 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. Standard 
FNMA/FHLMC 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.
    2. Can a servicer force place on behalf of a lender?
    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.
    3. 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. Requirement 
to purchase flood insurance where available.)

VII. Determination Fees

    1. 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 a

[[Page 39529]]

notice or compendia that affects 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.
    2. May charges made for life of loan reviews by flood determination 
firms be passed along to the borrower?
    Answer: Yes. Many flood determination firms provide a service to 
the lender for conducting a periodic review of the loan during the time 
it is outstanding to ascertain whether the original determination 
remains valid. This service is sometimes coupled with the making of the 
original determination and the fee charged 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.
    Consequently, the agencies also believe that a fee for a life of 
loan service may be passed along to the borrower. However, because the 
life of loan fee is based on the ability to charge a determination fee, 
the monitoring fee may be charged only if the events specified in the 
answer to question VII.1 occur.

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

    1. Does the notice have to be provided to each borrower for a real 
estate related loan?
    Answer: The notice must be provided to a borrower only when the 
lender determines that the property securing the loan is or will be 
located in an SFHA. In a transaction involving multiple borrowers, the 
agencies believe it is only necessary to 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.
    2. Lenders making loans on mobile homes may not always know where 
the home is to be located until just prior to, or sometimes after, the 
time of loan closing. How is the notice requirement applied in these 
situations?
    Answer: 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 and, if possible, before completion of the loan transaction. In 
circumstances where 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.

IX. Notice of Servicer's Identity

    1. When a lender makes a designated loan and it 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.
    2. 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: 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 bank or servicer making notification;
     Name and address of new servicer;
     Name and telephone number of contact person at new 
servicer.
    3. Can delivery of the notice be made electronically, including 
batch transmissions?
    Answer: Yes. The Regulation specifically permits transmission by 
electronic means and a timely batch transmission of the notice would 
also be permissible, if it is acceptable to the Director's designee.
    4. 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.
    5. Is the lender required to provide notice when a servicer other 
than the

[[Page 39530]]

lender sells or transfers the servicing rights to another servicer?
    Answer: No. 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, First Financial 
Institution makes and services the loan. It then sells the loan in the 
secondary market and also sells the servicing rights to First Financial 
Mortgage Company. First Financial Institution notifies the Director's 
designee of the identity of the new servicer and the other information 
requested by FEMA so that FEMA can track the loan. If First Financial 
Mortgage Company later sells the servicing rights to another firm, 
First Financial Mortgage Company is responsible for notifying the 
Director's designee of the identity of the new servicer, not First 
Financial Institution.
    6. 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. Appendix A to the Regulation--Sample Form of Notice of Special 
Flood Hazards and Availability of Federal Disaster Relief 
Assistance

    1. Is use of the sample form of notice mandatory? Can it be revised 
to accommodate a lender's needs?
    Answer: Although lenders are required to provide a notice to a 
borrower who is purchasing property 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 if they choose. However, a lender-
revised form must provide the borrower with at least the minimum 
information required by the Regulation. Therefore, lenders should 
consult the Regulation to determine the information needed.

Federal Financial Institutions Examination Council.
    Dated at Washington, DC this 16th day of July 1997.

Joe M. Cleaver,
Executive Secretary.
[FR Doc. 97-19133 Filed 7-22-97; 8:45 am]
BILLING CODE 6210-01-P, 6720-01-P, 6714-01-P, 4810-01-P, 7535-01-P