[Federal Register Volume 76, Number 200 (Monday, October 17, 2011)]
[Notices]
[Pages 64175-64183]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-26749]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket ID OCC-2011-0024]

FEDERAL RESERVE SYSTEM

[Docket No. OP-1431]

FEDERAL DEPOSIT INSURANCE CORPORATION

[RIN 3064-ZA00]

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); Farm Credit Administration (FCA); 
National Credit Union Administration (NCUA).

ACTION: Notice and request for comment.

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SUMMARY: The OCC, Board, FDIC, FCA, and NCUA (collectively, the 
Agencies) are finalizing two new questions and answers, one relating to 
insurable value and one relating to force placement, and withdrawing 
one question and answer regarding insurable value. The two final 
questions and answers supplement the ``Interagency Questions and 
Answers Regarding Flood Insurance'' (Interagency Questions and 
Answers), which were published on July 21, 2009 (74 FR 35914). Based on 
comments received, the Agencies also have significantly revised two 
questions and answers regarding force placement of flood insurance that 
were initially proposed on July 21, 2009, and are proposing revision to 
a previously finalized question and answer. These three revised 
questions and answers are being proposed for comment.

DATES: Effective date of final questions and answers: October 17, 2011. 
Comment due date: Comments on the proposed questions and answers must 
be submitted on or before December 1, 2011.

ADDRESSES: Although the Agencies will jointly review all the comments 
submitted, it will facilitate review of the comments if interested 
parties send comments to the agency that is the appropriate federal 
regulator for the type of institution addressed in the comments. 
Interested parties are invited to submit written comments to:
    OCC: Because paper mail in the Washington, DC area and at the 
Agencies is subject to delay, commenters are encouraged to submit 
comments by e-mail, if possible. Please use the title ``Loans in Areas 
Having Special Flood Hazards; Interagency Questions and Answers 
Regarding Flood Insurance'' to facilitate the organization and 
distribution of the comments. You may submit comments by any of the 
following methods:
     E-mail: [email protected].
     Mail: Office of the Comptroller of the Currency, 250 E 
Street, SW., Mail Stop 2-3, Washington, DC 20219.
     Fax: (202) 874-5274.
     Hand Delivery/Courier: 250 E Street, SW., Attn: 
Communications Division, Mail Stop 2-3, Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2011-0024'' in your comment. In general, the OCC will 
enter all comments received into the docket and publish them on the 
Regulations.gov Web site without change, including any business or 
personal information that you provide such as name and address 
information, e-mail addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this notice by any of the following methods:
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC's Communications Division, 250 E 
Street, SW., Washington, DC. For security reasons, the OCC requires 
that visitors make an appointment to inspect comments. You may do so by 
calling in advance (202) 874-4700. Upon arrival, visitors will be 
required to present valid government-issued photo identification and 
submit to security screening in order to inspect and photocopy 
comments.

[[Page 64176]]

     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-1431, 
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: [email protected]. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information.
    Public comments may also be viewed electronically or in paper in 
Room MP-500 of the Board's Martin Building (20th and C Streets, NW.) 
between 9 a.m. and 5 p.m. on weekdays.
    FDIC: You may submit comments, identified by RIN number 3064-ZA00 
by any of the following methods:
     Agency Web site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on 
the Agency Web site.
     E-mail: [email protected]. Include the RIN number in the 
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
     Hand Delivery/Courier: Guard station at the rear of the 
550 17th Street Building (located on F Street) on business days between 
7 a.m. and 5 p.m.
     Instructions: All submissions received must include the 
agency name and RIN number.
     Public Inspection: All comments received will be posted 
without change to http://www.fdic.gov/regulations/laws/federal/propose.html including any personal information provided. Paper copies 
of public comments may be ordered from the Public Information Center by 
telephone at 1-877-275-3342 or 703-562-2200.
    FCA: There are several methods for you to submit comments. For 
accuracy and efficiency reasons, commenters are encouraged to submit 
comments by e-mail or through the Agency's Web site. As facsimiles 
(fax) are difficult for us to process and achieve compliance with 
section 508 of the Rehabilitation Act (29 U.S.C. 794d), we are no 
longer accepting comments submitted by fax. Regardless of the method 
you use, please do not submit your comment multiple times via different 
methods. FCA requests that comments to the proposed amendment include 
the reference RIN 3052-AC46. You may submit comments by any of the 
following methods:
     E-mail: Send us an e-mail at [email protected].
     Web site: http://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments,'' and follow the directions for 
``Submitting a Comment.''
     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.
    You may review copies of all 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 ``Public Commenters'' then ``Public 
Comments'' and follow the directions for ``Reading Submitted 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/RegulationOpinionsLaws/proposed_regs/proposed_regs.html. Follow the instructions for 
submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name] Comments on Flood Insurance, Interagency Questions & Answers'' in 
the e-mail subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Mary Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    Public Inspection: All public comments are available on the 
agency's Web site at http://www.ncua.gov/RegulationOpinionsLaws/comments as submitted, except as may not be possible for technical 
reasons. Public comments will not be edited to remove any identifying 
or contact information. Paper copies of comments may be inspected in 
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by 
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, 
call (703) 518-6546 or send an e-mail to [email protected].

FOR FURTHER INFORMATION CONTACT:
    OCC: Pamela Mount, National Bank Examiner, Compliance Policy, (202) 
874-4428; or Margaret Hesse, Special Counsel, Community and Consumer 
Law Division, (202) 874-5750, Office of the Comptroller of the 
Currency, 250 E Street, SW., Washington, DC 20219.
    Board: Nikita M. Pastor, Senior Attorney, Division of Consumer and 
Community Affairs, (202) 452-2412; Lanette J. Meister, Senior 
Supervisory Consumer Financial Services Analyst (202) 452-2705; 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: John Jackwood, Senior Policy Analyst, Supervisory Policy 
Branch, Division of Depositor and Consumer Protection, (202) 898-3991; 
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.
    FCA: Mark L. Johansen, Senior Policy Analyst, Office of Regulatory 
Policy, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4498, TTY (703) 883-4434; or Mary Alice Donner, Senior Attorney, Office 
of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, 
(703) 883-4033, TTY (703) 883-4020.
    NCUA: Justin M. Anderson, Staff Attorney, Office of General 
Counsel, (703) 518-6540; or Pamela Yu, Staff Attorney, Office of 
General Counsel, (703) 518-6593, National Credit Union Administration, 
1775 Duke Street, Alexandria, VA 22314-3428.

SUPPLEMENTARY INFORMATION:

[[Page 64177]]

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, the Office of Thrift Supervision (``OTS''), and NCUA to 
revise their flood insurance regulations and required the FCA to 
promulgate a flood insurance regulation for the first time. The OCC, 
Board, FDIC, OTS, 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).\1\
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    \1\ Throughout this document ``the Agencies'' includes the OTS 
with respect to events that occurred prior to July 21, 2011, but 
does not include OTS with respect to events thereafter. Sections 311 
and 312 of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act transferred OTS's functions to other agencies on July 21, 2011. 
The OTS's supervisory functions relating to Federal savings 
associations were transferred to the OCC, while those relating to 
state savings associations were transferred to the FDIC. See also 76 
FR 39246 (Jul. 6, 2011).
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    In connection with the 1996 joint rulemaking process, the Agencies 
received a number of requests to clarify specific issues covering a 
wide spectrum of the proposed rule's provisions. The Agencies addressed 
many of these requests in the preamble to the joint final rule. The 
Agencies concluded, however, that given the number, level of detail, 
and diversity of the requests, guidance addressing the technical 
compliance issues would be helpful and appropriate. Consequently, the 
Agencies decided guidance would be appropriate to address these 
technical issues subsequent to the promulgation of the final rule (61 
FR 45685). The Federal Financial Institutions Examination Council 
(FFIEC) fulfilled that objective through the initial release of the 
Interagency Questions and Answers in 1997 (1997 Interagency Questions 
and Answers). 62 FR 39523 (July 23, 1997).
    After notice and comment, on July 21, 2009, the Agencies updated 
the interagency guidance (2009 Interagency Questions and Answers). 74 
FR 35914 (July 21, 2009). In this publication, the Agencies also 
proposed five new questions and answers for comment. See 74 FR 35931. 
The proposed questions and answers addressed issues related to 
insurable value and force placement of flood insurance.
    The Agencies received 28 total comments on the proposed questions 
and answers. These comments are discussed below.
    The Agencies are adopting two of the five questions and answers 
proposed in the 2009 Interagency Questions and Answers: one question 
and answer relating to insurable value (question and answer 9) and 
another question and answer relating to force placement of flood 
insurance (question and answer 61). The Agencies are also withdrawing 
one question and answer relating to insurable value and have reserved 
this question and answer for later use (question and answer 10). 
However, as discussed below, because the Agencies propose to 
significantly and substantively change the answers to two of the 
questions and answers relating to the force placement of flood 
insurance, the Agencies are proposing them for additional comment 
(questions and answers 60 and 62). In addition, the Agencies are 
proposing changes to a previously finalized question and answer 
(question and answer 57) that also relates to the force placement of 
flood insurance to be consistent with the proposed changes to these two 
questions and answers.
    The two questions and answers being adopted as final today 
supplement the 2009 Interagency Questions and Answers and other 
guidance or interpretations issued by the Agencies and the Federal 
Emergency Management Agency (FEMA). The Agencies will publish the 
combined and complete Interagency Questions and Answers in their 
entirety once the questions and answers that are being proposed for 
comment are finalized.
    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 Reform 
Act (codified at 42 U.S.C. 4001 et seq.). ``Regulation'' refers to each 
agency's current final flood insurance rule.\2\
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    \2\ The Agencies' rules are codified at 12 CFR part 22 (national 
banks) and 76 FR 48,950, 49,140 (Aug. 9, 2011) (to be codified at 12 
CFR part 172) (Federal savings associations) (OCC), 12 CFR part 208 
(Board), 12 CFR part 339 (state nonmember banks) and 76 FR 47,822 
(Aug. 5, 2011) (to be codified at 12 CFR part 391 subpart D) (state 
savings associations) (FDIC), 12 CFR part 614 (FCA), and 12 CFR part 
760 (NCUA). OTS's rules at 12 CFR part 572 will be removed from 
codification at a later date.
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Final and Withdrawn Questions and Answers

Section II. Determining When Certain Loans Are Designated Loans for 
Which Flood Insurance Is Required Under the Act and Regulation

    Insurable value. In general, the questions and answers in Section 
II explain that, in order to comply with the Regulation, the amount of 
insurance required is the lesser of the outstanding principal balance 
of the designated loan or the maximum amount of insurance available 
under the National Flood Insurance Program (NFIP). The maximum amount 
of insurance available under the NFIP is the lesser of the maximum 
limit of coverage available for the particular type of property under 
the Act or ``the overall value of the property securing the designated 
loan minus the value of the land on which the property is located.'' 
Consistent with terminology used by FEMA in its guidance, the Agencies 
use the term ``insurable value'' to denote the regulatory phrase 
``overall value of the property minus the value of the land.'' See 
generally question and answer 8.
    The Agencies proposed questions and answers 9 and 10 in an effort 
to assist lenders in calculating the ``insurable value'' of a property 
for purposes of determining the required amount of flood insurance 
under the NFIP. Proposed question and answer 9 referenced FEMA 
guidelines in providing that the full insurable value of a building is 
the same as 100 percent replacement cost value (RCV) \3\ of the insured 
building. Proposed question and answer 9 sought to illustrate the 
flexibility lenders have in determining RCV of a building by providing 
that lenders (either by themselves or in consultation with the flood 
insurance provider or other professionals) could consider permissible 
methods, such as the RCV used in a hazard insurance policy (recognizing 
that replacement cost for flood insurance will include the foundation), 
an appraisal based on a cost-value (not market-value) approach before 
depreciation deductions, and/or a construction cost calculation.
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    \3\ RCV is the cost to replace property with the same kind of 
material and construction without deduction for depreciation. FEMA, 
Mandatory Purchase of Flood Insurance Guidelines, at GLS 10.
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    Proposed question and answer 10 provided alternatives to 
determining the insurable value other than RCV for certain 
nonresidential buildings used for ranching, farming, and industrial 
purposes when the borrower either would replace the building with a 
structure more closely aligned with the

[[Page 64178]]

function the building is presently providing or would not replace the 
building if damaged or destroyed by a flood. In such cases, the 
alternatives proposed by the Agencies would have allowed the lender to 
determine the insurable value by either the ``functional building cost 
value'' or by the demolition/removal cost value.

Comments and Final Question and Answer 9

    Although the Agencies received several comments commending the 
proposed guidance, numerous commenters objected to tying insurable 
value to RCV in all cases. Commenters stated that it was not possible 
to obtain RCV in many instances, particularly in cases of 
nonresidential properties. Commenters also stated that reliance on RCV 
was inappropriate for nonresidential properties because borrowers would 
only recover actual cash value \4\ in the event of a loss for these 
types of properties, resulting in the borrower being over-insured.
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    \4\ ``Actual cash value'' is the cost to replace an insured item 
of property at the time of loss, less the value of its physical 
depreciation. FEMA, Mandatory Purchase of Flood Insurance 
Guidelines, at GLS 1.
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    In response, the Agencies reaffirm that the insurable value for 
certain residential or condominium properties should be written to RCV. 
Further, the Agencies recognize that this strict interpretation of 
insurable value as RCV may not be practical in all cases for 
nonresidential buildings. Although FEMA's guidance states that 
insurable value is the same as RCV, it also provides that lenders 
should avoid creating a situation in which the insured pays for 
coverage that exceeds the amount the NFIP will pay in the event of a 
loss.\5\ In cases involving certain residential or condominium 
properties,\6\ insurance policies should be written to, and the 
insurance loss payout would be the equivalent of, RCV. However, in 
cases involving nonresidential properties, as well as some residential 
properties, where the insurance loss payout is normally based on actual 
cash value, insurance policies written at RCV may require an insured to 
pay for coverage that significantly exceeds the amount the NFIP would 
pay in the event of a loss. Similarly, in the case of certain 
nonresidential buildings used for ranching, farming, or industrial 
purposes that the borrower either would not replace if damaged or 
destroyed by a flood or would replace with a structure more closely 
aligned to the function the building is providing at the time of the 
flood, payouts may be well below RCV. Further, in cases where the 
physical depreciation of a nonresidential building is very high, the 
actual cash value payout would likely be very low, causing an even 
larger gap in the amount of insurance purchased and the potential 
payout. As a result, requiring flood insurance equal to RCV in such 
instances may lead to over-insurance for such properties. Lenders, 
however, need to be equally mindful of avoiding situations in which, as 
a result of insuring at a level below RCV, they under-insure property. 
In determining the amount of insurance to require, lenders should 
consider the extent of recovery allowed under the applicable NFIP 
policy.
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    \5\ FEMA, Mandatory Purchase of Flood Insurance Guidelines, at 
27.
    \6\ A single-family dwelling, including a single-family unit in 
a building under a condominium form of ownership, used as the 
insured's primary residence is covered under the NFIP's Dwelling 
Policy and, upon loss, payment is settled at RCV if the dwelling is 
insured for at least the lesser of 80 percent of the dwelling's full 
RCV or the maximum limit of coverage under the NFIP. Losses on other 
residential properties are settled at actual cash value. See FEMA, 
Flood Insurance Manual, at POL 3-20. Residential condominium 
buildings are covered under the NFIP's Residential Condominium 
Building Association Policy (RCBAP). Losses on residential 
condominium buildings are settled at RCV, unless subject to a co-
insurance penalty, which applies when the building coverage is less 
than the lesser of 80 percent of full RCV or the maximum limit of 
coverage under the NFIP. See id. at POL 43-60.
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    Given these practical considerations, the Agencies are adopting 
question and answer 9 with a revision to provide that, in calculating 
the required amount of insurance, the lender and borrower (either by 
themselves or in consultation with the flood insurance provider or 
other appropriate professional) may choose from a variety of approaches 
or methods to establish a reasonable valuation. They may use an 
appraisal based on a cost-value (not market-value) approach, a 
construction-cost calculation, the insurable value used in a hazard 
insurance policy (recognizing that the insurable value for flood 
insurance purposes may differ from the coverage provided by the hazard 
insurance and that adjustments may be necessary; for example, most 
hazard policies do not cover foundations), or any other reasonable 
approach, so long as it can be supported. It is important for lenders 
to recognize that, when calculating the minimum amount of insurance 
that is required to be purchased, the insurable value is only relevant 
to the extent that it is lower than either the outstanding principal 
balance of the loan or the maximum amount of insurance available under 
the NFIP.

Withdrawn Question and Answer 10

    In light of the alternative approaches suggested in final question 
and answer 9, the Agencies believe the specific exceptions to insurable 
value in proposed question and answer 10 are no longer necessary. As a 
result, the Agencies are withdrawing question and answer 10 and that 
number is reserved for future use.

Section X. Force Placement of Flood Insurance

    Section X addressed issues concerning the force placement of flood 
insurance. The section and the accompanying questions and answers were 
originally adopted in the 1997 Interagency Questions and Answers. The 
Agencies proposed changes to those existing questions and answers in 
March 2008 designed to provide greater clarity with no intended change 
in substance and meaning. These revisions were adopted in July 2009. In 
response to comments received, however, the Agencies proposed three new 
questions and answers (60, 61, and 62). These proposed questions and 
answers addressed the following force placement issues: when the 45-day 
notice period should begin, whether a borrower may be charged for the 
cost of flood insurance coverage during the 45-day notice period, and 
how soon after the end of the notice period a lender should purchase a 
flood insurance policy when the borrower has failed to purchase an 
appropriate policy.
    The Agencies are adopting question and answer 61 as final, with 
minor nonsubstantive clarifications. However, after consideration of 
the comments received on questions and answers 60 and 62, the Agencies 
are revising these proposed questions and answers for further comment. 
The Agencies are also proposing revisions to question and answer 57 to 
make it consistent with proposed questions and answers 60 and 62.

Comments and Final Question and Answer 61

    The Agencies proposed new question and answer 61 to address 
questions and concerns about how soon lenders have to force place 
insurance after the end of the 45-day notice period. The Regulation 
provides that the lender or its servicer shall purchase insurance on 
the borrower's behalf if the borrower fails to obtain flood insurance 
within 45 days after notification. Proposed question and answer 61 
stated that, given that the lender is already aware during the 45-day 
notice period that it may be required to force place insurance

[[Page 64179]]

if there is no response from the borrower, any delay in force placing 
flood insurance should be brief. Where there is a brief delay in force 
placing required insurance, the proposed question and answer stated 
that the Agencies will expect the lender to provide a reasonable 
explanation for the delay.
    The Agencies received comments from six commenters addressing 
proposed question and answer 61. Two lender commenters explained that 
batch processing of force placed flood insurance policies may cause a 
brief delay in the completion of the force placement process. They 
requested that the Agencies specify in the answer that, if a policy is 
in effect, for example, five days after the end of the 45-day notice 
period, then the force placement time frame has been satisfied. The 
Agencies decline to set an arbitrary number of days after the end of 
the 45-day notice period as a ``safe harbor'' for completion of the 
force placement process. The Agencies believe that the lender should 
have policies and procedures in place to allow force placement 
generally to commence when the 45-day notice period has expired. 
However, the Agencies also recognize that the process of force placing 
flood insurance may not always occur immediately on the 46th day. If 
there is a brief delay in force placing the required insurance, the 
lender should be able to provide a reasonable explanation for the 
delay.
    A government-sponsored enterprise (GSE) commenter did not agree 
with allowing a brief delay, even if the lender could provide a 
reasonable explanation, noting that flood insurance coverage is 
required at all times during the term of the mortgage. This commenter 
also expressed concern over the concept of the 45-day notice period, 
which results in the unintended consequence that properties may be 
uninsured or under-insured during the term of the loan. The Agencies 
are unable to address this overall concern, given that the 45-day 
notice requirement is found in the Act.
    The Agencies are adopting final question and answer 61 with minor 
nonsubstantive clarifications.

Revised Proposed Questions and Answers

Section X. Force Placement of Flood Insurance

    Section X addressed issues concerning the force placement of flood 
insurance. As noted above, the Agencies have revised and are re-
proposing question and answer 60, which addresses when a lender should 
send the force-placement notice, and question and answer 62, which 
addresses when a lender may charge a borrower for the cost of flood 
insurance during the 45-day notice period. The Agencies are also 
proposing revisions to final question and answer 57 in consideration of 
the proposed revisions to questions and answers 60 and 62.

Comments and Revised Proposed Question and Answer 60

    On July 21, 2009, the Agencies proposed question and answer 60 to 
address the permissibility of a lender's acceleration of the 45-day 
notice period for force placement by sending notice to the borrower 
before the borrower's flood insurance coverage expires. The Act 
provides that a lender or its servicer must notify a borrower if it 
determines that the improved real estate collateral's insurance 
coverage has expired or is less than the amount required for that 
particular property. The Act further provides that if the borrower 
fails to purchase flood insurance within 45 days of such notice, the 
lender or servicer is required to purchase the insurance on behalf of 
the borrower. See 42 U.S.C. 4012a(e)(1) & (2). The proposed answer to 
question 60 stated that although a lender or servicer could send an 
advance notice, the Act and Regulation do not allow a lender or its 
servicer to shorten the 45-day force-placement notice period by sending 
a notice to the borrower prior to the actual expiration date of the 
flood insurance policy. The proposed answer also provided that the 
notice must allow the borrower 45 days in which to obtain flood 
insurance.
    The Agencies received a number of comments on this question and 
answer. A few commenters generally agreed with the proposed answer to 
question 60; however, the majority of the commenters viewed the 
proposed question and answer as thwarting the flood insurance program's 
primary purpose of ensuring continuous flood insurance coverage during 
the life of the loan.
    Some commenters asserted that the proposed question and answer 
contradicted the NFIP Flood Insurance Manual, which requires flood 
insurance protection for the life of the loan and states that renewal/
expiration letters should be sent not less than 45 days before policy 
expiration. However, that discussion referenced in the manual pertains 
to the renewal notice that is sent by an insurance company to 
policyholders, reminding them that their flood insurance coverage is 
about to lapse. As such, it has no application to the question and 
answer, which pertains to the notice that a lender or its servicer is 
required to send to borrowers once the lender or its servicer has made 
a determination that flood insurance coverage has either lapsed or is 
inadequate.
    The Agencies agree with the commenters that the purpose of the 
notice process is to ensure that there is continuous flood insurance 
coverage during the life of the loan. In considering these comments to 
proposed question and answer 60, the Agencies have sought to reconcile 
the statute's requirement that a lender send the borrower notice of 
inadequate or lapsed flood insurance with the purpose of the statute to 
facilitate a lender or servicer's ability to ensure continuous flood 
insurance coverage. The Agencies are, therefore, proposing revisions to 
question and answer 60 to clarify when a lender is required to send a 
force placement notice to the borrower to ensure adequate flood 
insurance coverage is maintained throughout the term of the loan. The 
revisions to the question and answer are further made in recognition of 
the position, set out in the revisions to proposed question and answer 
62 infra, that lenders may force place flood insurance coverage for any 
part of the 45-day notice period in which no adequate borrower-
purchased flood insurance is in effect and charge the borrower for the 
costs of such coverage, if the borrower has given the lender express 
authority as a contractual condition of the loan being made.
    The text of the revised proposed question and answer is as follows:
    [rtrif]60. When should a lender send the force placement notice to 
the borrower?
    Answer: To ensure that adequate flood insurance coverage is 
maintained throughout the term of the loan, a lender or its servicer 
must notify a borrower whenever flood insurance on the collateral has 
expired or is less than the amount required for the property. The 
lender must send this notice upon making a determination that the flood 
insurance coverage is inadequate or has expired, such as upon receipt 
of the notice of cancellation or expiration from the insurance provider 
or as a result of an internal flood policy monitoring system. Notice is 
also required when a lender learns that a property requires flood 
insurance coverage because it is in an SFHA as a result of a flood map 
change (which is occurring in many communities as a result of FEMA's 
map modernization program). To avoid the expiration of insurance, the 
Agencies recommend that the lender also advise the borrower when flood 
insurance on the collateral is about to expire.[ltrif]

[[Page 64180]]

Comments on Revised Proposed Question and Answer 62

    On July 21, 2009, the Agencies proposed question and answer 62 to 
address whether a borrower may ever be charged for the cost of flood 
insurance that provides coverage for the 45-day force-placement notice 
period. The Agencies received comments from 19 commenters regarding the 
proposed question and answer. Of these, a majority disagreed with the 
proposition that a lender or servicer has no authority to charge a 
borrower for coverage that applies to the notice period. One commenter 
favored the question and answer, but noted that gaps in coverage and 
costly administration of the notice requirements would be eliminated if 
lenders escrowed flood insurance premiums, even though not legally 
required to do so. Another commenter had no objection to the proposed 
question and answer.
    Several commenters reasoned that the Act intended to establish a 
goal of continuous coverage throughout the life of a mortgage loan. 
These commenters contended that question and answer 62 would undercut 
this primary goal if finalized as proposed.
    Commenters also contended that a borrower must maintain flood 
insurance at the borrower's expense throughout the life of the loan. 
They argued that it is in the borrower's best interest if flood 
insurance coverage on the collateral is purchased by the lender during 
the 45-day notice period after a policy lapses if a borrower has not 
renewed the policy or otherwise purchased insurance. A commenter 
contended that it is fair and equitable that borrowers should pay for 
continuous coverage. Some commenters also noted that the Act expressly 
allows a lender to charge a borrower for the cost of premiums and fees 
incurred in purchasing insurance. One commenter argued it would further 
safety and soundness principles to allow a lender or a servicer to 
charge a borrower for the cost of flood insurance during the notice 
period because, otherwise, the lender may not purchase such coverage if 
it could not recoup its cost. Another commenter did not address the 
proposed question and answer directly, but did argue for continuous 
flood insurance coverage throughout the life of a mortgage, including 
the notice period, citing potential significant financial risk to a 
borrower during that time.
    Some commenters acknowledged that the Act does not specifically 
authorize a lender or a servicer to charge a borrower for a force-
placed policy until the notice period has expired. However, these 
commenters contended that, absent a specific prohibition on charging 
borrowers for coverage for the 45-day notice period, lenders should be 
permitted to charge borrowers for such coverage.
    Several commenters contended that most loan agreements generally 
prohibit any gap in flood insurance coverage and authorize a lender to 
force place insurance on the collateral if the borrower fails to 
maintain coverage. One commenter advised that the proposed question and 
answer would interfere with the borrower-lender contractual 
relationship and also with the purpose of the Act by prohibiting 
lenders from relying on the authority granted in their loan documents 
to force place flood coverage.
    One commenter noted that a policy force-placed through the NFIP is 
not available until the expiration of the notice period; others 
contended that private insurers offer force-placed coverage effective 
retroactively to the date of the lapse to avoid any uninsured loss. 
With respect to coverage during the notice period, one commenter noted 
that, if retroactive coverage to the date of lapse is not permitted for 
a force-placed private insurance policy, the lender (and the borrower) 
will be exposed to loss. Several commenters noted that the lender would 
be exposed to at least a 15-day lapse in coverage under an NFIP policy 
because the lender's coverage continues for only 30 days after lapse, 
not 45.
    Several commenters maintained that proposed question and answer 62 
could harm borrowers. Commenters argued that a borrower would not have 
to pay for duplicate coverage under most force-placed policies. They 
contended that an insurer would waive or refund the premiums for force-
placed insurance if the borrower establishes that coverage is already 
in place or was obtained during the notice period. Several commenters 
even argued that the proposed question and answer might encourage a 
``free-rider situation'' in which borrowers may delay renewal or even 
cancel policies since they cannot be charged during the notice period.
    A few commenters argued that proposed question and answer 62 could 
lead to increased losses for the NFIP since lenders would submit more 
claims under the mortgagee clauses of the NFIP policy for losses that 
occur during the notice period instead of submitting them to a private 
force-placed policy. The same commenters maintained that smaller 
lenders may not be able to afford the cost of blanket or force-placed 
policies and will allow collateral to remain uninsured for the gap 
period, contrary to safety and soundness principles.
    In consideration of the comments received, the Agencies are 
revising proposed question and answer 62. As a general rule, the 
revised proposed question and answer would allow a lender or its 
servicer to charge a borrower for insurance coverage for any part of 
the 45-day notice period in which no adequate borrower-purchased flood 
insurance coverage is in effect if the borrower has given the lender or 
its servicer the express authority to charge the borrower for such 
coverage as a contractual condition of the loan being made. Any policy 
that is obtained by a lender or its servicer, the premium of which is 
charged to the borrower pursuant to a contractual right, should be 
equivalent in coverage and exclusions to an NFIP policy and cover the 
interests of both the borrower and the lender.
    In the proposed question and answer, the Agencies also encourage 
institutions to explain their force-placement policies to borrowers 
(including their policy on charging for force-placement coverage for 
the 45-day period and the timing of that charge) and encourage lenders 
and servicers to escrow flood insurance premiums. Following these 
recommendations could result in significantly less force placement of 
flood insurance. The Agencies also note in the proposed question and 
answer that Regulation Z requires lenders to establish an escrow 
account for the payment of property taxes and mortgage-related 
insurance required by the lender, including flood insurance, for all 
``higher priced'' first-lien mortgage loans. See 12 CFR 
226.35(b)(3).\7\
---------------------------------------------------------------------------

    \7\ Institutions should note that upcoming rules to implement 
section 1461 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Pub. L. 111-203) (Dodd-Frank Act), may affect the 
portion of the answer referencing mandatory escrow requirements for 
flood insurance.
---------------------------------------------------------------------------

    The text of the revised proposed question and answer follows:
    [rtrif]62. When may a lender or its servicer charge a borrower for 
the cost of insurance that covers collateral during the 45-day notice 
period?
    Answer: A lender or its servicer may charge a borrower for 
insurance coverage for any part of the 45-day notice period in which no 
adequate borrower-purchased flood insurance coverage is in effect, if 
the borrower has given the lender or its servicer the express authority 
to charge the borrower for such coverage as a contractual condition of 
the loan being made. Any policy that is obtained by a lender or its 
servicer, the premium of which is

[[Page 64181]]

charged to the borrower pursuant to a contractual right, should be 
equivalent in coverage and exclusions to an NFIP policy and cover the 
interests of both the borrower and the lender.
    The Agencies encourage institutions to explain their force-
placement policies to borrowers (including their policy on charging for 
force-placement coverage for the 45-day period and the timing of that 
charge) and encourage lenders and servicers to escrow flood insurance 
premiums. Following these recommendations could result in less force 
placement of flood insurance. Further, Regulation Z requires lenders to 
establish an escrow account for the payment of property taxes and 
mortgage-related insurance required by the lender, including flood 
insurance, for all ``higher priced'' first-lien mortgage loans. See 12 
CFR 226.35(b)(3).[ltrif]

Revised Proposed Question and Answer 57

    Proposed question and answer 57 provides general guidance on force 
placement under the Act and Regulation. The Agencies are proposing 
revisions to previously finalized question and answer 57 as a result of 
the proposed revisions to questions and answers 60 and 62. The proposed 
revisions to question and answer 57 clarify when a lender is required 
to send a force-placement notice to the borrower to ensure adequate 
flood insurance coverage is maintained throughout the term of the loan. 
The proposed revisions also clarify best practices that lenders should 
follow in providing borrowers with useful information in the force-
placement notice to assist them in understanding the high costs of 
premiums and fees in connection with force-placed insurance coverage. 
The revised question and answer also encourages lenders, in situations 
where a borrower has not previously been required to have flood 
insurance (such as a map change), to send borrowers the Notice of 
Special Flood Hazards and Availability of Federal Disaster Assistance 
with the force-placement notice to give borrowers important information 
about the implications of being in a SFHA.
    The text of the revised proposed question and answer is as follows:
    [rtrif]57. What is the requirement for the force placement of flood 
insurance under the Act and Regulation?
    Answer: The Act and Regulation require a lender to force place 
flood insurance, if all of the following circumstances occur:
     The lender determines at any time during the life of the 
loan that the property securing the loan is located in an SFHA;
     Flood insurance under the Act is available for improved 
property securing the loan;
     The lender determines that flood insurance coverage is 
inadequate or does not exist; and
     After required notice, the borrower fails to purchase the 
appropriate amount of coverage within 45 days.
    The Act and Regulation require the lender, or its servicer, to send 
notice to the borrower upon making a determination that the improved 
real estate collateral's insurance coverage has expired or is less than 
the amount required for that particular property, such as upon receipt 
of the notice of cancellation or expiration from the insurance 
provider. The Act and Regulation also require the lender, or its 
servicer, to give notice and force-place such insurance, if necessary, 
when a lender learns that a property requires flood insurance coverage 
because it is in an SFHA as a result of a flood map change (which is 
occurring in many communities as a result of FEMA's map modernization 
program).
    The notice to the borrower must clearly state that the borrower 
should obtain, at the borrower's expense, flood insurance in an amount 
at least equal to the amount required under the NFIP, for the remainder 
of the loan's term. The notice should also state that if the borrower 
does not obtain the insurance within 45 days, the lender will purchase 
the insurance on behalf of the borrower and may charge the borrower for 
the cost of premiums and fees to obtain the coverage, which are likely 
to be more expensive than if the borrower purchases it. The Agencies 
encourage institutions to explain their force-placement policies to 
borrowers (including, where applicable, that they charge for force-
placement coverage for the 45-day period and the timing of that 
charge). In situations where a borrower has not previously been 
required to have flood insurance (such as a map change), it is a best 
practice to also provide the Notice of Special Flood Hazards and 
Availability of Federal Disaster Assistance, which give borrowers 
important information about the implications of being in an SFHA.
    If adequate insurance is not obtained by the borrower within the 
45-day notice period, then the lender must purchase insurance on the 
borrower's behalf. Standard Fannie Mae/Freddie Mac documents permit the 
servicer or lender to add those charges to the principal amount of the 
loan.
    FEMA developed the Mortgage Portfolio Protection Program (MPPP) to 
assist lenders in connection with force-placement procedures. FEMA 
published these procedures in the Federal Register on August 29, 1995 
(60 FR 44881). Appendix A of FEMA's September 2007 Mandatory Purchase 
of Flood Insurance Guidelines sets out the MPPP Guidelines and 
Requirements, including force-placement procedures and examples of 
notification letters to be used in connection with the MPPP. [ltrif]

Public Comments

    The Agencies invite specific public comment on proposed questions 
and answers 57, 60, and 62 and are particularly interested in comments 
regarding proposed question and answer 62. With regard to proposed 
question and answer 62, the Agencies note that question and answer 62 
being proposed today reaches a conclusion that is significantly 
different from the guidance proposed in July 2009. In the July 2009 
proposed guidance, proposed question and answer 62 stated that a lender 
or its servicer does not have the authority to charge a borrower for 
the cost of insurance coverage during the 45-day notice period. 
However, in recognition of standard provisions in many contracts 
entered into between borrowers and lenders at loan origination, the 
Agencies are now proposing guidance allowing lenders, or servicers 
acting on behalf of lenders, to charge a borrower for insurance 
coverage for any part of the 45-day notice period in which no adequate 
borrower-purchased flood insurance coverage is in effect if the 
borrower has given the lender or its servicer the express authority to 
charge the borrower for such coverage as a contractual condition of the 
loan being made.
    The Agencies are concerned that borrowers are not adequately aware 
of the higher costs of lender-placed flood insurance. In addition, the 
Agencies are concerned that borrowers may not be aware that lender 
force placement may occur during the 45-day notice period and that the 
borrower could be charged for such coverage. The Agencies invite 
comment on how to address these concerns and on whether they should 
adopt question and answer 62 as proposed. The Agencies also seek 
comment on whether there are alternative approaches that would 
appropriately balance the borrower's right to obtain flood insurance at 
any time during the 45-day period after notification and avoid force 
placement with the lender's need to protect itself during that period 
and to be compensated for lender-purchased insurance.

[[Page 64182]]

    The Agencies note that an NFIP flood insurance policy provides 
coverage for the mortgagee for 30 days after lapse. Proposed question 
and answer 62 does not directly address whether a lender may charge the 
borrower for coverage during the 30 days after lapse of the borrower-
purchased NFIP policy, during which time the policy is still in effect, 
other than stating that the lender may charge a borrower for insurance 
coverage for any part of the 45-day notice period in which no adequate 
borrower-purchased flood insurance coverage is in effect. The Agencies 
also seek comment on whether any final question and answer on this 
issue should provide that lenders may not charge for additional 
overlapping lender-placed coverage during that 30-day period.
    Finally, the Agencies note that there are a number of recent 
developments relating to force-placed insurance on consumer mortgages. 
For example, Congress recently set forth notice and force-placement 
requirements for hazard insurance in section 1463 of the Dodd-Frank 
Act, which amends the Real Estate Settlement Procedures Act of 1974. 
While section 1463 is still awaiting regulatory implementation, the 
statutory language provides that a servicer of a federally related 
mortgage may not impose any charge on any borrower for force-placed 
hazard insurance unless the servicer has sent the borrower two separate 
notices within a 45-day period and has not received confirmation from 
the borrower that such insurance has been obtained during that period. 
The Agencies note that section 1463 of the Dodd-Frank Act does not 
cover the force placement of flood insurance. Force-placement of 
insurance also has been raised as a significant concern in connection 
with recent foreclosure activity. The Agencies will continue to monitor 
developments in this area to the extent that they can inform agencies' 
supervisory policy with regard to the Act rules.
    If financial institutions, bank examiners, community groups, or 
other interested parties have unanswered questions or comments about 
the Agencies' flood insurance regulation, they should submit them to 
the Agencies. The Agencies will consider addressing these questions in 
future guidance.

Solicitation of Comments Regarding the Use of ``Plain Language''

    Section 722 of the Gramm--Leach--Bliley Act of 1999, 12 U.S.C. 
4809, requires the federal banking Agencies to use ``plain language'' 
in all proposed and final rules published after January 1, 2000. 
Although this document is not a proposed rule, comments are 
nevertheless invited on whether the proposed questions and answers are 
stated clearly and how they might be revised to be easier to read.
    The text of the new final Questions and Answers follows:

Interagency Questions and Answers Regarding Flood Insurance

* * * * *

II. Determining the Appropriate Amount of Flood Insurance Required 
Under the Act and Regulation

* * * * *
    9. What is the ``insurable value'' of a building?
    Answer: The insurable value of a building is the same as the 
overall value of a property minus the land on which the property is 
located. FEMA's Mandatory Purchase of Flood Insurance Guidelines 
state that the insurable value of a building is the same as 100 
percent replacement cost value (RCV) of the insured building, which 
is defined as ``[t] he cost to replace property with the same kind 
of material and construction without deduction for depreciation.'' 
\8\ FEMA's guidelines, however, also provide that lenders should 
avoid creating a situation in which the insured pays for more 
coverage than the NFIP would pay in the event of a loss.\9\ Strictly 
linking insurable value to RCV is not practical in all cases. In 
cases involving certain residential or condominium properties, 
insurance policies should be written to, and the insurance loss 
payout usually would be the equivalent of, RCV.\10\ However, in 
cases involving nonresidential properties, and even some residential 
properties, where the insurance loss payout would normally be based 
on actual cash value, which is RCV less physical depreciation,\11\ 
insurance policies written at RCV may require an insured to pay for 
coverage that exceeds the amount the NFIP would pay in the event of 
a loss. Therefore, it is reasonable for lenders, in determining the 
amount of flood insurance required, to consider the extent of 
recovery allowed under the NFIP policy for the type of property 
being insured. This allows the lender to assist the borrower in 
avoiding situations in which the insured pays for coverage that 
exceeds the amount the NFIP will pay in the event of a loss. Lenders 
need to be equally mindful of avoiding situations in which, as a 
result of insuring at a level below RCV, they underinsure property.
---------------------------------------------------------------------------

    \8\ FEMA, Mandatory Purchase of Flood Insurance Guidelines, at 
GLS 10.
    \9\ FEMA, Mandatory Purchase of Flood Insurance Guidelines, at 
27.
    \10\ A single-family dwelling, including a single-family unit in 
a building under a condominium form of ownership, used as the 
insured's primary residence is covered under the NFIP's Dwelling 
Policy and, upon loss, payment is settled at RCV if the dwelling is 
insured for at least the lesser of 80 percent of the dwelling's full 
RCV or the maximum limit of coverage under the NFIP. Losses on other 
residential properties are settled at actual cash value. See FEMA, 
Flood Insurance Manual, at POL 3-20. Residential condominium 
buildings are covered under the NFIP's Residential Condominium 
Building Association Policy (RCBAP). Losses on residential 
condominium buildings are settled at RCV, unless subject to a co-
insurance penalty, which applies when the building coverage is less 
than the lesser of 80 percent of full RCV or the maximum limit of 
coverage under the NFIP. See id. at POL 43-60.
    \11\ FEMA, Mandatory Purchase of Flood Insurance Guidelines, at 
GLS 1.
---------------------------------------------------------------------------

    In calculating the amount of insurance to require, the lender 
and borrower (either by themselves or in consultation with the flood 
insurance provider or other appropriate professional) may choose 
from a variety of approaches or methods to establish the insurable 
value. They may use an appraisal based on a cost-value (not market-
value) approach, a construction-cost calculation, the insurable 
value used in a hazard insurance policy (recognizing that the 
insurable value for flood insurance purposes may differ from the 
coverage provided by the hazard insurance and that adjustments may 
be necessary; for example, most hazard policies do not cover 
foundations), or any other reasonable approach, so long as it can be 
supported.
    10. [Reserved]
    Answer: [Reserved]
* * * * *

X. Force Placement of Flood Insurance

* * * * *
    57. What is the requirement for the force placement of flood 
insurance under the Act and Regulation?
    Answer: [Reserved]
    60. When should a lender send the force-placement notice to the 
borrower?
    Answer: [Reserved]
    61. When must the lender have flood insurance in place if the 
borrower has not obtained adequate insurance within the 45-day 
notice period?
    Answer: The Regulation provides that the lender or its servicer 
shall purchase insurance on the borrower's behalf if the borrower 
fails to obtain flood insurance within 45 days after notification. 
However, where there is a brief delay in force placing required 
insurance, the Agencies will expect the lender to provide a 
reasonable explanation for the delay, for example, where a lender 
uses batch processing to purchase force-placed flood insurance 
policies.
    62. When may a lender or its servicer charge a borrower for the 
cost of insurance that covers collateral during the 45-day notice 
period?
    Answer: [Reserved]
* * * * *
    End of text of the new final Questions and Answers.

    Dated: June 28, 2011.
John Walsh,
Acting Comptroller of the Currency.


    By order of the Board of Governors of the Federal Reserve 
System, September 30, 2011.
Jennifer J. Johnson,
Secretary of the Board.

    Dated at Washington, DC this 11th day of October, 2011.


[[Page 64183]]


Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.

    Dated: October 5, 2011.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.


    By the National Credit Union Administration Board, on October 3, 
2011.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. 2011-26749 Filed 10-14-11; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 6705-01-P; 7535-01-P