[Federal Register Volume 85, Number 129 (Monday, July 6, 2020)]
[Proposed Rules]
[Pages 40442-40478]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14015]



[[Page 40441]]

Vol. 85

Monday,

No. 129

July 6, 2020

Part III





Department of the Treasury





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Office of the Comptroller of the Currency





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Federal Reserve System

Federal Deposit Insurance Corporation

Farm Credit Administration

National Credit Union Administration





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12 CFR Parts 22, 208, 339, et al.





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

  Federal Register / Vol. 85, No. 129 / Monday, July 6, 2020 / Proposed 
Rules  

[[Page 40442]]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 22

[Docket ID OCC-2020-0008]

FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Docket No. OP-1720]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 339

RIN 3064-ZA16

FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052-AD42

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 760

RIN 3133-AF14


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

AGENCY: Office of the Comptroller of the Currency (OCC), Treasury; 
Board of Governors of the Federal Reserve System (Board); Federal 
Deposit Insurance Corporation (FDIC); Farm Credit Administration (FCA); 
National Credit Union Administration (NCUA).

ACTION: Notification and request for comment.

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SUMMARY: The OCC, Board, FDIC, FCA, and NCUA (collectively, the 
Agencies) propose to reorganize, revise, and expand the Interagency 
Questions and Answers Regarding Flood Insurance and solicit comment on 
all aspects of the amendments. To help lenders meet their 
responsibilities under Federal flood insurance law and to increase 
public understanding of their flood insurance regulations, the Agencies 
have prepared proposed new and revised guidance addressing the most 
frequently asked questions and answers about flood insurance. 
Significant topics addressed by the proposed revisions include the 
effect of major amendments to flood insurance laws with regard to the 
escrow of flood insurance premiums, the detached structure exemption, 
and force-placement procedures.

DATES: Comments on the proposed questions and answers must be submitted 
on or before September 4, 2020.

ADDRESSES: Interested parties are invited to submit written comments 
to:
    OCC: Commenters are encouraged to submit comments through the 
Federal eRulemaking Portal or email, if possible. Please use the title 
``Loans in Areas Having Special Flood Hazards; Interagency Questions 
and Answers Regarding Flood Insurance'' to facilitate the organization 
and distribution of the comments. You may submit comments by any of the 
following methods:
     Federal eRulemaking Portal--Regulations.gov Classic or 
Regulations.gov Beta:
    Regulations.gov Classic: Go to https://www.regulations.gov/. Enter 
``Docket ID OCC-2020-0008'' in the Search Box and click ``Search.'' 
Click on ``Comment Now'' to submit public comments. For help with 
submitting effective comments please click on ``View Commenter's 
Checklist.'' Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting public comments.
    Regulations.gov Beta: Go to https://beta.regulations.gov/ or click 
``Visit New Regulations.gov Site'' from the Regulations.gov Classic 
homepage. Enter ``Docket ID OCC-2020-0008'' in the Search Box and click 
``Search.'' Public comments can be submitted via the ``Comment'' box 
below the displayed document information or by clicking on the document 
title and then clicking the ``Comment'' box on the top-left side of the 
screen. For help with submitting effective comments please click on 
``Commenter's Checklist.'' For assistance with the Regulations.gov Beta 
site, please call (877) 378-5457 (toll free) or (703) 454-9859 Monday-
Friday, 9 a.m.-5 p.m. ET or email [email protected].
     Email: [email protected].
     Mail: Chief Counsel's Office, Attention: Comment 
Processing, Office of the Comptroller of the Currency, 400 7th Street 
SW, Suite 3E-218, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218, 
Washington, DC 20219.
     Fax: (571) 465-4326.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2020-0008'' in your comment. In general, the OCC will 
enter all comments received into the docket and publish the comments on 
the Regulations.gov website without change, including any business or 
personal information provided such as name and address information, 
email addresses, or phone numbers. Comments received, including 
attachments and other supporting materials, are part of the public 
record and subject to public disclosure. Do not include any information 
in your comment or supporting materials that you consider confidential 
or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this action by any of the following methods:
     Viewing Comments Electronically--Regulations.gov Classic 
or Regulations.gov Beta:
    Regulations.gov Classic: Go to https://www.regulations.gov/. Enter 
``Docket ID OCC-2020-0008'' in the Search box and click ``Search.'' 
Click on ``Open Docket Folder'' on the right side of the screen. 
Comments and supporting materials can be viewed and filtered by 
clicking on ``View all documents and comments in this docket'' and then 
using the filtering tools on the left side of the screen. Click on the 
``Help'' tab on the Regulations.gov home page to get information on 
using Regulations.gov. The docket may be viewed after the close of the 
comment period in the same manner as during the comment period.
    Regulations.gov Beta: Go to https://beta.regulations.gov/ or click 
``Visit New Regulations.gov Site'' from the Regulations.gov Classic 
homepage. Enter ``Docket ID OCC-2020-0008'' in the Search Box and click 
``Search.'' Click on the ``Comments'' tab. Comments can be viewed and 
filtered by clicking on the ``Sort By'' drop-down on the right side of 
the screen or the ``Refine Results'' options on the left side of the 
screen. Supporting materials can be viewed by clicking on the 
``Documents'' tab and filtered by clicking on the ``Sort By'' drop-down 
on the right side of the screen or the ``Refine Results'' options on 
the left side of the screen.'' For assistance with the Regulations.gov 
Beta site, please call (877) 378-5457 (toll free) or (703) 454-9859 
Monday-Friday, 9 a.m. -5 p.m. ET or email 
[email protected].
    The docket may be viewed after the close of the comment period in 
the same manner as during the comment period.
     Viewing Comments Personally: You may personally inspect 
comments at the OCC, 400 7th Street SW, Washington, DC 20219. For 
security reasons, the OCC requires that visitors make an appointment to 
inspect comments. You may do so by calling (202) 649-6700 or, for 
persons who are deaf or hearing impaired, TTY, (202) 649-5597. Upon 
arrival, visitors will be required to present valid government-issued 
photo

[[Page 40443]]

identification and submit to security screening in order to inspect 
comments.
    Board: You may submit comments, identified by Docket No. OP-1720, 
by any of the following methods:
     Agency website: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551.
    All public comments will be made available on the Board's website 
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room 146, 1709 New York Avenue NW, Washington, DC 20006, 
between 9:00 a.m. and 5:00 p.m. on weekdays.
    FDIC: You may submit comments, identified by RIN 3064-ZA16, by any 
of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Agency Website: https://www.fdic.gov/regulations/laws/federal/. Follow the instructions for submitting comments.
     Email: [email protected]. Include RIN 3064-ZA16 in the 
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street NW, Washington, DC 20429.
     Hand Delivery/Courier: Comments may be hand-delivered to 
the guard station at the rear of the 550 17th Street building (located 
on F Street) on business days between 7:00 a.m. and 5:00 p.m.
    Instructions: All submissions must include the agency name and RIN 
3064-ZA16 for this rulemaking. Comments received will be posted without 
change to https://www.fdic.gov/regulations/laws/federal/, including any 
personal information provided. For detailed instructions on sending 
comments and additional information on the rulemaking process, see the 
``Public Participation'' heading of the SUPPLEMENTARY INFORMATION 
section of this document.
    FCA: We offer a variety of methods for you to submit your comments. 
For accuracy and efficiency reasons, commenters are encouraged to 
submit comments by email or through the FCA's website. As facsimiles 
(fax) are difficult for us to process and achieve compliance with 
section 508 of the Rehabilitation Act, we are no longer accepting 
comments submitted by fax. Regardless of the method you use, please do 
not submit your comment multiple times via different methods. You may 
submit comments by any of the following methods:
     Email: Send us an email at [email protected].
     FCA Website: http://www.fca.gov. Click inside the ``I want 
to . . . '' field near the top of the page; select ``comment on a 
pending regulation '' from the dropdown menu; and click ``Go.'' This 
takes you to an electronic public comment form.
     Mail: David P. Grahn, Director, Office of Regulatory 
Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 
22102-5090.
    You may review copies of all comments we receive at our office in 
McLean, Virginia, or from our website at http://www.fca.gov. Once you 
are in the website, click inside the ``I want to . . . '' field near 
the top of the page; select ``find comments on a pending regulation'' 
from the dropdown menu; and click ``Go.'' This will take you to the 
Comment Letters page where you can select the regulation for which you 
would like to read the public comments. We will show your comments as 
submitted, including any supporting data provided, but for technical 
reasons, we may omit items such as logos and special characters. 
Identifying information that you provide, such as phone numbers and 
addresses, will be publicly available. However, we will attempt to 
remove email addresses to help reduce internet spam.
    NCUA: You may submit comments identified by RIN 3133-AF14 by any of 
the following methods (please send comments by one method only). Please 
note that the NCUA is now accepting electronic comments only through 
the Federal eRulemaking portal, Regulations.gov:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Fax: (703) 518-6319. Use the subject line ``[Your name] 
Comments on Flood Insurance, Interagency Questions & Answers'' on the 
transmission cover sheet.
     Mail: Address to Gerard S. Poliquin, Secretary of the 
Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    Public Inspection: You can view all public comments on the agency's 
website at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as 
submitted, except for those we cannot post for technical reasons. The 
NCUA will not edit or remove any identifying or contact information 
from the public comments. You may inspect paper copies of comments in 
the NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, 
by appointment weekdays between 9:00 a.m. and 3:00 p.m. To make an 
appointment, call (703) 518-6540 or send an email to [email protected].

FOR FURTHER INFORMATION CONTACT: 
    OCC: Rhonda L. Daniels, Compliance Specialist, Compliance Risk 
Policy Division, (202) 649-5405; or Sadia A. Chaudhary, Counsel, Chief 
Counsel's Office, (202) 649-6350, or, for persons who are deaf or 
hearing impaired, TTY, (202) 649-5597.
    Board: Lanette Meister, Senior Supervisory Consumer Financial 
Services Analyst (202) 452-2705 or Vivian W. Wong, Senior Counsel (202) 
452- 3667, Division of Consumer and Community Affairs; Daniel Ericson, 
Senior Counsel (202) 452-3359, Legal Division; for users of 
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.
    FDIC: Navid Choudhury, Counsel, Consumer Compliance Unit, Legal 
Division, (202) 898-6526, [email protected]; or Simin Ho, Senior 
Policy Analyst, Division of Depositor and Consumer Protection, (202) 
898-6907, [email protected].
    FCA: Ira D. Marshall, Senior Policy, Analyst, Office of Regulatory 
Policy, (703) 883-4379, TTY (703) 883-4056; or Jennifer Cohn, Senior 
Counsel, Office of General Counsel, (703) 883- 4020, TTY (703) 883-
4056.
    NCUA: Sarah Chung, Senior Staff Attorney, Office of General 
Counsel, (703) 518-6540, or Lou Pham, Senior Credit Specialist, Office 
of Examination and Insurance, (703) 518-6360.

SUPPLEMENTARY INFORMATION:

Background

    The National Flood Insurance Act of 1968 created the National Flood 
Insurance Program (NFIP), which is administered by the Federal 
Emergency

[[Page 40444]]

Management Agency (FEMA).\1\ The NFIP enables property owners in 
participating communities to purchase flood insurance if the community 
has adopted floodplain management ordinances and minimum standards for 
new and substantially damaged or improved construction. Thus, in 
participating communities, Federally-backed flood insurance is 
available for property owners in flood risk areas.
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    \1\ Public Law 90-448, 82 Stat. 572 (1968).
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    Congress expanded the NFIP by enacting the Flood Disaster 
Protection Act of 1973 (FDPA).\2\ The FDPA made the purchase of flood 
insurance mandatory in connection with loans made by Federally-
regulated lending institutions when the loans are secured by improved 
real estate or mobile homes located in a special flood hazard area 
(SFHA). The National Flood Insurance Reform Act of 1994 (the Reform 
Act) (Title V of the Riegle Community Development and Regulatory 
Improvement Act of 1994) comprehensively revised the Federal flood 
insurance statutes.\3\ The Reform Act required the OCC, Board, FDIC, 
Office of Thrift Supervision (OTS), and NCUA to revise their flood 
insurance regulations, and required the FCA to promulgate a flood 
insurance regulation for the first time.\4\ The OCC, Board, FDIC, OTS, 
NCUA, and FCA \5\ fulfilled these requirements by issuing a joint final 
rule in the summer of 1996.\6\
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    \2\ Public Law 93-234, 87 Stat. 975 (1973).
    \3\ Title V of Public Law 103-325, 108 Stat. 2255 (1994).
    \4\ Title V of Public Law 103-325, 108 Stat. 2255 (1994).
    \5\ Throughout this document ``the Agencies'' includes the OTS 
with respect to events that occurred prior to July 21, 2011, but 
does not include OTS with respect to events thereafter. Sections 311 
and 312 of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (the Dodd-Frank Act) transferred OTS's functions to other 
agencies on July 21, 2011. The OTS's supervisory functions relating 
to Federal savings associations were transferred to the OCC, while 
those relating to state savings associations were transferred to the 
FDIC. See also 76 FR 39246 (Jul. 6, 2011).
    \6\ 61 FR 45684 (August 29, 1996).
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    In connection with the 1996 joint rulemaking process, commenters 
asked the Agencies to clarify specific issues covering a wide spectrum 
of the proposed rule's provisions. The Agencies addressed many of these 
requests in the preamble to the joint final rule. The Agencies 
concluded, however, that given the number, level of detail, and 
diversity of the requests, guidance addressing technical compliance 
issues would be helpful and appropriate. The Federal Financial 
Institutions Examination Council (FFIEC) fulfilled that objective 
through the initial release of the Interagency Questions and Answers in 
1997 (1997 Interagency Questions and Answers).\7\
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    \7\ 62 FR 39523 (July 23, 1997). Throughout this document, 
``Questions and Answers'' refers to the Interagency Questions and 
Answers Regarding Flood Insurance in its entirety; ``Q&A'' refers to 
an individual question and answer within the Questions and Answers.
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    After notice and comment, the Agencies comprehensively updated the 
1997 Interagency Questions and Answers in July 2009 (2009 Interagency 
Questions and Answers) through significant revision and reorganization. 
As part of the 2009 effort, the Agencies also proposed five new Q&As 
for comment relating to insurable value and force placement of flood 
insurance.\8\ As a result, the 2009 Interagency Questions and Answers 
included a total of 77 final Q&As, which superseded the 1997 
Interagency Questions and Answers.\9\
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    \8\ 74 FR 35914 (July 21, 2009).
    \9\ 74 FR 35914 (July 21, 2009).
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    On October 17, 2011, the Agencies finalized two of the five new 
proposed Q&As from 2009, one relating to insurable value and one 
relating to force placement, and withdrew one Q&A regarding insurable 
value.\10\ The two finalized Q&As (2011 Interagency Questions and 
Answers) supplemented the 2009 Interagency Questions and Answers. As 
part of the same Federal Register notice, based on comments received, 
the Agencies proposed to significantly revise the remaining two Q&As 
regarding force placement of flood insurance that were initially 
proposed in 2009, and proposed revisions to a previously finalized Q&A 
on force placement for consistency with the re-proposed Q&As. These 
three revised Q&As were re-proposed for comment in the October 17, 
2011, Federal Register notice.
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    \10\ 76 FR 64175. The Agencies finalized Q&As 9 (insurable 
value) and 61 (force placement) and withdrew Q&A 10 (insurable 
value).
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    Before the Agencies could finalize the three re-proposed Q&As, the 
Federal flood insurance statutes were amended by two major pieces of 
legislation, the Biggert-Waters Flood Insurance Reform Act of 2012 (the 
Biggert-Waters Act) and the 2014 Homeowner Flood Insurance 
Affordability Act (HFIAA). The Biggert-Waters Act amended the 
requirements that the Agencies have authority to implement and 
enforce.\11\ Among other things, the Biggert-Waters Act: (1) Required 
the Agencies to issue a rule regarding the escrow of premiums and fees 
for flood insurance; (2) clarified the requirement to force place 
insurance; and (3) required the Agencies to issue a rule to direct 
regulated lending institutions to accept ``private flood insurance,'' 
as defined by the Biggert-Waters Act, and to notify borrowers of the 
availability of private flood insurance.
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    \11\ Public Law 112-141, 126 Stat. 916 (2012).
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    In October 2013, the Agencies jointly issued proposed rules to 
implement the escrow, force placement, and private flood insurance 
provisions of the Biggert-Waters Act.\12\ In March 2014, the HFIAA was 
enacted, which, among other things, amended the Biggert-Waters Act 
requirements regarding the escrow of flood insurance premiums and fees 
and created a new exemption from the mandatory flood insurance purchase 
requirements for certain detached structures.\13\ The Agencies 
finalized the regulations to implement provisions in the Biggert-Waters 
Act and HFIAA under the Agencies' jurisdiction, except for the 
provisions related to private flood insurance, with a final rule issued 
in July 2015.\14\ In February 2019, the Agencies finalized regulations 
that implement the private flood insurance related provisions of the 
Biggert-Waters Act.\15\
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    \12\ 78 FR 65108 (Oct. 30, 2013).
    \13\ Public Law 113-89, 128 Stat. 1020 (2014).
    \14\ 80 FR 43216 (July 21, 2015). Subsequently, on November 7, 
2016, the Agencies re-proposed the private flood insurance 
provisions through a joint notice of proposed rulemaking (81 FR 
78063).
    \15\ 84 FR 4953 (Feb. 20, 2019).
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    The Agencies are releasing for public comment proposed revisions 
and new Interagency Q&As in light of the significant changes to flood 
insurance requirements pursuant to the Biggert-Waters Act and HFIAA as 
well as regulations issued to implement these laws. Further, over the 
years, the lending industry has requested that the Agencies provide 
additional guidance on flood insurance compliance issues on many 
occasions, including at conferences and through interagency webinars. 
Finally, pursuant to the Economic Growth and Regulatory Paperwork 
Reduction Act of 1996 (EGRPRA), certain Agencies are directed to 
conduct a joint review of their regulations every 10 years and consider 
whether any of those regulations are outdated, unnecessary, or unduly 
burdensome.\16\ As part of the joint

[[Page 40445]]

review, the Board, FDIC, OCC and NCUA received comments on the 
Agencies' flood insurance rules. Several commenters asked for more 
guidance to the industry on flood insurance requirements, particularly 
with respect to renewal notices for force-placed insurance policies, 
the required amount of flood insurance, and flood insurance 
requirements for tenant-owned buildings and detached structures. One 
commenter specifically requested that the Interagency Flood Questions 
and Answers be updated. In the FFIEC's EGRPRA Joint Report to Congress, 
the Board, FDIC, and OCC indicated that they:
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    \16\ Public Law 104-208, 110 Stat. 3001 (1996) (codified at 12 
U.S.C. 3311). The most recent report to Congress required by EGRPRA 
was published by the Board, FDIC, OCC, and NCUA under the FFIEC in 
March 2017. The NCUA, although an FFIEC member, is not a ``federal 
banking agency'' within the meaning of EGRPRA and so is not required 
to participate in the review process. Nevertheless, NCUA elected to 
participate in the EGRPRA review and conducted its own parallel 
review of its regulations. The FCA is not subject to EGRPRA; 
however, it is directed by the Farm Credit System Reform Act of 1996 
to conduct a regulatory review (see 12 U.S.C. 2252 note) and 
conducts such review every four years. The CFPB, although an FFIEC 
member, is not a ``federal banking agency'' within the meaning of 
EGRPRA and so is not required to participate in the review process.

``agree with these EGRPRA commenters that additional agency guidance 
on flood insurance requirements would be helpful to the banking 
industry and that the Interagency Flood Q&As should be updated to 
address recent amendments to the flood insurance statutes. In fact, 
the agencies have begun work on revising the Interagency Flood Q&As 
to reflect the agencies' recently issued final rules implementing 
the Biggert-Waters Act and HFIAA requirements and to address other 
issues that have arisen since the last update in 2011. As part of 
this revision, the agencies also plan to address many of the flood 
insurance issues raised by EGRPRA commenters.'' \17\
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    \17\ https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.

    Accordingly, the Agencies, in proposing these Interagency Questions 
and Answers for public comment, are addressing the commitment made in 
the EGRPRA Joint Report to Congress.
    This 2020 proposal to reorganize, revise, and introduce new 
Interagency Q&As includes the introduction of new Q&As on escrow of 
flood insurance premiums, force placement of flood insurance, and the 
detached structures exemption. The Agencies are also proposing to 
revise and reorganize the existing Q&As into new categories by subject 
to enhance clarity and understanding for users, and improve 
efficiencies by making it easier to find information related to 
technical flood insurance topics. Once finalized, the new Interagency 
Questions and Answers will supersede the 2009 and the 2011 Interagency 
Questions and Answers and supplement other guidance or interpretations 
issued by the Agencies relative to loans in areas having special flood 
hazards. Along with the finalized new Interagency Questions and 
Answers, the Agencies plan to issue separately for notice and comment 
another set of proposed Q&As relating to the private flood insurance 
rule. In the interim, the Agencies have provided information regarding 
the private flood insurance rule that may serve as a resource in a 
webinar dated June 18, 2019.\18\ In addition to guidance and 
interpretations issued by the Agencies, lenders should be aware of 
information related to the NFIP provided by FEMA that may address 
questions pertaining to NFIP requirements.
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    \18\ https://consumercomplianceoutlook.org/outlook-live/2019/interagency-flood-insurance-regulation-update/.
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Public Comments

    The Agencies invite specific public comment on the proposed new and 
revised Interagency Questions and Answers. If lenders, community 
groups, or other parties have unanswered questions or comments about 
the Agencies' flood insurance regulations, they should submit them to 
the Agencies. The Agencies will consider including these Q&As in future 
guidance. Comments are also invited on whether the proposed Q&As are 
stated clearly and how they might be revised to be easier to read.

Reorganization of Interagency Questions and Answers

    For ease of reference and in light of the increased number of 
subjects covered that address complex issues, the Agencies propose to 
reorganize the Interagency Questions and Answers to provide a more 
logical flow of questions through the flood insurance process for 
lenders, servicers, regulators, and policyholders. The table below sets 
forth the current categories and the corresponding new, reorganized 
categories for purposes of comparison:

                            Table of Contents
------------------------------------------------------------------------
 Category from current table (from 2009
                  Q&A)                         Reorganized category
------------------------------------------------------------------------
I. Determining When Certain Loans Are    Determining the Applicability
 Designated Loans for Which Flood         of Flood Insurance
 Insurance Is Required Under the Act      Requirements for Certain Loans
 and Regulation.                          [Applicability].
II. Determining the Appropriate Amount   Exemptions From the Mandatory
 of Flood Insurance Required Under the    Flood Insurance Purchase
 Act and Regulation.                      Requirements [Exemptions].
III. Exemptions From the Mandatory       Coverage -NFIP/Private Flood
 Flood Insurance Requirements.            Insurance [Coverage].
IV. Flood Insurance Requirements for     Required Use of Standard Flood
 Construction Loans.                      Hazard Determination Form
                                          [SFHDF].
V. Flood Insurance Requirements for      Flood Insurance Determination
 Nonresidential Buildings.                Fees [Fees].
VI. Flood Insurance Requirements for     Flood Zone Discrepancies
 Residential Condominiums.                [Zone].
VII. Flood Insurance Requirements for    Notice of Special Flood Hazards
 Home Equity Loans, Lines of Credit,      and Availability of Federal
 Subordinate Liens, and Other Security    Disaster Relief [Notice].
 Interests in Collateral Located in an
 SHFA.
VIII. Flood Insurance Requirements in    Determining the Appropriate
 the Event of the Sale or Transfer of a   Amount of Flood Insurance
 Designated Loan and/or Its Servicing     Required [Amount].
 Rights.
IX. Escrow Requirements................  Flood Insurance Requirements
                                          for Construction Loans
                                          [Construction].
X. Force Placement.....................  Flood Insurance Requirements
                                          for Residential Condominiums
                                          and Co-Ops [Condo and Co-Op ].
XI. Private Flood Insurance............  Flood Insurance Requirements
                                          for Home Equity Loans, Lines
                                          of Credit, Subordinate Liens,
                                          and Other Security Interests
                                          in Collateral Located in an
                                          SFHA [Other Security
                                          Interests].
XII. Required Use of Standard Flood      Requirement to Escrow Flood
 Hazard Determination Form (SFHDF).       Insurance Premiums and Fees--
                                          General [Escrow].
XIII. Flood Determination Fees.........  Requirement to Escrow Flood
                                          Insurance Premiums and Fees--
                                          Small Lender Exception [Small
                                          Lender Exception].
XIV. Flood Zone Discrepancies..........  Requirement to Escrow Flood
                                          Insurance Premiums and Fees--
                                          Loan Exceptions [Loan
                                          Exceptions].
XV. Notice of Special Flood Hazards and  Force Placement of Flood
 Availability of Federal Disaster         Insurance [Force Placement].
 Relief.

[[Page 40446]]

 
XVI. Mandatory Civil Money Penalties...  Flood Insurance Requirements in
                                          the Event of the Sale or
                                          Transfer of a Designated Loan
                                          and/or Its Servicing Rights
                                          [Servicing].
XVII...................................  Mandatory Civil Money Penalties
                                          [Penalty].
------------------------------------------------------------------------

    Moreover, the Agencies also propose a new system of designation for 
the Q&As. Rather than numbering the Q&As successively through all the 
categories, each Q&A will be designated by the category to which it 
belongs and then designated in numerical order for that particular 
category. For example, Q&As in the first category, Determining the 
Applicability of Flood Insurance Requirements for Certain Loans, would 
be re-designated as Applicability 1, Applicability 2, etc. This 
numbering system would enable the Agencies to add or delete Q&As in the 
future without needing to significantly renumber or reorganize all of 
the Q&As. The Agencies specifically solicit comment as to the proposed 
re-designations, whether they would promote ease of reference and 
whether some other designation system might be more preferable.
    For ease of reference, the following terms are used throughout this 
document: ``Act'' refers to the National Flood Insurance Act of 1968 
and the Flood Disaster Protection Act of 1973, as revised by the 
National Flood Insurance Reform Act of 1994, Biggert-Waters Flood 
Insurance Reform Act of 2012 and Homeowner Flood Insurance 
Affordability Act (codified at 42 U.S.C. 4001 et seq). ``Regulation'' 
refers to each agency's current final rule.\19\
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    \19\ The Agencies' rules are codified at 12 CFR part 22 (OCC), 
12 CFR part 208 (Board), 12 CFR part 339 (FDIC), 12 CFR part 614 
(FCA), and 12 CFR part 760 (NCUA).
---------------------------------------------------------------------------

Section-by-Section Analysis

Section I. Determining the Applicability of Flood Insurance 
Requirements for Certain Loans

    The heading to proposed section I has been streamlined to provide 
greater clarity with no intended change in substance or meaning. This 
new proposed general applicability section would include current Q&As 
1-7 relating to residential buildings and, for organizational purposes, 
would incorporate current section V's Q&As 24 and 25, which address 
flood insurance requirements for nonresidential buildings. The Agencies 
propose to re-designate current Q&A 1 as proposed Q&A Applicability 1 
with only minor language modifications, with no intended change in 
substance or meaning. Current Q&A 24 would be re-designated as proposed 
Q&A Applicability 2 and revised so that the proposed answer depends on 
whether buildings with limited utility meet the detached structure 
exemption for purposes of mandating flood insurance for such buildings. 
Current Q&A 25 would be re-designated as proposed Q&A Applicability 3 
and current Q&As 2, 3, 5-7 would be re-designated as proposed Q&As 
Applicability 4, 5, 6-8, respectively. Current Q&A 4 would be re-
designated as proposed Q&A Applicability 9.
    The Agencies are proposing revisions to proposed Q&A Applicability 
3 to include an example to provide greater clarity and to improve 
readability, with no intended change in substance or meaning. Proposed 
Q&A Applicability 4 would be revised from current Q&A 2 to also address 
a lender's responsibility if a building or mobile home that secures a 
loan is not located within an SFHA. The proposed answer would be 
expanded to state that a lender may, at its discretion and subject to 
applicable State law, require flood insurance for property outside of 
SFHAs for risk management purposes as a condition of a loan being made. 
Proposed Q&As Applicability 5, 7, 8, and 9 would have only minor 
language modifications for greater clarity, with no intended change in 
substance or meaning. Proposed Q&A Applicability 6 would remain 
unchanged from current Q&A 5.
    Lastly, the Agencies propose to add three new Q&As, Applicability 
10, 11, and 12. Proposed new Q&A Applicability 10 would address a 
lender's obligations when participating in a multi-tranche credit 
facility, specifically whether a lender is expected to consider any 
triggering event and any cashless roll of which it becomes aware in any 
tranche. The proposed answer would provide that a multi-tranche credit 
facility is analogous to a loan syndication or participation and that 
the Agencies do not expect a lender participating in one tranche in a 
multi-tranche credit facility to be responsible for taking action to 
comply with flood insurance requirements in connection with a 
triggering event or cashless roll that occurs in a tranche in which the 
lender does not participate. Furthermore, the proposed answer clarifies 
that the Agencies expect a lender participating in a multi-tranche 
credit facility to perform upfront due diligence to determine whether 
the lead lender has adequate controls to monitor the loan on an ongoing 
basis for compliance with flood insurance requirements. Proposed new 
Q&A Applicability 11 would clarify that an automatic extension of a 
credit facility agreed upon by the borrower and lender in the original 
loan agreement would not constitute a triggering event for purposes of 
the federal flood insurance requirements. Proposed new Q&A 
Applicability 12, which would be based on guidance previously issued by 
the Agencies,\20\ would address the applicability of the mandatory 
purchase requirement during a period of time when coverage under the 
NFIP is unavailable, such as due to a lapse in authorization or in 
appropriations. The proposed answer would clarify that during a period 
when NFIP coverage is not available, lenders may continue to make loans 
subject to the Regulation without flood insurance coverage, but must 
continue to make flood determinations, provide timely, complete and 
accurate notices to borrowers, and comply with other aspects of the 
Regulation. Lenders also should evaluate the safety and soundness and 
legal risks, and prudently manage those risks, during such periods when 
the NFIP is unavailable.
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    \20\ See Guidance Regarding Lapse and Extension of FEMA's 
Authority to Issue Flood Insurance Contracts, OCC Bulletin 2010-20 
(OCC); Informal Guidance on the Lapse of FEMA's Authority to Issue 
Flood Insurance Contracts, CA Letter 10-3 (Board); Lapse of FEMA 
Authority to Issue Flood Insurance Policies, FIL-23-2010 (FDIC); 
Lapse and Extension of FEMA's Authority to Issue Flood Insurance 
Contracts, Informational Memorandum June 3, 2010 (FCA), and Guidance 
on the Lapse of FEMA's Authority to Issue Flood Insurance Contracts, 
Letter No. 10-CU-08 (NCUA).
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Section II. Exemptions From the Mandatory Flood Insurance Purchase 
Requirements

    Current section III would be moved to proposed section II and 
significantly expanded with the addition of six new

[[Page 40447]]

proposed Q&As pertaining to the exemption from the mandatory flood 
insurance purchase requirements for certain detached structures created 
by HFIAA. The heading to proposed section II has been revised to 
provide greater clarity with no intended change in substance or 
meaning. Current Q&A 18 would be included in this section, re-
designated as proposed Q&A Exemptions 1, and would be revised to 
include the detached structure exemption in addition to the exemptions 
for State-owned property, and loans with a principal balance of less 
than $5,000 and an original repayment term of one year or less. The 
revised Q&A also would note that although an exemption may apply, a 
borrower may still elect to purchase flood insurance or a lender may 
still require flood insurance as a condition of making the loan for 
purposes of safety and soundness, depending on its risk analysis.
    As stated above, the Agencies propose to add six new Q&As to 
address the application of the detached structure exemption and related 
lender obligations. The new proposed Q&As would be designated as 
Exemptions 2-7. This set of Q&As on the detached structure exemption 
responds to a request for more guidance related to this exemption in 
the EGRPRA report. Proposed new Q&A Exemptions 2 would be added to 
address whether a lender must take a security interest in the primary 
residential structure for a detached structure to be eligible for the 
detached structure exemption. The proposed answer would provide that 
although a lender does not have to take a security interest in the 
primary residential structure, it would need to evaluate the uses of 
the detached structures to confirm each is eligible for the exemption. 
Proposed new Q&A Exemptions 3 would clarify that a flood hazard 
determination is required for a detached structure even though flood 
insurance coverage is not required on such structure because it is used 
to identify the number and type of structures present on the property. 
Proposed new Q&A Exemptions 4 would provide that a lender or its 
servicer may cancel its flood insurance requirement on an eligible 
detached structure that is currently insured, but that a lender 
alternatively may want to continue to require flood insurance coverage 
for detached structures of relatively high value if such coverage would 
be beneficial to the borrower and the lender. Proposed new Q&A 
Exemptions 5 would address whether a property being re-mapped into an 
SFHA triggers a review of the intended use of each detached structure. 
Specifically, the proposed answer states that although there is no duty 
to monitor the status of a detached structure following the lender's 
initial determination, sound risk management practices may lead a 
lender to conduct scheduled periodic reviews that track the need for 
flood insurance on properties securing loans in its portfolio.
    Proposed new Q&A Exemptions 6 would discuss whether a lender, 
following a review of its loan portfolio, may determine it would no 
longer require flood insurance on a detached structure in an SFHA if 
the structure does not provide contributory value. The Agencies propose 
to clarify that, while a lender or servicer could initiate such a 
review, the Regulation does not permit the exemption of structures from 
the mandatory flood insurance purchase requirement based solely on 
their contributory value, but instead on whether a specific exemption 
applies. Lastly, proposed new Q&A Exemptions 7 would address whether a 
building would qualify as a detached structure if it is joined to 
another building by a stairway or covered walkway. The proposed answer 
would provide that for purposes of the detached structure exemption, a 
structure is ``detached'' from the primary residential structure if it 
is not joined by any structural connection to that structure.

Section III. Coverage (NFIP/Private Flood Insurance)

    For organizational purposes, current section XI would be moved to 
proposed section III, logically following the discussions of 
applicability and exemptions from flood insurance requirements. The 
heading to proposed section III would be expanded to cover the various 
types of flood insurance policies available to borrowers. Proposed 
section III would cover questions related to flood insurance policy 
coverage issues under the NFIP and private flood insurance. Current Q&A 
63 would be deleted because it is inconsistent with the Agencies' final 
rule implementing the private flood insurance provision of the Biggert-
Waters Act.\21\ A new proposed Q&A Coverage 1 would be included to 
assist lenders in complying with the discretionary acceptance provision 
and mutual aid societies provision in the Agencies' final rule 
implementing the private flood insurance provision of the Biggert-
Waters Act. Current Q&A 64, addressing the use of private flood 
insurance for portfolio-wide coverage, would be re-designated as 
proposed Coverage 2 and revised given that FEMA withdrew the Mandatory 
Purchase of Flood Insurance Guidelines, which is cross-referenced in 
current Q&A 64, with no intended change in substance or meaning. 
Additionally, a new proposed Q&A Coverage 3 would address when 
mandatory flood insurance is required to be in place.
---------------------------------------------------------------------------

    \21\ 84 FR 4953 (Feb. 20, 2019).
---------------------------------------------------------------------------

    Specifically, proposed new Coverage 1 would list several factors a 
lender may consider in determining whether a flood insurance policy 
issued by a private insurer or mutual aid plan provides sufficient 
protection of the loan. These factors may include whether: (1) A 
policy's deductibles are reasonable based on the borrower's financial 
condition; (2) the insurer provides adequate notice of cancellation to 
the mortgagor and mortgagee to allow for timely force placement of 
flood insurance, if necessary; (3) the terms and conditions of the 
policy with respect to payment per occurrence or per loss and aggregate 
limits are adequate to protect the regulated lending institution's 
interest in the collateral; (4) the flood insurance policy complies 
with applicable State insurance laws; and (5) the private insurance 
company has the financial solvency, strength, and ability to satisfy 
claims. A lender may include its analysis of such factors in 
documenting its conclusion of sufficient protection of the loan when 
accepting flood insurance coverage issued by a private insurer or 
mutual aid society in satisfaction of the mandatory purchase 
requirement.
    Proposed Q&A Coverage 2 would be slightly revised to address when a 
lender may rely on a private insurance policy providing portfolio-wide 
coverage. The proposed answer would be revised by removing the 
reference to criteria set forth by FEMA and including language 
addressing a lender's reliance on a policy that provides portfolio-wide 
coverage. Lastly, proposed new Q&A Coverage 3 would explain when 
mandatory flood insurance on a designated loan needs to be in place 
during the closing process. The proposed answer would clarify that a 
lender should use the loan ``closing date'' to determine the date by 
which flood insurance should be in place for a designated loan. FEMA 
deems the ``closing date'' as the date the ownership of the property 
transfers to the new owner based on State law. The proposed answer 
further explains the difference between ``wet funding'' and ``dry 
funding'' States and how it impacts the ``closing date'' for purposes 
of flood insurance.

[[Page 40448]]

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

    For organizational purposes, current section XII would be moved to 
proposed section IV. Accordingly, current Q&As 65-68 would be re-
designated as proposed Q&As SFHDF 1-4, respectively, with only minor 
language modifications and no intended change in substance or meaning.

V. Flood Insurance Determination Fees

    For organizational purposes, current section XIII would be moved to 
proposed section V. Current Q&As 69 and 70 would be re-designated as 
proposed Q&As Fees 1 and 2 with only minor changes and no intended 
change in substance or meaning.

VI. Flood Zone Discrepancies

    For organizational purposes, current section XIV would be moved to 
proposed section VI. Current Q&As 71 and 72 would be re-designated as 
proposed Q&As Zone 1 and 2. The Agencies propose to revise current Q&A 
71, re-designated as proposed Q&A Zone 1, to reflect a change in the 
Agencies' expectations regarding a lender's obligation when there is a 
discrepancy between the flood determination form and the flood 
insurance policy. A lender no longer would be required to attempt to 
resolve the discrepancy, but the lender should consider documenting the 
discrepancy in the loan file. If the flood determination form indicates 
that the building securing the loan is in an SFHA, the lender must 
require the appropriate amount of insurance coverage and would not 
otherwise be required to attempt to resolve the discrepancy as 
previously indicated in current Q&A 71. The Agencies note in the 
proposed answer that the issue of flood zone discrepancies is an 
insurance rating issue, not a coverage issue. Proposed Q&A Zone 2 would 
clarify that a lender is not in violation of the Regulation if there is 
a discrepancy between the flood zone on the flood determination form 
and the flood zone on the policy declarations page. Lastly, proposed 
new Q&A Zone 3 would explain what a lender should do when a borrower 
disputes the lender's flood zone determination that a building securing 
the loan is located in an SFHA requiring mandatory flood insurance 
coverage.

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

    For organizational purposes, current section XV would be moved to 
proposed section VII. This section would include current Q&As 73-76 and 
78-80 and would be re-designated as proposed Q&As Notice 1-7, 
respectively. Proposed Q&A Notice 1 would have minor language 
modifications for purposes of clarity with no change in meaning or 
substance. Proposed Q&A Notice 2 would be amended to conform more 
closely to the Regulation. As modified, the answer to proposed Q&A 
Notice 2 would state that a lender must provide the Notice of Special 
Flood Hazards to the borrower within a reasonable time before the 
completion of the transaction, even if the lender only learns where the 
mobile home will be located just prior to closing and delivery of the 
Notice of Special Flood Hazards would delay closing. Proposed Q&A 
Notice 3 would remain unchanged from current Q&A 75. For organizational 
purposes, current Q&As 76 and 77 would be consolidated, with no 
substantive changes, into proposed Q&A Notice 4 in this section. 
Current Q&A 78 would be re-designated as Notice 5 and revised to list 
examples of what constitutes an acceptable record of receipt. Current 
Q&As 79 and 80 would be re-designated as Q&As Notice 6 and 7, 
respectively, and would be revised nonsubstantively to provide 
additional clarity.

Section VIII. Determining the Appropriate Amount of Flood Insurance 
Required

    The Agencies propose to move current section II to proposed section 
VIII. The heading to proposed section VIII would be amended for 
streamlining purposes. Current Q&As 8, 9, and 11-17 would be re-
designated as Amount 1, Amount 2, and Amount 3-9 respectively. Proposed 
Q&A Amount 1 would discuss NFIP coverage limits more fully to include 
coverage for condominiums and contents coverage. The proposed answer 
would provide that for single-family and two-to-four family or 
individually-owned condominium units insured under the Dwelling Form 
policy, the maximum limit is $250,000. For a residential condominium 
building insured under the Residential Condominium Building Association 
Policy (RCBAP) form, the maximum amount of insurance available is 
$250,000 multiplied by the number of units. For all other buildings 
insured under the General Property Form, the maximum limit of building 
coverage available is $500,000. The maximum limit for contents insured 
under the Dwelling Form and RCBAP is $100,000 total (not per unit) and 
$500,000 for contents insured under the General Property Form. Proposed 
Q&A Amount 2, which defines ``insurable value,'' would be revised to 
remove references to the rescinded FEMA Mandatory Purchase of Flood 
Insurance Guidelines and to provide greater clarity with no intended 
change in substance or meaning.
    Proposed Q&A Amount 3 would be revised to include more detailed 
definitions from the NFIP Flood Insurance Manual of the terms: Single 
family dwelling, 2-4 family residential building, and other residential 
building. Proposed Q&A Amount 4 would similarly be revised to provide a 
more detailed definition of nonresidential building as defined in the 
NFIP Flood Insurance Manual. Proposed Q&As Amount 5-9 would be revised 
to provide greater clarity with no intended change in substance or 
meaning.

IX. Flood Insurance Requirements for Construction Loans

    Current section IV would be moved to proposed section IX and would 
include current Q&As 19-23, which would be re-designated as proposed 
Q&As Construction 1-5, respectively. The Agencies propose minor changes 
to proposed Q&As Construction 1 and Construction 2 for purposes of 
clarification. The Agencies would revise proposed Q&A Construction 3 to 
accurately cite to the NFIP Flood Insurance Manual. Proposed Q&A 
Construction 4 would address when a lender must require flood insurance 
in connection with a loan secured by a building in the course of 
construction and would be revised to incorporate the NFIP's change in 
policy regarding the 30-day waiting period. In particular, the Agencies 
propose that if a lender requires a borrower to have flood insurance in 
place at the time of loan origination, a borrower should obtain a 
provisional rating based on the construction designs and intended use 
of the building to enable the placement of coverage prior to receipt of 
the Elevation Certificate (EC), based on FEMA guidance. The proposed 
Q&A would state that in accordance with the NFIP requirement, it is 
expected that an EC will be secured and a full-risk rating completed 
within 60 days of the policy effective date. Under the proposed Q&A, 
failure to obtain the EC could result in reduced coverage limits at the 
time of loss. Alternatively, if the lender requires the borrower to 
have flood insurance in place before the lender disburses funds to pay 
for building construction, the lender should have adequate controls in 
place to ensure the borrower obtains flood insurance no later than 30 
days prior to disbursement of funds to the borrower due to FEMA's 
removal of the 30-day waiting period waiver. Proposed

[[Page 40449]]

Q&A Construction 5, addressing the 30-day waiting period in connection 
with a construction loan, also would be revised to reflect this change. 
Proposed new Q&A Construction 6 would explain that if a lender allows a 
borrower to defer the purchase of flood insurance until either the 
foundation slab has been poured and/or an EC has been issued, or if the 
building to be constructed will have its lowest floor below Base Flood 
Elevation when the building is walled and roofed, the lender will need 
to begin escrowing flood insurance premiums and fees at the time of 
purchase of the flood insurance.

X. Flood Insurance Requirements for Residential Condominiums and Co-Ops

    The heading to proposed section X would be expanded to include 
other multi-family dwellings such as cooperatives. This section would 
include current Q&As 26-33, which would be re-designated as proposed 
Q&As Condo and Co-Op 1-8, respectively. Proposed Q&As Condo and Co-Op 
1, Condo and Co-Op 2, and Condo and Co-Op 7 would remain generally 
unchanged. Proposed Q&As Condo and Co-Op 3, 4, 5, 6, and 8 would have 
minor revisions to provide greater clarity or accurate references with 
no intended changes in substance or meaning. A new proposed Q&A Condo 
and Co-Op 9 would be added to proposed section X to address flood 
insurance requirements for loans secured by a unit in a cooperative 
building located in an SFHA. The proposed answer provides that a loan 
to a cooperative unit owner is not a designated loan subject to the Act 
or Regulation because the unit owner does not own a title to the 
building but simply the right to occupy a particular unit based on the 
cooperative ownership structure.

XI. Flood Insurance Requirements for Home Equity Loans, Lines of 
Credit, Subordinate Liens, and Other Security Interests in Collateral 
(Contents) Located in an SFHA

    The heading to section XI would be amended for purposes of clarity. 
This section would include current Q&As 34, 35 and 36-43, which would 
be re-designated as Other Security Interests 1, Other Security 
Interests 2, and Other Security Interests 4-9 and 11-12, respectively. 
Proposed Q&As Other Security Interests 1, 2, 5, 6, 8, 11, and 12 would 
remain substantively unchanged. A new proposed Q&A Other Security 
Interests 3 would be added to address flood insurance coverage 
requirements for a line of credit secured by improved real property 
located in an SFHA. The proposed answer would provide alternative 
approaches depending on when the lender requires flood insurance to be 
in place. Proposed Q&A Other Security Interests 4 would be amended 
slightly with no intended changes in substance or meaning. Proposed Q&A 
Other Security Interests 7 would be revised to clarify the application 
of Federal flood insurance requirements when both a building and its 
contents secure a loan. Proposed Q&A Other Security Interests 9 would 
be revised to clarify the impact of including language regarding 
contents taken as security for a loan in the loan agreement. Proposed 
new Q&A Other Security Interests 10 would indicate that flood insurance 
is required if the lender takes a security interest in contents 
regardless of whether that security interest is perfected.

XII. Requirement to Escrow Flood Insurance Premiums and Fees--General

    With the passage of HFIAA, the escrow requirements for flood 
insurance premiums have been significantly revised through the 
introduction of new escrow requirements that are not dependent on 
whether other insurance or taxes are escrowed, lender and loan-related 
exceptions to those requirements, and the requirement for an escrow 
notice. Accordingly, the Agencies propose to revise the discussion of 
escrow requirements by designating four sections to address escrow 
considerations. The first section, proposed section XII, would include 
Q&As covering the general escrow requirement for flood insurance 
premiums and fees. The second section, proposed section XIII, would 
include Q&As related to the small lender exception to flood insurance 
escrow requirements. Proposed section XIV, the third section, would 
include Q&As related to loan-related exceptions to the requirement to 
escrow flood insurance premiums and fees. These sets of Q&As on the 
escrow of flood insurance premiums and fees respond to a request for 
more guidance related to the escrow requirement in the EGRPRA report.
    Proposed new section XII would contain two Q&As from current 
section IX and five new proposed Q&As. Specifically, current Q&As 51 
and 52 would be included in proposed section XII and re-designated as 
Escrow 5 and Escrow 1, respectively. Proposed Q&A Escrow 1 would be 
significantly revised from current Q&A 52 to address the general 
question of when escrow accounts for flood insurance premiums and fees 
must be established. The proposed revised answer would explain that the 
new escrow requirement applies only upon a triggering event and would 
not apply if either the small lender exception or any of the loan-
related exceptions apply. The proposed revised answer also would 
address a lender's escrow obligations if the lender no longer qualifies 
for the small lender exception. Proposed new Q&A Escrow 2 would clarify 
that a lender must escrow flood insurance premium payments even if it 
does not escrow for taxes or homeowner's insurance. Proposed new Q&A 
Escrow 3 would state that a lender must escrow force-placed flood 
insurance premium payments because there is no exception for force-
placed insurance under the Act or Regulation. Proposed new Q&A Escrow 4 
would discuss whether flood insurance premium payments must be escrowed 
when a loan has not experienced a triggering event (a making, increase, 
renewal, or extension) but the loan has experienced a non-triggering 
event, such as a loan modification, a FEMA remapping, or the assumption 
of the loan by a new borrower. The Agencies explain in the proposed 
answer that, subject to certain exceptions, until a loan experiences a 
triggering event, the lender is not required to escrow flood insurance 
premiums and fees unless: (i) A borrower requests the escrow in 
connection with the requirement that the lender provide an option to 
escrow for outstanding loans; or (ii) the lender determines that a loan 
exception to the escrow requirement no longer applies.
    The Agencies propose revisions to current Q&A 51, which has been 
re-designated as proposed Q&A Escrow 5, to reflect updates to clarify 
that multi-family buildings or mixed-use properties are included in the 
definition of ``residential improved real estate'' and therefore are 
subject to the escrow requirement unless an exception applies. New 
proposed Q&A Escrow 6 would address the situation in which a junior 
lienholder determines that the primary lienholder does not have 
sufficient flood insurance coverage in place and is also not escrowing 
for flood insurance. The proposed answer would clarify that if the 
primary lienholder has not obtained adequate flood insurance, the 
junior lienholder would need to ensure adequate flood insurance is in 
place and also would need to escrow for that flood insurance. The 
proposed answer also would indicate that the escrow requirements would 
not apply to a junior lien that is a home equity line of credit 
(HELOC), since HELOCs have a separate escrow exception under the Act 
and Regulation. New proposed Q&A Escrow 7 addresses whether a lender or 
its servicer must escrow when real

[[Page 40450]]

property securing the loan is not located in an SFHA, but the borrower 
chooses to buy flood insurance, by clarifying that a lender or its 
servicer is not required to escrow premium payments but may choose to 
do so. Current Q&As 53 and 54 would be removed because they are no 
longer applicable.

XIII. Requirement to Escrow Flood Insurance Premiums and Fees--Small 
Lender Exception

    As previously discussed, new section XIII would include seven new 
proposed Q&As related to the small lender exception to the requirement 
to escrow flood insurance premiums. New proposed Q&A Small Lender 
Exception 1 would specify that the $1 billion threshold for the small 
lender exception would be based on assets held at the regulated 
financial institution level and not at the holding company level. New 
proposed Q&A Small Lender Exception 2 would discuss whether a 
qualifying lender must escrow flood insurance premiums if it was 
previously required to escrow only under the Higher-Priced Mortgage 
Loan (HPML) rules \22\ or under specific Federal housing programs prior 
to July 6, 2012. The proposed answer would clarify that the 
applicability of the first criterion of the small lender exception is 
dependent on whether the Federal or State law requirement to escrow was 
for the entire term of the loan. New proposed Q&A Small Lender 
Exception 3 would address whether a lender would be disqualified from 
the exemption if it escrowed funds on behalf of a third party. The 
Agencies' proposed answer would draw a distinction based on whether the 
lender established an individual escrow account for the loan. 
Specifically, the proposed answer would provide that if a lender 
collected escrow funds at closing and servicing of the loan was 
maintained by the lender, the lender would not qualify for the small 
lender exception because the lender would have had a policy of 
consistently and uniformly requiring the deposit of funds in an escrow 
account by establishing escrow accounts that the lender would service. 
However, if the lender collected the escrow funds at closing at the 
behest of a third party and then transferred those funds to the third 
party servicing that loan, the lender would qualify for the small 
lender exception under the proposed answer, provided the lender did not 
establish an individual escrow account and the lender transferred the 
escrow funds to the third party as soon as reasonably practicable. New 
proposed Q&A Small Lender Exception 4 would cover whether a lender 
would be eligible for the exception if it only escrows upon a 
borrower's request. As noted in the preamble to the 2015 Final Rule, 
the proposed answer would reiterate that a lender maintaining escrow 
accounts only on a borrower's request does not constitute a consistent 
or uniform policy of requiring escrow and therefore a lender could be 
eligible for the small lender exception if the other requirements are 
met.
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    \22\ Pursuant to the Dodd-Frank Act, an HPML loan is one where 
the Annual Percentage Rate exceeds certain specified thresholds with 
the result that certain consumer protections must be observed, such 
as the escrow of property taxes and insurance premiums. See section 
129D of the Truth in Lending Act as amended by section 1461(a) of 
the Dodd-Frank Act, 15 U.S.C. 1639D. See also HPML escrow rules at 
12 CFR 226.35(b)(3) (Board) and 12 CFR 1026.35(b) (Bureau of 
Consumer Financial Protection).
---------------------------------------------------------------------------

    New proposed Q&A Small Lender Exception 5 would discuss whether the 
option to escrow is required for: (1) All outstanding loans not 
excepted from the escrow requirement and secured by residential real 
estate and (2) outstanding loans not secured by buildings located in an 
SHFA. The proposed answer would clarify that the option to escrow 
notice requirement only applies to lenders who have a change in status 
and no longer qualify for the small lender exception. Such lenders will 
be required to provide the option to escrow notice by September 30 of 
the first calendar year in which the lender has had a change in status 
for all outstanding designated loans secured by residential improved 
real estate or a mobile home as of July 1 of the first calendar year in 
which the lender no longer qualifies for the small lender exception. 
The proposed answer would also clarify that the option to escrow 
requirement does not apply to loans or lenders that are excepted by the 
Regulation from the escrow requirement nor does the notice requirement 
apply to loans not subject to the mandatory flood insurance purchase 
requirement. New proposed Q&A Small Lender Exception 6 would explain 
that a lender must send to a borrower a notice of the option to escrow 
flood insurance premium payments when the borrower has previously 
waived escrow for flood insurance because it is possible the borrower's 
circumstances have changed and, if offered another chance to escrow, 
the borrower may desire to do so. Lastly, new proposed Q&A Small Lender 
Exception 7 would make clear that lenders who qualify for the small 
lender exception are not required to provide borrowers with either the 
escrow notice or the option to escrow notice.

XIV. Requirement to Escrow Flood Insurance Premiums and Fees--Loan 
Exceptions

    New section XIV would include five Q&As regarding the loan-related 
exceptions to the escrow requirement. Current Q&A 55 would be re-
designated as proposed Q&A Loan Exceptions 1 and revised to address 
whether escrow accounts must be set up for commercial loans secured by 
residential buildings based on the new loan-related exceptions. 
Specifically, the proposed answer would clarify that extensions of 
credit primarily for business, commercial, or agricultural purposes are 
not subject to the escrow requirement even if such loans are secured by 
residential improved real estate or a mobile home. New proposed Q&A 
Loan Exceptions 2 would indicate that construction-permanent loans that 
have a construction phase before the loan converts into permanent 
financing do not qualify for the 12-month exception from escrow even if 
one phase of the loan is for 12 months or less. New proposed Q&A Loan 
Exceptions 3 would clarify that a subordinate lienholder must begin to 
escrow as soon as reasonably practicable after it becomes aware that it 
has moved into the primary lien position on a designated loan subject 
to the escrow requirement. Current Q&A 56 would be re-designated as 
proposed Q&A Loan Exceptions 4 and revised to address an escrow account 
for insured real property covered by an RCBAP. The proposed answer 
would note that while escrow is not required for property covered by an 
RCBAP, if the RCBAP coverage is inadequate and the borrower obtains a 
separate dwelling policy, escrow would be required for such a policy 
unless an escrow exception applies. Lastly, new proposed Q&A Loan 
Exceptions 5 would discuss whether there is an exception to the escrow 
requirement for loans secured by multi-family buildings. The Agencies 
would make clear in the proposed answer that escrow requirements do not 
apply to a loan that is an extension of credit primarily for business, 
commercial, or agricultural purposes, even if the loan is secured by 
residential real estate such as a multi-family building, nor would it 
apply to a loan secured by a particular unit in a multi-family 
residential building if a condominium association, cooperative, 
homeowners association, or other applicable group provides an adequate 
policy and pays for the insurance as a common expense. Otherwise, under 
the proposed answer, the escrow requirements generally would apply to

[[Page 40451]]

loans for units in multi-family residential buildings.

XV. Force Placement of Flood Insurance

    For organizational purposes, the Agencies propose to move current 
section X to proposed section XV. This section would include current 
Q&As 57-62 and add ten new Q&As. This set of Q&As responds to a request 
for more guidance related to force placement of flood insurance from 
commenters through the EGRPRA process. Current Q&A 57, re-proposed in 
2011 but not finalized, would be re-designated as proposed Q&A Force 
Placement 1 and would discuss the requirements that must be fulfilled 
before force placement can occur, as well as the notice requirements a 
lender must follow prior to force placing flood insurance. The Agencies 
explain in the proposed answer that if a lender, or a servicer acting 
on its behalf, determines at any time during the term of a designated 
loan, that the building or mobile home and any personal property 
securing the designated loan is not covered by flood insurance or is 
covered by flood insurance in an amount less than the amount required, 
then the lender or its servicer must notify the borrower that the 
borrower should obtain flood insurance, at the borrower's expense, in 
an amount at least equal to the amount required. The proposed answer 
further provides that before the lender or service must force place 
insurance, if the lender or servicer is aware that a borrower has 
obtained insurance that otherwise satisfies the flood insurance 
requirements but in an insufficient amount, the lender or servicer 
should inform the borrower an additional amount of insurance is needed 
in order to comply with the Regulation. Finally, the proposed answer 
would specify that if the borrower fails to obtain flood insurance 
within 45 days after notification, then the lender or its servicer must 
purchase insurance on the borrower's behalf at that time. The proposed 
answer explains that the lender must force place flood insurance for 
the full amount required under the Regulation, or if the borrower 
purchases flood insurance that otherwise satisfies the flood insurance 
requirements, but in an insufficient amount, the lender would be 
required to force place only for the ``insufficient amount,'' that is, 
the difference between the amount the borrower insured and the amount 
of flood insurance required under the Regulation.
    Additionally, while not required under the Act or the Regulation, 
the Agencies indicate that a lender or its servicer could include in 
the notice to the borrower the amount of flood insurance needed to 
satisfy the statutory requirement. By providing this information, the 
lender or its servicer can help ensure that a borrower obtains the 
appropriate amount of insurance.
    New proposed Q&A Force Placement 2 would clarify that the 
Regulation requires the lender, or its servicer, to send the borrower 
the force-placement notice upon making a determination that the 
building or mobile home and any personal property securing the 
designated loan is not covered by flood insurance or is covered by 
flood insurance in an amount less than the amount required under the 
Regulation.
    Current Q&A 58 would be re-designated as proposed Q&A Force 
Placement 3 and would remain unchanged. Proposed Q&A 60, re-proposed in 
2011 but not finalized, would be re-designated as proposed Q&A Force 
Placement 4 and would discuss whether a lender can satisfy its notice 
requirement by sending the force-placement notice to the borrower prior 
to the expiration of the flood insurance policy. The Agencies would 
specifically state in the proposed answer that a lender or servicer 
must send a notice upon determining that the collateral property 
securing the loan is either not covered by flood insurance or the 
insurance is inadequate. Although the proposed answer provides that a 
lender may send notice prior to the expiration date as a courtesy, the 
lender or servicer is still required to send notice upon determining 
the flood insurance policy has actually lapsed or is determined to be 
insufficient in order to meet the statutory requirement. Current Q&A 61 
would be re-designated as proposed Q&A Force Placement 5 and would 
contain minor revisions for clarity with no change in meaning or 
substance. New proposed Force Placement 6 would clarify that, once a 
lender makes a determination that a designated loan has no or 
insufficient flood insurance coverage, the lender must notify the 
borrower and, if the borrower fails to obtain sufficient flood 
insurance coverage within 45 days after the original notice, the lender 
must purchase coverage on the borrower's behalf and may not extend the 
period for obtaining force-placed coverage by sending another force-
placement notice during that time. New proposed Q&A Force Placement 7 
would address when a force-placed policy should begin to provide 
coverage and give an example. Specifically, the proposed answer would 
state that a lender's new force-placed policy should begin to provide 
coverage the day after the borrower's existing policy expires. The 
proposed answer would also state that a lender or its servicer may not 
require the borrower to pay for double coverage and that the Regulation 
requires a lender or servicer to refund the borrower for any periods of 
overlap between the borrower's policy and the force-placed policy.
    Current Q&A 59 would be re-designated as proposed Q&A Force 
Placement 8 and would be significantly revised to discuss more fully 
the minimum amount of flood insurance coverage that is statutorily 
required and to illustrate this point through a hypothetical example. 
Specifically, the proposed answer would illustrate that if the 
outstanding principal balance is the basis for the minimum amount of 
required flood insurance, the lender must ensure that the force-placed 
policy amount covers the existing loan balance plus any additional 
force-placed premium and fees that will be added to the loan balance.
    Current Q&A 62 would be re-designated as proposed Q&A Force 
Placement 9 and would clarify that a lender or servicer may charge a 
borrower for the cost of force-placed insurance beginning on the date 
of lapse or insufficient coverage, and would not have to wait 45 days 
after providing notification to force place insurance. Lenders that 
monitor loans secured by property located in an SFHA for continuous 
coverage of flood insurance help ensure that they complete the force 
placement of flood insurance in a timely manner and minimize any gaps 
in coverage and any charge to the borrower for coverage for a timeframe 
prior to the lender's or its servicer's date of discovery and force 
placement. The proposed answer would explain that if a lender or its 
servicer, despite its monitoring efforts, discovers a loan with no or 
insufficient coverage, it may charge for the cost of premiums and fees 
incurred by the lender or servicer in purchasing the flood insurance on 
the borrower's behalf, including premiums and fees incurred for 
coverage beginning on the date of lapse, if the lender has purchased a 
policy on the borrower's behalf and that policy was effective as of the 
date of the insufficient coverage.
    The Agencies propose to add new Q&A Force Placement 10 to discuss 
whether the addition of the amount of force-placed insurance policy 
premiums and fees to the outstanding balance of a loan would constitute 
an ``increase'' that would trigger the applicability of flood insurance 
regulatory requirements. In the answer to proposed Q&A Force Placement 
10, the Agencies discuss three options that the Agencies understand 
lenders currently use to

[[Page 40452]]

charge a borrower for force-placed flood insurance and the impact of 
each option on the amount of coverage. Under the proposed Q&A, the 
subsequent treatment of the flood insurance premiums and fees would 
depend on which method the lender chooses. Specifically, the proposed 
answer provides that if the lender chooses to add the premium and fees 
to the mortgage balance and the lender's loan contract includes a 
provision permitting the lender or servicer to advance funds to pay for 
flood insurance premiums and fees as additional debt, such an 
advancement would be considered part of the loan and not an 
``increase'' in the loan amount, and therefore would not be considered 
a triggering event. The proposed Q&A continues to explain that if, 
however, there is no explicit provision permitting such advancement in 
the loan contract, the addition of the force-placed premiums and fees 
would be considered an ``increase'' in the loan amount and would be a 
triggering event because no advancement of funds was contemplated as 
part of the loan. If the premiums and fees are added to an unsecured 
account or billed directly to the borrower, the proposed Q&A states 
that these approaches would not result in an increase in the loan 
balance and therefore would not be considered triggering events.
    New proposed Q&A Force Placement 11 would address the sufficiency 
of evidence of flood insurance in connection with refunding premiums 
paid by a borrower for force-placed insurance during any period of 
overlap with borrower-purchased insurance. The proposed answer would 
provide that as stated in the Regulation, a lender is required to 
refund premiums paid by a borrower for force-placed insurance during 
any period of overlap with borrower-purchased insurance. The proposed 
answer would state that in that scenario, a lender must accept a policy 
declarations page that includes the existing flood insurance policy 
number and the identity of and contact information for, the insurance 
company or its agent and that the Regulation does not require that the 
declarations page include any additional information. In addition, the 
proposed answer would note that in situations not involving a lender's 
refund of premiums for force-placed insurance, the Regulation does not 
specify what documentation would be sufficient. The proposed answer 
also provides that generally, it is appropriate, although not required 
by the Regulation, for lenders to accept a copy of the flood insurance 
application and premium payment as evidence of proof of purchase for 
new policies.
    New proposed Q&A Force Placement 12 would reinforce the requirement 
that a lender is to refund any premiums and fees paid for by the 
borrower for force-placed insurance for any overlap period within 30 
days of receipt of a confirmation of a borrower's existing flood 
insurance coverage without exception. Such refund is required even in 
situations in which a lender cannot obtain a refund from the insurance 
company because the borrower did not provide proof of coverage in a 
timely manner, or when the insurance company fails to provide the 
refund within 30 days.
    New proposed Q&A Force Placement 13 would explain that a lender can 
rely on a force-placed insurance policy to satisfy the mandatory 
purchase requirement for a refinance or loan modification if the 
borrower does not purchase his or her own policy. Assuming the force-
placed policy is in effect and otherwise satisfies the regulatory 
coverage standards, then that policy may satisfy the mandatory purchase 
requirement. The Agencies suggest in the proposed answer that lenders 
could encourage the borrower to purchase his or her own policy, likely 
at a reduced cost, prior to the loan closing.
    In response to an issue raised in the EGRPRA report, new proposed 
Q&A Force Placement 14 would explain the process for renewal of force-
placed coverage by requiring the lender to follow its normal 
communications practice with its insurance provider to renew the flood 
insurance policy on the borrower's behalf to ensure that flood 
insurance coverage remains in place. Under the proposed answer, the 
lender is not required to send a notice prior to force-placing 
insurance at the expiration of a force-placed policy. However, the 
proposed answer provides that the lender or its servicer, at its 
discretion, may notify the borrower about its plan to renew the force-
placed policy.
    New proposed Q&A Force Placement 15 would indicate that, although 
there is no explicit duty to monitor flood insurance coverage over the 
life of the loan in the Act or Regulation, for purposes of safety and 
soundness, many lenders obtain ``life-of-loan'' monitoring. The 
Agencies believe such a practice could help ensure that lenders 
complete the force placement of flood insurance in a timely manner upon 
lapse of a policy, that there is continuous coverage, and that lenders 
are promptly made aware of flood map changes.
    New proposed Q&A Force Placement 16 would address what the Act and 
Regulation require a lender or its servicer to do if a lender or 
servicer receives a notice of remapping that states that a property 
will be remapped into an SFHA as of a future effective date. The 
proposed answer would clarify that if a lender or its servicer 
determines at any time during the term of a designated loan that the 
building or mobile home and any personal property securing the loan is 
uninsured or underinsured, the lender or servicer must begin the force-
placement process. For a loan secured by a property subject to a 
remapping that was not previously located in an SFHA, such a loan does 
not become a designated loan until the effective date of the map 
change. Therefore, when a lender or its servicer receives advance 
notice of a map change, the effective date of the map change is the 
date the lender or servicer must determine whether the property is 
covered by sufficient flood insurance. If the borrower does not 
purchase a flood insurance policy that begins on the effective date of 
the map change, the lender or its servicer must send the force-
placement notice to the borrower.
XVI. Flood Insurance Requirements in the Event of the Sale or Transfer 
of a Designated Loan and/or Its Servicing Rights
    The Agencies propose to move current section VIII to proposed 
section XVI as part of the overall reorganization of the Interagency 
Questions and Answers. Current Q&As 44 through 50 would be re-
designated as proposed Q&As Servicing 1-7, respectively, with minor 
nonsubstantive modifications to account for the change in the title of 
the head of FEMA from ``Director'' to ``Administrator'' and for 
purposes of clarity.

XVII. Mandatory Civil Money Penalties

    For organizational purposes, the Agencies propose to move current 
section XVI to proposed section XVII. Current Q&As 81 and 82 would be 
included in this section and re-designated as proposed Q&As Penalty 1 
and 2, respectively. The changes proposed to the Q&As are for purposes 
of clarity and accuracy with no intended change in meaning or 
substance.
    The Agencies solicit comments on all aspects of the revised and new 
proposed Q&As.
    The following re-designation table is provided as an aid to assist 
the public in reviewing the proposed revisions to the 2009 and 2011 
Interagency Questions and Answers.

[[Page 40453]]



------------------------------------------------------------------------
      2009 & 2011 Interagency Q&A            Proposed Interagency Q&A
------------------------------------------------------------------------
Section I. Determining When Certain      Section I. Determining the
 Loans Are Designated Loans for Which     Applicability of Flood
 Flood Insurance Is Required Under the    Insurance Requirements for
 Act and Regulation.                      Certain Loans.
    Section 1, Question 1..............  Section I, Applicability 1.
    Section 1, Question 2..............  Section I, Applicability 4.
    Section 1, Question 3..............  Section I, Applicability 5.
    Section 1, Question 4..............  Section I, Applicability 9.
    Section 1, Question 5..............  Section I, Applicability 6.
    Section 1, Question 6..............  Section I, Applicability 7.
    Section 1, Question 7..............  Section I, Applicability 8.
Section II. Determining the Appropriate  Section VIII. Determining the
 Amount of Flood Insurance Required       Appropriate Amount of Flood
 Under the Act and Regulation.            Insurance Required.
Section II, Question 8.................  Section VIII, Amount 1.
Section II, Question 9.................  Section VIII, Amount 2.
Section II, Question 10................  Deleted.
Section II, Question 11................  Section VIII, Amount 3.
Section II, Question 12................  Section VIII, Amount 4.
Section II, Question 13................  Section VIII, Amount 5.
Section II, Question 14................  Section VIII, Amount 6.
Section II, Question 15................  Section VIII, Amount 7.
Section II, Question 16................  Section VIII, Amount 8.
Section II, Question 17................  Section VIII, Amount 9.
Section III. Exemptions from the         Section II. Exemptions from the
 Mandatory Flood Insurance Requirements.  Mandatory Flood Insurance
                                          Purchase Requirements.
Section III, Question 18...............  Section II, Exemptions 1.
Section IV. Flood Insurance              Section IX. Flood Insurance
 Requirements for Construction Loans.     Requirements for Construction
                                          Loans.
Section IV, Question 19................  Section IX. Construction 1.
Section IV, Question 20................  Section IX. Construction 2.
Section IV, Question 21................  Section IX. Construction 3.
Section IV, Question 22................  Section IX. Construction 4.
Section IV, Question 23................  Section IX. Construction 5.
Section V. Flood Insurance Requirements
 for Nonresidential Buildings.
    Section V, Question 24.............  Section I, Applicability 2.
    Section V, Question 25.............  Section I, Applicability 3.
Section VI. Flood Insurance              Section X. Flood Insurance
 Requirements for Residential             Requirements for Residential
 Condominiums.                            Condominiums and Co-Ops.
Section VI, Question 26................  Section X, Condo and Co-Op 1.
Section VI, Question 27................  Section X, Condo and Co-Op 2.
Section VI, Question 28................  Section X, Condo and Co-Op 3.
Section VI, Question 29................  Section X, Condo and Co-Op 4.
Section VI, Question 30................  Section X, Condo and Co-Op 5.
Section VI, Question 31................  Section X, Condo and Co-Op 6.
Section VI, Question 32................  Section X, Condo and Co-Op 7.
Section VI, Question 33................  Section X, Condo and Co-Op 8.
Section VII. Flood Insurance             Section XI. Flood Insurance
 Requirements for Home Equity Loans,      Requirements for Home Equity
 Lines of Credit, Subordinate Liens,      Loans, Lines of Credit,
 and Other Security Interests in          Subordinate Liens, and Other
 Collateral Located in an SHFA.           Security Interests in
                                          Collateral Located in an SFHA.
Section VII, Question 34...............  Section XI, Other Security
                                          Interests 1.
Section VII, Question 35...............  Section XI, Other Security
                                          Interests 2.
Section VII, Question 36...............  Section XI, Other Security
                                          Interests 4.
Section VII, Question 37...............  Section XI, Other Security
                                          Interests 5.
Section VII, Question 38...............  Section XI, Other Security
                                          Interests 6.
Section VII, Question 39...............  Section XI, Other Security
                                          Interests 7.
Section VII, Question 40...............  Section XI, Other Security
                                          Interests 8.
Section VII, Question 41...............  Section XI, Other Security
                                          Interests 9.
Section VII, Question 42...............  Section XI, Other Security
                                          Interests 11.
Section VII, Question 43...............  Section XI, Other Security
                                          Interests 12.
Section VIII. Flood Insurance            Section XVI. Flood Insurance
 Requirements in the Event of the Sale    Requirements in the Event of
 or Transfer of a Designated Loan and/    the Sale or Transfer of a
 or Its Servicing Rights.                 Designated Loan and/or Its
                                          Servicing Rights.
Section VII, Question 44...............  Section XVI, Servicing 1.
Section VII, Question 45...............  Section XVI, Servicing 2.
Section VII, Question 46...............  Section XVI, Servicing 3.
Section VII, Question 47...............  Section XVI, Servicing 4.
Section VII, Question 48...............  Section XVI, Servicing 5.
Section VII, Question 49...............  Section XVI, Servicing 6.
Section VII, Question 50...............  Section XVI, Servicing 7.
Section IX. Escrow Requirements........  Section XII-VX. Requirement to
                                          Escrow Flood Insurance
                                          Premiums and Fees.
Section IX, Question 51................  Section XII, Escrow 5.
Section IX, Question 52................  Section XII, Escrow 1.
Section IX, Question 53................  Deleted.
Section IX, Question 54................  Deleted.
Section IX, Question 55................  Section XIV, Loan Exception 1.
Section IX, Question 56................  Section XIV, Loan Exception 4.
Section X. Force Placement.............  Section XV. Force Placement of
                                          Flood Insurance.

[[Page 40454]]

 
Section X, Question 57.................  Section XV, Force Placement 1.
Section X, Question 58.................  Section XV, Force Placement 3.
Section X, Question 59.................  Section XV, Force Placement 8.
Section X, Question 60.................  Section XV, Force Placement 4.
Section X, Question 61.................  Section XV, Force Placement 5.
Section X, Question 62.................  Section XV, Force Placement 9.
Section XI. Private Flood Insurance....  Section III, Coverage--NFIP/
                                          Private Flood Insurance.
Section XI, Question 63................  Section III, Coverage 1.
Section XI, Question 64................  Section III, Coverage 2.
Section XII. Required Use of Standard    Section IV. Required Use of
 Flood Hazard Determination Form          Standard Flood Hazard
 (SFHDF).                                 Determination Form (SFHDF).
Section XII, Question 65...............  Section IV, SFHDF 1.
Section XII, Question 66...............  Section IV, SFHDF 2.
Section XII, Question 67...............  Section IV, SFHDF 3.
Section XII, Question 68...............  Section IV, SFHDF 4.
Section XIII. Flood Determination Fees.  Section V. Flood Insurance
                                          Determination Fees.
Section XIII, Question 69..............  Section V, Fees 1.
Section XIII, Question 70..............  Section V, Fees 2.
Section XIV. Flood Zone Discrepancies..  Section VI. Flood Zone
                                          Discrepancies.
Section XIV, Question 71...............  Section VI, Zone 1.
Section XIV, Question 72...............  Section VI, Zone 2.
Section XV. Notice of Special Flood      Section VII. Notice of Special
 Hazards and Availability of Federal      Flood Hazards and Availability
 Disaster Relief.                         of Federal Disaster Relief.
Section XV, Question 73................  Section VII, Notice 1.
Section XV, Question 74................  Section VII, Notice 2.
Section XV, Question 75................  Section VII, Notice 3.
Section XV, Question 76................  Section VII, Notice 4.
Section XV, Question 77................  Section VII, Notice 4.
Section XV, Question 78................  Section VII, Notice 5.
Section XV, Question 79................  Section VII, Notice 6.
Section XV, Question 80................  Section VII, Notice 7.
Section XVI. Mandatory Civil Money       Section XVII. Mandatory Civil
 Penalties.                               Money Penalties.
Section XVI, Question 81...............  Section XVI, Question 82.
Section XVII, Penalty 1................  Section XVII, Penalty 2.
------------------------------------------------------------------------

Interagency Questions and Answers Regarding Flood Insurance

    The Interagency Questions and Answers are organized by topic. Each 
topic addresses a major area of flood insurance law and regulations. 
For ease of reference, the following terms are used throughout this 
document: ``Act'' refers to the National Flood Insurance Act of 1968 
and the Flood Disaster Protection Act of 1973, as revised. 
``Regulation'' refers to each agency's current final rule.\23\ 
``Lenders'' refers only to regulated lending institutions as defined in 
the Act.\24\ ``Designated loan'' means a loan secured by a building or 
mobile home that is located or to be located in a special flood hazard 
area in which flood insurance is available under the Act. The OCC, 
Board, FDIC, FCA, and NCUA, (collectively, ``the Agencies'') are 
providing answers to questions pertaining to the following topics:
---------------------------------------------------------------------------

    \23\ The Agencies' rules are codified at 12 CFR part 22 (OCC), 
12 CFR 208.25 (Board), 12 CFR part 339 (FDIC), 12 CFR part 614, 
subpart S (FCA), and 12 CFR part 760 (NCUA).
    \24\ 42 U.S. Code 4003 (a)(10).

I. Determining the Applicability of Flood Insurance Requirements for 
Certain Loans
II. Exemptions from the Mandatory Flood Insurance Purchase 
Requirements
III. Coverage--NFIP/Private Flood Insurance
IV. Required Use of Standard Flood Hazard Determination Form (SFHDF)
V. Flood Insurance Determination Fees
VI. Flood Zone Discrepancies
VII. Notice of Special Flood Hazards and Availability of Federal 
Disaster Relief
VIII. Determining the Appropriate Amount of Flood Insurance Required
IX. Flood Insurance Requirements for Construction Loans
X. Flood Insurance Requirements for Residential Condominiums and Co-
Ops
XI. Flood Insurance Requirements for Home Equity Loans, Lines of 
Credit, Subordinate Liens, and Other Security Interests in 
Collateral Located in an SFHA
XII. Requirement to Escrow Flood Insurance Premiums and Fees--
General
XIII. Requirement to Escrow Flood Insurance Premiums and Fees--Small 
Lender Exception
XIV. Requirement to Escrow Flood Insurance Premiums and Fees--Loan 
Exceptions
XV. Force Placement of Flood Insurance
XVI. Flood Insurance Requirements in the Event of the Sale or 
Transfer of a Designated Loan and/or Its Servicing Rights
XVII. Mandatory Civil Money Penalties

I. Determining the Applicability of Flood Insureance Requirements for 
Certain Loans
APPLICABILITY 1. Does the Regulation apply to a loan where the building 
or mobile home securing such loan is located in a community that does 
not participate in the National Flood Insurance Program (NFIP)?
    Yes, the Regulation does apply; however, a lender need not require 
borrowers to obtain flood insurance for a building or mobile home 
located in a community that does not participate in the NFIP, even if 
the building or mobile home securing the loan is located in a Special 
Flood Hazard Area (SFHA). Nonetheless, a lender, using the standard 
Special Flood Hazard Determination Form (SFHDF), must still determine 
whether the building or mobile home is located in an SFHA.\25\ If the 
building or mobile home is determined to be located in an SFHA, a 
lender is required to mail or deliver a written notice to the 
borrower.\26\ In this

[[Page 40455]]

case, a lender, generally, may make a conventional loan without 
requiring flood insurance. However, because Federal agencies such as 
the Small Business Administration, Veterans Administration, or Federal 
Housing Administration are prohibited from guaranteeing or insuring a 
loan secured by a building or mobile home located in an SFHA in a 
community that does not participate in the NFIP, a lender would not be 
able to make a federally guaranteed or insured loan. See 42 U.S.C. 
4106(a). Also, a lender is responsible for exercising sound risk 
management practices to avoid making a loan secured by a building or 
mobile home located in an SFHA where no flood insurance is available, 
if doing so would pose an unacceptable risk to the lender.
---------------------------------------------------------------------------

    \25\ 12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR 
339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a) 
(NCUA).
    \26\ 12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR 
339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a) 
(NCUA).
---------------------------------------------------------------------------

APPLICABILITY 2. Some borrowers have buildings with limited utility or 
value and, in many cases, the borrower would not replace them if lost 
in a flood. Must a lender require flood insurance for such buildings?
    Lenders must require flood insurance on a building or mobile home 
when those structures are part of the property securing the loan and 
are located in an SFHA in a participating community.\27\ However, flood 
insurance is not required on a structure that is part of a residential 
property but is detached from the primary residential structure of such 
property and does not serve as a residence.\28\ If the limited utility 
or value structure does not qualify for the detached structure 
exemption, a lender may consider ``carving out'' the building from the 
security it takes on the loan to avoid having to require flood 
insurance on the structure. However, the lender should fully analyze 
the risks of this option. In particular, a lender should consider 
whether and how it would be able to market and sell the property 
securing its loan in the event of foreclosure.
---------------------------------------------------------------------------

    \27\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
    \28\ 12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR 
339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c) 
(NCUA).
---------------------------------------------------------------------------

    APPLICABILITY 3. What are a lender's requirements under the 
Regulation for a loan secured by multiple buildings when some of the 
buildings are located in an SFHA in which flood insurance is available 
and other buildings are not? What if the buildings are located in 
different communities and some of the communities participate in the 
NFIP and others do not?
    A lender must determine whether any improved real property securing 
the loan is in an SFHA.\29\ In cases in which the loan is secured by 
multiple buildings and some of the buildings are located in an SFHA in 
which flood insurance is available under the Act, but other buildings 
are not located in an SFHA (or are located in an SFHA, but not in a 
participating community), a lender is required to obtain flood 
insurance only on the buildings securing the loan that are located in 
an SFHA in which flood insurance is available under the Act.\30\ For 
example, assume a loan is secured by five buildings as follows:
---------------------------------------------------------------------------

    \29\ 12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR 
339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a) 
(NCUA).
    \30\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
---------------------------------------------------------------------------

     Buildings 1 and 2 are located in an SFHA and the community 
participates in the NFIP;
     Building 3 is not located in an SFHA; and
     Buildings 4 and 5 are located in an SFHA, but the 
communities do not participate in the NFIP.
    In this scenario, the lender is required to obtain insurance only 
on buildings 1 and 2. As a matter of safety and soundness, however, a 
lender may decide to require the purchase of flood insurance (from a 
private insurer) on buildings 4 and 5 because these buildings are 
located in an SFHA. Further, depending on the risk factors of building 
3, the lender may elect to require flood insurance as a matter of 
safety and soundness, even if the building is not located in an SFHA.
APPLICABILITY 4. What is a lender's responsibility if a particular 
building or mobile home that secures a loan is not located within an 
SFHA, or is no longer located within an SFHA due to a map change?
    Although a lender is not obligated to require mandatory flood 
insurance on a building or mobile home securing a loan that is not 
located within an SFHA or is no longer located within an SFHA, a lender 
may, at its discretion and taking into consideration State law, as 
appropriate, require flood insurance for property outside of SFHAs for 
safety and soundness purposes as a condition of a loan being made. Each 
lender should tailor its own flood insurance policies and procedures to 
suit its business needs and protect its ongoing interest in the 
collateral. For loans in which the property is no longer located in an 
SFHA, the borrower can elect to convert the existing NFIP standard-
rated policy to a lower cost NFIP Preferred Risk Policy, if available.
APPLICABILITY 5. Does a lender's purchase from another lender of a loan 
secured by a building or mobile home located in an SFHA in which flood 
insurance is available under the Act trigger any requirements under the 
Regulation?
    No. A lender's purchase of a loan, secured by a building or mobile 
home located in an SFHA in which flood insurance is available under the 
Act, alone, is not an event that triggers the Regulation's 
requirements, such as making a new flood determination or requiring a 
borrower to purchase flood insurance. Requirements under the Regulation 
are triggered when a lender makes, increases, extends, or renews a 
designated loan.\31\ A lender's purchase of a loan does not fall within 
any of those categories.
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    \31\ 12 CFR 22.2(e), 22.3(a) (OCC); 12 CFR 208.25(b)(5) and 
(c)(1) (Board); 12 CFR 339.2, 339.3(a) (FDIC); 12 CFR 614.4925, 
614.4930 (FCA); and 12 CFR 760.2, 760.3(a) (NCUA).
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    However, if a lender becomes aware at any point during the life of 
a designated loan that flood insurance is required, the requirements of 
the Regulation apply, including force placing insurance, if 
necessary.\32\ Depending on the circumstances, the lender may need to 
conduct due diligence for safety and soundness reasons, which could 
include determining whether flood insurance on purchased loans is 
required. Additionally, if the purchasing lender subsequently 
refinances, extends, increases, or renews a designated loan, it must 
comply with the Regulation.\33\
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    \32\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
    \33\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930 (FCA); and 12 CFR 760.3(a) (NCUA).
---------------------------------------------------------------------------

APPLICABILITY 6. Does the Regulation apply to loans that are being 
restructured or modified?
    It depends. If the loan otherwise meets the definition of a 
designated loan and if the lender increases the amount of the loan, or 
extends or renews the terms of the original loan, then the Regulation 
applies.\34\
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    \34\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930 (FCA); and 12 CFR 760.3(a) (NCUA).
---------------------------------------------------------------------------

APPLICABILITY 7. Are table funded loans treated as new loan 
originations?
    Yes. Table funding, as defined in the Regulation, means a 
settlement at which a loan is funded by a contemporaneous advance of 
loan funds and an assignment of the loan to the person

[[Page 40456]]

advancing the funds.\35\ A loan made through a table funding process is 
treated as though the party advancing the funds has originated the 
loan.\36\ The funding party is required to comply with the Regulation. 
The table funding lender can meet the administrative requirements of 
the Regulation by requiring the party processing and underwriting the 
application to perform those functions on its behalf.
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    \35\ 12 CFR 22.2(m) (OCC); 12 CFR 208.25(b)(11) (Board); 12 CFR 
339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).
    \36\ 12 CFR 22.3(b) (OCC); 12 CFR 208.25(c)(2) (Board); 12 CFR 
339.3(b) (FDIC); 12 CFR 614.4930(b) (FCA); and 12 CFR 760.3(b) 
(NCUA).
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APPLICABILITY 8. Is a lender required by the Act or the Regulation to 
perform a review of its, or of its servicer's, existing loan portfolio 
for compliance with the flood insurance requirements under the Act and 
Regulation?
    No. Apart from the requirements mandated when a loan is made, 
increased, extended, or renewed, a lender need only review and take 
action on any part of its existing portfolio for safety and soundness 
purposes, or if it knows or has reason to know of the need for NFIP 
coverage.\37\ Regardless of the lack of such requirement in the Act and 
Regulation, however, sound risk management practices may lead a lender 
to conduct scheduled periodic reviews that track the need for flood 
insurance on a loan portfolio.
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    \37\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
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APPLICABILITY 9. Do the mandatory purchase requirements under the Act 
and Regulation apply when a lender participates in a loan syndication 
or participation?
    The acquisition by a lender of an interest in a loan either by 
participation or syndication after that loan has been made does not 
trigger the requirements of the Act or the Regulation, such as making a 
new flood determination or requiring a borrower to purchase flood 
insurance.
    Nonetheless, as with purchased loans, depending upon the 
circumstances, the lender may undertake due diligence for safety and 
soundness purposes to protect itself against the risk of flood or other 
types of loss.
    Lenders who pool or contribute funds that will be simultaneously 
advanced to a borrower or borrowers as a loan secured by improved real 
estate would be making a loan that triggers the requirements of the Act 
and Regulation.\38\ Federal flood insurance requirements also would 
apply when a group of lenders refinances, extends, renews or increases 
a loan.\39\ Although the agreement among the lenders may assign 
compliance duties to a lead lender or agent, and include clauses in 
which the lead lender or agent indemnifies participating lenders 
against flood losses, each participating lender remains individually 
responsible for compliance with the Act and Regulation. Therefore, the 
Agencies will examine whether the regulated institution/participating 
lender has performed upfront due diligence to determine whether the 
lead lender or agent has undertaken the necessary activities to ensure 
that the borrower obtains appropriate flood insurance and that the lead 
lender or agent has adequate controls to monitor the loan(s) on an 
ongoing basis for compliance with the flood insurance requirements. 
Further, the Agencies expect the participating lender to have adequate 
controls to monitor the activities of the lead lender or agent for 
compliance with flood insurance requirements over the term of the loan.
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    \38\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
    \39\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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Applicability 10. Is a lender expected to consider any triggering event 
or any cashless roll of which it becomes aware in any tranche of a 
multi-tranche credit facility, regardless of whether the lender 
participates in the affected tranche?
    No. Consistent with Q&A Applicability 9, the Agencies expect that a 
lender participating in a multi-tranche credit facility will perform 
upfront due diligence to determine whether the lead lender has adequate 
controls to monitor the loan on an ongoing basis for compliance with 
the flood insurance requirements. Even though each lender participating 
in a tranche in a multi-tranche credit facility remains individually 
responsible for compliance with the flood insurance requirements 
relating to structures securing the tranche in which it participates, 
this obligation can be achieved through the upfront due diligence 
process when determining the lead lender/administrative agent's ongoing 
monitoring for compliance with flood insurance requirements.
    A multi-tranche credit facility is analogous in many respects to a 
loan syndication or participation. Q&A Applicability 9 addresses 
applicability of the mandatory purchase requirements when a lender 
participates in a loan syndication or participation. Similar to a loan 
syndication or participation, a multi-tranche credit facility involves 
one credit agreement that describes and governs all the tranches. In 
addition, similar to a loan syndication or participation, a multi-
tranche credit facility typically has one lead lender that acts as the 
administrative agent for the credit facility and its tranches. Thus, 
the Agencies do not expect a lender participating in one tranche in a 
multi-tranche credit facility to be responsible for taking direct steps 
to comply with flood insurance requirements in connection with a 
triggering event (i.e., making, increasing, extending or renewing) or 
cashless roll that occurs in a tranche in which the lender does not 
participate.
    A multi-tranche commercial credit facility is a loan arrangement 
containing more than one type of loan or tranche. Each loan within the 
overall credit facility is made to the same borrower or group of 
related borrowers, but the loans may have different lenders and 
different terms and conditions. For example, a credit facility might 
have one tranche that is a revolving line of credit with a one-year 
maturity date and one or more additional tranches that are fixed rate 
loans with different interest rates and different maturity dates. 
Various lenders may participate in each tranche. Generally, the 
tranches share the same collateral and there is one credit agreement 
that describes and governs all the tranches.
    Under most multi-tranche credit facility agreements, a triggering 
event can occur within a particular tranche without any requirement to 
notify and obtain the consent of the lenders not participating in that 
tranche. Lenders may also participate in a ``cashless roll,'' which is 
an exchange of an existing loan for a new or amended loan without any 
transfer of cash. A cashless roll may be used to replace or supplement 
existing tranches, but not to increase the total amount of committed 
debt; therefore, this is not considered a triggering event.
Applicability 11. Does an automatic extension of a credit facility, 
that was agreed upon by the borrower and the lender at loan origination 
and memorialized in the loan agreement, constitute a triggering event 
(i.e., making, increasing, extending or renewing) that would trigger 
the federal flood insurance requirements?
    No. An automatic extension of a credit facility that was agreed 
upon by the lender and the borrower at loan origination and 
memorialized in the loan agreement does not constitute a

[[Page 40457]]

triggering event (i.e., making, increasing, extending or renewing) that 
would trigger the federal flood insurance requirements, because the 
automatic extension was agreed to in the original loan contract.
Applicability 12. What is the applicability of the mandatory purchase 
requirement during a period of time when coverage under the NFIP is not 
available?
    During a period when coverage under the NFIP is not available, such 
as due to a lapse in authorization or in appropriations, lenders may 
continue to make loans subject to the Regulation without requiring 
flood insurance coverage. However, lenders must continue to make flood 
determinations,\40\ provide timely, complete, and accurate notices to 
borrowers,\41\ and comply with other applicable parts of the 
Regulation.
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    \40\ 12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR 
339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a) 
(NCUA).
    \41\ 12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR 
339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a) 
(NCUA).
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    In addition, lenders should evaluate safety and soundness and legal 
risks and prudently manage those risks during a period when coverage 
under the NFIP is not available. Lenders should take appropriate 
measures or consider possible options in consultation with the borrower 
to mitigate loss exposures in the event of a flood during such periods. 
For example,
     Lenders may determine the risk of loss is sufficient to 
justify a postponement in closing the loan until the NFIP coverage is 
available again.
     Lenders may require the borrower to obtain private flood 
insurance if available, as a condition of closing the loan. However, 
after considering the cost of the private flood policy, a lender or the 
borrower may decide to postpone closing rather than incur a long-term 
obligation to address a possible short-term lapse.
     Lenders may make the loan without requiring the borrower 
to apply for flood insurance and pay the premium while NFIP coverage is 
unavailable. However, this option poses a number of risks that should 
be carefully evaluated. Moreover, once NFIP coverage becomes available 
again, the Agencies expect that flood insurance will be obtained for 
these loans, including, if necessary, by force placement.\42\ Before 
making such loans, lenders should make borrowers aware of the flood 
insurance requirements and that force-placed insurance is typically 
more costly than borrower-obtained insurance. Lenders also should have 
a process to identify these loans to ensure that insurance is promptly 
purchased when NFIP coverage becomes available subsequent to their 
closing.
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    \42\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
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II. Exemptions From the Mandatory Flood Insurance Purchase Requirements
Exemptions 1. What are the exemptions from the mandatory purchase 
requirement?
    There are only three exemptions from the mandatory requirement to 
purchase flood insurance on a designated loan. The first applies to 
State-owned property covered under a policy of self-insurance 
satisfactory to the Administrator of FEMA.\43\ The second applies if 
both the original principal balance of the loan is $5,000 or less, and 
the original repayment term is one year or less.\44\ The third applies 
to any structure that is a part of any residential property but is 
detached from the primary residential structure of such property and 
does not serve as a residence. For purposes of the detached structure 
exemption, a ``structure that is a part of residential property'' is a 
structure used primarily for personal, family, or household purposes, 
and not used primarily for agricultural, commercial, industrial, or 
other business purposes. In addition, a structure is ``detached'' from 
the primary residential structure if it is not joined by any structural 
connection to that structure. Furthermore, whether a structure ``does 
not serve as a residence'' is based upon the good faith determination 
of the lender that the structure is not intended for use or actually 
used as a residence, which generally includes sleeping, bathroom, or 
kitchen facilities.\45\ If one of these exemptions applies, a borrower 
may still elect to purchase flood insurance. Also, a lender may require 
flood insurance as a condition of making the loan, as a matter of 
safety and soundness.
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    \43\ 12 CFR 22.4(a) (OCC); 12 CFR 208.25(d)(1) (Board); 12 CFR 
339.4(a) (FDIC); 12 CFR 614.4932(a) (FCA); and 12 CFR 760.4(a) 
(NCUA).
    \44\ 12 CFR 22.4(b) (OCC); 12 CFR 208.25(d)(2) (Board); 12 CFR 
339.4(b) (FDIC); 12 CFR 614.4932(b) (FCA); and 12 CFR 760.4(b) 
(NCUA).
    \45\ 12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR 
339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c) 
(NCUA).
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Exemptions 2. Does a lender have to take a security interest in the 
primary residential structure for detached structures to be eligible 
for the detached structure exemption? For example, suppose the house on 
a farm is not collateral, but all of the outbuildings including the 
barn, the equipment storage shed, and the silo (which are used for farm 
production), and a detached garage where the homeowner keeps his car, 
are taken as collateral. May the lender apply the detached structure 
exemption to the outbuildings?
    The lender does not have to take a security interest in the primary 
residential structure for detached structures to be eligible for the 
exemption, but the lender needs to evaluate the uses of detached 
structures to determine if they are eligible.\46\ The term ``a 
structure that is part of a residential property'' in the detached 
structure exemption applies only to structures for which there is a 
residential use and not to structures for which there is a commercial, 
agricultural, or other business use.\47\ In this example, only the 
garage is serving a residential use, so it could qualify for the 
exemption. The barn, equipment storage shed, and silo, which are used 
for farm production, would not qualify for the exemption.
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    \46\ 12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR 
339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c) 
(NCUA).
    \47\ 12 CFR 22.4(c)(1) (OCC); 12 CFR 208.25(d)(3)(i) (Board); 12 
CFR 339.4(c)(1) (FDIC); 12 CFR 614.4932(c)(1) (FCA); and 12 CFR 
760.4(c)(1) (NCUA).
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Exemptions 3. Do detached structures require a flood hazard 
determination to be performed even if coverage is not required?
    Because a flood hazard determination is often needed to identify 
the number and types of structures on the property, conducting a flood 
hazard determination remains necessary for the lender to be able to 
comply with the flood insurance requirements.\48\
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    \48\ 12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR 
339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a) 
(NCUA).
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Exemptions 4. If a borrower currently has a flood insurance policy on a 
detached structure that is part of residential property and the 
detached structure does not serve as a residence, may the lender or its 
servicer cancel its requirement to carry flood insurance on that 
structure?
    Yes. If a borrower has a flood insurance policy on a detached 
structure that is part of a residential

[[Page 40458]]

property and does not serve as a residence, the lender is no longer 
mandated by the Act to require flood insurance on that structure.\49\ 
The lender may allow the borrower to cancel the policy. If warranted as 
a matter of safety and soundness, the lender may continue to require 
flood insurance coverage on the detached structure.
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    \49\ 12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR 
339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c) 
(NCUA).
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Exemptions 5. If a property is remapped into an SFHA, does that trigger 
a review of the intended use of each detached structure?
    No. A lender must examine the status of a detached structure upon a 
qualifying triggering event--i.e., making, increasing, extending, or 
renewing a loan.\50\ A remapping is not a triggering event. There is no 
duty to monitor the status of a detached structure following the 
lender's initial determination. However, regardless of the absence of 
such requirement in the Regulation, sound risk management practices may 
lead a lender to conduct scheduled periodic reviews that track the need 
for flood insurance on a loan portfolio. Consistent with existing 
obligations under the Regulation, if a lender determines at any time 
that a property has become subject to the mandatory flood insurance 
purchase requirement and, as a result, the collateral is uninsured or 
underinsured, the lender has a duty to inform the borrower of the 
obligation to obtain or increase insurance coverage and to purchase 
flood insurance on the borrower's behalf, as necessary.\51\
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    \50\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
    \51\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
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Exemptions 6. May a lender review current loans in its portfolio as the 
flood insurance policies renew and determine that it will no longer 
require flood insurance on a detached structure in an SFHA if the 
structure does not contribute to the value of the property securing the 
loan?
    A lender or servicer could initiate such a review; however, the 
Regulation does not permit the exemption of structures from the 
mandatory flood insurance purchase requirement based solely on whether 
the detached structure contributes value to the overall residential 
property securing the loan.\52\ In the case of any residential 
property, flood insurance is not required on any structure that is part 
of such property as long as it is detached from the primary residential 
structure and does not serve as a residence.\53\ In addition, there are 
other exemptions that could apply: The exemption for State-owned 
property covered under a policy of self-insurance satisfactory to the 
Administrator of FEMA or the exemption for property securing any loan 
with an original principal balance of $5,000 or less and a repayment 
term of one year or less.\54\
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    \52\ 12 CFR 22.4 (OCC); 12 CFR 208.25(d) (Board); 12 CFR 339.4 
(FDIC); 12 CFR 614.4932 (FCA); and 12 CFR 760.4 (NCUA).
    \53\ 12 CFR 22.4(c) (OCC); 12 CFR 208.25(d)(3) (Board); 12 CFR 
339.4(c) (FDIC); 12 CFR 614.4932(c) (FCA); and 12 CFR 760.4(c) 
(NCUA).
    \54\ 12 CFR 22.4(a) and (b) (OCC); 12 CFR 208.25(d)(1) and (2) 
(Board); 12 CFR 339.4(a) and (b) (FDIC); 12 CFR 614.4932(a) and (b) 
(FCA); and 12 CFR 760.4(a) and (b) (NCUA).
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Exemptions 7. If a loan is secured by a residential property and is 
joined to another building by a stairway or covered walkway, for 
purposes of Federal flood insurance requirements, would the other 
building qualify as a detached structure?
    For purposes of the detached structure exemption, a structure is 
``detached'' from the primary residential structure if it is not joined 
by any structural connection to that structure.\55\ That is, a 
structure is ``detached'' if it stands alone. This definition is 
consistent with the coverage provision of the NFIP's Standard Flood 
Insurance Policy (SFIP) for additions and extensions to the dwelling 
unit. In this case, the connected structure would not qualify as a 
detached structure because it is attached to the primary residence.
---------------------------------------------------------------------------

    \55\ 12 CFR 22.4(c)(2) (OCC); 12 CFR 208.25(d)(3)(ii) (Board); 
12 CFR 339.4(c)(2) (FDIC); 12 CFR 614.4932(c)(2) (FCA); and 12 CFR 
760.4(c)(2) (NCUA).
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    For purposes of insurance coverage under the NFIP, FEMA provides 
that if one building is attached to another through a covered breezeway 
or similar connection, it may be insured as one building under one 
policy or may be insured separately under two policies. See the FEMA 
NFIP Flood Insurance Manual for guidance.
III. Coverage--NFIP/Private Flood Insurance
Coverage 1. What are some factors to consider when determining whether 
a flood insurance policy issued by a private insurer provides 
sufficient protection of a loan secured by improved real property 
located in an SFHA, consistent with general safety and soundness 
principles?
    Some factors, among others, that a lender could consider in 
determining whether a policy provides sufficient protection of a loan 
include whether: (1) A policy's deductibles are reasonable based on the 
borrower's financial condition; (2) the insurer provides adequate 
notice of cancellation to the mortgagor and mortgagee to allow for 
timely force placement of flood insurance, if necessary; (3) the terms 
and conditions of the policy with respect to payment per occurrence or 
per loss and aggregate limits are adequate to protect the regulated 
lending institution's interest in the collateral; (4) the flood 
insurance policy complies with applicable State insurance laws; and (5) 
the private insurance company has the financial solvency, strength, and 
ability to satisfy claims.
Coverage 2. May a lender rely on a private insurance policy providing 
portfolio-wide coverage to meet the flood insurance purchase 
requirement or the force placement requirement under the Regulation?
    No. A private insurance policy that provides a lender portfolio-
wide coverage may provide protection to the lender in certain 
circumstances. For example, when a flood insurance policy has expired 
and the borrower has failed to renew coverage, private insurance 
policies providing portfolio-wide coverage may be useful protection for 
the lender for a gap in coverage in the period of time before a force-
placed policy takes effect. However, even if a lender has portfolio-
wide coverage to address gaps, the lender must still ensure the flood 
insurance purchase requirement is satisfied at the time a loan is made, 
increased, renewed or extended, and the lender must still force place 
coverage on the borrower's behalf in a timely manner, as required,\56\ 
and may not rely on a private insurance policy that provides portfolio-
wide coverage as a substitute for a force-placed policy.
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    \56\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
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Coverage 3. When does mandatory flood insurance on a designated loan 
need to be in place during the closing process?
    The Regulation states that a lender cannot ``make'' a loan secured 
by a property in an SFHA without adequate flood insurance coverage 
being in place.\57\ A lender should use the loan ``closing date'' to 
determine the date by which flood insurance must be in place for a 
designated loan. FEMA deems the ``closing date'' as the day the 
ownership

[[Page 40459]]

of the property transfers to the new owner based on State law.
---------------------------------------------------------------------------

    \57\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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    ``Wet funding'' and ``dry funding,'' which varies by State, refer 
to when a mortgage is considered officially closed. In a ``wet'' 
settlement State, the signing of closing documents, funding, and 
transfer of title occur all on the same day. By contrast, in a ``dry'' 
settlement State, documents are signed on one date, but loan funding 
and/or transfer of title/recording occur on subsequent date(s). 
Therefore, in ``dry'' settlement States, the ``closing date'' is the 
date of property transfer, regardless of loan signing or funding date.
    It is also important to note that the application and premium 
payment for NFIP flood insurance must be provided at or prior to the 
closing date since this impacts the FEMA flood insurance effective date 
and any resulting 30-day waiting period for new policies not made in 
connection with a triggering event. This application requirement 
applies for properties located in both dry and wet settlement States. 
See NFIP Flood Insurance Manual.
IV. Required Use of Standard Flood Hazard Determination Form (SFHDF)
SFHDF 1. Does the SFHDF replace the borrower notification form?
    No. The SFHDF is used by the lender to determine whether the 
building or mobile home offered as collateral security for a loan is or 
will be located in an SFHA in which flood insurance is available under 
the Act.\58\ The notification form, on the other hand, is used to 
notify the borrower(s) that the building or mobile home is or will be 
located in an SFHA and to inform the borrower(s) about flood insurance 
requirements and the availability of Federal disaster relief 
assistance.\59\
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    \58\ 12 CFR 22.6(a) (OCC); 12 CFR 208.25(f)(1) (Board); 12 CFR 
339.6 (FDIC); 12 CFR 614.4940 (FCA); and 12 CFR 760.6 (NCUA).
    \59\ 12 CFR 22.9 (OCC); 12 CFR 208.25(i) (Board); 12 CFR 339.9 
(FDIC); 12 CFR 614.4955 (FCA); and 12 CFR 760.9 (NCUA).
---------------------------------------------------------------------------

SFHDF 2. May a lender provide the SFHDF to the borrower?
    Yes. Although not a statutory requirement, a lender may provide a 
copy of the flood determination to the borrower so they can better 
understand their flood risk. The Agencies note that under the FEMA 
process for a Letter of Determination Review (LODR), a lender would 
also need to make the determination available to the borrower. FEMA 
requires that the lender and the borrower request the LODR jointly 
within 45-days of the notification of the requirement to purchase flood 
insurance for a fee. In the event a lender provides the SFHDF to the 
borrower, the signature of the borrower is not required to acknowledge 
receipt of the form.
SFHDF 3. May the SFHDF be used in electronic format?
    Yes.\60\ In the final rule adopting the SFHDF, FEMA stated: ``If an 
electronic format is used, the format and exact layout of the Standard 
Flood Hazard Determination Form is not required, but the fields and 
elements listed on the form are required. Any electronic format used by 
lenders must contain all mandatory fields indicated on the form.'' It 
should be noted that the lender must be able to reproduce the form upon 
receiving a document request by its Federal supervisory agency.
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    \60\ 12 CFR 22.6(b) (OCC); 12 CFR 208.25(f)(2) (Board); 12 CFR 
339.6(b) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(b) 
(NCUA).
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SFHDF 4. May a lender rely on a previous determination for a 
refinancing or assumption of a loan or multiple loans to the same 
borrower secured by the same property?
    It depends. The Act (42 U.S.C. 4104b(e)) permits a lender to rely 
on a previous flood determination using the SFHDF when it increases, 
extends, renews, or purchases a loan secured by a building or a mobile 
home. Under the Act, the ``making'' of a loan is not listed as a 
permissible event that permits a lender to rely on a previous 
determination. When the loan involves a refinancing or assumption by 
the same lender who obtained the original flood determination on the 
same property, the lender may rely on the previous determination only 
if the original determination was made not more than seven years before 
the date of the transaction, the basis for the determination was set 
forth on the SFHDF, and there were no map revisions or updates 
affecting the security property since the original determination was 
made. Further, if the same lender makes multiple loans to the same 
borrower secured by the same improved real estate, the lender may rely 
on its previous determination if the original determination was made 
not more than seven years before the date of the transaction, the basis 
for the determination was set forth on the SFHDF, and there were no map 
revisions or updates affecting the security property since the original 
determination was made. These loans are extended by the same lender, to 
the same borrower, and are secured by the same improved real estate, 
and, therefore, these types of transactions are the functional 
equivalent of an increase of a loan.
    When the loan involves a refinancing or assumption made by a lender 
different from the one who obtained the original determination, this 
would constitute the making of a new loan, thereby requiring a new 
determination.
V. Flood Insurance Determination Fees
Fees 1. When can lenders or servicers charge the borrower a fee for 
making a determination?
    There are four instances under the Act and Regulation when the 
borrower can be charged a fee for a flood determination:
     When the determination is made in connection with the 
making, increasing, extending, or renewing of a loan that is initiated 
by the borrower;
     When the determination reflects a revision or updating by 
FEMA of floodplain areas or flood-risk zones;
     When the determination reflects FEMA's publication of a 
notice or compendium that affects the area in which the security 
property is located, or FEMA requires a determination as to whether the 
building securing the loan is located in an SFHA; or
     When the determination results in force placement of 
insurance.\61\
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    \61\ 12 CFR 22.8(b) (OCC); 12 CFR 208.25(h)(2) (Board); 12 CFR 
339.8(b) (FDIC); 12 CFR 614.4950(b) (FCA); and 12 CFR 760.8(b) 
(NCUA).
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    Loan or other contractual documents between the parties may also 
permit the imposition of fees.
Fees 2. May charges made for life-of-loan reviews by flood 
determination firms be passed along to the borrower?
    Yes, with limitations noted below. In addition to the initial 
determination at the time a loan is made, increased, renewed, or 
extended, many flood determination firms provide a service to the 
lender to review and report changes in the flood status of a dwelling 
for the entire term of the loan (i.e., life-of-loan monitoring). The 
fee charged for the service at loan closing is a composite fee for 
conducting both the original and subsequent reviews. Charging a fee for 
the original determination is clearly authorized by the Act. The 
Agencies agree that a determination fee may include, among other 
things, reasonable fees for a lender, servicer, or third party to 
monitor the flood hazard status of property securing a loan in order to 
make determinations on an ongoing basis.
    However, the life-of-loan fee is based on the authority to charge a 
determination fee and, therefore, the composite determination/life-of-
loan

[[Page 40460]]

monitoring fee may be charged only if the events specified in the 
answer to Q&A Fees 1 occur.\62\ Further, a lender may not charge a 
composite determination and life-of-loan fee if the loan does not 
close, because such life-of loan fee would be an unearned fee in 
violation of the Real Estate Settlement Procedures Act.\63\
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    \62\ 12 CFR 22.8 (OCC); 12 CFR 208.25(h) (Board); 12 CFR 339.8 
(FDIC); 12 CFR 614.4950 (FCA); and 12 CFR 760.8 (NCUA).
    \63\ 12 U.S.C. 2607. See 12 CFR 1024.14(c).
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VI. Flood Zone Discrepancies
Zone 1. What should a lender do when there is a discrepancy between the 
flood hazard zone designation on the flood determination form and the 
flood insurance policy?
    If a lender receives a policy declarations page that has a flood 
zone designation that is different from the flood zone shown on the 
SFHDF, it should consider documenting the discrepancy in the loan file. 
If the SFHDF indicates that the building securing the loan is in an 
SFHA, the lender must require the appropriate amount of insurance 
coverage in accordance with the Act and Regulation,\64\ but the lender 
is not otherwise required to resolve a discrepancy between the flood 
zone designation on the SFHDF and the designation on the flood 
insurance policy declarations page provided by the borrower. This 
guidance applies to any flood zone discrepancy that arises in 
connection with a mortgage loan that is made, increased, extended or 
renewed. In addition, the guidance applies to any building that has 
been rated in accordance with NFIP procedures.
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    \64\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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    For a policy issued under the NFIP, if a misrating is discovered at 
the time of loss resulting from an incorrect flood zone, and a 
policyholder has underpaid the flood insurance premium, a policyholder 
may keep the contracted coverage limits if an additional premium is 
paid. Once paid, a revised declarations page will be issued showing the 
corrected flood zone. The lender will receive a copy of the 
declarations page and may receive a copy of the underpayment notice.
    If the borrower does not pay the additional premium, resulting in 
inadequate coverage, lenders must proceed with force-placement 
procedures.\65\ On the other hand, if a policyholder has overpaid the 
flood insurance premium as a result of a misrating, FEMA may allow a 
refund of insurance premiums under certain circumstances. See NFIP 
Flood Insurance Manual for specific instructions. Private policies may 
resolve flood zone discrepancies differently.
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    \65\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a)(FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
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Zone 2. Is a lender in violation of the Regulation if there is 
discrepancy between the flood zone on the SFHDF and the flood insurance 
policy declarations page?
    No, a lender is not in violation of the Regulation if there is a 
discrepancy between the flood zone on the SFHDF and the flood zone on 
the policy declarations page. As provided in Q&A Zone 1, a lender 
should consider documenting any zone discrepancy in the loan file.
Zone 3. What should a lender do when the lender's flood zone 
determination specifies that a building securing the loan is located in 
an SFHA requiring mandatory flood insurance coverage, but the borrower 
disputes that determination?
    If a borrower disputes a lender's determination that the building 
securing the loan is located in an SFHA requiring mandatory flood 
insurance coverage, the parties involved in making the determination 
are encouraged to resolve the flood zone discrepancy before contacting 
FEMA for a final determination. If the flood zone discrepancy cannot be 
resolved, an appeal may be filed with FEMA. Depending on the nature of 
the dispute, FEMA has different options for review, including:
     Letters of Determination Review (LODR), and
     Letters of Map Change (LOMC), which include Letters of Map 
Amendment (LOMA), Letters of Map Revision (LOMR), and Letters of Map 
Revision Based on Fill (LOMR-F).
    Lenders and borrowers should consult FEMA guidance on the 
appropriate process to follow, any applicable fees, and any deadlines 
by which the request to review must be made. However, as long as the 
lender's flood determination specifies that a building securing the 
loan is located in an SFHA and requires mandatory flood insurance 
coverage, sufficient coverage must be in place in accordance with the 
Act and the Regulation until FEMA has determined that the building is 
not in an SFHA.\66\ As noted in Q&A Zone 1, if there is sufficient 
insurance coverage in place, lenders are not required to resolve flood 
zone discrepancies between the flood zone determination form and the 
flood insurance policy.
---------------------------------------------------------------------------

    \66\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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VII. Notice of Special Flood Hazards and Availability of Federal 
Disaster Relief
Notice 1. Does the Notice of Special Flood Hazards have to be provided 
to each borrower for a real estate related loan?
    No. The Notice of Special Flood Hazards must be provided to one 
borrower when the lender determines that the property securing the loan 
is or will be located in an SFHA.\67\ In a transaction involving 
multiple borrowers, the lender need only provide the Notice of Special 
Flood Hazards to any one of the borrowers in the transaction. Lenders 
may provide multiple notices if they choose. The lender and borrower(s) 
typically designate the borrower to whom the Notice of Special Flood 
Hazards will be provided.
---------------------------------------------------------------------------

    \67\ 12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR 
339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a) 
(NCUA).
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Notice 2. Lenders making loans on mobile homes may not always know 
where the home is to be located until just prior to, or sometimes 
after, the time of loan closing. How is the requirement to provide the 
Notice of Special Flood Hazards applied in these situations?
    As required by the Regulation, a lender must provide the Notice of 
Special Flood Hazards to the borrower within a reasonable time before 
the completion of the transaction.\68\ If a lender determines that a 
mobile home securing a designated loan will be located in an SFHA just 
prior to closing, the lender may need to delay the closing until the 
Notice of Special Flood Hazards has been provided in accordance with 
the Regulation.
---------------------------------------------------------------------------

    \68\ 12 CFR 22.9(c) (OCC); 12 CFR 208.25(i)(2) (Board); 12 CFR 
339.9(c) (FDIC); 12 CFR 614.4955(c) (FCA); and 12 CFR 760.9(c) 
(NCUA).
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    In the case of loan transactions secured by mobile homes not 
located on a permanent foundation, the Agencies note that such ``home 
only'' transactions are excluded from the definition of mobile home and 
the notice requirements would not apply to these transactions. However, 
the Agencies encourage a lender to advise the borrower that if the 
mobile home is later located on a permanent foundation in an SFHA, 
flood insurance will be

[[Page 40461]]

required. If the lender, when notified of the location of the mobile 
home subsequent to the loan closing, determines that it has been placed 
on a permanent foundation and is located in an SFHA in which flood 
insurance is available under the Act, flood insurance coverage becomes 
mandatory and a force-placement notice must be given to the borrower 
under those provisions.\69\ If the borrower fails to purchase flood 
insurance coverage within 45 days after notification, the lender must 
force place the insurance.\70\
---------------------------------------------------------------------------

    \69\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
    \70\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
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Notice 3. When is the lender required to provide notice to the servicer 
of a loan that flood insurance is required?
    Because the servicer of a loan is often not identified prior to the 
closing of a loan, the Regulation requires that notice be provided no 
later than the time the lender transmits other loan data, such as 
information concerning hazard insurance and taxes, to the servicer.\71\
---------------------------------------------------------------------------

    \71\ 12 CFR 22.9(c) (OCC); 12 CFR 208.25(i)(2) (Board); 12 CFR 
339.9(c) (FDIC); 12 CFR 614.4955(c) (FCA); and 12 CFR 760.9(c) 
(NCUA).
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Notice 4. What will constitute appropriate form of notice to the 
servicer?
    Delivery to the servicer of a copy of the notice given to the 
borrower is appropriate notice. The Regulation also provides that the 
notice can be made either electronically or by a written copy.\72\
---------------------------------------------------------------------------

    \72\ 12 CFR 22.9(c) (OCC); 12 CFR 208.25(i)(2) (Board); 12 CFR 
339.9(c) (FDIC); 12 CFR 614.4955(c) (FCA); and 12 CFR 760.9(c) 
(NCUA).
---------------------------------------------------------------------------

    In the case of a servicer affiliated with the lender, the Act 
requires the lender to notify the servicer of special flood hazards and 
the Regulation reflects this requirement. Neither the Act nor the 
Regulation contains an exception for affiliates.\73\
---------------------------------------------------------------------------

    \73\ 12 U.S.C. 4104a(a)(1); 12 CFR 22.9(c) (OCC); 12 CFR 
208.25(i)(2) (Board); 12 CFR 339.9(c) (FDIC); 12 CFR 614.4955(c) 
(FCA); and 12 CFR 760.9(c) (NCUA).
---------------------------------------------------------------------------

Notice 5. How long must the lender maintain the record of receipt by 
the borrower of the Notice of Special Flood Hazards?
    The record of receipt provided by the borrower must be maintained 
for the period of time that the lender owns the loan.\74\ Examples of a 
record of receipt include: The borrower's signed acknowledgment of 
receipt of the Notice of Special Flood Hazards; the borrower's initials 
on a form that acknowledges receipt; or a certified return receipt if 
the Notice of Special Flood Hazards was mailed to the borrower. Lenders 
may keep the record in the form that best suits the lender's business 
practices. Lenders may retain the record electronically, but they must 
be able to retrieve the record within a reasonable time pursuant to a 
document request from their Federal supervisory agency.
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    \74\ 12 CFR 22.9(d) (OCC); 12 CFR 208.25(i)(3) (Board); 12 CFR 
339.9(d) (FDIC); 12 CFR 614.4955(d) (FCA); and 12 CFR 760.9(d) 
(NCUA).
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Notice 6. Can a lender rely on a previous Notice of Special Flood 
Hazards if it is less than seven years old, and it is the same 
property, same borrower, and same lender?
    The Regulation does not address waiving the requirement to provide 
the Notice of Special Flood Hazards to the borrower. Although 
subsequent transactions by the same lender with respect to the same 
property are the functional equivalent of a renewal and do not require 
a new determination, the lender must still provide a new Notice of 
Special Flood Hazards to the borrower.\75\
---------------------------------------------------------------------------

    \75\ 12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR 
339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a) 
(NCUA).
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Notice 7. Is use of the sample form of Notice of Special Flood Hazards 
mandatory?
    Although lenders are required to provide a Notice of Special Flood 
Hazards to a borrower when they make, increase, extend, or renew a loan 
secured by an improved structure located in an SFHA,\76\ use of the 
sample form of Notice of Special Flood Hazards provided in Appendix A 
of the Regulation is not mandatory. It should be noted that the sample 
form includes other information in addition to what is required by the 
Act and the Regulation. Lenders may personalize, change the format of, 
and add information to the sample form of notice, if they choose. 
However, a lender-revised Notice of Special Flood Hazards must provide 
the borrower with at least the minimum information required by the Act 
and Regulation.\77\ Therefore, lenders should consult the Act and 
Regulation to determine the information needed.
---------------------------------------------------------------------------

    \76\ 12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR 
339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a) 
(NCUA).
    \77\ 12 U.S.C. 4104a(a)(3); 12 CFR 22.9(b) (OCC); 12 CFR 
208.25(i)(1) (Board); 12 CFR 339.9(b) (FDIC); 12 CFR 614.4955(b) 
(FCA); and 12 CFR 760.9(b) (NCUA).
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VIII. Determining the Appropriate Amount of Flood Insurance Required
Amount 1. The Regulation states that the amount of flood insurance 
required ``must be at least equal to the lesser of the outstanding 
principal balance of the designated loan or the maximum limit of 
coverage available for the particular type of property under the Act.'' 
What is meant by the ``maximum limit of coverage available for the 
particular type of property under the Act''?
    ``The maximum limit of coverage available for the particular type 
of property under the Act'' depends on the value of the secured 
collateral. First, under the NFIP, there are maximum caps on the amount 
of insurance available for buildings located in a participating 
community under the Regular Program. For single-family and two-to-four 
family dwellings and individually owned condominium units insured under 
the Dwelling Form policy, the maximum limit is $250,000. For a 
residential condominium building insured under the Residential 
Condominium Building Association Policy (RCBAP) form, the maximum 
amount of insurance available is $250,000 multiplied by the number of 
units. For all other buildings insured under the General Property Form, 
the maximum limit of building coverage available is $500,000. This 
includes all non-residential buildings, mixed-use condominium buildings 
not eligible for coverage under the RCBAP, and other residential 
buildings of five or more families, such as cooperatives or apartment 
buildings in the non-condominium form of ownership. (In participating 
communities that are under the emergency program phase, the maximum 
limits of insurance are different.) The maximum limit for contents 
insured under the Dwelling Form and RCBAP is $100,000 ($100,000 total, 
not per unit) and $500,000 for contents insured under the General 
Property Form. See NFIP Flood Insurance Manual.
    In addition to the maximum caps under the NFIP, the Regulation also 
provides that ``flood insurance coverage under the Act is limited to 
the building or mobile home and any personal property that secures a 
loan and not the land itself,'' which is commonly referred to as the 
``insurable value'' of a structure.\78\ The NFIP does not insure

[[Page 40462]]

land; therefore, land values are not included in the calculation.\79\
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    \78\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
    \79\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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    An NFIP policy will not cover an amount exceeding the ``insurable 
value'' of the structure, so the maximum amount of insurance coverage 
is the applicable limit available under the NFIP or the insurable 
value, whichever is less. In determining coverage amounts for flood 
insurance, lenders often follow the same practice used to establish 
other hazard insurance coverage amounts. However, unlike the insurable 
valuation used to underwrite most other hazard insurance policies, the 
insurable value of improved real estate for flood insurance purposes 
also includes the repair or replacement cost of the foundation and 
supporting structures. It is very important to calculate the correct 
insurable value of the property; otherwise, the lender might 
inadvertently require the borrower to purchase too much or too little 
flood insurance coverage. For example, if the lender fails to exclude 
the value of the land when determining the insurable value of the 
improved real estate, the borrower will be asked to purchase coverage 
that exceeds the amount the NFIP will pay in the event of a loss. 
(Please note, however, when taking a security interest in improved real 
estate where the value of the land, excluding the value of the 
improvements, is sufficient collateral for the debt, the lender must 
nonetheless require flood insurance to cover the value of the structure 
if it is located in a participating community's SFHA.)\80\
---------------------------------------------------------------------------

    \80\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
---------------------------------------------------------------------------

Amount 2. What is the ``insurable value'' of a building and how is it 
used to determine the required amount of flood insurance?
    The insurable value of the building may generally be the same as 
100 percent Replacement Cost Value (RCV), which is the cost to replace 
the building with the same kind of material and construction without 
deduction for depreciation. In calculating the amount of insurance to 
require, the lender and borrower (either by themselves or in 
consultation with the flood insurance provider or other appropriate 
professional) may choose from a variety of approaches or methods to 
establish the insurable value. They may use an appraisal based on a 
cost-value (not market-value) approach, a construction-cost 
calculation, the insurable value used on a hazard insurance policy 
(recognizing that the insurable value for flood insurance purposes may 
differ from the coverage provided by the hazard insurance and that 
adjustments may be necessary; for example, most hazard policies do not 
cover foundations), or any other reasonable approach, so long as it can 
be supported.
    In cases involving certain residential or condominium properties, 
insurance policies under the NFIP should be written to, and the 
insurance loss payout usually would be the equivalent of, RCV. However, 
lenders should avoid a situation in which the insured borrower pays for 
more coverage than the insured would recover in the event of a loss. 
Therefore, to strictly link insurable value to RCV is not always 
practical. In cases involving nonresidential properties, and even some 
residential properties, the insurance loss payout might be based on 
actual cash value, which is RCV less physical depreciation. Insurance 
policies written at RCV for these properties would require an insured 
to pay for coverage that exceeds the amount the NFIP or private insurer 
would pay in the event of a loss, and this situation should be avoided. 
Therefore, it is reasonable for lenders, in determining the amount of 
flood insurance required, to consider the extent of recovery allowed 
under the NFIP or private policy for the type of property being 
insured. Doing so would allow the lender to assist the borrower in 
avoiding situations in which the insured pays for coverage that exceeds 
the amount the insured would recover in the event of a loss.
    Lenders should be equally mindful of avoiding situations in which, 
as a result of insuring at a level below RCV, they underinsure 
property.
Amount 3. What are examples of residential buildings?
    A residential building is a non-commercial building designed for 
habitation by one or more families or a mixed-use building that 
qualifies as a single-family, 2-4 family, or other residential 
building.
    The NFIP provides the following definitions:
    A single family dwelling is either a residential single-family 
building in which the total floor area devoted to non-residential uses 
is less than 50 percent of the building's total floor area, or a 
single-family residential unit within a 2-4 family building, other-
residential building, business, or non-residential building, in which 
commercial uses within the unit are limited to less than 50 percent of 
the unit's total floor area.
    A 2-4 family residential building is a residential building, 
including an apartment building, containing 2-4 residential spaces and 
in which commercial uses are limited to less than 25 percent of the 
building's total floor area. This category includes apartment buildings 
and condominium buildings. This excludes hotels and motels with normal 
room rentals for less than 6 months.
    An other residential building is a residential building that is 
designed for use as a residential space for 5 or more families or a 
mixed-use building in which the total floor area devoted to non-
residential uses is less than 25 percent of the total floor area within 
the building. This category includes condominium and apartment 
buildings as well as hotels, motels, tourist homes, and rooming houses 
where the normal occupancy of a guest is 6 months or more. Additional 
examples of other residential buildings include dormitories and 
assisted-living facilities.
    For more complete information, refer to the NFIP Flood Insurance 
Manual.
Amount 4. What are examples of nonresidential buildings?
    A nonresidential building is one in which the named insured is a 
commercial enterprise primarily carried out to generate income and the 
coverage is for:
     A building designed as a non-habitational building;
     A mixed-use building in which the total floor area devoted 
to residential uses is 50 percent or less of the total floor area 
within the building if the residential building is a single-family 
property; or 75 percent or less of the total floor area within the 
building for all other residential properties; or
     A building designed for use as office or retail space, 
wholesale space, hospitality space, or for similar uses.
    In addition, the NFIP describes other non-residential buildings as 
including, but not limited to, churches, schools, farm buildings 
(including grain bins and silos), garages, pool houses, clubhouses, and 
recreational buildings.
    For more complete information, refer to the NFIP Flood Insurance 
Manual.
Amount 5. How much insurance is required on a building located in an 
SFHA in a participating community?
    The amount of insurance required by the Act and Regulation is the 
lesser of:
     The outstanding principal balance of the loan(s); or
     The maximum amount of insurance available under the NFIP, 
which is the lesser of:

[[Page 40463]]

    [cir] The maximum limit available for the type of structure; or
    [cir] The ``insurable value'' of the structure.\81\
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    \81\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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    Example: (Calculating insurance required on a nonresidential 
building):
    Loan security includes one equipment shed located in an SFHA in a 
participating community under the Regular Program.
     Outstanding loan principal balance is $300,000.
     Maximum amount of insurance available under the NFIP:
    [cir] Maximum limit available for type of structure is $500,000 per 
building (nonresidential building).
    [cir] Insurable value of the equipment shed is $30,000.
    The minimum amount of insurance required by the Regulation for the 
equipment shed is $30,000.
Amount 6. Is flood insurance required for each building when the real 
estate security contains more than one building located in an SFHA in a 
participating community? If so, how much coverage is required?
    Yes. The lender must determine the amount of insurance required on 
each building and add these individual amounts together.\82\ The total 
amount of required flood insurance is the lesser of:
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    \82\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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     The outstanding principal balance of the loan(s); or
     The maximum amount of insurance available under the NFIP, 
which is the lesser of:
    [cir] The maximum limit available for the type of structures; or
    [cir] The ``insurable value'' of the structures.
    The amount of total required flood insurance can be allocated among 
the secured buildings in varying amounts, but all buildings in an SFHA 
must be covered in accordance with the statutory requirement.
    Example: Lender makes a loan in the principal amount of $150,000 
secured by five nonresidential buildings, only three of which are 
located in SFHAs within participating communities.
     Outstanding loan principal is $150,000.
     Maximum amount of insurance available under the NFIP.
    [cir] Maximum limit available for the type of structure is $500,000 
per building for nonresidential buildings (or $1.5 million total); or
    [cir] Insurable value ($100,000 for each nonresidential building 
for which insurance is required, or $300,000 total).
    Amount of insurance required for the three buildings is $150,000. 
This amount of required flood insurance could be allocated among the 
three buildings in varying amounts, so long as each is covered in 
accordance with the statutory requirement.
Amount 7. If the insurable value of a building or mobile home securing 
a designated loan is less than the outstanding principal balance of the 
loan, must a lender require the borrower to obtain flood insurance up 
to the balance of the loan?
    No. The Regulation provides that the amount of flood insurance must 
be at least equal to the lesser of the outstanding principal balance of 
the designated loan or the maximum limit of coverage available for a 
particular type of property under the Act. The Regulation also provides 
that flood insurance coverage under the Act is limited to the building 
or mobile home and any personal property that secures a loan and not 
the land itself. \83\ Since the NFIP policy does not cover land value, 
lenders determine the amount of insurance necessary based on the 
insurable value of the improvements.
---------------------------------------------------------------------------

    \83\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
---------------------------------------------------------------------------

Amount 8. Can a lender require more flood insurance than the minimum 
required by the Regulation?
    Yes. Lenders are permitted to require more than the minimum amount 
of flood insurance required by the Regulation, taking into 
consideration applicable State and Federal law and safe and sound 
banking practices, as appropriate. However, the borrower or lender may 
have to seek such coverage outside the NFIP. Although a lender has the 
responsibility to tailor its own flood insurance policies and 
procedures to suit its business needs and protect its ongoing interest 
in the collateral, it should consider the extent of recovery allowed 
under the NFIP or a private policy for the type of property being 
insured to assist the borrower in avoiding paying for coverage that 
exceeds the amount the insured would recover in the event of a loss.
Amount 9. Can a lender allow the borrower to use the maximum deductible 
to reduce the cost of flood insurance?
    Yes. However, it may not be a sound business practice for a lender, 
as a matter of policy, to always allow the borrower to use the maximum 
deductible. A lender should determine the reasonableness of the 
deductible on a case-by-case basis, taking into account the risk that 
such a deductible would pose to the borrower and lender. A lender may 
not allow the borrower to use a deductible amount equal to the 
insurable value of the property to avoid the mandatory purchase 
requirement for flood insurance.\84\
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    \84\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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IX. Flood Insurance Requirements For Construction Loans

Construction 1. Is a loan secured only by land, which is located in an 
SFHA in which flood insurance is available under the Act and that will 
be developed into buildable lot(s), a designated loan that requires 
flood insurance?
    No. A designated loan is a loan secured by a building or mobile 
home that is located or to be located in an SFHA in which flood 
insurance is available under the Act.\85\ Any loan secured only by land 
that is located in an SFHA in which flood insurance is available is not 
a designated loan since it is not secured by a building or mobile home.
---------------------------------------------------------------------------

    \85\ 12 CFR 22.2(e) (OCC); 12 CFR 208.25(b)(5) (Board); 12 CFR 
339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).
---------------------------------------------------------------------------

Construction 2. Is a loan secured or to be secured by a building in the 
course of construction that is located or to be located in an SFHA in 
which flood insurance is available under the Act a designated loan?
    Yes. A lender must always make a flood determination prior to loan 
origination to determine whether a building to be constructed that is 
security for the loan is located or will be located in an SFHA in which 
flood insurance is available under the Act.\86\ If the building or 
mobile home is located or will be located in an SFHA, then the loan is 
a designated loan and the lender must provide the requisite notice to 
the borrower prior to loan origination.\87\ The lender must then comply 
with the mandatory purchase

[[Page 40464]]

requirement under the Act and Regulation.\88\
---------------------------------------------------------------------------

    \86\ 12 CFR 22.6(a) (OCC): 12 CFR 208.25(f)(1) (Board); 12 CFR 
339.6(a) (FDIC); 12 CFR 614.4940(a) (FCA); and 12 CFR 760.6(a) 
(NCUA).
    \87\ 12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR 
339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a) 
(NCUA).
    \88\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
---------------------------------------------------------------------------

Construction 3. Is a building in the course of construction that is 
located in an SFHA in which flood insurance is available under the Act 
eligible for coverage under an NFIP policy?
    Yes. Buildings in the course of construction that have yet to be 
walled and roofed are eligible for coverage except when construction 
has been halted for more than 90 days and/or if the lowest floor used 
for rating purposes is below the Base Flood Elevation (BFE). Materials 
or supplies intended for use in such construction, alteration, or 
repair are not insurable unless they are contained within an enclosed 
building on the premises or adjacent to the premises. (NFIP Flood 
Insurance Manual).
    The NFIP Flood Insurance Manual defines ``start of construction'' 
in the case of new construction as ``either the first placement of 
permanent construction of a building on site, such as the pouring of a 
slab or footing, the installation of piles, the construction of 
columns, or any work beyond the stage of excavation; or the placement 
of a manufactured (mobile) home on a foundation.''
    Although an NFIP policy may be purchased prior to the start of 
construction, as a practical matter, coverage under an NFIP policy is 
not effective until actual construction commences or when materials or 
supplies intended for use in such construction, alteration, or repair 
are contained in an enclosed building on the premises or adjacent to 
the premises.
Construction 4. When must a lender require the purchase of flood 
insurance for a loan secured by a building in the course of 
construction that is located in an SFHA in which flood insurance is 
available?
    Under the Act, as implemented by the Regulation, a lender may not 
make, increase, extend, or renew any loan secured by a building or a 
mobile home, located or to be located in an SFHA in which flood 
insurance is available, unless the property is covered by adequate 
flood insurance for the term of the loan.\89\ The NFIP rules provide 
lenders an option to comply with the mandatory purchase requirement for 
a loan secured by a building in the course of construction that is 
located in an SFHA by requiring borrowers to have a flood insurance 
policy in place at the time of loan origination. Such a policy is 
issued based upon the construction designs and intended use of the 
building. A borrower should obtain a provisional rating (available only 
if certain criteria are met) to enable the placement of coverage prior 
to receipt of the Elevation Certificate (EC). In accordance with the 
NFIP requirement, it is expected that an EC will be secured and a full-
risk rating completed within 60 days of the policy effective date. 
Failure to obtain the EC could result in reduced coverage limits at the 
time of a loss. (See NFIP Flood Insurance Manual).
---------------------------------------------------------------------------

    \89\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
---------------------------------------------------------------------------

    Alternatively, a lender may allow a borrower to defer the purchase 
of flood insurance until either a foundation slab has been poured and/
or an EC has been issued or, if the building to be constructed will 
have its lowest floor below the Base Flood Elevation, when the building 
is walled and roofed. However, in order to comply with the 
Regulation,\90\ the lender must require the borrower to have flood 
insurance for the security property in place before the lender 
disburses funds to pay for building construction (except as necessary 
to pour the slab or perform preliminary site work, such as laying 
utilities, clearing brush, or the purchase and/or delivery of building 
materials). If the lender elects this approach and does not require the 
borrower to obtain flood insurance at loan origination, then it should 
have adequate internal controls in place at origination to ensure that 
the borrower obtains flood insurance no later than 30 days prior to 
disbursement of funds to the borrower. (See NFIP Flood Insurance 
Manual). (See also Q&A Construction 5).
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    \90\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
---------------------------------------------------------------------------

Construction 5. Does the 30-day waiting period apply when the purchase 
of the flood insurance policy is deferred in connection with a 
construction loan?
    Yes. Under the NFIP, a 30-day waiting period applies anytime a 
lender requires flood insurance not in connection with the making, 
increasing, renewing or extending of a designated loan. Therefore, a 
30-day waiting period will apply if a lender allows a borrower to delay 
the purchase of flood insurance in connection with a construction loan. 
(NFIP Flood Insurance Manual). (See also Q&A Construction 4).
Construction 6. If a lender allows a borrower to defer the purchase of 
flood insurance until either a foundation slab has been poured and/or 
an Elevation Certificate has been issued, or if the building to be 
constructed will have its lowest floor below Base Flood Elevation when 
the building is walled and roofed, when must the lender begin escrowing 
flood insurance premiums and fees?
    If the lender allows a borrower to defer the purchase of flood 
insurance until either the foundation slab has been poured and/or an 
Elevation Certificate has been issued, or if the building to be 
constructed will have its lowest floor below Base Flood Elevation when 
the building is walled and roofed, a lender must escrow flood insurance 
premiums and fees at the time of purchase of the flood insurance, 
unless one of the escrow exceptions applies.\91\
---------------------------------------------------------------------------

    \91\ 12 CFR 22.5(a)(1) (OCC); 12 CFR 208.25(e)(1)(i) (Board); 12 
CFR 339.5(a)(1) (FDIC); 12 CFR 614.4935(a)(1) (FCA); and 12 CFR 
760.5(a)(1) (NCUA).
---------------------------------------------------------------------------

X. Flood Insurance Requirements for Residential Condominiums and Co-Ops
Condo and Co-Op 1. Are residential condominiums, including multi-story 
condominium complexes, subject to the statutory and regulatory 
requirements for flood insurance?
    Yes. The mandatory flood insurance purchase requirements under the 
Act and Regulation apply to loans secured by individual residential 
condominium units, including those located in multi-story condominium 
complexes, located in an SFHA in which flood insurance is available 
under the Act.\92\ The mandatory purchase requirements also apply to 
loans secured by other residential condominium property, such as loans 
to a developer for construction of the condominium or loans to a 
condominium association.
---------------------------------------------------------------------------

    \92\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
---------------------------------------------------------------------------

Condo and Co-Op 2. What is an NFIP Residential Condominium Building 
Association Policy (RCBAP)?
    The RCBAP is a master policy for residential condominiums issued by 
FEMA. A residential condominium building is defined as having 75 
percent or more of the building's floor area in residential use. It may 
be purchased only by condominium owners associations. The RCBAP covers 
both the common and individually owned building elements within the 
units, improvements within the units, and contents owned in common (if 
contents coverage is purchased). The maximum

[[Page 40465]]

amount of building coverage that can be purchased under an RCBAP is 
either 100 percent of the replacement cost value of the building, 
including amounts to repair or replace the foundation and its 
supporting structures, or the total number of units in the condominium 
building times $250,000, whichever is less. RCBAP coverage is available 
only for residential condominium buildings in Regular Program 
communities.
Condo and Co-Op 3. What is the amount of flood insurance coverage that 
a lender must require with respect to residential condominium units, 
including those located in multi-story residential condominium 
complexes, to comply with the mandatory purchase requirements under the 
Act and the Regulation?
    To comply with the Regulation, the lender must ensure that the 
minimum amount of flood insurance covering the condominium unit is the 
lesser of:
     The outstanding principal balance of the loan(s); or
     The maximum amount of insurance available under the NFIP, 
which is the lesser of:
    [cir] The maximum limit available for the residential condominium 
unit; or
    [cir] The ``insurable value'' allocated to the residential 
condominium unit, which is the replacement cost value of the 
condominium building divided by the number of units.\93\
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    \93\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA) and 12 CFR 760.3(a) 
(NCUA).
---------------------------------------------------------------------------

    FEMA requires agents to provide on the declarations page of the 
RCBAP the replacement cost value of the condominium building and the 
number of units. Lenders may rely on the replacement cost value and 
number of units on the RCBAP declarations page in determining insurable 
value unless they have reason to believe that such amounts clearly 
conflict with other available information. If there is a conflict, the 
lender should notify the borrower of the facts that cause the lender to 
believe there is a conflict. If the lender determines that the borrower 
is underinsured, it must require the purchase of supplemental 
coverage.\94\ However, coverage under the supplemental policy may be 
limited depending on other coverage that may be applicable including 
the RCBAP insuring the condominium building and the terms and 
conditions of the policy.
---------------------------------------------------------------------------

    \94\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA) and 12 CFR 760.3(a) 
(NCUA).
---------------------------------------------------------------------------

    Assuming that the maximum amount of coverage available under the 
NFIP is less than the outstanding principal balance of the loan, the 
lender must require a borrower whose loan is secured by a residential 
condominium unit to either:
     Ensure the condominium owners association has purchased an 
NFIP Residential Condominium Building Association Policy (RCBAP) 
covering either 100 percent of the insurable value (replacement cost) 
of the building, including amounts to repair or replace the foundation 
and its supporting structures, or the total number of units in the 
condominium building times $250,000, whichever is less; or
     Obtain flood insurance coverage if there is no RCBAP, as 
explained in proposed Q&A Condo and Co-Op 4, or if the RCBAP coverage 
is less than 100 percent of the replacement cost value of the building 
or the total number of units in the condominium building times 
$250,000, whichever is less, as explained in Q&A Condo and Co-Op 5.
    Example: Lender makes a loan in the principal amount of $300,000 
secured by a condominium unit in a 50-unit condominium building, which 
is located in an SFHA within a participating community, with a 
replacement cost of $15 million and insured by an RCBAP with $12.5 
million of coverage.
     Outstanding principal balance of loan is $300,000.
     Maximum amount of coverage available under the NFIP, which 
is the lesser of:
    [cir] Maximum limit available for the residential condominium unit 
is $250,000; or
    [cir] Insurable value of the unit based on 100 percent of the 
building's replacement cost value ($15 million / 50 = $300,000).
    The lender does not need to require additional flood insurance 
since the RCBAP's $250,000 per unit coverage ($12.5 million / 50 = 
$250,000) satisfies the Regulation's mandatory flood insurance purchase 
requirement. (This is the lesser of the outstanding principal balance 
($300,000), the maximum coverage available under the NFIP ($250,000), 
or the insurable value ($300,000)). (NFIP Flood Insurance Manual)
    The requirement discussed in this Q&A applies to any loan that is 
made, increased, extended, or renewed after October 1, 2007. This 
requirement does not apply to any loans made prior to October 1, 2007, 
until a triggering event occurs (that is, the loan is refinanced, 
extended, increased, or renewed) in connection with the loan. Absent a 
new triggering event, loans made prior to October 1, 2007, will be 
considered compliant if the lender complied with the Agencies' previous 
guidance that an RCBAP with 80 percent RCV coverage was sufficient. 
FEMA issued guidance effective October 1, 2007, requiring NFIP insurers 
to add the RCV of the condominium building and the number of units to 
the RCBAP declarations page of all new and renewed policies.
Condo and Co-Op 4. What action must a lender take for an individual 
unit owner/borrower if there is no RCBAP coverage?
    If there is no RCBAP on the residential condominium building, then 
the lender must require the individual unit owner/borrower to obtain 
coverage in an amount sufficient to meet the requirements outlined in 
Q&A Condo and Co-Op 3.\95\
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    \95\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
---------------------------------------------------------------------------

    Under the NFIP, a Dwelling Policy is available for condominium unit 
owners' purchase when there is no or inadequate RCBAP coverage.
    Example: The lender makes a loan in the principal amount of 
$175,000 secured by a residential condominium unit in a 50-unit 
residential condominium building, which is located in an SFHA within a 
participating community, with a replacement cost value of $10 million; 
however, there is no RCBAP.
     Outstanding principal balance of loan is $175,000.
     Maximum amount of coverage available under the NFIP, which 
is the lesser of:
    [cir] Maximum limit available for the residential condominium unit 
is $250,000; or
    [cir] Insurable value of the unit based on 100 percent of the 
building's replacement cost value ($10 million / 50 = $200,000).
    The lender must require the individual unit owner/borrower to 
purchase flood insurance coverage in the amount of at least $175,000, 
since there is no RCBAP, to satisfy the Regulation's mandatory flood 
insurance purchase requirement. (This is the lesser of the outstanding 
principal balance ($175,000), the maximum coverage available under the 
NFIP ($250,000), or the insurable value ($200,000).)
Condo and Co-Op 5. What action must a lender take if the RCBAP coverage 
is insufficient to meet the Regulation's mandatory purchase 
requirements for a loan secured by an individual residential 
condominium unit?
    If the lender determines that flood insurance coverage purchased 
under the

[[Page 40466]]

RCBAP is insufficient to meet the Regulation's mandatory purchase 
requirements, then the lender should request that the individual unit 
owner/borrower ask the condominium association to obtain additional 
coverage that would be sufficient to meet the Regulation's requirements 
(See Q&A Condo and Co-Op 3). If the condominium association does not 
obtain sufficient coverage, then the lender must require the individual 
unit owner/borrower to purchase supplemental coverage in an amount 
sufficient to meet the Regulation's flood insurance requirements.\96\ 
The amount of supplemental coverage required to be purchased by the 
individual unit owner would be the difference between the RCBAP's 
coverage allocated to that unit and the Regulation's mandatory flood 
insurance purchase requirements (See Q&A Condo and Co-Op 4).
---------------------------------------------------------------------------

    \96\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
---------------------------------------------------------------------------

    Example: Lender makes a loan in the principal amount of $300,000 
secured by a condominium unit in a 50-unit condominium building, which 
is located in an SFHA within a participating community, with a 
replacement cost value of $10 million; however, the RCBAP is at 80 
percent of replacement cost value ($8 million or $160,000 per unit).
     Outstanding principal balance of loan is $300,000.
     Maximum amount of coverage available under the NFIP, which 
is the lesser of:
    [cir] Maximum limit available for the residential condominium unit 
($250,000); or
    [cir] Insurable value of the unit based on 100 percent of the 
building's replacement value ($10 million / 50 = $200,000).
    The lender must require the individual unit owner/borrower to 
purchase supplemental flood insurance coverage in the amount of $40,000 
to satisfy the Regulation's mandatory flood insurance purchase 
requirement of $200,000. (This is the lesser of the outstanding 
principal balance ($300,000), the maximum coverage available under the 
NFIP ($250,000), or the insurable value ($200,000).) The RCBAP fulfills 
only $160,000 of the Regulation's flood insurance requirement.
    While the individual unit owner's purchase of a separate policy 
that provides for adequate flood insurance coverage under the 
Regulation will satisfy the Regulation's mandatory flood insurance 
purchase requirements, the lender and the individual unit owner/
borrower may still be exposed to additional risk of loss. Lenders are 
encouraged to apprise borrowers of this risk. For example, the NFIP 
Dwelling Policy provides individual unit owners with supplemental 
building coverage that is in excess to the RCBAP. The policies are 
coordinated such that the Dwelling Policy purchased by the unit owner 
responds to shortfalls on building coverage pertaining either to 
improvements owned by the insured unit owner or to assessments. 
However, the Dwelling Policy does not extend the RCBAP limits, nor does 
it enable the condominium association to fill in gaps in coverage.
Condo and Co-Op 6. What must a lender do when a loan secured by a 
residential condominium unit is in a complex whose condominium 
association allows its existing RCBAP to lapse?
    If a lender determines at any time during the term of a designated 
loan that the loan is not covered by flood insurance or is covered by 
such insurance in an amount less than that required under the Act and 
the Regulation, the lender must notify the individual unit owner/
borrower of the requirement to maintain flood insurance coverage 
sufficient to meet the Regulation's mandatory requirements.\97\ The 
lender should encourage the individual unit owner/borrower to work with 
the condominium association to acquire a new RCBAP in an amount 
sufficient to meet the Regulation's mandatory flood insurance purchase 
requirement (See Q&A Condo and Co-Op 3). Failing that, the lender must 
require the individual unit owner/borrower to obtain a flood insurance 
policy in an amount sufficient to meet the Regulation's mandatory flood 
insurance purchase requirement (See Q&As Condo and Co-Op 4 & 5). If the 
borrower/unit owner or the condominium association fails to purchase 
flood insurance sufficient to meet the Regulation's mandatory 
requirements within 45 days of the lender's notification to the 
individual unit owner/borrower of inadequate insurance coverage, the 
lender must force place the necessary flood insurance on the borrower's 
behalf.\98\
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    \97\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
    \98\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
---------------------------------------------------------------------------

Condo and Co-Op 7. How does the RCBAP's co-insurance penalty apply in 
the case of residential condominiums, including those located in multi-
story condominium complexes?
    In the event the RCBAP's coverage on a condominium building at the 
time of loss is less than 80 percent of either the building's 
replacement cost or the maximum amount of insurance available for that 
building under the NFIP (whichever is less), then the loss payment, 
which is subject to a coinsurance penalty, is determined as follows 
(subject to all other relevant conditions in the policy, including 
those pertaining to valuation, adjustment, settlement, and payment of 
loss):
    A. Divide the actual amount of flood insurance carried on the 
condominium building at the time of loss by 80 percent of either its 
replacement cost or the maximum amount of insurance available for the 
building under the NFIP, whichever is less.
    B. Multiply the amount of loss, before application of the 
deductible, by the figure determined in A above.
    C. Subtract the deductible from the figure determined in B above.
    The policy will pay the amount determined in C above, or the amount 
of insurance carried, whichever is less.

Example 1: (Inadequate Insurance Amount To Avoid Penalty)

    Replacement value of the building: $250,000.
    80% of replacement value of the building: $200,000.
    Actual amount of insurance carried: $180,000.
    Amount of the loss: $150,000.
    Deductible: $500.

Step A: 180,000 / 200,000 = .90
(90% of what should be carried to avoid coinsurance penalty)
Step B: 150,000 x .90 = 135,000
Step C: 135,000-500 = 134,500

    The policy will pay no more than $134,500. The remaining $15,500 is 
not covered due to the co-insurance penalty ($15,000) and application 
of the deductible ($500).

Example 2: (Adequate Insurance Amount To Avoid Penalty)

    Replacement value of the building: $250,000.
    80% of replacement value of the building: $200,000.
    Actual amount of insurance carried: $200,000.
    Amount of the loss: $150,000.
    Deductible: $500.

Step A: 200,000 / 200,000 = 1.00
(100% of what should be carried to avoid coinsurance penalty)

[[Page 40467]]

Step B: 150,000 x 1.00 = 150,000
Step C: 150,000-500 = 149,500

    In this example there is no co-insurance penalty, because the 
actual amount of insurance carried meets the 80 percent requirement to 
avoid the co-insurance penalty. The policy will pay no more than 
$149,500 ($150,000 amount of loss minus the $500 deductible). This 
example also assumes a $150,000 outstanding principal loan balance.
Condo and Co-Op 8. What are the major factors involved with the 
individual unit owner's NFIP Dwelling Policy's coverage limitations 
with respect to the condominium association's RCBAP coverage?
    The following examples demonstrate how the unit owner's NFIP 
Dwelling Policy may cover in certain loss situations:

Example 1: RCBAP

    If the unit owner purchases building coverage under the Dwelling 
Policy and if there is an RCBAP covering at least 80 percent of the 
building replacement cost value, the loss assessment coverage under the 
Dwelling Policy will pay that part of a loss that exceeds 80 percent of 
the association's building replacement cost allocated to that unit.
    The loss assessment coverage under the Dwelling Policy will not 
cover the association's policy deductible purchased by the condominium 
association.
    If building elements within units have also been damaged, the 
Dwelling Policy pays to repair building elements after the RCBAP limits 
that apply to the unit have been exhausted. Coverage combinations 
cannot exceed the total limit of $250,000 per unit.

Example 2: No RCBAP

    If the unit owner purchases building coverage under the Dwelling 
Policy and there is no RCBAP, the Dwelling Policy covers assessments 
against unit owners for damages to common areas up to the Dwelling 
Policy limit.
    However, if there is damage to the building elements of the unit 
(e.g., inside the individual unit) as well, the combined payment of 
unit building damages, which would apply first, and the loss assessment 
may not exceed the building coverage limit under the Dwelling Policy.
Condo and Co-Op 9. What flood insurance requirements apply to a loan 
secured by a share in a cooperative building that is located in an 
SFHA?
    It is important to recognize the difference between ownership of a 
condominium and a cooperative. Although an owner of a condominium owns 
title to real property, a cooperative unit holder holds stock in a 
corporation with the right to occupy a particular unit, but owns no 
title to the building. As a result, a loan to a cooperative unit owner, 
secured by the owner's share in the cooperative, is not a designated 
loan that is subject to the Act or the Regulation.
    Although there is no requirement under the Act or Regulation to 
purchase flood insurance on the cooperative building if the loan is 
secured by the unit owner's share in the cooperative, for safety and 
soundness purposes, residential or nonresidential cooperative buildings 
may be insured by the association or corporation under the General 
Property Form. The entity that owns the cooperative building, not the 
individual unit members, is the named insured.
XI. Flood Insurance Requirements for Home Equity Loans, Lines of 
Credit, Subordinate Liens, and Other Security Interests in Collateral 
(Contents) Located in an SFHA
Other Security Interests 1. Is a home equity loan considered a 
designated loan that requires flood insurance?
    Yes. A home equity loan is a designated loan, regardless of the 
lien priority, if the loan is secured by a building or a mobile home 
located in an SFHA in which flood insurance is available under the 
Act.\99\
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    \99\ 12 CFR 22.2(e) (OCC); 12 CFR 208.25(b)(5) (Board); 12 CFR 
339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).
---------------------------------------------------------------------------

Other Security Interests 2. Does a draw against an approved line of 
credit secured by a building or mobile home, which is located in an 
SFHA in which flood insurance is available under the Act, require a 
flood determination under the Regulation?
    No. While a line of credit secured by a building or mobile home 
located in an SFHA in which flood insurance is available under the Act 
is a designated loan and, therefore, requires a flood determination 
before the loan is made, draws against an approved line do not require 
further determinations.\100\ However, a request made for an increase in 
an approved line of credit may require a new determination, depending 
upon whether a previous determination was done. (See Q&A SFHDF 4).
---------------------------------------------------------------------------

    \100\ 12 CFR 22.2(e) and 22.3(a) (OCC); 12 CFR 208.25(b)(5) and 
(c)(1) (Board); 12 CFR 339.2 and 339.3(a) (FDIC); 12 CFR 614.4925 
and 614.4930(a) (FCA); and 12 CFR 760.2 and 760.3(a) (NCUA).
---------------------------------------------------------------------------

Other Security Interests 3. What is the amount of flood insurance 
coverage required on a line of credit secured by a residential improved 
real estate?
    A lender may take the following alternative approaches:
     For administrative convenience in complying with the flood 
insurance requirements, upon origination, a lender may require the 
purchase of flood insurance for the total amount of all loans or the 
maximum amount of flood insurance coverage available, whichever is 
less; \101\ or
---------------------------------------------------------------------------

    \101\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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     A lender may actively review its records throughout the 
year to determine whether the appropriate amount of flood insurance 
coverage is maintained, considering the draws made against the line or 
repayments made to the account. In those instances in which there is no 
policy on the collateral at time of origination, the borrower must, at 
a minimum, obtain a policy as a requirement for drawing on the line. 
Lenders that choose to actively review the line should inform the 
borrower that this option may have more risks, such as inadequate flood 
insurance coverage during the 30-day waiting period for an NFIP flood 
policy to become effective. Lenders should be prepared to initiate 
force-placement procedures if at any time the lender determines a lack 
of adequate flood insurance coverage for a designated line of credit, 
as required under the Regulation.\102\
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    \102\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
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Other Security Interests 4. When a lender makes, increases, extends or 
renews a second mortgage secured by a building or mobile home located 
in an SFHA, how much flood insurance must the lender require?
    The lender must ensure that adequate flood insurance is in place or 
require that additional flood insurance coverage be added to the flood 
insurance policy in the amount of the lesser of either the combined 
total outstanding principal balance of the first and second loan, the 
maximum amount available under the Act (currently $250,000 for most 
residential buildings and $500,000 for other buildings), or the 
insurable value of the building or mobile home.\103\ The junior 
lienholder should also have the borrower add the junior lienholder's 
name as mortgagee/loss payee to the

[[Page 40468]]

existing flood insurance policy. Given the provisions of NFIP policies, 
a lender cannot comply with the Act and Regulation by requiring the 
purchase of an NFIP flood insurance policy only in the amount of the 
outstanding principal balance of the second mortgage without regard to 
the amount of flood insurance coverage on a first mortgage.
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    \103\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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    A junior lienholder should work with the senior lienholder, the 
borrower, or with both of these parties, to determine how much flood 
insurance is needed to cover improved real estate collateral. A junior 
lienholder should obtain the borrower's consent in the loan agreement 
or otherwise for the junior lienholder to obtain information on balance 
and existing flood insurance coverage on senior lien loans from the 
senior lienholder.
    Junior lienholders also have the option of pulling a borrower's 
credit report and using the information from that document to establish 
how much flood insurance is necessary upon increasing, extending, or 
renewing a junior lien, thus protecting the interests of the junior 
lienholder, the senior lienholder(s), and the borrower. In the limited 
situation in which a junior lienholder or its servicer is unable to 
obtain the necessary information about the amount of flood insurance in 
place on the outstanding balance of a senior lien (for example, in the 
context of a loan renewal), the lender may presume that the amount of 
insurance coverage relating to the senior lien in place at the time the 
junior lien was first established (provided that the amount of flood 
insurance relating to the senior lien was adequate at the time) 
continues to be sufficient.
    Example 1: Lender A makes a first mortgage with a principal balance 
of $100,000, but improperly requires only $75,000 of flood insurance 
coverage, which the borrower satisfied by obtaining an NFIP policy. 
Lender B issues a second mortgage with a principal balance of $50,000. 
The insurable value of the residential building securing the loans is 
$200,000. Lender B must ensure that flood insurance in the amount of 
$150,000 is purchased and maintained. If Lender B were to require 
additional flood insurance only in an amount equal to the principal 
balance of the second mortgage ($50,000), its interest in the secured 
property would not be fully protected in the event of a flood loss 
because Lender A would have prior claim on $100,000 of the loss payment 
towards its principal balance of $100,000, while Lender B would receive 
only $25,000 of the loss payment toward its principal balance of 
$50,000.
    Example 2: Lender A, who is not directly covered by the Act or 
Regulation, makes a first mortgage with a principal balance of $100,000 
and does not require flood insurance. Lender B, who is directly covered 
by the Act and Regulation, issues a second mortgage with a principal 
balance of $50,000. The insurable value of the residential building 
securing the loans is $200,000. Lender B must ensure that flood 
insurance in the amount of $150,000 is purchased and maintained. If 
Lender B were to require flood insurance only in an amount equal to the 
principal balance of the second mortgage ($50,000) through an NFIP 
policy, then its interest in the secured property would not be 
protected in the event of a flood loss because Lender A would have 
prior claim on the entire $50,000 loss payment towards its principal 
balance of $100,000.
    Example 3: Lender A made a first mortgage with a principal balance 
of $100,000 on improved real estate with a fair market value of 
$150,000. The insurable value of the residential building on the 
improved real estate is $90,000; however, Lender A improperly required 
only $70,000 of flood insurance coverage, which the borrower satisfied 
by purchasing an NFIP policy. Lender B later takes a second mortgage on 
the property with a principal balance of $10,000. Lender B must ensure 
that flood insurance in the amount of $90,000 (the insurable value) is 
purchased and maintained on the secured property to comply with the Act 
and Regulation. If Lender B were to require flood insurance only in an 
amount equal to the principal balance of the second mortgage ($10,000), 
its interest in the secured property would not be protected in the 
event of a flood loss because Lender A would have prior claim on the 
entire $80,000 loss payment towards the insurable value of $90,000.
Other Security Interests 5. If a borrower requesting a loan secured by 
a junior lien provides evidence that flood insurance coverage is in 
place, does the lender have to make a new determination? Does the 
lender have to adjust the insurance coverage?
    It depends. Assuming the requirements in Section 528 of the Act (42 
U.S.C. 4104b) are met and the same lender made the first mortgage, then 
a new determination may not be necessary when the existing 
determination is not more than seven years old, there have been no map 
changes, and the determination was recorded on an SFHDF. If, however, a 
lender other than the one that made the first mortgage loan is making 
the junior lien loan, a new determination would be required because 
this lender would be deemed to be ``making'' a new loan.\104\ In either 
situation, the lender will need to determine whether the amount of 
insurance in effect is sufficient to cover the lesser of the combined 
outstanding principal balance of all loans (including the junior lien 
loan), the insurable value, or the maximum amount of coverage available 
on the improved real estate. This will hold true whether the 
subordinate lien loan is a home equity loan or some other type of 
junior lien loan.
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    \104\ 12 CFR 22.3(a), 22.6(a) (OCC); 12 CFR 208.25(c)(1) and 
(f)(1) (Board); 12 CFR 339.3(a), 339.6(a) (FDIC); 12 CFR 
614.4930(a), 614.4940(a) (FCA); and 12 CFR 760.3(a), 760.6(a) 
(NCUA).
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Other Security Interests 6. If the loan request is to finance inventory 
stored in a building located within an SFHA, but the building is not 
security for the loan, is flood insurance required?
    No. The Act and the Regulation provide that a lender shall not 
make, increase, extend, or renew a designated loan, that is, a loan 
secured by a building or mobile home located or to be located in an 
SFHA, ``unless the building or mobile home and any personal property 
securing the loan is covered by flood insurance for the term of the 
loan.'' \105\ In this example, the loan is not a designated loan 
because it is not secured by a building or mobile home; rather, the 
collateral is the inventory alone.
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    \105\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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Other Security Interests 7. Is flood insurance required if a building 
and its contents both secure a loan, and the building is located in an 
SFHA in which flood insurance is available?
    Yes. Flood insurance is required for the building located in the 
SFHA and any personal property securing the loan.\106\ The method for 
allocating flood insurance coverage among multiple buildings, as 
described in Q&A Amount 6, would be the same method for allocating 
flood insurance coverage among contents and buildings. That is, both 
contents and building will be considered to have a sufficient amount of 
flood insurance coverage for regulatory purposes so long as some 
reasonable amount of insurance is allocated to each category.
---------------------------------------------------------------------------

    \106\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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    Example: Lender A makes a loan for $200,000 that is secured by a 
warehouse with an insurable value of $150,000 and

[[Page 40469]]

inventory in the warehouse worth $100,000. The Act and Regulation 
require that flood insurance coverage be obtained for the lesser of the 
outstanding principal balance of the loan or the maximum amount of 
flood insurance that is available under the NFIP. The maximum amount of 
insurance that is available for both building and contents is $500,000 
for each category. In this situation, Federal flood insurance 
requirements could be satisfied by placing $150,000 worth of flood 
insurance coverage on the warehouse, thus insuring it to its insurable 
value, and $50,000 worth of contents flood insurance coverage on the 
inventory, thus providing total coverage in the amount of the 
outstanding principal balance of the loan. Note that this holds true 
even though the inventory is worth $100,000.
Other Security Interests 8. If a loan is secured by Building A, which 
is located in an SFHA, and contents, which are located in Building B, 
is flood insurance required on the contents securing a loan?
    No. If collateral securing the loan is stored in Building B, which 
does not secure the loan, then flood insurance is not required on those 
contents whether or not Building B is located in an SFHA.
Other Security Interests 9. Does the Regulation apply when the lender 
takes a security interest in improved real estate and contents located 
in an SFHA only as an ``abundance of caution''?
    Yes. The Act and Regulation look to the collateral securing the 
loan. If the lender takes a security interest in improved real estate 
and contents located in an SFHA, then flood insurance is required.\107\
---------------------------------------------------------------------------

    \107\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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    The language in the loan agreement determines whether the contents 
are taken as security for the loan. If a lender intends to take a 
security interest in the contents, the loan agreement should include 
language indicating that the contents are security for the loan. If the 
lender does not intend to take a security interest in the contents, the 
loan agreement should not include language to this effect, including 
language inserted out of an ``abundance of caution.''
Other Security Interests 10. Is flood insurance required if the lender 
takes a security interest in contents located in a building in an SFHA 
securing the loan but does not perfect the security interest?
    Yes, flood insurance is required. The language in the loan 
agreement determines whether the contents are taken as security for the 
loan. If the lender takes a security interest in contents located in a 
building in an SFHA securing the loan, flood insurance is required for 
the contents, regardless of whether that security interest is 
perfected.\108\
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    \108\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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Other Security Interests 11. If a borrower offers a note on a single-
family dwelling as collateral for a loan but the lender does not take a 
security interest in the dwelling itself, is this a designated loan 
that requires flood insurance?
    No. A designated loan is a loan secured by a building or mobile 
home that is located or to be located in an SFHA in which flood 
insurance is available under the Act.\109\ In this example, the lender 
did not take a security interest in the building; therefore, the loan 
is not a designated loan.
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    \109\ 12 CFR 22.2(e) (OCC); 12 CFR 208.25(b)(5) (Board); 12 CFR 
339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).
---------------------------------------------------------------------------

Other Security Interests 12. If a lender makes a loan that is not 
secured by real estate, but is made on the condition of a personal 
guarantee by a third party who gives the lender a security interest in 
improved real estate owned by the third party that is located in an 
SFHA in which flood insurance is available, is it a designated loan 
that requires flood insurance?
    Yes. In this scenario, a loan is made on condition of a personal 
guarantee by a third party and further secured by improved real estate, 
which is located in an SFHA and owned by that third party. Under these 
circumstances, the security of improved real estate in an SFHA is so 
closely tied to the making of the loan that it is considered a 
designated loan that requires flood insurance.\110\
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    \110\ 12 CFR 22.2(e) (OCC); 12 CFR 208.25(b)(5) (Board); 12 CFR 
339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).
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XII. Requirement to Escrow Flood Insurance Premiums and Fees--General
Escrow 1. When must escrow accounts be established for flood insurance 
purposes?
    A lender, or a servicer acting on its behalf, must escrow all 
premiums and fees for any flood insurance required under the mandatory 
purchase of flood insurance requirement for any designated loan secured 
by residential improved real estate or a mobile home that is made, 
increased, extended, or renewed on or after January 1, 2016. The escrow 
must be payable with the same frequency as payments on the designated 
loan are required to be made for the duration of the loan, unless the 
loan or lender is subject to one of the exceptions.\111\
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    \111\ 12 CFR 22.5(a) (OCC); 12 CFR 208.25(e)(1) (Board); 12 CFR 
339.5(a)(1) (FDIC); 12 CFR 614.4935(a)(1) (FCA); and 12 CFR 
760.5(a)(1) (NCUA).
---------------------------------------------------------------------------

    A lender is not required to escrow for flood insurance if it 
qualifies for the small lender exception \112\ or the loan qualifies 
for one of the following loan-related exceptions \113\ in the 
Regulation:
---------------------------------------------------------------------------

    \112\ 12 CFR 22.5(c) (OCC); 12 CFR 208.25(e)(3) (Board); 12 CFR 
339.5(c) (FDIC); 12 CFR 614.4935(c) (FCA); and 12 CFR 760.5(c) 
(NCUA).
    \113\ 12 CFR 22.5(a)(2) (OCC); 12 CFR 208.25(e)(1)(ii) (Board); 
12 CFR 339.5(a)(2) (FDIC); 12 CFR 614.4935(a)(2) (FCA); and 12 CFR 
760.5(a)(2) (NCUA).
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     A loan that is an extension of credit primarily for 
business, commercial, or agricultural purposes;
     A loan that is in a subordinate position to a senior lien 
secured by the same property for which the borrower has obtained 
adequate flood insurance coverage;
     A loan that is covered by a condominium association, 
cooperative, homeowners association or other applicable group's 
adequate flood insurance policy;
     A loan that is a home equity line of credit;
     A loan that is a nonperforming loan that is 90 or more 
days past due; or
     A loan that has a term not longer than 12 months.
    If a lender no longer qualifies for the small lender exception, it 
must escrow all premiums and fees for any flood insurance required 
under the mandatory purchase of flood insurance requirement for any 
designated loan secured by residential improved real estate or a mobile 
home that is made, increased, extended, or renewed on or after July 1 
of the first calendar year in which a lender has a change in status, 
unless a loan qualifies for another exception.\114\

[[Page 40470]]

If a lender, other than a lender that qualifies for the small lender 
exception, determines at any time during the term of a designated loan 
secured by residential improved real estate or a mobile home that an 
exception from the escrow requirement that previously applied to a 
particular loan no longer applies to the loan, the lender must escrow 
flood insurance premiums and fees as soon as reasonably 
practicable.\115\
---------------------------------------------------------------------------

    \114\ 12 CFR 22.5(c)(2) (OCC); 12 CFR 208.25(e)(3)(ii) (Board); 
12 CFR 339.5(c)(2) (FDIC); 12 CFR 614.4935(c)(2) (FCA); and 12 CFR 
760.5(c)(2) (NCUA).
    \115\ 12 CFR 22.5(a)(3) (OCC); 12 CFR 208.25(e)(1)(iii) (Board); 
12 CFR 339.5(a)(3) (FDIC); 12 CFR 614.4935(a)(3) (FCA); and 12 CFR 
760.5(a)(3) (NCUA).
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Escrow 2. If a lender does not escrow for taxes or homeowner's 
insurance, is it required to escrow for flood insurance under the 
Regulation? If yes, is the lender obligated to escrow for taxes and 
other insurance because it escrows for flood insurance pursuant to the 
rule?
    If a lender or its servicer is required to escrow for flood 
insurance under the Regulation, it must do so even if it does not 
escrow for taxes or other insurance.\116\ A lender or servicer is not, 
however, obligated to escrow for taxes and other insurance solely 
because it must escrow for flood insurance pursuant to the Regulation, 
though there may be other laws or regulations that require that 
additional escrow.
---------------------------------------------------------------------------

    \116\ 12 CFR 22.5(a)(1) (OCC); 12 CFR 208.25(e)(1)(i) (Board); 
12 CFR 339.5(a)(1) (FDIC); 12 CFR 614.4935(a)(1) (FCA); and 12 CFR 
760.5(a)(1) (NCUA).
---------------------------------------------------------------------------

Escrow 3. Are lenders required to escrow force-placed insurance?
    Yes, the Regulation requires lenders or their servicers to escrow 
flood insurance premiums for any residential designated loan made, 
increased, extended, or renewed on or after January 1, 2016, unless the 
lender or the loan qualifies for an exception from the escrow 
requirement.\117\ The Act and Regulation do not include an exception to 
the escrow requirement for force-placed insurance.
---------------------------------------------------------------------------

    \117\ 12 CFR 22.5(a) (OCC); 12 CFR 208.25(e)(1) (Board); 12 CFR 
339.5(a)(1) (FDIC); 12 CFR 614.4935(a)(1) (FCA); and 12 CFR 
760.5(a)(1) (NCUA).
---------------------------------------------------------------------------

Escrow 4. Does the requirement to escrow flood insurance premiums and 
fees apply when a loan does not experience a triggering event, such as 
when the loan is modified without being increased, extended, or 
renewed; the loan is assumed by another borrower; or the building 
securing the loan is remapped into a Special Flood Hazard Area (SFHA)?
    No, subject to certain exceptions. The Regulation provides that a 
lender or its servicer is required to escrow flood insurance premiums 
and fees when a designated loan is made, increased, extended, or 
renewed (a triggering event), unless either the lender or the loan is 
excepted from the escrow requirement.\118\ Until the loan experiences a 
triggering event, the lender is not required to escrow flood insurance 
premiums and fees, unless: (i) A borrower requests the escrow in 
connection with the requirement that the lender provide an option to 
escrow for outstanding loans; \119\ or (ii) the lender determines that 
a loan exception to the escrow requirement no longer applies.\120\
---------------------------------------------------------------------------

    \118\ 12 CFR 22.5(a) (OCC); 12 CFR 208.25(e)(1) (Board); 12 CFR 
339.5(a) (FDIC); 12 CFR 614.4935(a) (FCA); and 12 CFR 
760.5(a)(NCUA).
    \119\ 12 CFR 22.5(d) (OCC); 12 CFR 208.25(e)(4) (Board); 12 CFR 
339.5(d) (FDIC); 12 CFR 614.4935(d) (FCA); and 12 CFR 760.5(d) 
(NCUA).
    \120\ 12 CFR 22.5(a)(3) (OCC); 12 CFR 208.25(e)(1)(iii) (Board); 
12 CFR 339.5(a)(3) (FDIC); 12 CFR 614.4935(a)(3) (FCA); and 12 CFR 
760.5(a)(3) (NCUA).
---------------------------------------------------------------------------

Escrow 5. Are multi-family buildings or mixed-use properties included 
in the definition of ``residential improved real estate'' under the 
Regulation for which escrows are required (unless an exception 
applies)?
    Yes. For the purposes of the Act and the Regulation, the definition 
of residential improved real estate does not make a distinction between 
whether a building is single- or multi-family, or whether a building is 
owner- or renter-occupied.\121\ Single-family dwellings (including 
mobile homes), two-to-four family dwellings, and multi-family 
properties containing five or more residential units are considered 
residential improved real estate.
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    \121\ 12 CFR 23.2(j) (OCC); 12 CFR 208.25(b)(8) (Board); 12 CFR 
339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).
---------------------------------------------------------------------------

    However, with regard to mixed-use properties, the lender should 
look to the primary use of a building to determine whether it meets the 
definition of ``residential improved real estate.'' (See Q&As Amount 3 
and 4 for guidance on residential and nonresidential buildings.) A loan 
secured by residential improved real estate is not subject to the 
escrow requirement if the loan is an extension of credit primarily for 
business, commercial or agricultural purposes.\122\
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    \122\ 12 CFR 22.5(a)(2)(i) (OCC); 12 CFR 208.25(e)(1)(ii)(A) 
(Board); 12 CFR 339.5(a)(2) (FDIC); 12 CFR 614.4935(a)(2) (FCA); and 
12 CFR 760.5(a)(2) (NCUA).
---------------------------------------------------------------------------

Escrow 6. If a borrower obtains a second mortgage loan for a property 
located in an SFHA, and it is determined that the first lienholder does 
not have sufficient flood insurance coverage for both liens and is not 
currently escrowing for flood insurance, does the junior lienholder 
have to escrow for the additional amount of flood insurance coverage?
    Under the Regulation, for a closed-end second mortgage loan, junior 
lienholders are not required to escrow for flood insurance as long as 
the borrower has obtained flood insurance coverage that meets the 
mandatory purchase requirement. Thus, the junior lender or its servicer 
must ensure that adequate flood insurance is in place (See Q&A Other 
Security Interests 4 for junior lienholder requirements).\123\ Q&A 
Other Security Interests 4 explains the requirements for junior 
lienholders. If adequate flood insurance has not been obtained by the 
first lienholder and insurance must be purchased in connection with the 
second mortgage loan to meet the mandatory purchase requirement, the 
junior lender or its servicer would need to escrow the insurance 
obtained in connection with the second mortgage loan.\124\ However, the 
escrow requirements do not apply to a junior lien that is a home equity 
line of credit (HELOC) since HELOCs have a separate escrow exception 
under the Act and Regulation.\125\
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    \123\ 12 CFR 22.5(a)(2)(ii) (OCC); 12 CFR 208.25(e)(1)(ii)(B) 
(Board); 12 CFR 339.5(a)(2) (FDIC); 12 CFR 614.4935(a)(2) (FCA); and 
12 CFR 760.5(a)(2) (NCUA).
    \124\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
    \125\ 12 CFR 22.5(a)(2)(iv) (OCC); 12 CFR 208.25(e)(1)(ii)(D) 
(Board); 12 CFR 339.5(a)(2) (FDIC); 12 CFR 614.4935(a)(2) (FCA); and 
12 CFR 760.5(a)(2) (NCUA).
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Escrow 7. Does a lender or servicer have to escrow for loans when the 
security property is not located in an SFHA, but the borrower chooses 
to buy flood insurance?
    Under the Regulation, lenders and servicers are only required to 
escrow for loans that are secured by residential improved real estate 
or a mobile home located or to be located in SFHAs where flood 
insurance is available under the NFIP and that experience a triggering 
event (made, increased, extended, or

[[Page 40471]]

renewed) on or after January 1, 2016, unless either the lender or the 
loan qualifies for an exception.\126\ If the property securing the loan 
is not located in an SFHA, it is not a designated loan, and the lender 
or its servicer is not required to escrow, although the lender or 
servicer may offer escrow service to the borrower.
---------------------------------------------------------------------------

    \126\ 12 CFR 22.5(a)(1) (OCC); 12 CFR 208.25(e)(1)(i) (Board); 
12 CFR 339.5(a)(1) (FDIC); 12 CFR 614.4935(a) (FCA); and 12 CFR 
760.5(a)(1) (NCUA).
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XIII. Requirement to Escrow Flood Insurance Premiums and Fees--Small 
Lender Exception
Small Lender Exception 1. Is the $1B small lender exception for the 
mandatory escrow of flood insurance premiums at the lending institution 
level or bank holding company level?
    By its own terms, the small lender exception to the flood insurance 
escrow requirement applies to lenders rather than holding 
companies.\127\ Therefore, the $1 billion requirement is calculated 
based on the assets held at the lending institution level, rather than 
at the holding company level.
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    \127\ 12 CFR 22.5(c)(1) (OCC); 12 CFR 208.25(e)(3)(i) (Board); 
12 CFR 339.5(c) (FDIC); 12 CFR 614.4935(c) (FCA); and 12 CFR 
760.5(c) (NCUA).
---------------------------------------------------------------------------

Small Lender Exception 2. If a lender was required to escrow for taxes 
and hazard insurance solely under the (a) Higher-Priced Mortgage Loan 
(HPML) rules or (b) USDA or FHA programs on or before July 6, 2012, is 
such a lender, who otherwise qualifies for the small lender exception, 
required to escrow the premiums and fees for flood insurance?
    The Act and Regulation provide that a small lender is eligible for 
the exception only if, on or before July 6, 2012, the lender: (1) Was 
not required under Federal or State law to deposit taxes, insurance 
premiums, fees, or any other charges in an escrow account for the 
entire term of any loan secured by residential improved real estate or 
a mobile home; and (2) did not have a policy of consistently and 
uniformly requiring the deposit of taxes, insurance premiums, fees, or 
other charges in an escrow account for any loans secured by residential 
improved real estate or a mobile home.\128\
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    \128\ 12 CFR 22.5(c)(1) (OCC); 12 CFR 208.25(e)(3)(i) (Board); 
12 CFR 339.5(c) (FDIC); 12 CFR 614.4935(c) (FCA); and 12 CFR 
760.5(c) (NCUA).
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    (a) With respect to an HPML, Federal law in effect on or before 
July 6, 2012, permitted a borrower to request cancellation of the 
escrow rather than have it apply for the entire term of the loan. 
Therefore, HPML escrow requirements would not result in the loss of the 
escrow exception for a small lender that made an HPML-covered loan 
prior to July 6, 2012, because the lender was not required under 
Federal law to escrow for the entire term of the loan. Note that the 
phrase ``entire term'' applies only with respect to the Federal or 
State law requirements criterion of the exception. In addition, if a 
lender required escrow for an HPML solely to comply with Federal law, a 
lender complying with that law would not be considered to have its own 
separate policy of consistently and uniformly requiring escrow.
    (b) With respect to loans under the USDA or FHA programs, under 
Federal law, such loans require the deposit of taxes, insurance 
premiums, fees and other charges in an escrow account for the entire 
term of the loan. Therefore, the first criterion of the exception would 
not be met and would disqualify the lender from the small lender 
exception under the Act and the Regulation.
Small Lender Exception 3. Is a lender disqualified from the small 
lender escrow exception if it is required to collect escrowed funds on 
a mortgage loan on behalf of a third party?
    To qualify for the small lender exception, one requirement is the 
lender must not have had a policy on or before July 6, 2012, of 
consistently and uniformly requiring the deposit of taxes, insurance 
premiums, fees, or any other charges in an escrow account for any loans 
secured by residential improved real estate or a mobile home.\129\
---------------------------------------------------------------------------

    \129\ 12 CFR 22.5(c)(1)(ii)(B) (OCC); 12 CFR 
208.25(e)(3)(i)(B)(2) (Board); 12 CFR 339.5(c)(1)(ii)(B) (FDIC); 12 
CFR 614.4935(c)(1)(ii)(B) (FCA); and 12 CFR 760.5(c)(1)(ii)(B) 
(NCUA).
---------------------------------------------------------------------------

     With regard to mortgage loans for which the lender had a 
policy on or before July 6, 2012, of collecting escrow funds at closing 
and the lender maintained servicing of the loan, the lender would not 
qualify for the exception because the lender established an individual 
escrow account for the loan it would then service.
     With regard to mortgage loans for which the lender did not 
have a policy on or before July 6, 2012, of collecting the escrow funds 
on its own behalf at closing, but escrowed funds on behalf of a third 
party and then transferred those escrow funds to the third party 
servicing that loan, the lender would be able to qualify for the small 
lender exception provided the lender did not establish an individual 
escrow account and the lender transferred the funds to the third party 
as soon as reasonably practicable. The small lender must also satisfy 
the other requirements for the exception, but because no individual 
escrow account was established for the loan whose servicing rights were 
transferred pursuant to a third party's requirements, the lender would 
not have had a policy of consistently and uniformly requiring the 
deposit of funds in an escrow account.
Small Lender Exception 4. Is a lender eligible for the small lender 
exception if it offers escrow accounts only upon a borrower's request?
    Yes. If a lender only offers escrow accounts upon the request of 
borrowers, this practice does not constitute a consistent or uniform 
policy of requiring escrow. The small lender exception does not apply 
if, on or before July 6, 2012, the lender had a policy of consistently 
and uniformly requiring the deposit of taxes, insurance premiums, fees, 
or any other charges in an escrow account for a loan secured by 
residential improved real estate or a mobile home.\130\
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    \130\ 12 CFR 22.5(c)(1)(ii)(B) (OCC); 12 CFR 
208.25(e)(3)(i)(B)(2) (Board); 12 CFR 339.5(c)(1)(ii)(B) (FDIC); 12 
CFR 614.4935(c)(1)(ii)(B) (FCA); and 12 CFR 760.5(c)(1)(ii)(B) 
(NCUA).
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Small Lender Exception 5. Is the option to escrow notice required for 
all outstanding loans secured by residential real estate that are not 
excepted from the escrow requirement? What about outstanding loans that 
are not secured by buildings located in SFHAs?
    Under the Regulation, lenders or their servicers are required to 
offer and make available the option to escrow flood insurance premiums 
and fees for all outstanding designated loans secured by residential 
improved real estate or a mobile home located in an SFHA as of January 
1, 2016, or July 1 of the first calendar year in which the lender no 
longer qualifies for the small lender exception to the escrow 
requirement.\131\ With the expiration of the June 30, 2016, deadline to 
comply with the option to escrow notice requirement for outstanding 
loans as of January 1, 2016, that requirement currently applies only to 
lenders who have a change in status and no longer qualify for the small 
lender exception.\132\ Such lenders will be required to provide the 
option to escrow notice by September 30 of the first calendar year in 
which the lender

[[Page 40472]]

has had a change in status pursuant to the Regulation.\133\ The 
requirement to provide the option to escrow notice does not apply to 
outstanding loans or to lenders that are excepted from the general 
escrow requirement under the Regulation. The option to escrow notice 
requirement also does not apply to loans that are not subject to the 
mandatory flood insurance purchase requirement.
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    \131\ 12 CFR 22.5(d) (OCC); 12 CFR 208.25(e)(4) (Board); 12 CFR 
339.5(d) (FDIC); 12 CFR 614.4935(d) (FCA); and 12 CFR 760.5(d) 
(NCUA).
    \132\ 12 CFR 22.5(c)(2) (OCC); 12 CFR 208.25(e)(3)(ii) (Board); 
12 CFR 339.5(c)(2) (FDIC); 12 CFR 614.4935(c)(2) (FCA); and 12 CFR 
760.5(c)(2) (NCUA).
    \133\ 12 CFR 22.5(d)(2) (OCC); 12 CFR 208.25(e)(4)(ii) (Board); 
12 CFR 339.5(d)(2) (FDIC); 12 CFR 614.4935(d)(2) (FCA); and 12 CFR 
760.5(d)(2) (NCUA).
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Small Lender Exception 6. If the borrower has waived escrow of flood 
insurance premiums and fees, does the lender or its servicer still need 
to send a notice to offer the ability to escrow for the flood 
insurance?
    Yes, if the small lender exception no longer applies. (See Q&A 
Small Lender Exception 5). The Regulation does not exclude loans for 
which borrowers have previously waived escrow from the requirement to 
offer and make available the option to escrow flood insurance premiums 
and fees. Consequently, lenders or their servicers must send a notice 
of the option to escrow flood insurance premiums and fees to borrowers 
who have previously waived escrow or for whom lenders previously 
offered an option to escrow.\134\ Although a borrower may have 
previously decided to waive escrow or been offered an option to escrow, 
it is possible that the borrower's circumstances have changed, and if 
offered another chance to escrow, the borrower may desire to do so.
---------------------------------------------------------------------------

    \134\ 12 CFR 22.5(d)(2) (OCC); 12 CFR 208.25(e)(4)(ii) (Board); 
12 CFR 339.5(d)(2) (FDIC); 12 CFR 614.4935(d)(2) (FCA); and 12 CFR 
760.5(d)(2) (NCUA).
---------------------------------------------------------------------------

Small Lender Exception 7. Is it correct that lenders that qualify for 
the small lender exception are not required to provide borrowers the 
escrow notice or the option to escrow notice?
    Yes. Lenders that qualify for the small lender exception are not 
required to provide borrowers either the escrow notice or the option to 
escrow notice unless the lender ceases to qualify for the small lender 
exception.\135\
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    \135\ 12 CFR 22.5(d)(1) (OCC); 12 CFR 208.25(e)(4)(i) (Board); 
12 CFR 339.5(d)(1) (FDIC); 12 CFR 614.4935(d)(1) (FCA); and 12 CFR 
760.5(d)(1) (NCUA).
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XIV. Requirement to Escrow Flood Insurance Premiums and Fees--Loan 
Exceptions
Loan Exceptions 1. Are escrow accounts for flood insurance premiums and 
fees required for commercial loans that are secured by multi-family 
residential buildings?
    No. Extensions of credit primarily for business, commercial or 
agricultural purposes are not subject to the escrow requirement for 
flood insurance premiums and fees, even if such loans are secured by 
residential improved real estate or a mobile home.\136\
---------------------------------------------------------------------------

    \136\ 12 CFR 22.5(a)(2) (OCC); 12 CFR 208.25(e)(1)(ii) (Board); 
12 CFR 339.5(a)(2) (FDIC); 12 CFR 614.4935(a)(2) (FCA); and 12 CFR 
760.5(a)(2) (NCUA).
---------------------------------------------------------------------------

Loan Exceptions 2. Do construction-permanent loans qualify for the 12-
month exception if one phase of the loan is for 12 months or less?
    Generally, no. Construction-permanent loans (or C-P loans) are 
loans that have a construction phase of approximately one year before 
the loan converts into permanent financing. During the construction 
phase, the loan is typically interest-only, so the borrower does not 
start paying principal until the permanent phase. After the 
construction phase, the borrower generally comes in to sign papers to 
start the permanent phase, but this is not a true closing. Given that 
C-P loans are generally 20- to 30-year term loans, a C-P loan would not 
qualify for the 12 month-exception from escrow, even if one phase of 
the loan is for 12 months or less.
Loan Exceptions 3. Although a lender is not required to monitor whether 
a subordinate lien moves into first lien position for the purpose of 
the mandatory escrow requirement, if the lender becomes aware that the 
subordinate lien exception no longer applies, when must the lender 
begin to escrow?
    If at any time during the term of the loan a lender determines that 
a subordinate lien exception no longer applies, the lender must begin 
escrowing flood insurance premiums and fees as soon as reasonably 
practicable (unless another exception applies).\137\ Lenders should 
ensure that the loan documents for the subordinate lien permit the 
lender to require an escrow if the loan takes a first lien position.
---------------------------------------------------------------------------

    \137\ 12 CFR 22.5(a)(3) (OCC); 12 CFR 208.25(e)(1)(iii) (Board); 
12 CFR 339.5(a)(3) (FDIC); 12 CFR 614.4935(a)(3) (FCA); and 12 CFR 
760.5(a)(3) (NCUA).
---------------------------------------------------------------------------

Loan Exceptions 4. Which requirements for an escrow account apply to a 
property covered by an RCBAP?
    An RCBAP (Residential Condominium Building Association Policy) is a 
policy purchased by the condominium association on behalf of itself and 
the individual unit owners in the condominium. Typically, a portion of 
the periodic dues paid to the association by the condominium owners 
applies to the premiums on the policy. When a lender makes, increases, 
renews, or extends a loan secured by a condominium unit that is 
adequately covered by an RCBAP and RCBAP premiums are paid by the 
condominium association as a common expense, an escrow account is not 
required.\138\ However, if the RCBAP coverage is inadequate and the 
unit is also covered by a flood insurance policy for supplemental 
coverage, premiums for the supplemental policy would need to be 
escrowed, provided the lender or the loan did not qualify for any other 
exception from the Regulation's escrow requirement.\139\ Lenders should 
exercise due diligence with respect to continuing compliance with the 
insurance requirements on the part of the condominium association.
---------------------------------------------------------------------------

    \138\ 12 CFR 22.5(a)(2)(iii) (OCC); 12 CFR 208.25(e)(1)(ii)(C) 
(Board); 12 CFR 339.5(a)(2)(iii) (FDIC); 12 CFR 614.4935(a)(2)(iii) 
(FCA); and 12 CFR 760.5(a)(2)(iii) (NCUA).
    \139\ 12 CFR 22.5(a) (OCC); 12 CFR 208.25(e)(1) (Board); 12 CFR 
339.5(a)(1) (FDIC); 12 CFR 614.4935(a) (FCA); and 12 CFR 760.5(a)(1) 
(NCUA).
---------------------------------------------------------------------------

Loan Exceptions 5. Is there an exception to the escrow requirement for 
loans secured by multi-family buildings? Is there an exception for 
commercial loans?
    Under the Regulation, the escrow requirements do not apply to a 
loan that is an extension of credit primarily for business, commercial, 
or agricultural purposes even if secured by residential real estate, 
such as a multi-family building.\140\
---------------------------------------------------------------------------

    \140\ 12 CFR 22.5(a)(2)(i) (OCC); 12 CFR 208.25(e)(1)(ii)(A) 
(Board); 12 CFR 339.5(a)(2)(i) (FDIC); 12 CFR 614.4935(a)(2)(i) 
(FCA); and 12 CFR 760.5(a)(2)(i) (NCUA).
---------------------------------------------------------------------------

    In addition, the escrow requirements in the Regulation would not 
apply to a loan secured by a particular unit in a multi-family 
residential building if a condominium association, cooperative, 
homeowners association, or other applicable group provides an adequate 
policy and pays for the insurance as a common expense.\141\ Otherwise, 
the escrow requirements generally would

[[Page 40473]]

apply to loans for particular units in multi-family residential 
buildings.
---------------------------------------------------------------------------

    \141\ 12 CFR 22.5(a)(2)(iii) (OCC); 12 CFR 208.25(e)(1)(ii)(C) 
(Board); 12 CFR 339.5(a)(2)(iii) (FDIC); 12 CFR 614.4935(a)(2)(iii) 
(FCA); and 12 CFR 760.5(a)(2)(iii) (NCUA).
---------------------------------------------------------------------------

XV. Force Placement of Flood Insurance
Force Placement 1. What is the requirement for the force placement of 
flood insurance under the Act and the Regulation?
    When a lender makes a determination that the collateral securing 
the loan is uninsured or underinsured, it must begin the force-
placement process. Specifically, the Act and the Regulation provide 
that if a lender, or a servicer acting on its behalf, determines at any 
time during the term of a designated loan that a building or mobile 
home and any personal property securing the loan is not covered by 
flood insurance or is covered by flood insurance in an amount less than 
the amount required under the Regulation, the lender or its servicer 
must notify the borrower that the borrower must obtain flood insurance, 
at the borrower's expense, in an amount at least equal to the minimum 
amount required under the Regulation. If the borrower fails to obtain 
flood insurance within 45 days of the lender's notification to the 
borrower, the lender must purchase flood insurance on the borrower's 
behalf at that time. The lender must force place flood insurance for 
the full amount required under the Regulation, or if the borrower has 
purchased flood insurance that otherwise satisfies the flood insurance 
requirements but in an insufficient amount, the lender would be 
required to force place only for the ``insufficient amount,'' that is, 
the difference between the amount the borrower insured and the required 
amount of flood insurance. The Act and the Regulation also provide that 
the lender or its servicer may purchase insurance on the borrower's 
behalf and may charge the borrower for the cost of premiums and fees 
incurred in purchasing the insurance beginning on the date on which 
flood insurance coverage lapsed or did not provide a sufficient 
coverage amount. (See also Q&A Force Placement 8).\142\
---------------------------------------------------------------------------

    \142\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
---------------------------------------------------------------------------

    A lender or its servicer may include in the force-placement notice 
the amount of flood insurance needed. By providing this information, 
the lender or its servicer can help ensure that a borrower obtains the 
appropriate amount of insurance. In addition, before the lender or 
servicer must force place flood insurance, if the lender or servicer is 
aware that a borrower has obtained insurance that otherwise satisfies 
the flood insurance requirements but in an insufficient amount, the 
lender or servicer should inform the borrower an additional amount of 
insurance is needed in order to comply with the Regulation.
Force Placement 2. When must a lender provide the force-placement 
notice to the borrower?
    The Regulation requires the lender, or its servicer, to send notice 
to the borrower upon making a determination that the building or mobile 
home and any personal property securing the designated loan is not 
covered by flood insurance or is covered by flood insurance in an 
amount less than the amount required under the Regulation. The Agencies 
expect that such notice will be provided to the borrower at the time of 
determination of no or insufficient coverage. If there is a brief delay 
in providing the notice, the Agencies will expect the lender or 
servicer to provide a reasonable explanation for the delay, for 
example, that the lender uses batch processing to send the force-
placement notice to its borrowers.
Force Placement 3. May a servicer force place on behalf of a lender?
    Yes. Assuming the statutory prerequisites for force placement are 
met, and subject to the servicing contract between the lender and its 
servicer, the Act authorizes servicers to force place flood insurance 
on behalf of the lender, following the procedures set forth in the 
Regulation.\143\
---------------------------------------------------------------------------

    \143\ 42 U.S.C. 4012a(e); 12 CFR 22.7(a) (OCC); 12 CFR 
208.25(g)(1) (Board); 12 CFR 339.7(a) (FDIC); 12 CFR 614.4945(a) 
(FCA); and 12 CFR 760.7(a) (NCUA).
---------------------------------------------------------------------------

Force Placement 4. May a lender satisfy its notice requirement by 
sending the force-placement notice to the borrower prior to the 
expiration of the flood insurance policy?
    No. The Act specifically provides that the lender or servicer for a 
loan must send a notice upon its determination that the collateral 
property securing the loan is either not covered by flood insurance or 
is covered by flood insurance in an amount less than the amount 
required.\144\ Although a lender may send notice prior to the 
expiration date of the flood insurance policy as a courtesy, the lender 
or servicer is still required to send notice upon determining that the 
flood insurance policy actually has lapsed or is insufficient in 
meeting the statutory requirement. The lender may purchase insurance on 
the borrower's behalf beginning on the date of the lapse.\145\
---------------------------------------------------------------------------

    \144\ 12 U.S.C. 4012a(e)(1). See also 12 CFR 22.7(a) (OCC); 12 
CFR 208.25(g)(1) (Board); 12 CFR 339.7(a) (FDIC); 12 CFR 614.4945(a) 
(FCA); and 12 CFR 760.7(a) (NCUA).
    \145\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
---------------------------------------------------------------------------

Force Placement 5. When must the lender have flood insurance in place 
if the borrower has not obtained adequate insurance within 45 days 
after notification?
    The Regulation provides that the lender or its servicer shall 
purchase insurance on the borrower's behalf if the borrower fails to 
obtain flood insurance within 45 days after notification.\146\ If the 
borrower fails to obtain flood insurance and the lender does not force 
place flood insurance by the end of the force-placement notification 
period, the Agencies will expect the lender to provide a reasonable 
explanation for the brief delay, for example, that a lender uses batch 
processing to purchase force-placed flood insurance policies.
---------------------------------------------------------------------------

    \146\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
---------------------------------------------------------------------------

Force Placement 6. Once a lender makes a determination that a 
designated loan has no or insufficient flood insurance coverage and 
sends the borrower a force-placement notice, may a lender make a 
subsequent determination in connection with the initial notification 
period that the designated loan has no or insufficient coverage and 
send another force-placement notice, effectively providing more than 45 
days for the borrower to obtain sufficient coverage?
    No. The Act and Regulation state that once a lender makes a 
determination that a designated loan has no or insufficient flood 
insurance coverage, the lender must notify the borrower and, if the 
borrower fails to obtain sufficient flood insurance coverage within 45 
days after that notice, the lender must purchase coverage on the 
borrower's behalf.\147\ For example, if in response to a force-
placement notice, the borrower obtains flood insurance that is 
insufficient in amount, there is no extension of the time period by 
which the lender must force place flood insurance.
---------------------------------------------------------------------------

    \147\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).

---------------------------------------------------------------------------

[[Page 40474]]

Force Placement 7. May a lender commence a force-placed insurance 
policy on the day the previous policy expires, or must the new policy 
begin on the day after?
    The Regulation provides that the lender or its servicer may charge 
the borrower for the cost of premiums and fees incurred in purchasing 
the insurance, including premiums or fees incurred for coverage, 
beginning on the date on which flood insurance lapsed or did not 
provide a sufficient coverage amount.\148\
---------------------------------------------------------------------------

    \148\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
---------------------------------------------------------------------------

    A lender, however, may not require the borrower to pay for double 
coverage. The Regulation requires the lender or its servicer to refund 
to the borrower all premiums paid by the borrower for any force-placed 
insurance purchased by the lender or its servicer during any period in 
which the borrower's flood insurance coverage and the force-placed 
insurance policy were each in effect.\149\
---------------------------------------------------------------------------

    \149\ 12 CFR 22.7(b)(1)(ii) (OCC); 12 CFR 208.25(g)(2)(i)(B) 
(Board); 12 CFR 339.7(b)(1)(ii) (FDIC); 12 CFR 614.4945(b)(1)(ii) 
(FCA); and 12 CFR 760.7(b)(1)(ii) (NCUA).
---------------------------------------------------------------------------

    If the previous policy expires at the end of Day 1, the lender's 
new force-placed policy should not begin to provide coverage until the 
beginning of Day 2. If the lender did force place on Day 1 and the 
policy provided overlapping coverage on Day 1, the lender could not 
charge the borrower for the period of overlapping coverage on Day 1.
Force Placement 8. When force placement occurs, what is the amount of 
insurance required to be placed?
    The Regulation states that the minimum amount of flood insurance 
required ``must be at least equal to the lesser of the outstanding 
principal balance of the designated loan or the maximum limit of 
coverage available for the particular type of property under the Act.'' 
\150\ Therefore, if the outstanding principal balance is the basis for 
the minimum amount of required flood insurance, the lender must ensure 
that the force-placed policy amount covers the existing loan balance 
plus any additional force-placed premium and fees added to the loan 
balance.\151\
---------------------------------------------------------------------------

    \150\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
    \151\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
---------------------------------------------------------------------------

    To illustrate this point, assume that there is a loan with an 
outstanding principal balance of $200,000, secured by a residential 
property located in a special flood hazard area that has an insurable 
value of $350,000. The borrower has a $200,000 flood insurance policy 
for that property, reflecting the minimum amount required under the 
Agencies' regulations. If the $200,000 flood insurance policy lapses, 
the lender or its servicer must notify the borrower of the need to 
obtain adequate flood insurance. If the borrower fails to obtain 
adequate flood insurance within 45 days after notification, then the 
lender or its servicer must purchase insurance on the borrower's 
behalf.\152\
---------------------------------------------------------------------------

    \152\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
---------------------------------------------------------------------------

    If the lender intends to add the premium for the force-placed 
policy to the loan balance, the lender must ensure that the policy is 
issued in an amount sufficient to cover the anticipated higher loan 
balance, including the force-placed policy premium, even if the 
addition of the force-placed premium is not considered a triggering 
event. (See also Q&A Force Placement 10). In this scenario, if the cost 
of the force-placed policy is $2,000, the coverage amount of the force-
placed policy must be at least $202,000.
Force Placement 9. When may a lender or its servicer charge the 
borrower for the cost of force-placed insurance?
    A lender, or a servicer acting on its behalf, may force place 
insurance and charge the borrower for the cost of premiums and fees 
incurred by the lender or servicer in purchasing the flood insurance on 
the borrower's behalf at any time starting from the date on which flood 
insurance coverage lapsed or did not provide a sufficient coverage 
amount. The lender or servicer would not have to wait 45 days after 
providing notification to force place insurance.\153\
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    \153\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
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    Lenders that monitor loans secured by property located in an SFHA 
for continuous flood insurance coverage can minimize any gaps in 
coverage and any charge to the borrower for coverage for a timeframe 
prior to the lender's or its servicer's date of discovery and force 
placement. If a lender or its servicer, despite its monitoring efforts, 
discovers a loan with no or insufficient coverage, for example, due to 
a re-mapping, it may charge the borrower for premiums and fees incurred 
by the lender or servicer for a force-placed flood insurance policy 
purchased on the borrower's behalf, including premiums and fees for 
coverage, beginning on the date of no or insufficient coverage, 
provided that the policy was effective as of the date of the 
insufficient coverage. When a lender or its servicer purchases a policy 
on the borrower's behalf, the lender or its servicer may not charge for 
premiums and fees for coverage beginning on the date of lapse or 
insufficient coverage if that policy purchased on the borrower's behalf 
did not provide coverage for the borrower prior to purchase.
Force Placement 10. Does adding the flood insurance premium to the 
outstanding loan balance constitute a triggering event- an ``increase'' 
that would trigger the applicability of flood insurance regulatory 
requirements?
    The Act and the Regulation require a lender to notify the borrower 
that the borrower should obtain adequate flood insurance when the 
lender determines that a building or a mobile home located or to be 
located in a Special Flood Hazard Area is not covered by any or 
adequate flood insurance.\154\ If the borrower fails to obtain adequate 
flood insurance within 45 days, then the lender must purchase insurance 
on the borrower's behalf. The lender may charge the borrower for the 
premiums and fees incurred by the lender in purchasing the force-placed 
flood insurance.\155\
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    \154\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
    \155\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
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    Among the various methods that a lender might use to charge a 
borrower for force-placed flood insurance are: (1) Adding the premium 
and fees to the existing mortgage loan balance; (2) adding the premium 
and fees to a separate, unsecured account; or (3) billing the borrower 
directly for the premiums and fees of the force-placed flood insurance. 
The treatment of force-placed flood insurance premiums and fees depends 
on the method the lender chooses for charging the borrower.
Premium and Fees Added to Mortgage Loan Balance
    If the lender's loan contract with the borrower includes a 
provision permitting the lender or servicer to advance funds to pay for 
flood insurance premiums and fees as additional debt to be secured by 
the building or mobile home, such an advancement would be considered 
part of the loan. As such, the addition of the flood insurance premiums 
and fees to the loan balance is not considered an ``increase'' in the 
loan amount, and thus would not be considered a triggering event. If, 
however, there is no explicit provision permitting this type of

[[Page 40475]]

advancement of funds in the loan contract, the addition of flood 
insurance premiums and fees to the borrower's loan balance would be 
considered an ``increase'' in the loan amount, and, therefore is 
considered a triggering event because no advancement of funds was 
contemplated as part of the loan. (See also Q&A Force Placement 8).
Premium and Fees Added to an Unsecured Account
    If the lender accounts for and tracks the amount owed on the force-
placed flood insurance premium and fees in a separate, unsecured 
account, this approach does not result in an increase in the loan 
balance and, therefore, is not considered a triggering event.
Premium and Fees Billed Directly to Borrower
    If the lender bills the borrower directly for the cost of the 
force-placed flood insurance, this approach does not increase the loan 
balance and is not considered a triggering event.
Force Placement 11. What documentation is sufficient to demonstrate 
evidence of flood insurance in connection with a lender's refund of 
premiums paid by a borrower for force-placed insurance during any 
period of overlap with borrower-purchased insurance?
    With respect to when a lender is required to refund premiums paid 
by a borrower for force-placed insurance during any period of overlap 
with borrower-purchased insurance, the Regulation specifically 
addresses the documentation requirements. The Regulation provides that, 
for purposes of confirming a borrower's existing flood insurance 
coverage, a lender must accept from the borrower an insurance policy 
declarations page that includes the existing flood insurance policy 
number and the identity of, and contact information for, the insurance 
company or its agent.\156\ The Regulation does not require that the 
declarations page contain any additional information in order to be 
accepted as fulfilling the mandatory flood insurance purchase 
requirement.
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    \156\ 12 CFR 22.7(b)(2) (OCC); 12 CFR 208.25(g)(2)(ii) (Board); 
12 CFR 339.7(b)(2) (FDIC); 12 CFR 614.4945(b)(2) (FCA); and 12 CFR 
760.7(b)(2) (NCUA).
---------------------------------------------------------------------------

    In situations not involving a lender's refund of premiums for 
force-placed insurance, the Regulation does not specify what 
documentation would be sufficient. Generally, it is appropriate, 
although not required by the Regulation, for lenders to accept a copy 
of the flood insurance application and premium payment as evidence of 
proof of purchase for new policies.
Force Placement 12. If a lender cannot obtain a refund from the 
insurance company because the borrower did not provide proof of 
coverage in a timely manner or the insurance company fails to provide 
the lender the refund within 30 days, is the lender required to refund 
the premium to the borrower?
    Yes. The Regulation specifically requires the refund of force-
placed insurance premiums and any related fees charged to the borrower 
for any overlap period within 30 days of receipt of a confirmation of a 
borrower's existing flood insurance coverage without exception.\157\
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    \157\ 12 CFR 22.7(b)(1) (OCC); 12 CFR 208.25(g)(2)(i) (Board); 
12 CFR 339.7(b)(1) (FDIC); 12 CFR 614.4945(b)(1) (FCA); and 12 CFR 
760.7(b)(1) (NCUA).
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Force Placement 13. Is a lender permitted to increase, renew, or extend 
a designated loan that is currently insured by force-placed insurance? 
More specifically, if the borrower is undergoing a refinance or a loan 
modification, can the lender rely on the existing force-placed 
insurance to meet the mandatory purchase requirement?
    A lender can rely on the force-placed insurance to satisfy the 
mandatory flood insurance purchase requirement if the borrower does not 
purchase his or her own policy. The Regulation states that a lender 
``shall not make, increase, extend or renew any designated loan unless 
the building or mobile home and any personal property securing the loan 
is covered by flood insurance for the term of the loan.'' \158\ 
Assuming the force-placed policy is in effect and otherwise satisfies 
the regulatory coverage standards, then that policy may satisfy the 
mandatory purchase requirement.
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    \158\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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    When a lender refinances increases, renews, or extends an existing 
loan, the lender is required to provide the notice of special flood 
hazards, which details the borrower's obligation to obtain a flood 
insurance policy for any building in an SFHA securing the loan.\159\ At 
that time, the lender could encourage the borrower to purchase his or 
her own policy, likely at a reduced cost to the borrower.
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    \159\ 12 CFR 22.9(a) (OCC); 12 CFR 208.25(i) (Board); 12 CFR 
339.9(a) (FDIC); 12 CFR 614.4955(a) (FCA); and 12 CFR 760.9(a) 
(NCUA).
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Force Placement 14. If a borrower's force-placed flood insurance 
expires, is the lender required to send a force-placement notification 
to the borrower prior to renewing the force-placed flood insurance 
coverage?
    No. The Regulation does not require the lender to send a notice to 
the borrower prior to renewing a force-placed policy. However, the 
lender or its servicer, at its discretion, may notify the borrower that 
the lender is planning to renew or has renewed the force-placed policy. 
Such a notification may encourage the borrower to purchase his or her 
own policy, which may be available for a lower premium amount.
Force Placement 15. Are lenders required to have in place ``Life-of-
Loan'' monitoring?
    Although there is no explicit duty to monitor flood insurance 
coverage over the life of the loan in the Act or Regulation, for 
purposes of safety and soundness, many lenders monitor the continuous 
coverage of flood insurance for the building or mobile home and any 
personal property securing the loan. Such a practice helps to ensure 
that lenders complete the force placement of flood insurance in a 
timely manner upon lapse of a policy, that there is continuous coverage 
to protect both the borrower and the lender, and that lenders are 
promptly made aware of flood map changes.
Force Placement 16. If a lender or its servicer receives a notice of 
remapping that states that a property will be remapped into an SFHA as 
a future effective date, what do the Act and Regulation require the 
lender or its servicer to do?
    The Act and Regulation provide that if a lender, or its servicer, 
determines at any time during the term of a designated loan, that a 
building or mobile home and any personal property securing a loan is 
uninsured or underinsured, the lender or its servicer must begin the 
notice and force-placement process, as detailed in Q&A Force Placement 
1.\160\ A loan that is secured by property that was not located in an 
SFHA does not become a designated loan until the effective date of the 
map change, remapping the property into an SFHA. Therefore, when a 
lender or its servicer receives advance notice that a property will be 
remapped into an SFHA, the effective date of the remapping becomes the 
date on which the lender or its servicer must determine whether the

[[Page 40476]]

property is covered by sufficient flood insurance. If the borrower does 
not purchase a flood insurance policy that begins on the effective date 
of the map change, the lender or its servicer must send the force-
placement notice to the borrower to purchase adequate flood 
insurance.\161\ Similar to the guidance set forth in Q&A Force 
Placement 4, a lender also may send notice prior to the effective date 
of the map change as a courtesy.
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    \160\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
    \161\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
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    In addition, as of the effective date of the remapping, the lender 
or servicer may force place flood insurance and charge the borrower for 
the force-placed insurance. However, if the borrower purchases an 
adequate flood insurance policy, the lender or servicer would need to 
reimburse the borrower for premiums and fees charged for the force-
placed coverage during any period of overlapping coverage.\162\
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    \162\ 12 CFR 22.7(b)(1)(ii) (OCC); 12 CFR 208.25(g)(2)(i)(B) 
(Board); 12 CFR 339.7(b)(1)(ii) (FDIC); 12 CFR 614.4945(b)(1)(ii) 
(FCA); and 12 CFR 760.7(b)(1)(ii) (NCUA).
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XVI. Flood Insureance Requirements in the Event of the Sale or Transfer 
of a Designated Loan and/or Its Servicing Rights
Servicing 1. How do the flood insurance requirements under the 
Regulation apply to lenders under the following scenarios involving 
loan servicing?
    Scenario 1: A regulated lender originates a designated loan secured 
by a building or mobile home located in an SFHA in which flood 
insurance is available under the Act. The regulated lender makes the 
initial flood determination, provides the borrower with appropriate 
notice, and flood insurance is obtained. The regulated lender initially 
services the loan; however, the regulated lender subsequently sells 
both the loan and the servicing rights to a nonregulated party. What 
are the regulated lender's requirements under the Regulation? What are 
the regulated lender's requirements under the Regulation if it only 
transfers or sells the servicing rights, but retains ownership of the 
loan?
    The regulated lender must comply with all requirements of the 
Regulation, including making the initial flood determination, providing 
appropriate notice to the borrower, and ensuring that the proper amount 
of insurance is obtained. In the event the regulated lender sells or 
transfers the loan and servicing rights, the regulated lender must 
provide notice of the identity of the new servicer to FEMA or its 
designee.\163\ Once the regulated lender has sold the loan and the 
servicing rights, the lender has no further obligation regarding flood 
insurance on the loan.
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    \163\ 12 CFR 22.10(b) (OCC); 12 CFR 208.25(j)(2) (Board); 12 CFR 
339.10(b) (FDIC); 12 CFR 614.4960(b) (FCA); and 12 CFR 760.10(b) 
(NCUA).
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    If the regulated lender retains ownership of the loan and only 
transfers or sells the servicing rights to a nonregulated party, the 
regulated lender must notify FEMA or its designee of the identity of 
the new servicer.\164\ The servicing contract should require the 
servicer to comply with all the requirements that are imposed on the 
regulated lender as owner of the loan, including escrow of insurance 
premiums and force placement of insurance, if necessary.
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    \164\ 12 CFR 22.10(b) (OCC); 12 CFR 208.25(j)(2) (Board); 12 CFR 
339.10(b) (FDIC); 12 CFR 614.4960(b) (FCA); and 12 CFR 760.10(b) 
(NCUA).
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    Generally, the Regulation does not impose obligations on a loan 
servicer independent from the obligations it imposes on the owner of a 
loan. Loan servicers are covered by the escrow, force placement, and 
flood hazard determination fee provisions of the Act and Regulation 
primarily so that they may perform the administrative tasks for the 
regulated lender, without fear of liability to the borrower for the 
imposition of unauthorized charges. It is the Agencies' longstanding 
position that the obligation of a loan servicer to fulfill 
administrative duties with respect to the flood insurance requirements 
arises from the contractual relationship between the loan servicer and 
the regulated lender or from other commonly accepted standards for 
performance of servicing obligations. The regulated lender remains 
ultimately liable for fulfillment of those responsibilities, and must 
take adequate steps to ensure that the loan servicer maintains 
compliance with the flood insurance requirements.
    Scenario 2: A nonregulated lender originates a designated loan. The 
nonregulated lender does not make an initial flood determination or 
notify the borrower of the need to obtain insurance. The nonregulated 
lender sells the loan and servicing rights to a regulated lender. What 
are the regulated lender's requirements under the Regulation? What are 
the regulated lender's requirements if it only purchases the servicing 
rights?
    A regulated lender's purchase of a loan and servicing rights, 
secured by a building or mobile home located in an SFHA in which flood 
insurance is available under the Act, is not an event that triggers 
certain requirements under the Regulation, such as making a new flood 
determination or requiring a borrower to purchase flood insurance.\165\ 
Those requirements only are triggered when a regulated lender makes, 
increases, extends, or renews a designated loan.\166\ A regulated 
lender's purchase of a loan does not fall within any of those 
categories. However, if a regulated lender becomes aware at any point 
during the life of a designated loan that flood insurance is 
required,\167\ then the regulated lender must comply with the 
Regulation, including force placing insurance, if necessary.\168\ 
Depending upon the circumstances, as a matter of safety and soundness, 
the lender may undertake due diligence upon the purchase of a loan, 
which would make the lender aware of the lack of adequate flood 
insurance and trigger flood insurance compliance requirements. Further, 
if the purchasing lender subsequently extends, increases, or renews a 
designated loan, it must also comply with the Act and Regulation.\169\
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    \165\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
    \166\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
    \167\ 42 U.S.C. 4012a(e)(1).
    \168\ 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 
339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) 
(NCUA).
    \169\ 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 
339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) 
(NCUA).
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    When a regulated lender purchases only the servicing rights to a 
loan originated by a nonregulated lender, the regulated lender is 
obligated to follow the terms of its servicing contract with the owner 
of the loan. In the event the regulated lender subsequently sells or 
transfers the servicing rights on that loan, the regulated lender must 
notify FEMA or its designee of the identity of the new servicer, if 
required to do so by the servicing contract with the owner of the 
loan.\170\
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    \170\ 12 CFR 22.10(b) (OCC); 12 CFR 208.25(j)(2) (Board); 12 CFR 
339.10(b) (FDIC); 12 CFR 614.4960(b) (FCA); and 12 CFR 760.10(b) 
(NCUA).
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Servicing 2. When a lender makes a designated loan and will be 
servicing that loan, what are the requirements for notifying the 
Administrator of FEMA or the Administrator's designee, i.e. the 
insurance provider?
    The Regulation states that the Administrator's designee is the 
insurance company issuing the flood insurance policy.\171\ The 
borrower's purchase of an NFIP policy (or the

[[Page 40477]]

lender's force placement of an NFIP policy) will constitute notice to 
FEMA when the lender is servicing that loan.
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    \171\ 12 CFR 22.10(a) (OCC); 12 CFR 208.25(j)(1) (Board); 12 CFR 
339.10(a) (FDIC); 12 CFR 614.4960(a) (FCA); and 12 CFR 760.10(a) 
(NCUA).
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    In the event the servicing is subsequently transferred to a new 
servicer, the lender must provide notice to the insurance company of 
the identity of the new servicer no later than 60 days after the 
effective date of such a change.\172\
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    \172\ 12 CFR 22.10(b) (OCC); 12 CFR 208.25(j)(2) (Board); 12 CFR 
339.10(b) (FDIC); 12 CFR 614.4960(b) (FCA); and 12 CFR 760.10(b) 
(NCUA).
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Servicing 3. Would a Real Estate Settlement Procedures Act (RESPA) 
Notice of Transfer sent to the Administrator of FEMA (or the 
Administrator's designee, i.e., the insurance provider) satisfy the 
regulatory provisions of the Act?
    Yes. The delivery of a copy of the Notice of Transfer or any other 
form of notice is sufficient if the sender includes, on or with the 
notice, the following information that FEMA has indicated is needed by 
its designee:
     Borrower's full name;
     Flood insurance policy number;
     Property address (including city and State);
     Name of lender or servicer making notification;
     Name and address of new servicer; and
     Name and telephone number of contact person at new 
servicer.
Servicing 4. Can delivery of the notice be made electronically, 
including batch transmission?
    Yes. The Regulation specifically permits transmission by electronic 
means.\173\ A timely batch transmission of the notice would also be 
permissible, if it is acceptable to the Administrator's designee, i.e., 
the insurance provider.
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    \173\ 12 CFR 22.10(a) (OCC); 12 CFR 208.25(j)(1) (Board); 12 CFR 
339.10(a) (FDIC); 12 CFR 614.4960(a) (FCA); and 12 CFR 760.10(a) 
(NCUA).
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Servicing 5. If the loan and its servicing rights are sold by the 
lender, is the lender required to provide notice to the Administrator 
or the Administrator's designee (i.e., the insurance provider)?
    Yes.\174\ Failure to provide such notice would defeat the purpose 
of the notice requirement because FEMA would have no record of the 
identity of either the owner or servicer of the loan.
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    \174\ 12 CFR 22.10 (OCC); 12 CFR 208.25(j) (Board); 12 CFR 
339.10 (FDIC); 12 CFR 614.4960 (FCA); and 12 CFR 760.10 (NCUA).
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Servicing 6. Is a lender required to provide notice when the servicer, 
not the lender, sells or transfers the servicing rights to another 
servicer?
    No. After servicing rights are sold or transferred, subsequent 
notification obligations are the responsibility of the new 
servicer.\175\ The obligation of the lender is to notify the 
Administrator or the Administrator's designee (i.e., the insurance 
provider) of the identity of the servicer transfers to the new 
servicer. The duty to notify the insurance provider of any subsequent 
sale or transfer of the servicing rights and responsibilities belongs 
to that servicer.\176\ For example, if a lender makes and services a 
loan and then sells the loan in the secondary market and also sells the 
servicing rights to a mortgage company, then the lender must notify the 
insurance provider of the identity of the new servicer and the other 
information requested by FEMA so that flood insurance transactions can 
be properly administered by the insurance provider. If the mortgage 
company later sells the servicing rights to another firm, the mortgage 
company, not the lender, is responsible for notifying the insurance 
provider of the identity of the new servicer.
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    \175\ 12 CFR 22.10 (OCC); 12 CFR 208.25(j) (Board); 12 CFR 
339.10 (FDIC); 12 CFR 614.4960 (FCA); and 12 CFR 760.10 (NCUA).
    \176\ 12 U.S.C. 4104a(b)(1).
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Servicing 7. In the event of a merger or acquisition of one lender with 
another, what are the responsibilities of the parties for notifying the 
Administrator's designee (i.e., the insurance provider)?
    If a lender is acquired by or merges with another lender, the duty 
to provide notice for the loans being serviced by the acquired lender 
will fall to the successor lender in the event that notification is not 
provided by the acquired lender prior to the effective date of the 
acquisition or merger.
XVII. Mandatory Civil Money Penalties
Penalty 1. Which violations of the Act can result in a mandatory civil 
money penalty?
    A pattern or practice of violations of any of the following 
requirements of the Act and its implementing Regulation triggers a 
mandatory civil money penalty:
     Purchase of flood insurance where available (42 U.S.C. 
4012a(b));
     Escrow of flood insurance premiums (42 U.S.C. 4012a(d));
     Failure to provide force-placement notice or purchase 
force-placed flood insurance coverage, as appropriate (42 U.S.C. 
4012a(e));
     Notice of special flood hazards and the availability of 
Federal disaster relief assistance (42 U.S.C. 4104a(a)); and
     Notice of servicer and any change of servicer (42 U.S.C. 
4104a(b)).
    The Act provides that any regulated lending institution found to 
have a pattern or practice of the violations ``shall be assessed a 
civil penalty'' by its Federal supervisory agency in an amount not to 
exceed $2,000 per violation (42 U.S.C. 4012a(f)(5)). There is no 
ceiling on the total penalty amount that a Federal supervisory agency 
can assess for a pattern or practice of violations. Each Agency adjusts 
the limit pursuant to the Federal Civil Penalties Inflation Adjustment 
Act of 1990 (28 U.S.C. 2461 note).\177\ As required by the Act, the 
penalties must be paid into the National Flood Mitigation Fund.
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    \177\ Please refer to 12 CFR 19.240(b) & 12 CFR 109.103(c)(2) 
(OCC); 12 CFR 263.65(b) (Board); 12 CFR 308.132(d)(18) (FDIC); 12 
CFR 622.61(b) (FCA); and 12 CFR 747.1001 (NCUA) for the Agencies' 
current civil penalty limits.
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Penalty 2. What constitutes a ``pattern or practice'' of violations for 
which civil money penalties must be imposed under the Act?
    The Act does not define ``pattern or practice.'' The Agencies make 
a determination of whether a pattern or practice exists by weighing the 
individual facts and circumstances of each case. In making the 
determination, the Agencies look both to guidance and experience with 
determinations of pattern or practice under other regulations (such as 
Regulation B (Equal Credit Opportunity) and Regulation Z (Truth in 
Lending)), as well as Agencies' precedents in considering the 
assessment of civil money penalties for flood insurance violations.
    The Policy Statement on Discrimination in Lending (Policy 
Statement) provided the following guidance on what constitutes a 
pattern or practice: Isolated, unrelated, or accidental occurrences 
will not constitute a pattern or practice. However, repeated, 
intentional, regular, usual, deliberate, or institutionalized practices 
will almost always constitute a pattern or practice. The totality of 
the circumstances must be considered when assessing whether a pattern 
or practice is present.
    In determining whether a lender has engaged in a pattern or 
practice of flood insurance violations, the Agencies' considerations 
may include, but are not limited to, the presence of one or more of the 
following factors:

[[Page 40478]]

     Whether the conduct resulted from a common cause or source 
within the lender's control;
     Whether the conduct appears to be grounded in a written or 
unwritten policy or established process;
     Whether the noncompliance occurred over an extended period 
of time;
     The relationship of the instances of noncompliance to one 
another (for example, whether the instances of noncompliance occurred 
in the same area of a lender's operations);
     Whether the number of instances of noncompliance is 
significant relative to the total number of applicable transactions. 
(Depending on the circumstances, however, violations that involve only 
a small percentage of a lender's total activity could constitute a 
pattern or practice);
     Whether a lender was cited for violations of the Act and 
Regulation at prior examinations and the steps taken by the lender to 
correct the identified deficiencies;
     Whether a lender's internal and/or external audit process 
had not identified and addressed deficiencies in its flood insurance 
compliance; and
     Whether the lender lacks generally effective flood 
insurance compliance policies and procedures and/or a training program 
for its employees.
    Although these considerations are not dispositive of a final 
resolution, they do serve as a reference point in assessing whether 
there may be a pattern or practice of violations of the Act and 
Regulation in a particular case. As previously stated, the presence or 
absence of one or more of these considerations may not eliminate a 
finding that a pattern or practice exists.

Brian P. Brooks,
Acting Comptroller of the Currency.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.

    Dated at Washington, DC, on June 12, 2020.
Robert E. Feldman,
Executive Secretary.
    Dated at McLean, VA, this 10th day of February 2020.
Dale Aultman,
Secretary, Farm Credit Administration Board.
Gerard Poliquin,
Secretary of the Board, National Credit Union Administration.

[FR Doc. 2020-14015 Filed 7-2-20; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 7535-01-P; 6705-01-P