[Federal Register Volume 86, Number 51 (Thursday, March 18, 2021)]
[Proposed Rules]
[Pages 14696-14707]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-05314]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 22
[Docket ID OCC-2020-0033]
FEDERAL RESERVE SYSTEM
12 CFR Part 208
[Docket No. R-1742]
RIN 7100-AG12
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 339
RIN 3064-ZA16
FARM CREDIT ADMINISTRATION
12 CFR Part 614
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 760
RIN 3133-AF31
Loans in Areas Having Special Flood Hazards; Interagency
Questions and Answers Regarding Private Flood Insurance
AGENCY: Office of the Comptroller of the Currency (OCC); Board of
Governors of the Federal Reserve System (Board); Federal Deposit
Insurance Corporation (FDIC); Farm Credit Administration (FCA); and
National Credit Union Administration (NCUA).
ACTION: Notice and request for comment.
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SUMMARY: The OCC, Board, FDIC, FCA, and NCUA (collectively, the
Agencies) propose to supplement the Interagency Questions and Answers
Regarding Flood Insurance with new questions and answers regarding the
acceptance of flood insurance policies issued by private insurers
pursuant to the Agencies' private flood insurance final rule issued in
February 2019. These questions and answers will assist lenders in
meeting their responsibilities under the final rule and increase public
understanding of the Agencies' respective flood insurance regulations.
The Agencies solicit comment on all aspects of these new questions and
answers.
DATES: Comments on the proposed questions and answers must be submitted
on or before May 17, 2021.
ADDRESSES: Interested parties are invited to submit written comments
to:
OCC: Commenters are encouraged to submit comments through the
Federal eRulemaking Portal. Please use the title ``Loans in Areas
Having Special Flood Hazards; Interagency Questions and Answers
Regarding Private 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: Go to https://regulations.gov/. Enter ``Docket ID OCC-2020-0033'' 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 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].
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.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2020-0033'' 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 the following method:
Viewing Comments Electronically--Regulations.gov: Go to
https://regulations.gov/. Enter ``Docket ID OCC-2020-0033'' in the
Search Box and click ``Search.'' Click on the ``Documents'' tab and
then the document's title. After clicking the document's title, click
the ``Browse 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 Documents Results'' options on the left
side of the screen. For assistance with the Regulations.gov 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.
Board: You may submit comments, identified by Docket No. R-1742, 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 a.m. and 5 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.
[[Page 14697]]
Email: [email protected]. Include RIN 3064-ZA16 in the
subject line of the message.
Mail: James P. Sheesley, Assistant Executive Secretary,
Attention: Comments-RIN 3064-ZA16/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 NW 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.
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: Kevin J. Kramp, 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 on 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.
You may also review comments at our office in McLean, Virginia. Please
call us at (703) 883-4056 or email us at [email protected] to make an
appointment.
NCUA: You may submit comments identified by RIN 3133-AF31 by any of
the following methods (please send comments by one method only).
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Fax: (703) 518-6319. Use the subject line ``[Your name]
Comments on ``Interagency Questions & Answers Regarding Private Flood
Insurance'' on the transmission cover sheet.
Mail: Address to Melane Conyers-Ausbrooks, 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. Due to social distancing measures in effect,
the usual opportunity to inspect paper copies of comments in the NCUA's
law library is not currently available. After social distancing
measures are relaxed, visitors may make an appointment to review paper
copies by calling (703) 518-6540 or emailing [email protected].
FOR FURTHER INFORMATION CONTACT:
OCC: Rhonda L. Daniels, Compliance Specialist, Compliance Risk
Policy Division, (202) 649-5405; Heidi M. Thomas, Special Counsel, or
Cyndy MacMahon, Attorney, Chief Counsel's Office, (202) 649-6350.
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, Policy Unit, Legal Division, (202)
898-6526; or Simin Ho, Senior Policy Analyst, Division of Depositor and
Consumer Protection, (202) 898-6907.
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, (720) 213-0440.
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 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. The OCC, Board, FDIC, OTS,
FCA, and NCUA \4\ fulfilled these requirements by issuing a joint final
rule in the summer of 1996.\5\
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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\ Throughout this document ``the Agencies'' includes the OTS
with respect to events that occurred prior to July 21, 2011, but
does not include OTS with respect to events thereafter. Sections 311
and 312 of the Dodd-Frank Wall Street Reform and Consumer Protection
Act transferred OTS's functions to other agencies on July 21, 2011.
The OTS's supervisory functions relating to Federal savings
associations were transferred to the OCC, while those relating to
State savings associations were transferred to the FDIC. See also 76
FR 39246 (July 6, 2011).
\5\ 61 FR 45684 (Aug. 29, 1996).
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Since 1997, the Interagency Questions and Answers \6\ have provided
the
[[Page 14698]]
lending industry with guidance addressing a wide spectrum of technical
flood insurance-related compliance issues. In 2009, the Agencies
comprehensively revised and reorganized the initial 1997 Interagency
Questions and Answers. In 2011, the Agencies further finalized two
additional Q&As that were proposed in 2009.\7\ In October 2013, the
Agencies jointly issued proposed rules \8\ to implement the escrow,
force placement, and private flood insurance provisions of the Biggert-
Waters Flood Insurance Reform Act of 2012 (the Biggert-Waters Act).\9\
In March 2014, the Homeowner Flood Insurance Affordability Act (HFIAA)
was enacted, which, among other things, amended the Biggert-Waters
Act's requirements regarding the escrow of flood insurance premiums and
fees and created a new exemption from the mandatory flood insurance
purchase requirement for certain detached structures.\10\ 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.\11\ In February 2019, the Agencies finalized regulations
that implement the private flood insurance related provisions of the
Biggert-Waters Act.\12\ This rule requires lenders to accept ``private
flood insurance,'' as defined in the Biggert-Waters Act (mandatory
acceptance). In order to assist lenders in evaluating whether a flood
insurance policy meets the definition of ``private flood insurance,''
the private flood insurance rule also includes a compliance aid
provision. Under the compliance aid provision, a lender may conclude
that a policy meets the definition of ``private flood insurance,''
without further review, if the policy, or an endorsement to the policy,
contains the compliance aid clause set forth in the rule. Moreover, the
private flood insurance rule permits a lender, at its discretion, to
accept a flood insurance policy issued by a private insurer, even if
the policy does not meet the statutory and regulatory definition of
``private flood insurance,'' provided the policy meets certain
requirements in the rule (discretionary acceptance). A lender also is
permitted, at its discretion, to accept certain mutual aid plans that
meet the conditions stated in the rule.
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\6\ 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.
\7\ For additional information on the history of Interagency
Questions and Answers, please see the preamble to the July 2020
Proposed Interagency Questions and Answers at 85 FR 40442 (July 6,
2020).
\8\ 78 FR 65108 (Oct. 30, 2013).
\9\ Public Law 112-141, 126 Stat. 916 (2012).
\10\ Public Law 113-89, 128 Stat. 1020 (2014).
\11\ 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).
\12\ 84 FR 4953 (Feb. 20, 2019).
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On June 18, 2019, prior to the effective date of the final rule,
the Agencies hosted a webinar entitled ``Interagency Flood Insurance
Updates on Private Insurance Rule'' to discuss updates to the Agencies'
flood regulations concerning acceptance of private flood insurance
policies.\13\ The Agencies also discussed the private flood insurance
rule at various flood insurance conferences. Through these activities,
the Agencies received numerous questions regarding technical compliance
with this rule.
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\13\ For more information about the June 2019 interagency
webinar on the private flood insurance rule, including the
presentation transcripts, see https://www.consumercomplianceoutlook.org/outlook-live/2019/interagency-flood-insurance-regulation-update/.
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On July 6, 2020, the Agencies issued proposed new and revised
Interagency Questions and Answers (July 2020 Proposed Questions and
Answers) that covered a broad range of topics related to technical
flood insurance-related issues, including the escrow of flood insurance
premiums, the detached structure exemption to the mandatory purchase of
flood insurance requirement, and force-placement procedures.\14\ The
July 2020 Proposed Questions and Answers included only two Q&As related
to private flood insurance because the private flood insurance rule had
only been in effect since July 2019.
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\14\ See 85 FR 40442 (July 6, 2020).
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As noted in the July 2020 Proposed Questions and Answers, the
Agencies committed to separately issuing for notice and comment
proposed questions and answers relating to the private flood insurance
rule. Accordingly, the Agencies have carefully considered each of the
many questions received on the private flood insurance rule since its
issuance, categorized and consolidated the questions, and drafted 24
private flood insurance questions and answers to be broadly applicable
to supervised lenders and servicers. The Agencies are now issuing for
public comment these 24 proposed questions and answers, categorized in
the three following sections:
I. Private Flood Insurance--Mandatory Acceptance
II. Private Flood Insurance--Discretionary Acceptance
III. Private Flood Insurance--General Compliance
To assist the reader, the Agencies have included references to
specific Q&As from the July 2020 Proposed Questions and Answers and
from other Q&As in this proposal when helpful. In addition, 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 rule.\15\
Furthermore, the Agencies note that some of the information included in
certain proposed questions and answers is derived from the preamble of
the private flood insurance final rule.
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\15\ 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).
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The Agencies plan to publish a final document in the Federal
Register that consolidates these proposed private flood insurance
questions and answers and the July 2020 Proposed Questions and Answers
into one set of Interagency Questions and Answers Regarding Flood
Insurance.
Public Comments
The Agencies solicit comment on all aspects of the proposed
questions and answers regarding the private flood insurance rule. If
lenders, community groups, or other parties have unanswered questions
or comments about the private flood insurance provision of the
Regulation, they are invited to submit them to the Agencies in their
comments.
Section-by-Section Analysis
I. Private Flood Insurance--Mandatory Acceptance
The Agencies propose nine new Q&As to address issues regarding the
mandatory acceptance and the application of the compliance aid
assurance clause with respect to the private flood insurance provision
of the Regulation. The new proposed Q&As would be designated as
Mandatory 1-9. Proposed new Q&A Mandatory 1 would address whether a
lender may decide to only accept private flood insurance policies under
the mandatory acceptance provision of the Regulation. The proposed
answer would confirm that a lender may decide to only accept flood
insurance policies issued by a private insurer that the lender is
required to accept because the policies meet the definition of
``private flood
[[Page 14699]]
insurance'' under the Regulation. The proposed answer also would
clarify that a lender is not required to accept flood insurance
policies that only meet the criteria set forth in the discretionary
acceptance or mutual aid provisions in the Regulation.
Proposed new Q&A Mandatory 2 would address when a lender must
review a flood policy issued by a private flood insurer to make sure
the policy meets the mandatory acceptance criteria, other than at loan
origination. The proposed response would explain that, other than at
origination, a lender must review a flood insurance policy issued by a
private insurer when the policy is up for renewal, or any time the
borrower presents the lender with any new flood insurance policy issued
by a private insurer. The Agencies would clarify that a lender must
review the policy in these instances in addition to when a triggering
event occurs (making, increasing, extending or renewing a loan).
During this review, a lender may determine that the policy meets
the mandatory acceptance criteria without further review if the policy
or an endorsement to the policy includes the compliance aid assurance
clause. However, if the policy does not meet the mandatory acceptance
criteria, the lender may still accept it if it meets the discretionary
acceptance criteria or, if applicable, the mutual aid plan criteria.
The proposed answer would also explain that if the policy does not meet
any such criteria, the lender must notify the borrower in accordance
with the force placement provisions of the Regulation. If the borrower
does not purchase flood insurance that complies with the Regulation,
the lender must purchase insurance on the borrower's behalf. In
addition, the Agencies would clarify that a lender may rely on a
previous review of a flood insurance policy under the discretionary
acceptance provision, provided there are no changes to the terms of the
policy. However, as required by the Regulation and discussed below in
proposed new Q&A Discretionary 4, the lender must document its
conclusion regarding sufficient protection of the loan in writing. The
Agencies are also including a reference to proposed new Q&A
Discretionary 4.
Proposed new Q&A Mandatory 3 would address whether the private
flood insurance requirements under the Regulation require a lender to
change its policy of not originating a mortgage in non-participating
communities or coastal barrier regions where the NFIP is not available.
The proposed answer would explain that the Regulation does not require
a lender to originate a loan that does not meet the lender's
underwriting criteria. The Agencies would note that the flood insurance
purchase requirement only applies to loans secured by structures
located or to be located in an SFHA in which flood insurance is
available under the Act. As stated in proposed Q&A Applicability 1 in
the July 2020 Proposed Questions and Answers, the flood insurance
purchase requirement does not apply within non-participating
communities where NFIP insurance is not available under the Act.
Therefore, the proposed answer would state that the lender does not
need to change its policy of not originating mortgages in areas where
NFIP insurance is unavailable solely because of the private flood
insurance requirements under the Regulation.
Proposed new Q&A Mandatory 4 would address whether the compliance
aid assurance clause could act as a conformity clause that would make a
private policy conform to the definition of private flood insurance
under the Regulation. The Agencies propose to clarify that the
compliance aid assurance clause is not intended to act as a conformity
clause but rather to facilitate the ability of lenders and consumers to
recognize policies that meet the definition of ``private flood
insurance'' and to promote the consistent acceptance of policies that
meet this definition.
Proposed new Q&A Mandatory 5 would provide that a lender is not
required to accept a flood insurance policy issued by a private insurer
solely because the policy contains the compliance aid assurance clause
if the lender chooses to conduct its own review and determines the
flood insurance policy actually does not meet the mandatory acceptance
requirements. The proposed answer also would note that if a flood
insurance policy issued by a private insurer does not include the
compliance aid assurance clause, the lender must still review the
policy to determine if it meets the requirements for private flood
insurance as set forth in the Regulation before the lender may choose
to reject the policy.
Proposed new Q&A Mandatory 6 would discuss whether a lender is
required to conduct an additional review of a flood insurance policy
under the mandatory acceptance provision if the policy includes the
compliance aid assurance clause. The proposed answer would state that
under the mandatory acceptance provision of the Regulation, if a policy
or an endorsement to the policy contains the compliance aid assurance
clause, a lender is not required to conduct any further review of the
policy in order to determine that the policy meets the definition of
``private flood insurance.'' The Agencies also propose to clarify that
the language of the compliance aid assurance clause must be stated as
set forth in the Regulation in order for the lender to rely on the
protections of the compliance aid assurance clause. However, the
proposed answer would provide that a lender need not reject a policy
containing the compliance aid assurance clause if the formatting, font,
punctuation, and similar stylistic effects that do not change the
substantive meaning of the clause are different from the compliance aid
assurance clause set forth in the Regulation. The proposed answer would
also include a reference to proposed new Q&A Mandatory 7.
Proposed new Q&A Mandatory 7 would describe additional reviews a
lender must conduct when a flood insurance policy issued by a private
insurer includes the compliance aid assurance clause, as the clause
only assists a lender in making the determination that a flood
insurance policy meets the definition of private flood insurance in the
Regulation, and not other requirements specified in the Regulation.
Specifically, the lender also must ensure that the coverage is 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, and also should ensure that
other key aspects of the policy are accurate, such as the borrower's
name and property address. The proposed answer would also include a
reference to proposed new Q&A Mandatory 6.
Proposed new Q&A Mandatory 8 would address whether a lender may use
the criteria under the discretionary acceptance provision to decide
whether to accept a policy that does not contain the compliance aid
assurance clause without first reviewing the policy to determine if it
meets the mandatory acceptance provision. The proposed answer would
clarify that a lender may first review the policy to determine whether
it meets the criteria under the discretionary acceptance provision.
However, if the policy is not accepted under the discretionary
acceptance provision, the lender would still need to determine whether
it must accept the policy under the mandatory acceptance criteria. The
proposed answer would also remind lenders to document that a policy
provides sufficient protection of the loan if the lender accepts the
policy under the discretionary acceptance provision of the Regulation.
[[Page 14700]]
Lastly, new proposed Q&A Mandatory 9 would note that if the
compliance aid assurance clause is included on the declarations page, a
lender may accept the policy without further review to determine
whether the policy meets the definition of private flood insurance.
However, a lender must also ensure compliance with the mandatory
purchase requirement.
II. Private Flood Insurance--Discretionary Acceptance
The Agencies propose to add four new Q&As to provide additional
clarity on the discretionary acceptance provision of the Regulation.
These new Q&As would be designated as Discretionary 1-4. Proposed new
Q&A Discretionary 1 would address whether lenders are required to
accept flood insurance policies that meet the discretionary acceptance
criteria. The proposed answer would note that the discretionary
acceptance criteria in the Regulation set forth the minimum acceptable
criteria that a flood insurance policy must have for the lender to
accept the policy under the discretionary acceptance provision. The
proposed answer would clarify that it is at the lender's discretion to
accept a policy that meets the discretionary acceptance criteria so
long as the policy does not meet the mandatory acceptance criteria.
Proposed new Q&A Discretionary 2 would address the requirements for
documentation to demonstrate that a policy provides sufficient
protection of a loan when a lender accepts that policy under the
discretionary acceptance criteria. The proposed answer would explain
that the Regulation requires the lender to document its conclusion in
writing that the policy provides sufficient protection of the loan,
consistent with safety and soundness principles. In addition, the
proposed answer would include a reference to proposed Q&A Coverage 1
from the July 2020 Proposed Questions and Answers, which discusses some
factors to consider when determining whether a flood insurance policy
issued by a private insurer provides sufficient protection of the loan,
consistent with safety and soundness principles.\16\ Furthermore, the
proposed answer would note that while the Regulation does not require
any specific documentation to demonstrate that the policy provides
sufficient protection of the loan, lenders may include any information
that reasonably supports the lender's conclusion following review of
the policy.
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\16\ These factors include whether: (1) A policy's deductibles
are reasonable based on a borrower's financial condition; (2) the
insurer provides adequate notice of cancellation to the mortgagor
and the mortgagee; (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 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 strength, solvency and ability to satisfy claims. See 85
FR 40442, 40458 (July 6, 2020).
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Proposed new Q&A Discretionary 3 would address how a lender could
evaluate concerns related to an insurer's solvency, strength, and
ability to pay claims in order to determine whether an insurance policy
provides sufficient protection of a loan, consistent with general
safety and soundness principles. The proposed answer would provide that
a lender may evaluate an insurer's solvency, strength, and ability to
satisfy claims by obtaining information from the State insurance
regulator's office of the State in which the property securing the loan
is located, among other options. The proposed answer would further
indicate that a lender could rely on the licensing or other processes
used by the State insurance regulator for such an evaluation. The
proposed answer would also include a reference to proposed Q&A Coverage
1 from the July 2020 Proposed Questions and Answers.
Proposed new Q&A Discretionary 4 would address whether a lender is
required to review a flood insurance policy upon renewal if that policy
was issued by a private insurer and was originally accepted in
accordance with the discretionary acceptance requirements. The proposed
answer would provide that if a lender had accepted a flood insurance
policy issued by a private insurer in accordance with the discretionary
acceptance requirements and the policy is renewed, the lender would be
required to review the policy upon renewal to ensure that it continues
to meet the discretionary acceptance requirements. The proposed answer
would also state that a lender would need to document its conclusion
regarding sufficiency of the protection of the loan in writing upon
each renewal to indicate that the policy continues to provide
sufficient protection of the loan.
III. Private Flood Insurance--General Compliance
The Agencies propose to add 11 new Q&As on topics related to the
private flood insurance provisions of the Regulation that are not
covered in sections I and II above. The new proposed Q&As would be
designated as Private Flood Compliance 1-11.
New proposed Q&A Private Flood Compliance 1 would address questions
on the maximum deductible that a flood insurance policy issued by a
private insurer can have for properties located in an SFHA. Under the
proposed answer, the Agencies would clarify that the analysis would
depend on whether the lender is accepting the flood insurance policy
under the mandatory acceptance provision or the discretionary
acceptance provision.
Specifically, for a private flood insurance policy that the lender
is accepting under the mandatory acceptance provision, the proposed
answer would state that the Regulation provides that the policy must
contain a deductible that is ``at least as broad as'' the maximum
deductible in the Standard Flood Insurance Policy (SFIP) under the
NFIP, which means that the deductible is no higher than the specified
maximum under an SFIP for any total coverage amount up to the maximum
available under the NFIP at the time the policy is provided to the
lender. The proposed answer would provide that a policy with a coverage
amount exceeding that available under the NFIP may have a deductible
exceeding the specific maximum deductible under an SFIP. However, the
proposed answer would also advise that for safety and soundness
purposes, the lender should consider whether the deductible is
reasonable based on the borrower's financial condition, consistent with
guidance the Agencies proposed in Q&A Amount 9 \17\ in the July 2020
Proposed Questions and Answers and with how deductibles may be
evaluated under the discretionary acceptance provision. The proposed
answer would also set forth examples to aid in compliance.
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\17\ Proposed Q&A Amount 9, adapted from current Q&A 17,
provides that 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 the lender.
Proposed Q&A Amount 9 also states that 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. See 85 FR 40442 at 40463 (July 6, 2020).
---------------------------------------------------------------------------
The Agencies note that this proposed guidance regarding the
deductible for a private flood insurance policy with a coverage amount
exceeding that available under the NFIP is different from the informal
advice the Agencies previously provided in supplementary information to
the private flood insurance rule.\18\ In the supplementary information
to the private flood insurance rule, the Agencies advised that even for
private flood insurance
[[Page 14701]]
policies with amounts exceeding the maximum coverage under the NFIP,
the lender should still match the SFIP deductible for the amount up to
the maximum coverage amount under the NFIP but could exceed the maximum
deductible for an SFIP for the coverage over the maximum coverage
amount available under the NFIP. However, based on additional
investigation, the Agencies understand that these types of tiered
deductibles are not common and the guidance provided in the
supplementary information may not be practicable. Therefore, the
Agencies believe the guidance they are proposing in Q&A Private Flood
Compliance 1 with respect to deductibles for private flood insurance
policies accepted under the mandatory acceptance provision will be more
consistent with private flood insurance policies available in the
marketplace and safety and soundness standards.
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\18\ See 84 FR 4953 at 4957 (Feb. 20, 2019).
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Proposed Q&A Private Flood Compliance 1 would also provide guidance
for accepting flood insurance policies issued by private insurers under
the discretionary acceptance provision. Under the Regulation, the
policy must provide sufficient protection of the loan, consistent with
general safety and soundness principles. Proposed Q&A Private Flood
Compliance 1 would note that among the factors a lender could consider
in determining whether a policy provides sufficient protection of a
loan is whether the policy's deductible is reasonable based on the
borrower's financial condition. Therefore, unlike the limitation on
deductibles for policies accepted under the mandatory acceptance
provision for any total coverage amount up to the maximum available
under the NFIP, the proposed answer would provide that a lender can
accept a flood insurance policy issued by a private insurer under the
discretionary acceptance provision with a deductible higher than that
for an SFIP for a similar type of property, provided the lender has
determined the policy provides sufficient protection of the loan,
consistent with general safety and soundness principles.
Proposed Q&A Private Flood Compliance 1 would also include a
reminder that, consistent with the guidance provided in proposed Q&A
Amount 9 in the July 2020 Proposed Questions and Answers, 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. This principle would apply whether the
lender is evaluating the policy under the mandatory acceptance
provision or the discretionary acceptance provision.
The Agencies also received questions on whether a lender may
require that the deductible of any flood insurance policy issued by a
private insurer be lower than the maximum deductible for an NFIP
policy. New proposed Q&A Private Flood Compliance 2 would clarify that
a lender may do so under both the mandatory acceptance provision and
the discretionary acceptance provision. For the mandatory acceptance
provision, the Regulation requires that the private flood insurance
policy be at least as broad as an NFIP policy, which includes a
requirement that the private flood insurance policy contain a
deductible no higher than the specified maximum deductible for an SFIP.
Therefore, the proposed answer would clarify that a lender may require
a borrower's private flood insurance policy deductible be lower than
the maximum deductible for an NFIP policy in connection with a policy
that the lender accepts under the mandatory acceptance provision
consistent with general safety and soundness principles and based on a
borrower's financial condition, among other factors. With respect to
the discretionary acceptance provision, the proposed answer would note
that the lender need only consider whether the policy, including the
stated deductible, provides sufficient protection of the loan,
consistent with general safety and soundness principles. The proposed
answer would also include a reference to proposed Q&A Private Flood
Compliance 1.
Proposed new Q&A Private Flood Compliance 3 would provide guidance
regarding whether a lender may charge fees to the borrower for the
lender's use of a third party to review flood insurance policies. The
proposed answer would provide that the Act and the Regulation do not
prohibit lenders from charging fees to borrowers for contracting with a
third party to review flood insurance policies, with references to Q&A
Fees 1 and Q&A Fees 2 proposed in the July 2020 Proposed Questions and
Answers.\19\ The proposed answer would remind lenders that they should
be aware of any other applicable requirements regarding fees and
disclosures of fees.
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\19\ Proposed Q&A Fees 1, adapted from current Q&A 69, lists the
four instances in the Act and Regulation when a lender or servicer
can charge the borrower a fee for making a flood determination.
Proposed Q&A Fees 2, adapted from current Q&A 70, provides that
charges made for life-of-loan reviews by determination firms may be
passed to the borrower under certain conditions. See 85 FR 40442 at
40459-60 (July 6, 2020).
---------------------------------------------------------------------------
Proposed new Q&A Private Flood Compliance 4 addresses the lender's
responsibility to ensure a flood insurance policy issued by a private
insurer meets the requirements of the Regulation if the policy is not
available prior to loan closing. The proposed answer would provide that
the Act and Regulation do not specify the acceptable types of
documentation for a lender to rely on when reviewing a flood insurance
policy issued by a private insurer. The proposed answer also would
advise that lenders should determine whether they have sufficient
evidence to show the policy meets the requirements under the Regulation
and that if the lender does not have enough information to determine if
the policy meets the private flood insurance requirements under the
Regulation, then the lender should timely request additional
information as necessary to complete its review. The proposed answer
also would suggest some optional steps that a lender could take to
mitigate against closing delays.
The Agencies received many questions requesting guidance on whether
a declarations page provides sufficient information for a lender to
determine whether the policy complies with the Regulation. Proposed new
Q&A Private Flood Compliance 5 would note that the answer depends on
the information contained in the declarations page. Under the proposed
answer, if the declarations page provides sufficient information for
the lender to determine whether the policy meets the mandatory
acceptance provision or the discretionary acceptance provision of the
Regulation or if the declarations pages contains the compliance aid
assurance clause, then the lender may rely on the declarations page.
However, if the declarations page does not provide sufficient
information for the lender to determine whether the policy satisfies
the mandatory acceptance or the discretionary acceptance provision of
the Regulation, the proposed answer would suggest that the lender
should request additional information about the policy to aid its
determination.
Proposed new Q&A Private Flood Compliance 6 would provide guidance
on a lender's ability to accept multiple-peril policies. Specifically,
the proposed answer would clarify that a lender may accept multiple-
peril policies that cover the hazard of flood under the private flood
insurance provisions of the Regulation, provided they meet the
requirements of the Regulation.
[[Page 14702]]
Proposed new Q&A Private Flood Compliance 7 would address the
question of how the private flood insurance requirements of the
Regulation would work in conjunction with requirements of secondary
market investors, such as the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac). The proposed answer would first remind lenders that they must
comply with the Federal flood insurance requirements. The proposed
answer would then note that secondary market investor requirements are
separate from the requirements of the Regulation. Therefore, if a
lender plans to sell loans to such an investor, the proposed answer
would advise that a lender should carefully review the investor's
requirements and direct questions regarding these requirements to the
appropriate entities.
The Agencies are proposing new Q&A Private Flood Compliance 8 to
provide guidance to servicers for loans covered by flood insurance
mandated by the Act. Specifically, the proposed answer would clarify
that for loans serviced on behalf of lenders supervised by the
Agencies, the servicer must comply with the Regulation in determining
whether a flood insurance policy issued by a private insurer must be
accepted under the mandatory acceptance provision or may be accepted
under the discretionary acceptance or mutual aid provisions. However,
for loans serviced on behalf of other entities not supervised by the
Agencies, the proposed answer would state that the servicer should
comply with the terms of its contract with such an entity. The proposed
answer would suggest that when servicing loans on behalf of Fannie Mae
or Freddie Mac, where there are insurer rating requirements specified
within those entities' servicing guidance or other relevant authorities
that are not included in the Regulation, the servicer should adhere to
those servicing requirements.
The Agencies also propose to add three new Q&As to provide guidance
regarding optional methods lenders can use to address questions on
whether an insurer is licensed, admitted, or otherwise approved to do
business in a particular State, which is one of the factors lenders
must evaluate under both the mandatory acceptance and discretionary
acceptance provisions. Proposed new Q&A Private Flood Compliance 9
would explain how a lender could determine whether an insurer is
licensed, admitted, or otherwise approved in a particular State, or
whether a surplus lines \20\ or nonadmitted alien insurer \21\ is
permitted to issue an insurance policy in a particular State. The
proposed answer would suggest that a lender may review the website of
the State insurance regulator where the collateral property is located
to determine whether a particular insurer is licensed, admitted, or
otherwise permitted to issue insurance in a particular State. The
proposed answer also would advise that a lender could contact the State
insurance regulator directly. Further, the proposed answer notes that
the information with respect to surplus lines insurer eligibility may
be available in the Consumer Insurance Search (CIS) tool available on
the National Association of Insurance Commissioners (NAIC) website.\22\
The proposed answer would state that lenders also may consult
commercial service providers regarding the eligibility of surplus lines
insurers in particular States as long as the lenders have a reasonable
basis to believe that these service providers have reliable
information. With regard to nonadmitted alien insurers in particular,
the proposed answer would suggest that lenders could review the NAIC's
Quarterly Listing of Alien Insurers.\23\
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\20\ The National Association of Insurance Commissioners (NAIC)
notes, ``[t]he surplus lines market (inclusive of U.S. and non-U.S.
domiciled insurers) is a distinct segment of the industry consisting
of non-admitted specialized insurers covering risks not available
within the admitted market . . . Surplus lines insurers are subject
to regulatory requirements and are overseen for solvency by their
domiciliary [S]tate or country.'' https://content.naic.org/cipr_topics/topic_surplus_lines.htm. For specific definitions
related to surplus lines insurers, lenders should review the State
law in which the property is located.
\21\ The NAIC notes that ``[w]hereas [S]tates monitor the
eligibility of U.S. domiciled surplus lines insurers, alien insurers
eligible to write surplus lines premium are listed on the NAIC
Quarterly Listing of Alien Insurers [https://www.naic.org/prod_serv_alpha_listing.htm#quarterly_alien] ... [Alien insurers]
are prohibited from establishing a U.S. branch office.'' https://content.naic.org/cipr_topics/topic_surplus_lines.htm.
\22\ See https://content.naic.org/cis_consumer_information.htm.
\23\ See https://www.naic.org/prod_serv_alpha_listing.htm#quarterly_alien.
---------------------------------------------------------------------------
Proposed new Q&A Private Flood Compliance 10 would address whether
lenders may accept policies issued by private insurers that are surplus
lines insurers for noncommercial residential properties. The proposed
answer would explain that if the surplus lines insurer is eligible or
not disapproved to place insurance in the State or jurisdiction in
which the property to be insured is located, lenders may accept
policies issued by surplus lines insurers as coverage for noncommercial
(i.e., residential) properties. In addition, consistent with the Act
and the Regulation, the proposed answer would confirm that policies
issued by surplus lines insurers for noncommercial properties are
covered in the definition of ``private flood insurance'' and in the
discretionary acceptance provision.\24\ In the definition of ``private
flood insurance,'' surplus lines policies for noncommercial properties
are covered as policies that are issued by insurance companies that are
``otherwise approved to engage in the business of insurance by the
insurance regulator of the State or jurisdiction in which the property
to be insured is located.'' The proposed answer also would note that
within the discretionary acceptance provision, noncommercial
residential policies issued by surplus lines carriers are covered as
policies that are issued by private insurance companies that are
``otherwise approved to engage in the business of insurance by the
insurance regulator of the State or jurisdiction in which the property
to be insured is located.''
---------------------------------------------------------------------------
\24\ During discussion of the Biggert-Waters Act on the Senate
floor, Sen. Crapo noted that surplus lines insurers can provide
flood insurance coverage for residential properties and asked for
clarification regarding the inclusion of surplus lines coverage in
the definition of ``private flood insurance.'' In his response, Sen.
Johnson stated, ``[T]he definition of `private flood insurance'
includes private flood insurance provided by a surplus lines insurer
and is not intended to limit surplus lines eligibility to
nonresidential properties. While the Senator is correct that surplus
lines insurance is specifically mentioned in that context, overall
the definition accommodates private flood insurance from insurers
who are `licensed, admitted, or otherwise approved' in the State
where the property is located.'' 158 Cong. Rec. S6051 (daily ed.
Sept. 10, 2012).
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As noted above, if the surplus lines insurer is eligible or not
disapproved to place insurance in the State or jurisdiction in which a
property to be insured is located, the surplus lines insurer is deemed
to be ``otherwise approved to engage in the business of insurance by
the insurance regulator of the State or jurisdiction in which the
property to be insured is located'' for purposes of the Act and
Regulation. Therefore, the proposed answer would note that even if the
surplus lines insurer is not considered to be engaged in the business
of insurance under applicable State law, the surplus lines insurer
nevertheless would meet the criteria only for purposes of this
provision of the Regulation if the insurer is eligible or not
disapproved to place insurance in the State or jurisdiction in which a
property to be insured is located.
For example, under section 1776 of the California Insurance Code,
the
[[Page 14703]]
permission granted to allow an insurance policy issued by a nonadmitted
insurer to be placed in California, ``shall not be deemed or construed
to authorize any insurer to do business in [California].'' \25\ In
addition, section 1776 of the California Insurance Code states that
``[p]lacement activities of a licensed surplus line broker in
accordance with [California law], including, but not limited to, policy
issuance, shall not be deemed or construed to be business done by the
insurer in [California].'' \26\ However, it is the Agencies'
understanding that these provisions of California law do not make
ineligible or disapprove any individual surplus lines insurer from
placing insurance in California if they meet all other applicable
requirements in California law. Consequently, a surplus lines insurer
that is eligible or not disapproved to place insurance in California is
``otherwise approved'' for purposes of the Regulation even though the
surplus lines insurer is not authorized to do business in California
for purposes of Section 1776 of the California Insurance Code.
---------------------------------------------------------------------------
\25\ Cal. Ins. Code Sec. 1776.
\26\ Id.
---------------------------------------------------------------------------
Proposed new Q&A Private Flood Compliance 11 would address whether
a lender may accept a private flood insurance policy that includes a
compliance aid assurance clause, but also includes a disclaimer that
the ``insurer is not licensed in the State or jurisdiction in which the
property is located.'' The proposed answer would explain that there are
circumstances under which lenders may accept a policy issued by an
insurer that is not licensed in the State or jurisdiction in which the
property is located. For example, a lender would be able to accept a
policy issued by a surplus lines insurer recognized or not disapproved
by the relevant State insurance regulator as protection for loan
collateral that is a nonresidential commercial property. The proposed
answer would also provide that a lender may accept a policy issued by a
surplus lines insurer as protection for loan collateral that includes
residential property as a policy issued by an insurance company that is
``otherwise approved to engage in the business of insurance by the
insurance regulator of the State or jurisdiction in which the property
to be insured is located.'' The proposed answer would include a cross-
reference to proposed Q&A Private Flood Compliance 10.
Interagency Questions and Answers Regarding Private Flood Insurance
I. Private Flood Insurance--Mandatory Acceptance
Mandatory 1. May a lender decide to only accept private flood insurance
policies under the mandatory acceptance provision of the Regulation?
Yes. A lender is only required to accept flood insurance policies
issued by a private insurer that meet the definition of ``private flood
insurance'' under the Regulation. A lender is not required to accept
flood insurance policies that only meet the criteria set forth in the
discretionary acceptance or mutual aid provision of the Regulation.
Mandatory 2. Apart from loan origination, when must a lender review a
flood policy issued by a private flood insurer?
Once a flood insurance policy issued by a private insurer comes up
for renewal or any time the borrower presents the lender with any new
flood insurance policy issued by a private insurer, regardless of
whether a triggering event occurred (making, increasing, extending or
renewing a loan), the lender must review the policy to determine
whether it meets the mandatory acceptance criteria.\27\ A lender may
determine that the policy meets the mandatory acceptance criteria
without further review if the policy or an endorsement to the policy
includes the compliance aid assurance clause.\28\ If the policy does
not meet the mandatory acceptance criteria, the lender may still accept
the policy if it meets the discretionary acceptance criteria or, if
applicable, the mutual aid plan criteria. If the policy does not meet
the mandatory acceptance, discretionary acceptance, or mutual aid plan
criteria, the lender must notify the borrower in accordance with the
force placement provisions of the Regulation.\29\ If the borrower does
not purchase flood insurance that complies with the Regulation, the
lender must purchase insurance on the borrower's behalf.\30\
---------------------------------------------------------------------------
\27\ See 12 CFR 22.3(c)(1) (OCC); 12 CFR 208.25(c)(3)(i)
(Board); 12 CFR 339.3(c)(1) (FDIC); 12 CFR 614.4930(c)(1) (FCA); and
12 CFR 760.3(c)(1) (NCUA).
\28\ 12 CFR 22.3(c)(2) (OCC); 12 CFR 208.25(c)(3)(ii) (Board);
12 CFR 339.3(c)(2) (FDIC); 12 CFR 614.4930(c)(2) (FCA); and 12 CFR
760.3(c)(2) (NCUA).
\29\ 12 CFR 22.7 (OCC); 12 CFR 208.25(g) (Board); 12 CFR 339.7
(FDIC); 12 CFR 614.4945 (FCA); and 12 CFR 760.7 (NCUA).
\30\ 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 has previously reviewed the flood insurance policy
under the discretionary acceptance provision to ensure that the policy
meets the private flood insurance requirements of the Regulation, the
lender may rely on its previous review, provided there are no changes
to the terms of the policy. However, as required by the Regulation, the
lender must document its conclusion regarding sufficiency of protection
of the loan in writing.\31\ See Q&A Discretionary 4.
---------------------------------------------------------------------------
\31\ 12 CFR 22.3(c)(3) (OCC); 12 CFR 208.25(c)(3)(iii) (Board);
12 CFR 339.3(c)(3) (FDIC); 12 CFR 614.4930(c)(3) (FCA); and 12 CFR
760.3(c)(3) (NCUA).
---------------------------------------------------------------------------
Mandatory 3. If a lender has a policy not to originate a mortgage in
non-participating communities or coastal barrier regions where the NFIP
is not available, do the private flood insurance requirements under the
Regulation require a lender to change its policy?
The Regulation does not require that a lender originate a loan that
does not meet the lender's underwriting criteria. The Agencies note
that the flood insurance purchase requirement only applies to loans
secured by structures located or to be located in an SFHA in which
flood insurance is available under the Act.\32\ As noted in Q&A
Applicability 1, the flood insurance purchase requirement does not
apply within non-participating communities, where NFIP insurance is not
available under the Act. Therefore, the lender does not need to change
its policy of not originating mortgages in areas where NFIP insurance
is unavailable solely because of the private flood insurance
requirements under the Regulation.
---------------------------------------------------------------------------
\32\ Public Law 93-234, 87 Stat. 975 (1973).
---------------------------------------------------------------------------
Mandatory 4. Did the Agencies intend the compliance aid assurance
clause to act as a conformity clause that would make a private policy
conform to the definition of private flood insurance?
No. The Agencies did not intend the compliance aid assurance clause
to act as a conformity clause. Rather, the compliance aid assurance
clause is intended to facilitate the ability of lenders, as well as
consumers, to recognize policies that meet the definition of ``private
flood insurance'' and promote the consistent acceptance of policies
that meet this definition. The compliance aid provision is intended to
leverage the expertise of insurers to assist lenders in satisfying the
requirements of the Regulation.
[[Page 14704]]
Mandatory 5. Is a lender required to accept a flood insurance policy
issued by a private insurer that includes the compliance aid assurance
clause? Conversely, may a lender reject a flood insurance policy issued
by a private insurer solely because it does not contain the compliance
aid assurance clause?
A lender is not required to accept a flood insurance policy issued
by a private insurer solely because the policy contains the compliance
aid assurance clause if the lender chooses to conduct its own review
and determines the flood insurance policy actually does not meet the
mandatory acceptance requirements.
If a flood insurance policy issued by a private insurer does not
include the compliance aid assurance clause, the lender must still
review the policy to determine if it meets the requirements for private
flood insurance as set forth in the Regulation before the lender may
choose to reject the policy.\33\
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\33\ 12 CFR 22.3(c) (OCC); 12 CFR 208.25(c)(3) (Board); 12 CFR
339.3(c) (FDIC); 12 CFR 614.4930(c) (FCA); and 12 CFR 760.3(c)
(NCUA).
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Mandatory 6. If a flood insurance policy issued by a private insurer
includes the compliance aid assurance clause, does a lender need to
conduct an additional review of the policy for compliance with the
mandatory acceptance provision of the Regulation?
No, under the mandatory acceptance provision of the Regulation, if
a policy or an endorsement to the policy contains the compliance aid
assurance clause, further review is not necessary in order for the
lender to determine that a policy meets the definition of ``private
flood insurance.'' \34\
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\34\ 12 CFR 22.3(c)(2) (OCC); 12 CFR 208.25(c)(3)(ii) (Board);
12 CFR 339.3(c)(2) (FDIC); 12 CFR 614.4930(c)(2) (FCA); and 12 CFR
760.3(c)(2) (NCUA).
---------------------------------------------------------------------------
It is important to note that, in order for the lender to rely on
the compliance aid assurance clause without further review of the
policy, the language of the compliance aid assurance clause must be
stated in the policy, or as an endorsement to the policy, as set forth
in the Regulation. If the language is different from the compliance aid
assurance clause set forth in the Regulation, the lender cannot rely on
the protections of the compliance aid assurance clause in the
Regulation and should review the policy to determine if it meets the
definition of private flood insurance. However, a policy containing the
compliance aid assurance clause need not be rejected if there are
stylistic differences, such as formatting, font, and punctuation that
do not change the substantive meaning of the clause, from the
compliance aid assurance clause included in the Regulation. See also
Q&A Mandatory 7.
Mandatory 7. What additional reviews does a lender need to conduct if
the flood insurance policy issued by a private insurer includes the
compliance aid assurance clause?
Although a lender may rely on the compliance aid assurance clause
to determine that a flood insurance policy meets the definition of
private flood insurance in the Regulation, the lender must also ensure
that the coverage is 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.\35\ The lender should also ensure that other key aspects of the
policy are accurate, such as the borrower's name and property address.
See also Q&A Mandatory 6.
---------------------------------------------------------------------------
\35\ 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).
---------------------------------------------------------------------------
Mandatory 8. If a flood insurance policy issued by a private issuer
does not include a compliance aid assurance clause, can a lender use
the criteria under the discretionary acceptance provision to decide
whether to accept the policy without first checking to see if the
policy meets the criteria under the mandatory acceptance provision?
Yes, the lender may first review the policy to determine whether it
meets the criteria under the discretionary acceptance provision.\36\
However, even if the policy does not meet the discretionary acceptance
criteria, the lender will still need to determine whether it must
accept the policy under the mandatory acceptance criteria.\37\
---------------------------------------------------------------------------
\36\ 12 CFR 22.3(c)(3) (OCC); 12 CFR 208.25(c)(3)(iii) (Board);
12 CFR 339.3(c)(3) (FDIC); 12 CFR 614.4930(c)(3) (FCA); and 12 CFR
760.3(c)(3) (NCUA).
\37\ 12 CFR 22.3(c) (OCC); 12 CFR 208.25(c)(3) (Board); 12 CFR
339.3(c) (FDIC); 12 CFR 614.4930(c) (FCA); and 12 CFR 760.3(c)
(NCUA).
---------------------------------------------------------------------------
Note that if the lender accepts a policy under the discretionary
acceptance provision, the Regulation requires the lender to document
that the policy provides sufficient protection of the loan.\38\
---------------------------------------------------------------------------
\38\ 12 CFR 22.3(c)(3) (OCC); 12 CFR 208.25(c)(3)(iii) (Board);
12 CFR 339.3(c)(3) (FDIC); 12 CFR 614.4930(c)(3) (FCA); and 12 CFR
760.3(c)(3) (NCUA).
---------------------------------------------------------------------------
Mandatory 9. If the compliance aid assurance clause is on the
declarations page, may a lender accept the policy without further
review?
If the compliance aid assurance clause is included on the
declarations page, a lender may accept the policy without further
review to determine whether the policy meets the definition of private
flood insurance. However, a lender must also ensure compliance with the
mandatory purchase requirement. See Q&A Mandatory 7.
II. Private Flood Insurance--Discretionary Acceptance
Discretionary 1. Are lenders required to accept flood insurance
policies that meet the discretionary acceptance criteria?
No, the discretionary acceptance criteria in the Regulation sets
forth the minimum acceptable criteria that a flood insurance policy
must have for the lender to accept the policy under the discretionary
acceptance provision. It is at the lender's discretion to accept a
policy that meets the discretionary acceptance criteria so long as the
policy does not meet the mandatory acceptance criteria.
Discretionary 2. If the lender determines that a flood insurance policy
meets the discretionary acceptance criteria and accepts that policy,
what documentation will demonstrate that the policy provides sufficient
protection of the loan, consistent with general safety and soundness
principles?
The Regulation requires the lender to document its conclusion in
writing that the policy provides sufficient protection of the loan,
consistent with general safety and soundness principles (see also Q&A
Coverage 1). While the Regulation does not require any specific
documentation to demonstrate that the policy provides sufficient
protection of the loan, lenders may include any information that
reasonably supports the lender's conclusion following review of the
policy.
Discretionary 3. How can a lender evaluate the sufficiency of an
insurer's solvency, strength, and ability to satisfy claims when
determining whether a flood insurance policy provides sufficient
protection of the loan, consistent with general safety and soundness
principles?
A lender may evaluate an insurer's solvency, strength, and ability
to satisfy claims by obtaining information from the State insurance
regulator's office of the State in which the property securing the loan
is located, among other options. A lender can rely on the licensing or
other processes used by the State insurance regulator for such an
evaluation. See Q&A Coverage 1.
[[Page 14705]]
Discretionary 4. If a flood insurance policy issued by a private
insurer that was originally accepted in accordance with the
discretionary acceptance requirements is renewed annually, is the
lender required to review the policy upon renewal?
If a lender had accepted a flood insurance policy issued by a
private insurer in accordance with the discretionary acceptance
requirements and the policy is renewed, the lender must review the
policy upon renewal to ensure that it continues to meet the
discretionary acceptance requirements.\39\ The lender must also
document its conclusion regarding sufficiency of the protection of the
loan in writing upon each renewal to indicate that the policy continues
to provide sufficient protection of the loan.\40\
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\39\ 12 CFR 22.3(c) (OCC); 12 CFR 208.25(c)(3) (Board); 12 CFR
339.3(c) (FDIC); 12 CFR 614.4930(c) (FCA); and 12 CFR 760.3(c)
(NCUA).
\40\ 12 CFR 22.3(c)(3) (OCC); 12 CFR 208.25(c)(3)(iii) (Board);
12 CFR 339.3(c)(3) (FDIC); 12 CFR 614.4930(c)(3) (FCA); and 12 CFR
760.3(c)(3) (NCUA).
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III. Private Flood Insurance--Private Flood Compliance
Private Flood Compliance 1. What is the maximum deductible a flood
insurance policy issued by a private insurer can have for residential
or commercial properties located in an SFHA?
The maximum deductible for a flood insurance policy issued by a
private insurer varies depending on whether the lender accepts the
policy under the mandatory acceptance or the discretionary acceptance
provision. For purposes of compliance with the mandatory acceptance
provision, the Regulation provides that a policy must contain a
deductible that is ``at least as broad as'' in a Standard Flood
Insurance Policy (SFIP)--i.e., no higher than the specified maximum
under an SFIP--for any total coverage amount up to the maximum
available under the NFIP at the time the policy is provided to the
lender.\41\ For a private policy with a coverage amount exceeding that
available under the NFIP, the deductible may exceed the specific
maximum deductible under an SFIP. However, for safety and soundness
purposes, the lender should consider whether the deductible is
reasonable based on the borrower's financial condition, among other
factors. See Q&A Amount 9.
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\41\ 12 CFR 22.2(k) (OCC); 12 CFR 208.25(b)(9) (Board); 12 CFR
339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).
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For example, if a private policy for a commercial building
provided $1,000,000 of flood insurance coverage, which is in excess of
the NFIP maximum coverage of $500,000 for a commercial building, then
it would be acceptable for a million-dollar policy to have a deductible
higher than the maximum deductible for a policy available under the
NFIP. The lender should consider whether the deductible is reasonable
based on the borrower's financial condition.
Similarly, if a private policy for a residential building
provided $1,000,000 of flood insurance coverage, which is in excess of
the NFIP maximum coverage of $250,000 for a residential building, then
it would be acceptable for a million-dollar policy to have a deductible
higher than the maximum deductible for a policy available under the
NFIP. The lender should consider whether the deductible is reasonable
based on the borrower's financial condition.
For purposes of compliance with the discretionary acceptance
provision, the Regulation requires that the policy provide sufficient
protection of the loan, consistent with general safety and soundness
principles.\42\ Among the factors a lender could consider in
determining whether a policy provides sufficient protection of a loan
is whether the policy's deductible is reasonable based on the
borrower's financial condition. Unlike the limitation on deductibles
for policies accepted under the mandatory acceptance provision for any
total coverage amount up to the maximum available under the NFIP, a
lender can accept a flood insurance policy issued by a private insurer
under the discretionary acceptance provision with a deductible higher
than that for an SFIP for a similar type of property, provided the
lender has determined the policy provides sufficient protection of the
loan, consistent with general safety and soundness principles.
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\42\ 12 CFR 22.3(c)(3)(iv) (OCC); 12 CFR 208.25(c)(3)(iii)(D)
(Board); 12 CFR 339.3(c)(3)(iv) (FDIC); 12 CFR 614.4930(c)(3)(iv)
(FCA); and 12 CFR 760.3(c)(3)(iv) (NCUA).
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Whether the lender is evaluating the policy under the mandatory
acceptance provision or the discretionary acceptance provision, 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.\43\ See Q&A Amount 9.
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\43\ 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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Private Flood Compliance 2. May a lender require that the deductible of
any flood insurance policy issued by a private insurer be lower than
the maximum deductible for an NFIP policy?
Yes. If the lender is accepting the private flood insurance policy
under the mandatory acceptance provision, the Regulation requires that
the private flood insurance policy be at least as broad as an NFIP
policy, which includes a requirement that the private flood insurance
policy contain a deductible no higher than the specified maximum
deductible for a Standard Flood Insurance Policy (SFIP).\44\ The lender
may require a borrower's private flood insurance policy deductible be
lower than the maximum deductible for an NFIP policy in connection with
a policy that the lender accepts under the mandatory acceptance
provision, consistent with general safety and soundness principles and
based on a borrower's financial condition, among other factors.
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\44\ 12 CFR 22.2(k)(2)(iii) (OCC); 12 CFR 208.25(b)(9)(ii)(B)
(Board); 12 CFR 339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR
760.2 (NCUA).
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If the lender is accepting a flood insurance policy issued by a
private insurer under the discretionary acceptance provision, the
lender need only consider whether the policy, including the stated
deductible, provides sufficient protection of the loan, consistent with
general safety and soundness principles.\45\ See also Q&A Private Flood
Compliance 1.
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\45\ 12 CFR 22.3(c)(3)(iv)(D) (OCC); 12 CFR 208.25(c)(3)(iii)(D)
(Board); 12 CFR 339.3(c)(3)(iv) (FDIC); 12 CFR 614.4930(c)(3)(iv)
(FCA); and 12 CFR 760.3(c)(3)(iv) (NCUA).
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Private Flood Compliance 3. If a lender utilizes a third party to
review flood insurance policies, would it be permissible for a lender
to charge the borrower a fee for this review?
The Act and the Regulation do not prohibit lenders from charging
fees to borrowers for contracting with third parties to review flood
insurance policies. As explained in Q&A Fees 1 and Q&A Fees 2, lenders
may charge limited, reasonable fees for flood determinations and life-
of-loan monitoring. Similarly, the Act and the Regulation do not
prohibit lenders from charging a fee to a borrower when a third party
reviews a flood insurance policy issued by a private insurer. However,
lenders should be aware of any other applicable requirements regarding
fees and disclosures of fees.
[[Page 14706]]
Private Flood Compliance 4. If the policy is not available prior to
closing, what can the lender rely on to make sure the policy meets the
requirements of the Regulation?
The Act and Regulation do not specify the acceptable types of
documentation for a lender to rely on when reviewing a flood insurance
policy issued by a private insurer. Lenders should determine whether
they have sufficient evidence to show the policy meets the requirements
under the Regulation.
Lenders can take steps to help mitigate against closing delays such
as designating employees responsible for reviewing flood policies,
training employees, and requesting additional information from insurers
early in the process. If the lender does not have enough information to
determine if the policy meets the private flood insurance requirements
under the Regulation, then the lender should timely request additional
information as necessary to complete its review.
Private Flood Compliance 5. Under existing force placement
requirements, a declarations page is sufficient to evidence a
borrower's purchase of a flood insurance policy. Does the declarations
page have sufficient information for a lender to determine whether the
policy complies with the Regulation?
It depends. If the declarations page provides enough information
for the lender to determine whether the policy meets the mandatory
acceptance provision or discretionary acceptance provision of the
Regulation or if the declarations pages contains the compliance aid
assurance clause, then the lender may rely on the declarations pages.
However, if the declarations page does not provide enough information
for the lender to determine whether the policy satisfies the mandatory
acceptance provision or discretionary acceptance provision of the
Regulation, the lender should request additional information about the
policy to aid in making its determination.
Private Flood Compliance 6. May a lender accept a multiple-peril policy
issued by a private insurer to satisfy the mandatory purchase of flood
insurance requirement?
Yes. A lender can accept a multiple-peril policy that covers the
hazard of flood under the private flood insurance provisions of the
Regulation, provided the policy meets the requirements under the
Regulation.
Private Flood Compliance 7. How do the private flood insurance
requirements of the Regulation, especially the compliance aid assurance
clause, work in conjunction with the requirements from secondary market
investors (for example, the Federal National Mortgage Association
(Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie
Mac))?
Lenders must comply with Federal flood insurance requirements. The
requirements for the secondary market are separate from the Regulation.
A lender should carefully review these separate requirements for
secondary market investors regarding acceptable private flood insurance
if the lender plans to sell loans to such investors and should direct
questions regarding these requirements to the appropriate entities.
Private Flood Compliance 8. When servicing a loan covered by flood
insurance pursuant to the Act and the Regulation, which requirements
must a servicer follow in evaluating the acceptance of a flood
insurance policy issued by a private insurer?
For loans serviced on behalf of lenders supervised by the Agencies,
the servicer must comply with the Regulation in determining whether a
flood insurance policy issued by a private insurer must be accepted
under the mandatory acceptance provision or may be accepted under the
discretionary acceptance provision or mutual aid provision. For loans
serviced on behalf of other entities not supervised by the Agencies,
the servicer should comply with the terms of its contract with that
entity. For example, when servicing loans on behalf of Fannie Mae or
Freddie Mac, where there are insurer rating requirements specified
within those entities' servicing guidance or other relevant authorities
that are not required in the Regulation, the servicer should adhere to
those servicing requirements.
Private Flood Compliance 9. How can a lender determine: (i) Whether an
insurer is licensed or admitted in a particular State, (ii) or whether
a surplus lines or nonadmitted alien insurer is permitted to issue an
insurance policy in a particular State?
A lender may refer to the website of the State insurance regulator
where the collateral property is located to determine whether a
particular insurer is licensed, admitted, or otherwise permitted to
issue an insurance policy in a particular State. If the lender cannot
determine this information from the website, the lender could contact
the State insurance regulator directly. Further, information with
respect to surplus lines insurer eligibility also may be available in
the Consumer Insurance Search (CIS) tool available on the National
Association of Insurance Commissioners (NAIC) website. Lenders may
consult commercial service providers regarding the eligibility of
surplus lines insurers in particular States provided the lenders have a
reasonable basis to believe that these service providers have reliable
information.
With regard to nonadmitted alien insurers in particular, lenders
could review the NAIC's Quarterly Listing of Alien Insurers.\46\
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\46\ See 15 U.S.C. 8204.
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Private Flood Compliance 10. May lenders accept policies issued by
private insurers that are surplus lines insurers for noncommercial
residential properties?
Yes, if the surplus lines insurer is eligible or not disapproved to
place insurance in the State or jurisdiction in which the property to
be insured is located, lenders may accept policies issued by surplus
lines insurers as coverage for noncommercial (i.e., residential)
properties.
Consistent with the Act and the Regulation, the Agencies confirm
that policies issued by surplus lines insurers for noncommercial
properties are covered in the definition of ``private flood insurance''
and in the discretionary acceptance provision. In the definition of
``private flood insurance,'' surplus lines policies for noncommercial
properties are covered as policies that are issued by insurance
companies that are ``otherwise approved to engage in the business of
insurance by the insurance regulator of the State or jurisdiction in
which the property to be insured is located.'' \47\ Similarly, within
the discretionary acceptance provision, noncommercial residential
policies issued by surplus lines carriers are covered as policies that
are issued by private insurance companies that are ``otherwise approved
to engage in the business of insurance by the insurance regulator of
the State or jurisdiction in which the property to be insured is
located.'' \48\
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\47\ See 84 FR 4955-4956 (Feb.20, 2019). See also 12 CFR
22.2(k)(1)(i) (OCC); 12 CFR 208.25(b)(9)(i)(A) (Board); 12 CFR 339.2
(FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA).
\48\ See 84 FR 4962 (Feb. 20, 2019). See also 12 CFR
22.3(c)(3)(ii) (OCC); 12 CFR 208.25(c)(3)(iii)(B) (Board); 12 CFR
339.3(c)(3)(ii) (FDIC); 12 CFR 614.4930(c)(3)(ii) (FCA); and 12 CFR
760.3(c)(3)(ii) (NCUA).
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For purposes of the Regulation, the meaning of ``otherwise
approved'' is
[[Page 14707]]
based on whether applicable State law provides that the surplus lines
insurer is eligible or not disapproved to place insurance in that
State. Even if the surplus lines insurer is not considered to be
engaged in the business of insurance under applicable State law, the
surplus lines insurer would still be ``otherwise approved'' only for
purposes of this provision of the Regulation if the insurer is eligible
or not disapproved to place insurance in the State.
Private Flood Compliance 11. May a lender accept a private flood
insurance policy that includes a compliance aid assurance clause, but
also includes a disclaimer explaining that the ``insurer is not
licensed in the State or jurisdiction in which the property is
located,'' which suggests that the policy is issued by a surplus lines
insurer?
Even if the policy includes a statement indicating that the insurer
is not licensed in the State or jurisdiction in which the property is
located, suggesting that the policy is issued by a surplus lines
insurer, there are circumstances under which lenders may accept the
policy. A lender may accept a policy issued by a surplus lines insurer
recognized or not disapproved by the relevant State insurance regulator
as protection for loan collateral that is a commercial property. Also,
a lender may accept a policy issued by a surplus lines insurer as
protection for loan collateral that is a noncommercial property as a
policy issued by an insurance company that is ``otherwise approved to
engage in the business of insurance by the insurance regulator of the
State or jurisdiction in which the property to be insured is located.''
See Q&A Private Flood Compliance 10.
Blake J. Paulson,
Acting Comptroller of the Currency.
Ann Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
Dated at Washington, DC, on or about January 12, 2021.
James P. Sheesley,
Assistant Executive Secretary.
Dated at McLean, VA, this 1st day of March 2021.
Dale Aultman,
Secretary, Farm Credit Administration Board.
Melane Conyers-Ausbrooks,
Secretary of the Board, National Credit Union Administration.
[FR Doc. 2021-05314 Filed 3-17-21; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 7535-01-P; 6705-01-P