[Federal Register Volume 87, Number 104 (Tuesday, May 31, 2022)]
[Rules and Regulations]
[Pages 32826-32895]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-10414]



[[Page 32825]]

Vol. 87

Tuesday,

No. 104

May 31, 2022

Part IV





Department of the Treasury





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Office of the Comptroller of the Currency





Federal Reserve System





Federal Deposit Insurance Corporation





Farm Credit Administration





National Credit Union Administration





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12 CFR Parts 22, 208, 338, et al.





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

  Federal Register / Vol. 87 , No. 104 / Tuesday, May 31, 2022 / Rules 
and Regulations  

[[Page 32826]]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 22

[Docket IDs OCC-2020-0033, OCC-2020-0008]

FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Docket No. R-1742, OP-1720]

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, 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); 
and National Credit Union Administration (NCUA).

ACTION: Guidance.

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SUMMARY: The OCC, Board, FDIC, FCA, and NCUA (collectively, the 
Agencies) are reorganizing, revising, and expanding the Interagency 
Questions and Answers Regarding Flood Insurance. This revised guidance 
will assist lenders in meeting their responsibilities under Federal 
flood insurance law and increase public understanding of the Agencies' 
respective flood insurance regulations. Significant topics addressed by 
the revisions include guidance related to major amendments to the flood 
insurance laws with regard to the escrow of flood insurance premiums, 
the detached structure exemption, force placement procedures, and the 
acceptance of flood insurance policies issued by private insurers. With 
this issuance, the Agencies are consolidating the Questions and Answers 
proposed by the Agencies in July 2020 and the Questions and Answers 
proposed by the Agencies in March 2021 into one set of Interagency 
Questions and Answers Regarding Flood Insurance.

DATES: The issuance date of this guidance is May 11, 2022.

FOR FURTHER INFORMATION CONTACT: 
    OCC: Rhonda L. Daniels, Compliance Specialist, Compliance Risk 
Policy Division, (202) 649-5405; Amber Dapshi, Compliance Specialist, 
Compliance Risk Policy Division, (240) 646-4348; Heidi M. Thomas, 
Special Counsel, Sadia Chaudhary, Counsel, Rima Kundnani, Counsel, or 
Cyndy MacMahon, Attorney, Chief Counsel's Office, (202) 649-5490. If 
you are deaf, hard of hearing, or have a speech disability, please dial 
7-1-1 to access telecommunications relay services.
    Board: Vivian W. Wong, Senior Counsel, (202) 452-3667, Matthew 
Dukes, Counsel, (202) 973-5096, or Keshia King, Lead Supervisory Policy 
Analyst, (202) 452-2496, Division of Consumer and Community Affairs; or 
Daniel Ericson, Senior Counsel, (202) 452-3359, Legal Division; for 
users of Telecommunications Relay Service (TRS),Telecommunications 
Device for the Deaf (TDD) only, contact 711 or (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, Assistant 
General Counsel, Office of General Counsel, (720) 213-0440.
    NCUA: Thomas Zells, Senior Staff Attorney, Office of General 
Counsel, (703) 518-6540, or Simon Hermann, 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\ 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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    In October 2013, the Agencies jointly issued proposed rules \6\ 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).\7\ In March 2014, Congress enacted the 
Homeowner Flood Insurance Affordability Act (HFIAA), 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.\8\ The Agencies finalized the regulations to 
implement provisions in the Biggert-Waters Act and HFIAA under the 
Agencies' jurisdiction, except for the provisions in the Biggert-Waters 
Act related to private flood insurance, with a final rule issued in 
July 2015 (2015 Final Rule).\9\ In February 2019, the

[[Page 32827]]

Agencies finalized regulations to implement the private flood insurance 
related provisions of the Biggert-Waters Act (2019 Final Rule).\10\
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    \6\ 78 FR 65107 (Oct. 30, 2013).
    \7\ Public Law 112-141, 126 Stat. 916 (2012).
    \8\ Public Law 113-89, 128 Stat. 1020 (2014).
    \9\ 80 FR 43215 (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).
    \10\ 84 FR 4953 (Feb. 20, 2019).
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Interagency Questions and Answers Regarding Flood Insurance

    Since 1997, the Interagency Questions and Answers \11\ have 
provided the lending industry and other interested parties 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 (2009 Interagency Questions and Answers). In 2011, the Agencies 
further finalized two additional Q&As that were proposed in 2009, and 
re-proposed three Q&As that were never finalized.\12\
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    \11\ Throughout this document, ``Interagency 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.
    \12\ For additional information on the history of the 
Interagency Questions and Answers, please see the preamble to the 
July 2020 Proposed Interagency Questions and Answers at 85 FR 40442 
(July 6, 2020).
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    In light of the significant changes to flood insurance requirements 
pursuant to the Biggert-Waters Act and HFIAA, as well as the Agencies' 
regulations issued to implement these laws, the Agencies proposed new 
and revised Interagency Questions and Answers in July 2020 (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.\13\ This proposal also reorganized the 
Interagency Questions and Answers to provide a more logical flow of 
questions through the flood insurance process. The Agencies also 
committed in the July 2020 Proposed Questions and Answers to separately 
issuing for notice and comment additional proposed questions and 
answers relating to the 2019 Final Rule implementing the private flood 
insurance provisions of the Biggert-Waters Act. The Agencies published 
these proposed questions and answers in March 2021 (March 2021 Proposed 
Questions and Answers).\14\
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    \13\ See 85 FR 40442 (July 6, 2020). The comment period for the 
July 2020 Proposed Questions and Answers was extended from Sept. 4, 
2020 to Nov. 3, 2020. See 85 FR 54946 (Sept. 3, 2020).
    \14\ See 86 FR 14696 (Mar. 18, 2021).
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    With this Federal Register document, the Agencies are consolidating 
the July 2020 Proposed Questions and Answers and the March 2021 
Proposed Questions and Answers into one set of Interagency Questions 
and Answers Regarding Flood Insurance (2022 Interagency Questions and 
Answers), consisting of 144 Questions and Answers (including 24 private 
flood insurance questions and answers), revised as appropriate based on 
comments received. Specifically, the Q&As in the March 2021 Proposed 
Questions and Answers are now set forth as sections III, IV, and V in 
the 2020 Interagency Questions and Answers, and the remaining sections, 
with the exception of proposed Section III discussed below, are 
renumbered accordingly. The Agencies also are making non-substantive 
revisions to certain questions and answers to more directly respond to 
the question asked, provide additional clarity, or make technical 
corrections.
    These 2022 Interagency Questions and Answers supersede the 2009 
Interagency Questions and Answers (and the 2011 amendments to the 2009 
Interagency Questions and Answers) and supplement other guidance or 
interpretations issued by the Agencies related to loans in areas having 
special flood hazards. 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.
    The issuance of these 2022 Interagency Questions and Answers 
responds to requests over the years from the lending industry, 
including at conferences and through interagency webinars, to provide 
additional guidance on flood insurance compliance issues. In addition, 
the 2022 Interagency Questions and Answers are responsive to requests 
made pursuant to the most recent review under the Economic Growth and 
Regulatory Paperwork Reduction Act of 1996 (EGRPRA), which directs some 
of the Agencies to conduct a joint review of their regulations every 10 
years and consider whether any of those regulations are outdated, 
unnecessary, or unduly burdensome.\15\ As part of the most recent joint 
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 Agencies update the 
Interagency Questions and Answers. In the 2017 EGRPRA Joint Report to 
Congress issued by the Federal Financial Institutions Examination 
Council (FFIEC), the Board, FDIC, and OCC indicated that they agreed 
with commenters that the Interagency Questions and Answers should be 
updated and planned to address many of the flood insurance issues 
raised by EGRPRA commenters.\16\ Accordingly, in issuing these 2022 
Interagency Questions and Answers, the Agencies are addressing the 
commitment made in the 2017 EGRPRA Joint Report to Congress.
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    \15\ 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 and is available at https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf. 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, the 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, as required 
by the Farm Credit System Reform Act of 1996 (see 12 U.S.C. 2252 
note), FCA engages in periodic regulatory review. The Consumer 
Financial Protection Bureau (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.
    \16\ Specifically, the OCC, Board, and FDIC stated in the EGRPRA 
report that they ``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.'' FFIEC Joint EGRPRA Report to 
Congress, March 2017 at 56; available at https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.
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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 proposed 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. Moreover, the 
Agencies also proposed a new system of designation for the Q&As. Rather 
than numbering the Q&As successively

[[Page 32828]]

through all the categories, each Q&A would be designated by the 
category to which it belongs and then designated in numerical order for 
that particular category. This numbering system enables the Agencies to 
add or delete Q&As in the future without needing to significantly 
renumber or reorganize all of the Q&As. Furthermore, the Agencies have 
added three new Q&As (Applicability 13, Amount 10, and Condo and Co-op 
9) to better address commenters' questions and for organizational 
purposes, rather than adding information into existing Q&As.
    As discussed below, commenters supported the proposed 
reorganization. Therefore, the Agencies are adopting this 
reorganization with the inclusion of three new categories related to 
the private flood insurance requirements, proposed in the March 2021 
Proposed Questions and Answers. The table below sets forth the current 
categories and the corresponding new, reorganized categories for 
purposes of comparison:

                            Table of Contents
------------------------------------------------------------------------
                               Category from 2009   Reorganized category
                                   interagency       in 2022 interagency
                                  questions and         questions and
                                     answers               answers
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I...........................  Determining When      Determining the
                               Certain Loans Are     Applicability of
                               Designated Loans      Flood Insurance
                               for Which Flood       Requirements for
                               Insurance Is          Certain Loans
                               Required Under the    [Applicability].
                               Act and Regulation.
II..........................  Determining the       Exemptions From the
                               Appropriate Amount    Mandatory Flood
                               of Flood Insurance    Insurance Purchase
                               Required Under the    Requirements
                               Act and Regulation.   [Exemptions].
III.........................  Exemptions From the   Private Flood
                               Mandatory Flood       Insurance--Mandator
                               Insurance             y Acceptance
                               Requirements.         [Mandatory].
IV..........................  Flood Insurance       Private Flood
                               Requirements for      Insurance--Discreti
                               Construction Loans.   onary Acceptance
                                                     [Discretionary].
V...........................  Flood Insurance       Private Flood
                               Requirements for      Insurance--General
                               Non-residential       Compliance [Private
                               Buildings.            Flood Compliance].
VI..........................  Flood Insurance       Required Use of
                               Requirements for      Standard Flood
                               Residential           Hazard
                               Condominiums.         Determination Form
                                                     [SFHDF].
VII.........................  Flood Insurance       Flood Insurance
                               Requirements for      Determination Fees
                               Home Equity Loans,    [Fees].
                               Lines of Credit,
                               Subordinate Liens,
                               and Other Security
                               Interests in
                               Collateral Located
                               in an SHFA.
VIII........................  Flood Insurance       Flood Zone
                               Requirements in the   Discrepancies
                               Event of the Sale     [Zone].
                               or Transfer of a
                               Designated Loan and/
                               or Its Servicing
                               Rights.
IX..........................  Escrow Requirements.  Notice of Special
                                                     Flood Hazards and
                                                     Availability of
                                                     Federal Disaster
                                                     Relief [Notice].
X...........................  Force Placement.....  Determining the
                                                     Appropriate Amount
                                                     of Flood Insurance
                                                     Required [Amount].
XI..........................  Private Flood         Flood Insurance
                               Insurance.            Requirements for
                                                     Construction Loans
                                                     [Construction].
XII.........................  Required Use of       Flood Insurance
                               Standard Flood        Requirements for
                               Hazard                Residential
                               Determination Form    Condominiums and Co-
                               (SFHDF).              Ops [Condo and Co-
                                                     Op].
XIII........................  Flood Determination   Flood Insurance
                               Fees.                 Requirements for
                                                     Home Equity Loans,
                                                     Lines of Credit,
                                                     Subordinate Liens,
                                                     and Other Security
                                                     Interests in
                                                     Collateral Located
                                                     in an SFHA [Other
                                                     Security
                                                     Interests].
XIV.........................  Flood Zone            Requirement to
                               Discrepancies.        Escrow Flood
                                                     Insurance Premiums
                                                     and Fees--General
                                                     [Escrow].
XV..........................  Notice of Special     Requirement to
                               Flood Hazards and     Escrow Flood
                               Availability of       Insurance Premiums
                               Federal Disaster      and Fees--Small
                               Relief.               Lender Exception
                                                     [Escrow Small
                                                     Lender Exception].
XVI.........................  Mandatory Civil       Requirement to
                               Money Penalties.      Escrow Flood
                                                     Insurance Premiums
                                                     and Fees--Loan
                                                     Exceptions [Escrow
                                                     Loan Exceptions].
XVII........................  ....................  Force Placement of
                                                     Flood Insurance
                                                     [Force Placement].
XVIII.......................  ....................  Flood Insurance
                                                     Requirements in the
                                                     Event of the Sale
                                                     or Transfer of a
                                                     Designated Loan and/
                                                     or Its Servicing
                                                     Rights [Servicing].
XIX.........................  ....................  Mandatory Civil
                                                     Money Penalties
                                                     [Penalty].
------------------------------------------------------------------------

    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 of 2014 (codified at 42 U.S.C. 4001 et seq). 
``Regulation'' refers to each Agency's current final rule.\17\ 
References to the NFIP Flood Insurance Manual refer to the version 
published in April 2021.
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    \17\ 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).
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Public Comments

    The Agencies solicited comment on all aspects of the proposed Q&As 
and received a total of 22 substantive comment letters on the July 2020 
Proposed Questions and Answers and 11 substantive comment letters on 
the March 2021 Proposed Questions and Answers. Many of the commenters 
supported the proposed organizational changes to the Interagency 
Questions and Answers and believed the new organization provided 
clarity, increased understanding, and was user-friendly. In addition, 
some commenters specifically found the grouping by topic to be very 
useful, noting this would improve accessibility and allow the Agencies 
to easily revise the Interagency Questions and Answers in the future.

[[Page 32829]]

One commenter found the addition of references to the Regulation to be 
beneficial. Another commenter requested that the Agencies combine both 
sets of questions and answers into one set of final questions and 
answers. As indicated above, the Agencies are adopting the proposed 
reorganization of the Interagency Questions and Answers and combining 
both the July 2020 Proposed Questions and Answers and the March 2021 
Proposed Questions and Answers into one document.
    One commenter requested that these Interagency Questions and 
Answers be made available to insurance agents, which would be helpful 
for lenders and make the process easier for borrowers. A few commenters 
also suggested that the NCUA add the finalized Interagency Questions 
and Answers to the Regulation as an Appendix. The commenters felt that 
this would ensure the Interagency Questions and Answers are easily 
located and used by credit union staff in years to come.
    The Agencies note that the Interagency Questions and Answers are 
already publicly available, including to insurance agents, as the 
Interagency Questions and Answers are published in the Federal Register 
and readily accessible on the Agencies' websites. At this time, the 
Agencies decline to add the Interagency Questions and Answers to the 
Regulation as an Appendix. Furthermore, the NCUA is committed to 
assisting credit unions comply with the flood insurance requirements.
    In addition, the Agencies received several comments that urged the 
Agencies to provide periodic updates and review the Interagency 
Questions and Answers on a regular basis, as well as to allow the 
industry an adequate notice and comment period. Commenters stated that 
this would provide industry and other stakeholders predictable 
opportunities to provide feedback on compliance issues and questions as 
they arise. Commenters also felt this type of review would maintain the 
Interagency Questions and Answers in a more organized manner and would 
ensure the guidance keeps pace with the marketplace and the issues that 
arise with respect to compliance. One commenter emphasized that this 
review should take place more frequently than the 10-year EGRPRA cycle 
and recommended a formal review of the Interagency Questions and 
Answers every three to five years. Other commenters stated that 
additional issues may arise for credit unions, who planned to share 
these issues with the NCUA, and asked that the Interagency Questions 
and Answers be updated in the future to provide additional clarity.
    The Agencies understand the value of the Interagency Questions and 
Answers to the industry and other stakeholders and will continue to 
review the Interagency Questions and Answers and update the guidance as 
necessary. The Agencies agree that the reorganization of the 
Interagency Questions and Answers will facilitate future updates. The 
Agencies expect to update the Interagency Questions and Answers as 
needed and will provide interested parties a sufficient notice and 
comment period.
    Other commenters encouraged the Agencies to include in the final 
version of the Interagency Questions and Answers an explicit statement 
referencing the Interagency Statement Clarifying the Role of 
Supervisory Guidance (Interagency Statement).\18\ The commenters stated 
the Agencies should confirm that the Interagency Questions and Answers 
are guidance and failure to comply with the Interagency Questions and 
Answers are not grounds for matters requiring attention (MRAs), matters 
requiring immediate attention (MRIA), or any other adverse supervisory 
action. The Agencies confirm that the Agencies are providing the 
Interagency Questions and Answers as guidance only. The Agencies are 
not adding a reference to the Interagency Statement in the Interagency 
Questions and Answers because doing so is unnecessary.
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    \18\ The OCC, Board, FDIC, and NCUA subsequently codified this 
statement. See 12 CFR part 4, appendix A to subpart F (OCC); 12 CFR 
part 262, appendix A (Board); 12 CFR part 302, appendix A (FDIC); 
and 12 CFR part 791, appendix A to subpart D (NCUA).
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    One commenter asked the Agencies to specifically reference which 
Q&As apply only to an NFIP policy and which Q&As apply to a flood 
insurance policy issued by a private insurance company or both. In 
response to this comment, the Agencies note that all the Q&As apply to 
all policies, whether NFIP or a flood insurance policy issued by a 
private insurance company, unless otherwise noted in the Q&A.
    The Agencies also received a general comment regarding climate 
change. The commenter noted that the Interagency Questions and Answers 
failed to discuss climate change risks. According to the commenter, 
climate change risks should serve as a ``safe-harbor'' for insurers to 
deny flood coverage. Further, the commenter suggested that the Agencies 
should explicitly require the insurers to consider climate risks and 
that flood insurance should be mandatory in high risk zones as a result 
of climate change. Climate change risk is outside the scope of the 
Agencies' Interagency Questions and Answers. The Agencies note that 
they are working individually and on an interagency basis to address 
financial risks associated with climate change consistent with the 
Agencies' regulatory and supervisory authorities. Therefore, the 
Agencies decline to make changes to any of the Q&As in response to this 
comment.
    Comments on specific Q&As are discussed below in the Section-by-
Section Analysis.

Section-by-Section Analysis

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

    Section I includes questions and answers related to the 
applicability of the Regulation's flood insurance requirements to 
certain loans. This proposed general applicability section included 
existing Q&As 1 through 7 relating to residential buildings and, for 
organizational purposes, incorporated existing section V's Q&As 24 and 
25, which address flood insurance requirements for non-residential 
buildings. The Agencies also proposed a streamlined heading for this 
section to provide greater clarity with no intended change in substance 
or meaning. The Agencies proposed changes to the Q&As in this section 
in the July 2020 Proposed Questions and Answers.
    Applicability 1. The Agencies proposed to redesignate existing Q&A 
1 as Q&A Applicability 1 with only minor language modifications, and no 
intended change in substance or meaning. This Q&A discusses whether the 
Regulation applies to a loan where the building or mobile home securing 
the loan is located in a community that does not participate in the 
NFIP. The Agencies received no specific comments on this Q&A and are 
adopting Q&A Applicability 1 as proposed with minor non-substantive 
edits.
    Applicability 2. The Agencies proposed to redesignate existing Q&A 
24 as Q&A Applicability 2. This Q&A discusses whether a lender is 
required to mandate flood insurance for buildings with limited utility 
or value. The Agencies proposed to update this Q&A to indicate that the 
answer depends on whether buildings with limited utility meet the 
detached structure exemption, which provides an exemption from the 
mandatory purchase requirements for certain detached structures. This 
exemption was added by HFIAA. The proposal also removed the existing 
language indicating that the lender should

[[Page 32830]]

consider any local zoning issues or other issues that would affect its 
collateral. In addition, the Agencies made minor wording changes.
    The Agencies received one comment on this Q&A. The commenter 
suggested an alternative ``carve-out'' approach that would permit a 
lender to include all buildings in the security instrument as a matter 
of convenience in closing the loan and in marketing the parcel of land 
if necessary, even if a structure could have been ``carved out'' as not 
necessary for collateral. The commenter suggested that buildings that 
are included as security for a loan as a matter of convenience, and not 
to protect the lender by providing material credit support for the 
loan, would not be considered to be buildings ``securing the loan'' 
that need to be covered by flood insurance. However, the approach 
suggested by this commenter is not legally possible because the Act 
\19\ requires flood insurance on all improved property that secures a 
designated loan. The Agencies therefore are adopting Q&A Applicability 
2 as proposed with an added cross-reference to Q&A Exemptions 1, which 
discusses the exemptions from the mandatory purchase requirement, for 
reader reference.
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    \19\ Public Law 93-234, 87 Stat. 975 (1973), codified at 42 
U.S.C. 4012a.
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    Applicability 3. The Agencies proposed to redesignate existing Q&A 
25 as proposed Q&A Applicability 3. This Q&A discusses a lender's 
requirements under the Regulation for a loan secured by multiple 
buildings if only some of the buildings are located in an SFHA, or if 
some of the buildings are located in different communities and only 
some of the communities participate in the NFIP. The Agencies proposed 
to change the answer to emphasize when flood insurance is required as 
opposed to when it is not required as in the existing Q&A. Further, the 
Agencies proposed to include an example in the answer. The Agencies 
proposed these changes to provide greater clarity and to improve 
readability and did not intend any change in substance or meaning.
    The Agencies received two comments on this proposed Q&A. One 
commenter requested that the Agencies add a statement that the 
mandatory purchase requirement is only applicable to buildings with a 
physical footprint at least partially within the boundaries of an SFHA. 
This commenter stated that the extension of a plat or lot into the SFHA 
does not automatically trigger the mandatory purchase of flood 
insurance for buildings located on that plat or lot. The other 
commenter requested that the Agencies address situations when a portion 
of a property securing a loan is located in an SFHA but the 
improvements located on that same property are not located in the SFHA. 
The commenter recommends that if the structure is not located within an 
SFHA, then insurance should not be required.
    The Agencies confirm that land itself is not subject to the 
mandatory flood insurance purchase requirement. To address these 
comments, the Agencies are clarifying in the final answer to this Q&A 
that if any portion of a building is located in an SFHA in which flood 
insurance is available under the Act, the flood insurance requirement 
applies even if the entire structure is not located in the SFHA. 
Further, the Agencies are revising the final answer to state that a 
building located on a portion of a plat or lot that is not in an SFHA 
is not subject to the mandatory flood insurance purchase requirement 
even if a portion of the plat or lot not containing a building extends 
into an SFHA. With these amendments and some minor non-substantive 
edits, the Agencies are adopting Q&A Applicability 3.
    Applicability 4. The Agencies proposed to redesignate existing Q&A 
2 as Q&A Applicability 4. This Q&A discusses a lender's responsibility 
if a particular building or mobile home that secures a loan is no 
longer located within an SFHA due to a map change. The Agencies 
proposed to broaden this Q&A to also address a lender's responsibility 
if a building or mobile home that secures a loan is not located within 
an SFHA, even if not due to a map change. In addition, the Agencies 
proposed to reword for clarity the sentence in the answer indicating 
that a lender, by contract, may still require flood insurance on such 
buildings or mobile homes for safety and soundness purposes. The 
proposed sentence states that a lender may, at its discretion and 
taking into consideration appropriate State law, require flood 
insurance for property outside of SFHAs for safety and soundness 
purposes as a condition of a loan being made. Further, the Agencies 
proposed to add language to the answer to specifically note that each 
lender should tailor its own flood insurance policies and procedures to 
suit its business needs and protect its ongoing interest in the 
collateral. The Agencies intended no substantive changes with these 
revisions. The Agencies received no specific comment on this proposed 
Q&A and are adopting it as proposed with one technical change. The 
Agencies are removing the discussion of the NFIP Preferred Risk Policy 
because of changes made by FEMA in Risk Rating 2.0--Equity in Action 
(Risk Rating 2.0).\20\
---------------------------------------------------------------------------

    \20\ See https://www.fema.gov/flood-insurance/risk-rating.
---------------------------------------------------------------------------

    Applicability 5. The Agencies proposed to redesignate existing Q&A 
3 as Q&A Applicability 5 and to revise it by making minor language 
modifications for greater clarity, with no intended change in substance 
or meaning. This Q&A discusses whether a lender's purchase of a 
designated loan triggers any requirements under the Regulation. The 
Agencies received positive comment on this Q&A and are adopting it as 
proposed.
    Applicability 6. The Agencies proposed to redesignate existing Q&A 
5, which addresses whether the Regulation applies to loans that are 
being restructured or modified, as proposed Q&A Applicability 6 with no 
changes. One commenter specifically stated that the clarification 
provided by Q&A Applicability 6 may be very helpful in light of the 
COVID-19 pandemic as more consumers may need to modify their mortgages. 
A few commenters requested that Q&A Applicability 6 include additional 
examples to clarify when flood compliance requirements are triggered in 
loan restructurings and modifications, and they provided specific 
language. As in the existing Q&A, proposed Q&A Applicability 6 states 
that 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. 
However, the Agencies agree that additional clarification on when loan 
restructurings and modifications trigger the Regulation's requirements 
would be helpful. Furthermore, the Agencies believe that rewording the 
question also would provide additional clarity. Therefore, the Agencies 
are revising the question in the final Q&A to ask whether a loan that 
is being restructured or modified constitutes a triggering event 
(making, increasing, renewing, or extending a loan) under the 
Regulation. In addition, the Agencies are revising the answer in the 
final Q&A to provide that if a loan modification or restructuring 
involves recapitalizing delinquent payments and other amounts due under 
the loan, or amounts that were otherwise originally contemplated to be 
part of the loan pursuant to the contract with the borrower, into the 
loan's outstanding principal balance and the maturity date of the loan 
otherwise stays the same, the Regulation would not apply because the 
modification or restructuring would not

[[Page 32831]]

increase, extend, or renew the terms of the loan. The revisions to the 
final answer also provide that, conversely, if the loan modification or 
restructuring changes terms of the loan such as by increasing the 
outstanding principal balance beyond what was contemplated as part of 
the loan under the contract with the borrower, or by extending the 
maturity date of the loan, the Regulation would apply because the 
lender increased or extended the terms of the loan beyond what was 
originally contemplated to be part of the loan. With these amendments, 
the Agencies are adopting Q&A Applicability 6.
    Applicability 7. The Agencies proposed to redesignate existing Q&A 
6, which addresses whether table funded loans are treated as new loan 
originations, as Q&A Applicability 7. The Agencies proposed to update 
the answer to refer to the definition of ``table funding'' in the 
Regulation instead of to the obsolete definition of this term in the 
Department of Housing and Urban Development's (HUD) former Real Estate 
Settlement Procedures Act (RESPA) rule. The Agencies received no 
specific comment on this Q&A and are adopting it as proposed.
    Applicability 8. The Agencies proposed to redesignate existing Q&A 
7 as Q&A Applicability 8 and proposed only one minor wording change, 
with no intended change in substance or meaning. This Q&A addresses 
whether a lender is required to perform a review of its, or of its 
servicers', existing loan portfolio for compliance with the flood 
insurance requirements under the Act and Regulation. The Agencies 
received positive comment on this Q&A and are adopting it as proposed.
    Applicability 9. The Agencies proposed to redesignate existing Q&A 
4 as Q&A Applicability 9 and to make only minor language modifications 
for greater clarity, with no intended change in substance or meaning. 
This proposed Q&A addressed whether the mandatory purchase requirements 
apply to loan syndications or participations. The proposed answer 
provided that 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 but 
that, 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. The 
proposed answer also stated that 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, and that Federal 
flood insurance requirements also would apply when a group of lenders 
refinances, extends, renews or increases a loan. Further, the proposed 
answer provided that although the agreement among the lenders may 
assign compliance duties to a lead lender or agent, and may 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, under the proposed answer, the Agencies would 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. Lastly, the proposed 
answer stated that 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.
    The Agencies received a number of comments on this Q&A. Some 
commenters requested that the Agencies offer further clarity on what 
constitutes sufficient ``upfront due diligence'' and ``adequate 
controls to monitor the activities of the lead lender or agent for 
compliance with flood insurance requirements over the term of the 
loan.'' These commenters also stated that problems arise when lead 
lenders have different regulators employing different approaches for 
upfront due diligence as well as monitoring for flood compliance. One 
commenter recommended the inclusion of an explicit statement in the Q&A 
that if a lead lender on a facility is not federally regulated, and 
thus not subject to flood compliance requirements, any participating 
lenders on that facility also do not have flood compliance obligations 
with respect to that facility. Another commenter requested that the 
Agencies indicate in the Q&A that as long as a participating non-lead 
lender has adopted written policies, procedures, and processes for 
managing the risks of flood compliance that are reasonably within that 
participating lender's control, that lender generally would be viewed 
as having satisfied its flood compliance obligations. A third commenter 
stated that the answer was confusing since it appears to state that 
flood compliance requirements can be assigned to the lead lender but 
subsequently states that each individual lender remains responsible for 
compliance. The commenter suggested that, in instances where a lead 
lender is in charge of ensuring flood insurance requirements are met, 
participating lenders be allowed to rely on, as a safe harbor, 
documentation from the lead lender to limit their individual exposure.
    The Agencies understand the compliance complications that may arise 
with loan syndications and participations. However, the requirements 
under the Act and the Regulation apply to each lender individually, 
even if they are part of a loan syndication or participation. The 
Agencies may not remove these requirements as suggested if the lead 
lender is not federally-regulated nor create a safe harbor that allows 
a lender to rely on the lead lender's policies or procedures or on 
others' policies and procedures for compliance. Further, the Agencies 
believe it is more appropriate for lenders to determine specific due 
diligence procedures and controls to ensure compliance with the Act and 
Regulation based on the particular facts of each transaction. 
Therefore, the Agencies decline to include examples of such procedures 
and controls in the Q&A. However, to emphasize the particular concerns 
that may arise with lead lenders who are not federally-regulated, the 
Agencies are adding a statement in the final answer indicating that a 
non-lead lender's due diligence and monitoring of the lead lender is 
especially important when the lead lender itself is not subject to 
Federal flood insurance requirements. With this amendment, the Agencies 
are adopting Q&A Applicability 9.
    Applicability 10. The Agencies proposed new Q&A Applicability 10 to 
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 provided 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

[[Page 32832]]

clarified 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. One 
commenter requested the same changes it suggested for proposed Q&A 
Applicability 9 regarding further clarification on what constitutes 
sufficient upfront due diligence and adequate controls and removal of 
flood compliance requirements if the lead lender is not federally-
regulated. For the reasons stated in the discussion of Q&A 
Applicability 9, the Agencies decline to accept these changes and are 
adopting Q&A Applicability 10 as proposed with the addition of a 
similar statement added to Q&A Applicability 9 regarding due diligence 
and non-Federal lead lenders.
    Applicability 11. The Agencies proposed new Q&A Applicability 11 to 
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. The Agencies received no specific comment on 
this Q&A and are adopting it as proposed.
    Applicability 12. The Agencies proposed new Q&A Applicability 12, 
based on guidance previously issued by the Agencies,\21\ to 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 
clarified 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. The 
proposed answer also indicated that lenders should evaluate the safety 
and soundness and legal risks, and prudently manage those risks, during 
such periods when the NFIP is unavailable. One commenter specifically 
commented on this proposed Q&A, stating that it provides helpful and 
appreciated clarity on how credit unions should proceed in the event of 
a lapse in authorization or appropriations. The Agencies are adopting 
this Q&A as proposed.
---------------------------------------------------------------------------

    \21\ 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).
---------------------------------------------------------------------------

    New Q&A Applicability 13. To address a number of comments regarding 
what is and is not a triggering event under the Regulation, and to 
further clarify the Interagency Questions and Answers Regarding Flood 
Insurance, the Agencies are adding a new Q&A Applicability 13 to the 
2022 Interagency Questions and Answers to specifically address 
triggering events. This new Q&A provides lenders with a quick reference 
of what constitutes a triggering event under the Regulation.
    Specifically, Q&A Applicability 13 states that under the 
Regulation, a triggering event occurs when a designated loan is made, 
increased, extended, or renewed. If a triggering event occurs with 
respect to a designated loan, the lender is required to comply with 
certain requirements of the Regulation, including the mandatory flood 
insurance purchase requirement, the requirement to provide the Notice 
of Special Flood Hazards to the borrower, the requirement to notify the 
Administrator of FEMA or the Administrator's designee (the insurance 
provider) in writing of the identity of the servicer of the loan, and 
the requirement to escrow for a loan secured by residential property, 
unless either the lender or the loan qualifies for an exception. This 
Q&A also includes examples of events that are not considered triggering 
events for purposes of the Regulation, including the purchase of a loan 
from another lender (see Q&A Applicability 5); a loan modification that 
does not increase the amount of the loan nor extend or renew the terms 
of the loan (see Q&A Applicability 6); the assumption of the loan by 
another borrower; the remapping of a building securing the loan into an 
SFHA; the acquisition by a lender of an interest in a loan either by 
participation or syndication (see Q&A Applicability 9); a cashless roll 
(see Q&A Applicability 10); certain automatic extensions of credit (see 
Q&A Applicability 11); and certain treatments of force placement 
premiums and fees (see Q&A Force Placement 10).
    Applicability 14 (Proposed as Q&A Coverage 2). The Agencies 
proposed to redesignate existing Q&A 64 as Q&A Coverage 2. As noted 
below, the Agencies are renumbering this Q&A as Q&A Applicability 14. 
This Q&A addresses when a lender may rely on an insurance policy 
providing portfolio-wide coverage, removes the reference to criteria 
set forth by FEMA, and includes language addressing a lender's reliance 
on a policy that provides portfolio-wide coverage.
    Several commenters suggested that the Agencies clarify the term 
``portfolio-wide'' coverage to explain that the typical ``master 
policy'' that lenders obtain and use to force place flood insurance on 
individual loans is different than portfolio-wide coverage. The 
Agencies agree with the commenters and are clarifying that a lender may 
not rely on an insurance policy providing portfolio-wide coverage to 
meet the flood insurance purchase or force placement requirements if 
the policy only provides coverage to the lender (``single interest''). 
As stated in the Regulation, flood insurance coverage under the 
discretionary acceptance provision must cover both the mortgagor and 
mortgagee (i.e., lender and the borrower) as loss payees, except in the 
case of a policy that is provided by a condominium association, 
cooperative, homeowners association, or other applicable group and for 
which the premium is paid by the respective organization. However, the 
Agencies are adding language to the answer indicating that lenders may 
purchase a master flood insurance policy that provides coverage for its 
entire portfolio and covers both the lender and the borrower (``dual 
interest'') because these policies provide coverage for the entire 
portfolio as well as individual coverage, and include the issuance of 
an individual policy or certificate.
    A few commenters suggested that the answer be clarified to state 
that a portfolio-wide gap policy may be useful in some circumstances, 
such as when a property is newly mapped into an SFHA. Additionally, a 
few commenters suggested that lenders be allowed to rely on master 
policies for compliance purposes. The Agencies decline to make these 
revisions. As noted in the existing and proposed Q&A, master 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, such policies do not provide 
coverage for the borrower and cannot be used to satisfy the force 
placement requirement.
    One commenter stated that using the term ``private insurance 
policy'' may be confused with a borrower-procured flood insurance 
policy issued by a private insurer. The Agencies agree and are making 
technical changes to remove the term ``private'' when referring to

[[Page 32833]]

lender procured flood insurance policies in the Q&A.
    The Agencies are adopting this Q&A as proposed with the amendments 
discussed above and an additional minor non-substantive change.
    Applicability 15 (Proposed as Q&A Coverage 3). The Agencies 
proposed new Q&A Coverage 3 to address when mandatory flood insurance 
on a designated loan is required to be in place during the closing 
process. As noted below, the Agencies are renumbering this Q&A as Q&A 
Applicability 15. This proposed Q&A clarified 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, and that 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 explained the difference between ``wet funding'' and ``dry 
funding'' States and how it impacts the ``closing date'' for purposes 
of flood insurance.
    A few commenters suggested expanding the Q&A to clarify the 
``closing date'' for refinances subject to rescission. One lender 
suggested that it would be helpful to add examples to illustrate when 
mandatory flood insurance needs to be in place on a designated loan. 
The Agencies agree and are expanding the answer to address transactions 
where there is no transfer of property ownership, such as a refinance, 
and the borrower is purchasing a new flood insurance policy or is 
required to increase flood insurance coverage. In these cases, the 
lender should use the loan's consummation date, which is the date the 
borrower becomes contractually obligated on the loan, as the effective 
date for the flood insurance policy. As a result of this clarification, 
the Agencies do not believe adding examples is necessary. The Agencies 
are adopting this Q&A with the changes discussed above.

Section II. Exemptions From the Mandatory Flood Insurance Purchase 
Requirements (Exemptions)

    Existing section III includes one Q&A related to the exemptions 
from the mandatory flood insurance purchase requirements. The Agencies 
proposed to redesignate existing section III as section II and proposed 
a streamlined heading for this section to provide greater clarity with 
no intended change in substance or meaning. As proposed, section II 
includes existing Q&A 18 and six new Q&As, Exemptions 2 through 7, 
pertaining to the exemption from the mandatory flood insurance purchase 
requirements for certain detached structures created by HFIAA. The 
Agencies proposed changes to the Q&As in this section in the July 2020 
Proposed Questions and Answers. As noted in the proposal, this set of 
Q&As on the detached structure exemption responds to a request for more 
guidance related to this exemption, as documented in the EGRPRA 
report.\22\
---------------------------------------------------------------------------

    \22\ https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.
---------------------------------------------------------------------------

    Exemptions 1. The Agencies proposed to redesignate existing Q&A 18 
as Q&A Exemptions 1. This Q&A discusses the exemptions from the 
mandatory flood insurance purchase requirement. The Agencies proposed 
to revise the Q&A to include the detached structure exemption in 
addition to the existing exemptions for State-owned property and loans 
with an original principal balance of $5,000 or less and an original 
repayment term of one year or less. The proposed Q&A also noted 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. One commenter requested further clarity 
and examples on what constitutes a detached structure. Another 
commenter requested clarification on ``mixed use'' property where 
detached buildings that may have been used for commercial purposes but 
no longer have a commercial use could fall under the residential 
exemption if the residence is using the structure for storage. The 
Agencies note that what constitutes a detached structure is a fact-
based determination and that the lender, who is in the best position to 
consider all the facts and circumstances and with input from the 
borrower, has the responsibility to determine what constitutes a 
detached structure and its purpose or the primary use of a mixed use 
structure. The Agencies are not in a position to provide examples for 
all possible scenarios. The Agencies also are including a cross 
reference to Q&A Exemptions 2 to provide further guidance and therefore 
are adopting the Q&A with this addition.
    Exemptions 2. The Agencies proposed new Q&A Exemptions 2 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 provided 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. 
One commenter suggested that the Agencies provide more examples of a 
primary residential structure. The Agencies decline to provide examples 
as the Agencies have indicated in the preamble to the 2015 Final Rule 
that whether a structure is defined as a primary residential structure 
is fact specific and that lenders would need to conduct good faith due 
diligence to make this determination. Another commenter suggested the 
Agencies separate this Q&A into two discrete questions to highlight 
different aspects of the answer. The Agencies decline to adopt this 
suggestion because the example is intertwined with the principles being 
discussed in the answer. Accordingly, the Agencies are adopting the Q&A 
as proposed.
    Exemptions 3. The Agencies proposed new Q&A Exemptions 3 to clarify 
that a flood hazard determination is required for a detached structure 
even though flood insurance coverage is not required on such a 
structure because the determination is used to identify the number and 
type of structures present on the property. One commenter noted that in 
practice, lenders first obtain a flood hazard determination as to the 
entire parcel of property to determine if any structures are located in 
an SFHA and then determine whether any detached structures on the 
property may be exempt under the Regulation, and therefore the proposed 
Q&A may imply that the presence or absence of exempt structures may 
affect whether a flood hazard determination is required. The Agencies 
agree that this Q&A may be confusing as proposed. As a result, the 
Agencies are revising the Q&A to clarify that a flood hazard 
determination is required even where detached structures are present. 
The revised answer provides that a flood hazard determination is needed 
to determine whether a building or mobile home securing a loan is or 
will be located in an SFHA where flood insurance is available under the 
Act. The answer further provides that in order to determine whether the 
exemption for non-residential detached structures on residential 
property may apply, a flood hazard determination must be conducted 
first, without regard to whether there may be any detached structures 
that could be exempt. With these amendments, the Agencies are adopting 
Q&A Exemptions 3.
    Exemptions 4. The Agencies proposed new Q&A Exemptions 4 to provide 
that a lender or its servicer may cancel its flood insurance 
requirement on an eligible detached structure that is

[[Page 32834]]

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. The Agencies received no specific comments on 
this Q&A and are adopting the Q&A as proposed.
    Exemptions 5. The Agencies proposed new Q&A Exemptions 5 to address 
whether a property being remapped into an SFHA triggers a review of the 
intended use of each detached structure. Specifically, the proposed 
answer stated that a lender must examine the status of a detached 
structure upon a qualifying triggering event and that a remapping is 
not a triggering event. The proposed answer also stated 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. Further, the proposed answer notes that, consistent with 
existing obligations under the Regulation, if a lender determines at 
any time that a property, including a detached structure, 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.
    One commenter asked whether notification of a map change 
constitutes notice that the property may be subject to the mandatory 
flood insurance purchase requirement. Another commenter inquired 
whether this Q&A allows a lender to rely on the initial appraisal as to 
what the detached structure is being used for or whether the lender is 
responsible for determining the current use. One commenter noted that 
the answer reiterates the requirements for force placement which do not 
seem relevant to the answer. Based on the comments received, the 
Agencies are revising the question to focus instead on whether a 
triggering event requires a lender to review the intended use of the 
detached structure. The answer remains unchanged, except for removing 
the language regarding remapping and force placement and non-
substantive wording changes for clarification. In addition, the 
Agencies are including a reference to new Q&A Applicability 13, which 
explains what constitutes a triggering event. With these changes, the 
Agencies are adopting Q&A Exemptions 5.
    Exemptions 6. The Agencies proposed new Q&A Exemptions 6 to discuss 
whether a lender, following a review of its loan portfolio, may 
determine to no longer require flood insurance on a detached structure 
in an SFHA if the structure does not provide contributory value. The 
Agencies proposed 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. Instead, a specific exemption 
must apply. The Agencies received no specific comments on this Q&A and 
are adopting the Q&A as proposed.
    Exemptions 7. The Agencies proposed new Q&A Exemptions 7 to 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 provided 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, and ``stands alone.'' One commenter suggested that the 
Agencies allow lenders to defer to an insurer's definition for a 
structural connection as this term is not defined in the Regulation or 
statute, or that the Agencies define this term. As indicated in the 
proposed Q&A, the Agencies have interpreted this term to mean a 
structure is ``detached'' if it stands alone and that this 
interpretation is consistent with the coverage provision of the NFIP's 
Standard Flood Insurance Policy (SFIP) for additions and extensions to 
a dwelling unit. The proposed answer also included a reference to the 
NFIP Flood Insurance Manual for additional information. However, the 
Agencies are amending the Q&A to track the language of the Regulation 
and are removing the FEMA example as it is unnecessary. Therefore, the 
Agencies are adopting the Q&A with these changes.

Proposed Section III. Coverage (NFIP/Private Flood Insurance)

    The Agencies proposed in the July 2020 Questions and Answers to 
move existing section XI to section III. This section included two new 
Q&As (Coverage 1 and 3), and existing Q&A 64 redesignated as Coverage 
2. Because the Agencies are consolidating the July 2020 Proposed 
Questions and Answers and the March 2021 Proposed Questions and 
Answers, for organizational purposes, in the 2022 Interagency Questions 
and Answers the Agencies are moving the three Q&As under Section III 
Coverage to other sections as noted below and reassigning section III.
    The Agencies proposed new Q&A Coverage 1 in the July 2020 Proposed 
Questions and Answers to assist lenders in complying with the 
discretionary acceptance provision and mutual aid societies provision 
in the Agencies' 2019 Final Rule. The Agencies are redesignating this 
Q&A as Q&A Discretionary 4. Please refer to Section IV, Q&A 
Discretionary 4 for the Agencies response to comments.
    The Agencies proposed to redesignate existing Q&A 64 as Coverage 2. 
This Q&A addresses when a lender may rely on an insurance policy 
providing portfolio-wide coverage, removes the reference to criteria 
set forth by FEMA, and includes language addressing a lender's reliance 
on a policy that provides portfolio-wide coverage. The Agencies are re-
designating this Q&A as Q&A Applicability 14. Please refer to Section 
I, Q&A Applicability 14 for the Agencies response to comments.
    The Agencies proposed new Q&A Coverage 3 in the July 2020 Proposed 
Questions and Answers to address when mandatory flood insurance on a 
designated loan is required to be in place during the closing process. 
The Agencies redesignated Q&A Coverage 3 as Q&A Applicability 15. 
Please refer to Section I, Q&A Applicability 15 for the Agencies 
response to comments.
    Additionally, the Agencies proposed in the July 2020 Proposed 
Questions and Answers to delete existing Q&A 63 because it was 
inconsistent with the Agencies' final rule implementing the private 
flood insurance provision of the Biggert-Waters Act.\23\ The Agencies 
received no specific comment on this proposed change and are deleting 
this Q&A as proposed.
---------------------------------------------------------------------------

    \23\ 84 FR 4953 (Feb. 20, 2019).
---------------------------------------------------------------------------

Section III. Private Flood Insurance--Mandatory Acceptance (Mandatory)

    The 2019 Final 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 2019 Final 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 
statement set forth in the rule.

[[Page 32835]]

    The Agencies proposed a number of Q&As regarding mandatory 
acceptance and the compliance aid provision in the March 2021 Proposed 
Questions and Answers. As discussed in further detail below, the 
Agencies are combining proposed Q&A Mandatory 2 with proposed Q&A 
Discretionary 4 and renumbering the Q&A as Q&A Private Flood Compliance 
11. The Agencies also are renumbering the other Q&As in this section 
accordingly.
    General Comments. The Agencies received some general comments 
regarding the Q&As related to the mandatory acceptance of private flood 
insurance policies. One commenter was supportive of the proposed Q&As, 
stating that the Agencies' implementation of the mandatory acceptance 
provisions and widespread use of a compliance aid assurance clause have 
allowed the private flood insurance market to thrive. This commenter 
believed the mandatory acceptance provisions facilitate private policy 
placements, ensure that consumers have access to affordable flood 
coverage, and provide security to lenders seeking to fulfill their 
compliance obligation.
    Another commenter suggested the Q&As could incorporate language 
that clarifies digital transmission of relevant flood coverage 
documents, as well as physical transmission or use of paper documents, 
is permissible. As explained under Q&A Discretionary 2, the Regulation 
does not address the acceptability of electronic records, but lenders 
may accept electronic and digital records for recordkeeping purposes.
    One commenter noted that a number of the mandatory acceptance Q&As 
refer to ``reviews'' of private flood insurance policies. This 
commenter stated that it would be helpful to clarify that a flood 
insurance policy issued by a private insurer is subject to two 
different reviews. According to the commenter, as with any flood 
insurance policy, including NFIP policies, the lender or servicer must 
conduct the mandatory purchase requirement review in connection with a 
triggering event. The commenter stated that this review would include, 
among other things, determining whether the policy contains the 
appropriate coverage limits, deductible, term of coverage, and 
mortgagee clause. In addition, the commenter stated that, the lender or 
servicer must determine whether a private flood insurance policy 
satisfies the definition of ``private flood insurance'' or could 
otherwise be accepted by a lender under the discretionary acceptance 
criteria. The commenter requested this clarification throughout the 
Interagency Questions and Answers.
    The Agencies understand the commenter's confusion regarding the 
term ``review'' as used in some of the Q&As in the mandatory acceptance 
section. The Agencies have generally clarified the type of review 
involved for relevant mandatory acceptance Q&As, either in the text of 
the Q&A or the preamble.
    Mandatory 1. Proposed new Q&A Mandatory 1 addressed whether a 
lender may decide to only accept private flood insurance policies under 
the mandatory acceptance provision of the Regulation. The proposed 
answer confirmed that a lender may decide to only accept private flood 
insurance policies that the lender is required to accept under the 
mandatory acceptance provision because the policies meet the definition 
of ``private flood insurance'' under the Regulation. The proposed 
answer also clarified 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 provision in the Regulation. The 
Agencies received no specific comments on this Q&A and are adopting it 
as proposed with minor non-substantive edits.
    Mandatory 2 (Proposed as Q&A Mandatory 3). Proposed new Q&A 
Mandatory 3 addressed 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 
explained that the Regulation does not require a lender to originate a 
loan that does not meet the lender's underwriting criteria. Further, 
the proposed answer noted 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 Q&A Applicability 1, as proposed and as adopted by the Agencies, the 
mandatory flood insurance purchase requirement does not apply within 
non-participating communities where NFIP insurance is not available 
under the Act. Therefore, the proposed answer states 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. The Agencies 
received no specific comments on this Q&A and are adopting it as 
proposed, with minor changes for clarity, and renumbered as Q&A 
Mandatory 2.
    Mandatory 3 (Proposed as Q&A Mandatory 4). Proposed new Q&A 
Mandatory 4 addressed whether the compliance aid assurance clause could 
act as a conformity clause that would make a flood insurance policy 
issued by a private insurer conform to the definition of ``private 
flood insurance'' under the Regulation. The proposed answer clarified 
that the compliance aid assurance clause is not intended to act as a 
conformity clause but rather to facilitate the ability of lenders and 
borrowers to recognize policies that meet the definition of ``private 
flood insurance'' and promote the consistent acceptance of policies 
that meet this definition.
    The Agencies received a few comments on this proposed Q&A. One 
commenter agreed in principle that the compliance aid language should 
not, and cannot, act as a conformity clause, due mainly to the unique 
legal status that the term ``conformity clause'' has in State insurance 
regulation and contract law. Another commenter noted that whether the 
compliance aid assurance clause acts as a conformity clause is best 
interpreted by State insurance regulation and contract law. The third 
commenter explained that interpretation of insurance contracts, 
including whether the compliance aid assurance clause acts as a 
conformity clause, should be a matter of State law. This commenter 
further stated that this Q&A is outside the scope of the Federal flood 
insurance statutes and regulations, and is outside the Agencies' 
authority to interpret and apply those Federal statutes and 
regulations. The commenter recommended instead that the Agencies 
address this question by providing guidance that this is a matter of 
State insurance contract law. The Agencies disagree with this 
commenter's statement regarding the scope of the Act and Regulation and 
the Agencies' authority to interpret or apply the Act and Regulation. 
The Agencies adopted the compliance aid provision in the Regulation 
pursuant to the authority granted to the Agencies in the Act to issue 
the Regulation.\24\ Therefore, the Agencies have the authority to 
interpret this provision in a Q&A.
---------------------------------------------------------------------------

    \24\ 42 U.S.C. 4012a(b)(1).
---------------------------------------------------------------------------

    Additionally, a few of the commenters recommended that the Agencies 
delete references to ``assurance clause'' in this Q&A and revert to 
prior language that simply refers to this clause as the compliance aid 
language or statement. The commenters noted that the addition of 
``assurance clause'' in the current

[[Page 32836]]

Q&A could infer a meaning beyond that intended by the Agencies because 
the term ``assurance clause'' has broad meaning under State insurance 
regulations and insurance laws. The Agencies agree with these comments. 
The Agencies are removing references to ``assurance clause'' in the 
final Q&A, as well as in the other Q&As, and will refer to this as the 
``compliance aid statement'' per the Regulation. With this change, and 
a minor change for clarity, the Agencies are adopting this Q&A as 
proposed and renumbered as Q&A Mandatory 3.
    Mandatory 4 (Proposed as Q&A Mandatory 5). Proposed new Q&A 
Mandatory 5 stated 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 noted 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.
    One commenter believed that a flood insurance policy issued by a 
private insurer that includes the compliance aid statement must be 
accepted and did not support Q&A Mandatory 5. The Agencies have been 
clear that a lender is not required to accept a flood insurance policy 
issued by a private insurer solely because it contains the compliance 
aid statement. Lenders may still, at their discretion, review a flood 
insurance policy issued by a private insurer that contains the 
compliance aid statement and reject the policy if they do not believe 
it meets the definition of ``private flood insurance'' or if it does 
not meet other requirements of the Regulation, such as providing the 
required amount of insurance.
    Other commenters emphasized that Q&A Mandatory 5 is confusing and 
unclear. For example, commenters pointed out that a lender does not 
have to accept a flood insurance policy issued by a private insurer 
that does not meet the coverage requirements and a review is not 
required if a policy does not meet the coverage requirements. 
Commenters were unsure if the ``required to accept'' phrase in the 
question applies only to an assessment of whether the policy meets the 
definition of ``private flood insurance'' or if a lender could be 
required to accept the policy even if the policy is otherwise 
insufficient (such as the required dollar amount of coverage).
    Some commenters believed the Agencies make an assumption about a 
given lender's processes by concluding that the lender would review a 
policy under mandatory acceptance criteria before the lender would 
review under discretionary acceptance criteria even though the Agencies 
make clear under proposed Q&A Mandatory 8 that a lender ``may first 
review the policy to determine whether it meets the criteria under the 
discretionary acceptance provision.'' One commenter emphasized that the 
Agencies go further than necessary in the proposed response and seem to 
dictate certain processes for the lender.
    In addition, commenters suggested the Agencies consider alternative 
language for Q&A Mandatory 5. One commenter was confused by the 
Agencies' choice of language that did not align with the Regulation or 
the preamble discussion on the proposed Q&A. One commenter recommended 
the Agencies modify the answer to use plain language from the 2019 
Final Rule and use consistent language to avoid confusion regarding key 
compliance concepts.
    As explained in the preamble to the 2019 Final Rule, the Regulation 
does not permit lenders to reject a flood insurance policy issued by a 
private insurer solely because the policy is not accompanied by the 
compliance aid statement.\25\ The Agencies stress that the compliance 
aid statement is meant to be an aid for lenders and it is not required 
for lenders to accept a flood insurance policy issued by a private 
insurer. In addition, lenders should remember that other aspects of the 
Regulation must be met for a lender to accept a flood insurance policy 
issued by a private insurer, even if the policy meets the definition of 
``private flood insurance.''
---------------------------------------------------------------------------

    \25\ 84 FR 4953, 4959 (Feb. 20, 2019).
---------------------------------------------------------------------------

    However, the Agencies understand the commenters' concerns about Q&A 
Mandatory 5 as proposed and are incorporating suggested changes to 
address these issues. The final answer provides that if a flood 
insurance policy issued by a private insurer includes the compliance 
aid statement, the lender may choose to rely upon the statement and 
would not need to review the policy further to determine if the policy 
meets the definition of ``private flood insurance.'' The final answer 
also makes clear, however, that the lender is not required to accept 
this policy based upon inclusion of the compliance aid statement alone 
and may choose to make its own determination about whether the policy 
meets the definition of ``private flood insurance'' or whether the 
policy is acceptable under the discretionary acceptance or mutual aid 
criteria. In addition, if a flood insurance policy issued by a private 
insurer does not include the compliance aid statement, the final answer 
provides that the lender may not reject the policy solely because it 
does not include this statement. The final answer also states that a 
lender is not relieved from the requirement to accept a policy that 
meets the definition of ``private flood insurance'' and provides the 
required amount of insurance under the Regulation. The final answer 
also provides that the lender may determine the policy is acceptable 
under the discretionary acceptance or mutual aid criteria.
    Lastly, as mentioned in Q&A Mandatory 3 in this section, the 
Agencies are changing the term ``compliance aid assurance clause'' 
throughout this Q&A to ``compliance aid statement'' to be consistent 
with the Regulation.
    With these changes, the Agencies are adopting proposed Q&A 
Mandatory 5 and renumbering it as Q&A Mandatory 4.
    Mandatory 5 (Proposed as Q&A Mandatory 6). Proposed new Q&A 
Mandatory 6 discussed whether a lender is required to conduct an 
additional review of a flood insurance policy issued by a private 
insurer under the mandatory acceptance provision if the policy includes 
the compliance aid assurance clause. The proposed answer stated 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 proposed answer also clarified 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, 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 included a cross-reference to proposed new Q&A 
Mandatory 7.
    The Agencies received a specific comment on Q&A Mandatory 6 that 
was

[[Page 32837]]

supportive. The commenter agreed that if a policy or an endorsement to 
the policy contains the compliance aid statement, further review is not 
necessary in order for the lender to determine that a policy meets the 
definition of ``private flood insurance.'' Therefore, the Agencies are 
adopting this Q&A as proposed, other than amending the term 
``compliance aid assurance clause'' throughout the Q&A to ``compliance 
aid statement'' to be consistent with the Regulation. The Agencies are 
also renumbering Q&A Mandatory 6 as proposed to Q&A Mandatory 5 and 
updating the included cross-reference.
    Mandatory 6 (Proposed as Q&A Mandatory 7). Proposed new Q&A 
Mandatory 7 described 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, under the 
proposed answer, the lender also must ensure that the amount of 
insurance 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. The answer 
also included a cross-reference to proposed new Q&A Mandatory 6.
    One commenter recommended that the Agencies revise Q&A Mandatory 7 
and include a new Q&A under the Private Flood Compliance section. This 
commenter understood that the Agencies are attempting to reassure 
lenders who may be reluctant to accept a flood insurance policy issued 
by a private insurer merely because the policy includes the compliance 
aid statement. At the same time, the commenter believed that the 
Agencies do not want lenders to overlook the fundamental ``requirements 
for coverage'' review. Thus, the commenter suggested the Agencies 
simplify Q&A Mandatory 7 and move the language regarding coverage and 
other applicable requirements to a new Q&A under the Private Flood 
Compliance section. In addition, this commenter further recommended the 
Agencies include appropriate cross-references between Q&A Mandatory 7 
and their suggested new Q&A, as well as to applicable questions under 
other sections. The Agencies disagree with this comment. Under the 
Regulation, lenders must determine whether a policy issued by a private 
flood insurance company meets both the definition of ``private flood 
insurance'' and the required amount of insurance under the Regulation. 
The intent of proposed Q&A Mandatory 7 is to remind lenders that they 
must review the policy to ensure that it meets the amount of insurance 
required under the Regulation even if the policy includes the 
compliance aid statement.
    Many commenters had concerns with the sentence in the answer 
recommending that lenders ensure the accuracy of other key aspects of 
the policy, such as the borrower's name and address. These commenters 
specifically found the phrase ``key aspects of the policy'' to be 
ambiguous, open-ended, extraneous, and potentially problematic and 
recommended either its deletion or amendment. Specifically, one 
commenter noted that because there are no statutory or regulatory 
requirements or references regarding this phrase or the included 
examples, this sentence could confuse lenders. Another commenter stated 
that the Agencies should clearly define the exact elements that lenders 
must review beyond the compliance aid statement. One commenter 
suggested that the Agencies instead instruct lenders to review the 
policy as they would review other insurance policies for safety and 
soundness. Further, one commenter explained that there are many valid 
reasons for differences between the named parties on a mortgage and a 
property insurance policy as well as for differences in the physical 
address of the property, especially if the mortgage system reflects the 
legal description for the property as opposed to a mailing address.
    The Agencies agree with the commenters that the phrase ``other key 
aspects of the policy'' is unclear. Because this sentence is not 
necessary to answer the question, the Agencies are deleting it in the 
final answer. Using alternative language regarding safety and 
soundness, as suggested by one commenter, would not eliminate 
ambiguity. However, the Agencies note that this deletion does not 
eliminate the need for lenders to conduct other reviews of a policy 
pursuant to their internal processes.
    One commenter requested that the Agencies use the term ``limit'' 
instead of the term ``coverage'' the first time it appears in the 
answer. The Agencies have considered this request and are changing this 
use of ``coverage'' to ``amount of insurance,'' which is the phrase 
used in the Regulation.
    Additionally, the Agencies are adding a reference to the Regulation 
in the question in this Q&A to avoid further confusion. The Agencies 
also are amending the term ``compliance aid assurance clause'' 
throughout the Q&A to ``compliance aid statement'' to be consistent 
with the Regulation.
    With these changes, the Agencies are adopting this Q&A, renumbering 
it as Q&A Mandatory 6, and making a corresponding update to the 
included cross-reference.
    Mandatory 7 (Proposed as Q&A Mandatory 8). Proposed new Q&A 
Mandatory 8 addressed 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 clarified 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 still 
needs to determine whether it must accept the policy under the 
mandatory acceptance criteria. The proposed answer also reminded 
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.
    The Agencies did not receive any specific comment on Q&A Mandatory 
8. However, the Agencies are adding a cross reference to Q&A 
Discretionary 2 regarding the documentation of the sufficient 
protection of the loan, which provides that the lender may document 
this information electronically. The Agencies also are amending the 
term ``compliance aid assurance clause'' in the question to 
``compliance aid statement'' to be consistent with the Regulation. The 
Agencies are adopting Q&A Mandatory 8 with minor clarifying edits and 
renumbering as Q&A Mandatory 7.
    Mandatory 8 (Proposed as Q&A Mandatory 9). Proposed new Q&A 
Mandatory 9 noted 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 also must 
ensure that the policy provides the amount of insurance as required 
under the Regulation. One commenter pointed out that many private flood 
insurance policies do not include this representation on the 
declarations page, but they do include it in the policy, and requested 
that the Agencies edit this Q&A to reflect this fact. The Agencies note 
that the

[[Page 32838]]

Regulation provides that a lender may accept a flood insurance policy 
issued by a private insurer if the compliance aid statement is in the 
policy. The purpose of the proposed Q&A was to provide guidance when a 
lender receives only the declarations page and not the policy. 
Therefore, to clarify this Q&A, the Agencies are changing the question 
to refer to the lender only receiving a declarations page without 
receiving a copy of the policy.
    Another commenter asked the Agencies to amend the response to make 
it clear that the lender may determine that the policy meets the 
definition of ``private flood insurance'' without further review. The 
Agencies agree and have revised the answer as suggested by this 
commenter, which better reflects the language in the Regulation.
    One commenter stated that it would be helpful for the Agencies to 
identify in the answer the specific items that a lender must review to 
ensure compliance with the mandatory purchase requirement when the 
compliance aid assurance clause is included. The Agencies have 
addressed this issue in Q&A Mandatory 6 and included a cross-reference 
to Q&A Mandatory 6 in Q&A Mandatory 9. Therefore, the Agencies do not 
believe it is necessary to amend Q&A Mandatory 9 to include this 
information.
    Lastly, the Agencies are amending the term ``compliance aid 
assurance clause'' throughout the Q&A to ``compliance aid statement'' 
to be consistent with the Regulation.
    With the changes described above, the Agencies are adopting this 
Q&A, renumbering it as Q&A Mandatory 8, and making a corresponding 
update to the included cross-reference.
    Mandatory 9 (Proposed as Private Flood Compliance 11). The Agencies 
are renumbering proposed Q&A Private Flood Compliance 11 as Q&A 
Mandatory 9 in the 2022 Interagency Questions and Answers because it 
more appropriately fits within the Mandatory Acceptance Q&A section. As 
proposed, this Q&A addressed whether a lender may accept a private 
flood insurance policy that includes a compliance aid assurance clause, 
but that also includes a disclaimer that the ``insurer is not licensed 
in the State or jurisdiction in which the property is located.'' The 
proposed answer explained 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. The proposed answer also 
included a cross-reference to proposed Q&A Private Flood Compliance 10, 
which addressed whether lenders may accept policies issued by private 
insurers that are surplus lines insurers \26\ for noncommercial 
residential properties.
---------------------------------------------------------------------------

    \26\ 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.
---------------------------------------------------------------------------

    Some commenters suggested revising the answer to be more direct and 
to remove language that is addressed in Q&A Private Flood Compliance 
10. The Agencies agree with the commenters that the answer can be 
worded more effectively and are adopting language similar to that 
recommended by one of the commenters. As revised, the answer provides 
that 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, but contains a compliance aid statement, lenders may accept 
the policy as long as the policy complies with the Regulation and 
applicable State laws. However, the Agencies note that the language 
removed from the proposed answer that provided specific circumstances 
under which lenders may accept a policy issued by a surplus lines 
insurer is still relevant. Specifically, 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.''
    The Agencies also are making one technical change to this question, 
amending the term ``compliance aid assurance clause'' to ``compliance 
aid statement'' to be consistent with the Regulation.
    With the changes described above, the Agencies are adopting Q&A 
Mandatory 9.

Section IV. Private Flood Insurance--Discretionary Acceptance 
(Discretionary)

    The 2019 Final 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). The 2019 Final Rule also permits a 
lender, at its discretion, to accept certain mutual aid plans that meet 
the conditions stated in the rule.
    The Agencies proposed the Q&As in this section, except for Q&A 
Discretionary 4, in the March 2021 Proposed Questions and Answers. The 
Agencies originally proposed Q&A Discretionary 4, as adopted in these 
2022 Interagency Questions and Answers, as Q&A Coverage 1 in the July 
2020 Proposed Questions and Answers. The Agencies are combining 
proposed Q&A Discretionary 4 with proposed Q&A Mandatory 2 and 
renumbering this Q&A as Q&A Private Flood Compliance 11, as discussed 
in more detail below.
    Discretionary 1. Proposed Q&A Discretionary 1 addressed whether 
lenders are required to accept flood insurance policies that meet the 
discretionary acceptance criteria. The proposed answer notes 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 clarified 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. The Agencies received no specific comments on this Q&A and 
are adopting Q&A Discretionary 1 as proposed.
    Discretionary 2. Proposed Q&A Discretionary 2 addressed 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 explained 
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 included a cross-reference to Q&A Discretionary 4 which 
discusses some factors to consider when determining whether a flood 
insurance policy issued by a private insurer provides sufficient 
protection of the

[[Page 32839]]

loan, consistent with safety and soundness principles.\27\ Furthermore, 
the proposed answer noted 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.
---------------------------------------------------------------------------

    \27\ 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).
---------------------------------------------------------------------------

    One commenter on this Q&A suggested that the Agencies clarify that 
a lender's electronic records may serve as documentation that 
demonstrates that a policy provides sufficient protection of the loan. 
The Agencies note that specific provisions in the Regulation allow for 
the use of electronic records. For example, the Regulation allows for 
the use of the Standard Flood Hazard Determination Form in an 
electronic format. Although there are no general provisions in the 
Regulation regarding the acceptability of electronic records, the 
Agencies agree that electronic and digital records are acceptable for a 
lender's recordkeeping purposes. In consideration of this comment, the 
Agencies are amending the Q&A by adding that a lender's review of a 
policy under the discretionary acceptance provision may be performed 
and recorded electronically.
    The second commenter asked the Agencies to clarify whether in 
situations where a loan is secured by a building and land, and the 
value of the land securing a loan is greater than the loan amount, the 
lender could determine that flood insurance is not required or that the 
deductible may be higher than what the mandatory purchase criteria 
allows. The Agencies note that the Regulation requires that flood 
insurance 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, and that land is 
excluded from this analysis. Therefore, the lender cannot waive the 
flood insurance requirement based on the value of the land. 
Additionally, a flood insurance policy issued by a private insurer must 
provide sufficient protection of the designated loan, consistent with 
general safety and soundness principles. When evaluating higher 
deductibles, lenders should ensure the deductible is reasonable 
considering the borrower's financial condition. The Agencies believe 
that no change is needed in the Q&A to address this comment and that 
readers should refer to Q&A Private Flood Compliance 1.
    With the amendment described above, the Agencies are adopting Q&A 
Discretionary 2.
    Discretionary 3. Proposed Q&A Discretionary 3 addressed 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 
provided 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 
further indicated that a lender could rely on the licensing or other 
processes used by the State insurance regulator for such an evaluation.
    A number of commenters suggested that the Agencies provide 
additional examples for evaluating an insurer's solvency, including the 
use of third-party sources of information such as credit rating 
agencies. Although lenders could consider many sources of information 
to evaluate an insurer, the Agencies decline to provide examples other 
than those included in the proposed Q&A. Further, including credit 
rating agencies as an example would be inconsistent with the principle 
in Section 939A of the Dodd-Frank Act, which required the Agencies to 
remove references to, or requirements of reliance on, credit ratings in 
their regulations with regard to assessment of the creditworthiness of 
a security or money market instrument using credit rating agencies. 
Although this provision concerns regulations, and not guidance, and is 
focused on the creditworthiness of a security or money market 
instrument, and not the solvency of an insurer, the Agencies believe it 
would be inappropriate to endorse or reference the use of credit rating 
agencies in the Interagency Questions and Answers in light of Section 
939A of the Dodd-Frank Act.
    One commenter suggested that the Agencies remove the requirement 
for financial institutions to evaluate the solvency and strength of 
private flood insurers. The Agencies note that the Regulation does not 
require lenders to evaluate the solvency and strength of private flood 
insurers. Rather, it requires lenders to determine that the policy 
provides sufficient protection of the designated loan, consistent with 
general safety and soundness principles. Evaluating the solvency and 
strength of private flood insurers is one factor, among others, that 
lenders could consider in making this determination, as detailed in Q&A 
Discretionary 4 as adopted, discussed below. For these reasons, the 
Agencies are adopting the Q&A as proposed, with an update to the 
included cross-reference to reflect Q&A renumbering.
    Discretionary 4 (Proposed as Q&A Coverage 1). The Agencies proposed 
new Q&A Coverage 1 in the July 2020 Proposed Questions and Answers 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. As noted above, the Agencies are renumbering this Q&A as 
Discretionary 4. The Q&A provides additional information on some 
factors to consider when determining whether a flood insurance policy 
issued by a private insurer provides sufficient protection of a loan.
    The Agencies received several comments on this Q&A. One commenter 
supported the Q&A because it is not overly prescriptive and will likely 
enhance the development of the private flood insurance market. A few 
commenters recommended that the Agencies clarify that the sufficient 
protection of a loan requirement only applies to the discretionary 
acceptance provision. The Agencies agree and are clarifying the 
question so that it specifically references the discretionary 
acceptance and mutual aid acceptance provisions.
    One commenter recommended that the Agencies expand the answer to 
explain that if a flood insurance policy issued by a private insurer or 
flood endorsement to an insurance policy issued by a private insurer 
states that the policy meets the definition of private flood insurance 
under 42 U.S.C. 4012a, or includes similar alternative language, such 
as that the coverage is at least as broad as the NFIP, the policy is 
explicitly acceptable. Additionally, the commenter suggested that if 
the flood insurance policy issued by a private issuer is determined to 
be less than the coverage provided under an NFIP policy, and the policy 
states that coverage is amended to match the terms of an NFIP policy, 
that the policy is explicitly acceptable. The Regulation provides a 
specific compliance aid

[[Page 32840]]

provision to assist lenders in determining if a policy meets the 
definition of private flood insurance. While lenders may consider the 
alternative language noted above when reviewing flood insurance 
policies issued by private insurers, making a policy acceptable based 
on such statements would not be consistent with the Regulation. 
Therefore, the Agencies are adopting proposed Q&A Coverage 1, 
renumbered as Discretionary 4, with the amendments discussed above.

Section V. Private Flood Insurance--General Compliance (Private Flood 
Compliance)

    The Agencies proposed eleven new Q&As in this section in the March 
2021 Proposed Questions and Answers. As discussed in more detail above, 
the Agencies are renumbering proposed Q&A Private Flood Compliance 11 
from the March 2021 Proposed Questions and Answers as Q&A Mandatory 9. 
Q&A Private Flood Compliance 11, as adopted in these 2022 Interagency 
Questions and Answers, is a combination of proposed Q&A Mandatory 2 and 
proposed Q&A Discretionary 4 from the March 2021 Proposed Questions and 
Answers.
    Private Flood Compliance 1. Proposed new Q&A Private Flood 
Compliance 1 addressed the maximum deductible permissible for a flood 
insurance policy issued by a private insurer on properties located in 
an SFHA. The proposed answer clarified that the analysis depends on 
whether the lender is accepting the flood insurance policy under the 
mandatory acceptance provision or the discretionary acceptance 
provision.
    For a private flood insurance policy that the lender is accepting 
under the mandatory acceptance provision, the proposed answer stated 
that the Regulation provides that the policy must contain a deductible 
that is ``at least as broad as'' the maximum deductible in the 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. Further, the proposed answer provided 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 also advised 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 \28\ and with how 
deductibles may be evaluated under the discretionary acceptance 
provision. The proposed answer also set forth examples to aid in 
compliance.
---------------------------------------------------------------------------

    \28\ Proposed Q&A Amount 9 provided 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.
---------------------------------------------------------------------------

    Further, the proposed answer provided that 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. The proposed 
answer stated that among other factors a lender could consider in 
determining whether the policy provides sufficient protection of the 
loan is whether the deductible is reasonable based on the borrower's 
financial condition. The proposed answer further provided that 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 provisions. Finally, the proposed answer provided 
that whether a 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.
    The Agencies received several comments on this Q&A. One commenter 
asked for clarification of the flood insurance requirements for non-
residential detached structures that are part of a commercial property 
and requested that the Agencies not limit the applicability of the 
detached structure exemption only to residential properties. The 
Agencies note that Congress established the detached structure 
exemption in HFIAA. This exemption provides that any structure that is 
part of a residential property but detached from the primary 
residential structure and does not serve as a residence is not required 
to be covered by flood insurance. As this statutory exemption only 
applies to a detached structure that is part of a residential property, 
the Agencies cannot create an exemption for detached structures that 
are part of a commercial property. Therefore, the Agencies do not have 
authority to revise the answer as requested.
    One commenter requested clarification regarding the deductible when 
multiple buildings are insured on a single insurance policy. Some other 
commenters requested clarification on how the statement in Q&A Amount 9 
referenced in the final paragraph of the proposed Q&A applies 
differently to a flood insurance policy issued by a private insurer 
covering multiple individual buildings versus an NFIP policy, which is 
limited to covering a single building. In response to these comments, 
the Agencies are amending the answer to add language that provides that 
a lender may accept a private flood insurance policy covering multiple 
buildings regardless of whether any single building covered by the 
policy has an insurable value lower than the amount of the per 
occurrence deductible. The Agencies also are adding cross-references to 
new Q&A Amount 10 and Q&A Private Flood Compliance 2, which address 
related deductible issues, to assist the reader.
    One commenter indicated that the Q&A should include guidance that 
directs private insurers to consider climate change risk when setting 
flood insurance deductibles. As discussed above, climate change risk is 
outside the scope of the Agencies' Interagency Questions and Answers. 
As indicated previously, the Agencies are working individually and on 
an interagency basis to address financial risks associated with climate 
change consistent with the Agencies' regulatory and supervisory 
authorities. Therefore, the Agencies decline to make any change to the 
Q&A in response to this comment. For clarity, the Agencies are 
rewording the reference to the deductible requirement in the 
Regulation. With this clarifying edit and the amendment as noted, the 
Agencies are adopting Q&A Private Flood Compliance 1.
    Private Flood Compliance 2. Proposed new Q&A Private Flood 
Compliance 2 clarified that 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, under both the mandatory 
acceptance provision and the discretionary acceptance provision. The 
proposed answer further stated that 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

[[Page 32841]]

insurance policy contain a deductible no higher than the specified 
maximum deductible for an SFIP. Therefore, the proposed answer 
clarified that a lender may require a borrower's private flood 
insurance policy deductible to 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 noted 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 also included a reference to 
proposed Q&A Private Flood Compliance 1, which also addresses 
deductibles.
    A commenter requested that the Agencies include in the answer an 
example of when a lender is not required to accept a policy for safety 
and soundness reasons related to the deductible, such as when a 
deductible is too high based on the borrower's financial condition. The 
Agencies decline to include an example in the answer because the answer 
already makes clear that a lender can require, as a condition of 
accepting the policy, a lower deductible for safety and soundness 
reasons. The Agencies note that the issues of deductibles as they 
relate to flood insurance policies issued by private insurers are 
already discussed in Q&A Private Flood Compliance 1. Therefore, the 
Agencies are adopting this Q&A as proposed with some minor non-
substantive edits.
    Private Flood Compliance 3. Proposed Q&A Private Flood Compliance 3 
provided 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 provided 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, 
including a policy issued by a private insurer, and, as provided in Q&A 
Fees 1 and Q&A Fees 2, lenders may charge limited, reasonable fees for 
flood determinations and life-of-loan monitoring.\29\ The proposed 
answer reminded lenders that they should be aware of any other 
applicable requirements regarding fees and disclosures of fees.
---------------------------------------------------------------------------

    \29\ New Q&A Fees 1, which is 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. New 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.
---------------------------------------------------------------------------

    A commenter suggested that the Q&A should be expanded to 
specifically speak to the lender's ability to condition its acceptance 
of a flood insurance policy issued by a private insurer on payment of a 
fee. The Agencies disagree. As provided in the Act and the Regulation, 
a lender is required to accept a flood insurance policy issued by a 
private insurer that meets the definition of ``private flood 
insurance,'' as long as the policy meets the amount of insurance 
required under the Regulation. Therefore, a lender cannot condition the 
acceptance of such a policy on the payment of a fee by the borrower. 
Further, as stated above lenders should be aware of any other 
applicable requirements regarding fees and disclosures of fees. 
Therefore, the Agencies are adopting this Q&A as proposed with minor 
non-substantive edits.
    Private Flood Compliance 4. Proposed new Q&A Private Flood 
Compliance 4 addressed the lender's responsibility to ensure a policy 
issued by a private insurer meets the private flood insurance 
requirements of the Regulation if the policy is not available prior to 
loan closing. The proposed answer stated 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 advised lenders to determine whether they have 
sufficient evidence to show the policy meets requirements under the 
Regulation and that if the lender does not have enough information to 
make this determination, then the lender should timely request 
additional information as necessary to complete its review. The 
proposed answer also suggested some optional steps that a lender could 
take to mitigate against closing delays.
    The Agencies received a number of comments on this Q&A. Commenters 
asserted that lenders may not be able to obtain, before closing, a full 
policy or other information sufficient to determine whether a policy 
complies with the private flood insurance requirements of the 
Regulation. The commenters suggested revising the answer to provide 
that a lender may close a loan without determining whether the policy 
satisfies these requirements and, if the lender later determines that 
the policy does not satisfy these requirements, the lender would then 
comply with the Act's force-placed insurance requirements. The 
commenters also noted that with NFIP policies, lenders often rely on 
paid applications as evidence of coverage and receive a declarations 
page only after loan closing.
    The Agencies decline to make the changes the commenters request. If 
a borrower is obtaining a flood insurance policy issued by a private 
insurer, the lender must determine whether the policy meets the 
requirements under the Regulation. If the lender cannot make this 
determination before closing on the loan, it may need to delay the 
closing. As discussed in Q&A Private Flood Compliance 5, the 
declarations page, if available to the lender before closing, may 
provide enough information for the lender to determine whether the 
policy meets the mandatory acceptance provision or discretionary 
acceptance provision of the Regulation or may contain the compliance 
aid statement, in which case the lender may rely solely on the 
declarations page. Otherwise, the lender may choose to ask the borrower 
to obtain the necessary information from the private insurer to provide 
to the lender.
    Further, with respect to the commenter's statement that with NFIP 
policies, lenders often rely before closing on paid applications for 
coverage and do not receive a declarations page until after closing, 
the Agencies note that an NFIP policy does not need to be evaluated to 
determine if it complies with the private flood insurance requirements 
of the Regulation. In contrast, flood insurance policies issued by 
private insurers may not necessarily satisfy the private flood 
insurance requirements of the Regulation. As indicated above, a lender 
must review such a policy to determine if it satisfies these 
requirements.
    Finally, commenters also requested that the answer distinguish its 
applicability to the two forms of review: The review of sufficiency for 
compliance with the mandatory purchase requirement and the review of 
acceptability under the private flood insurance requirements of the 
Regulation. The intent of this Q&A is to remind lenders of their 
responsibility to ensure that a policy meets the private flood 
insurance requirements of the Regulation if the policy is not available 
prior to loan closing. It is not to address any of the other 
requirements in the Regulation. To clarify this, the Agencies are 
amending the Q&A so that it addresses only the private flood insurance 
requirements under the

[[Page 32842]]

Regulation and does not address any other flood requirements that the 
Regulation imposes. The Agencies also are adding in this Q&A a 
reference to Q&A Private Flood Compliance 5, to direct readers to 
guidance on whether a declarations page provides sufficient information 
for a lender to determine whether the policy complies with the private 
flood insurance requirements of the Regulation.
    With the exception of the changes discussed above, the Agencies are 
adopting this Q&A as proposed.
    Private Flood Compliance 5. Proposed new Q&A Private Flood 
Compliance 5 addressed whether a declarations page provides sufficient 
information for a lender to determine whether a policy complies with 
the private flood insurance requirements of the Regulation. Under the 
proposed answer, the lender may rely on the declarations page if it 
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 page 
contains the compliance aid assurance clause. However, if the 
declarations page does not provide sufficient information, the proposed 
answer suggested that the lender should request additional information 
about the policy to aid its determination.
    The Agencies received a number of comments on this Q&A. Similar to 
Q&A Private Flood Compliance 4, the commenters asserted that the 
information lenders receive before closing may not be sufficient to 
determine whether the policy complies with the private flood insurance 
requirements of the Regulation, even though it is sufficient to 
determine that the policy satisfies the mandatory purchase requirement, 
and they suggested revising the answer to provide that a lender may 
close a loan without determining whether the policy satisfies the 
private flood insurance requirements. If the lender later determined 
that the policy does not satisfy these requirements, the lender would 
then comply with the Act's force-placed insurance requirements. For the 
reasons discussed in Private Flood Compliance 4, the Agencies decline 
to make the requested changes.
    Commenters further requested that the answer distinguish its 
applicability to the two forms of review: The review of sufficiency for 
compliance with the mandatory purchase requirement and the review of 
acceptability under the private flood insurance requirements of the 
Regulation. The Agencies note that the focus of this Q&A is on the 
private flood insurance requirements of the Regulation and not any 
other flood requirements imposed by the Regulation. To clarify this, 
the Agencies are revising the question to specifically refer only to 
the private flood insurance requirements under the Regulation.
    Several of the commenters requested guidance about a lender's 
authority to request necessary information from the borrower or 
insurer. The Agencies affirm that lenders may seek necessary 
information from borrowers and insurers. As discussed above, if a 
lender is unable to obtain the necessary information about a policy 
issued by a private insurer before closing, it may need to delay the 
closing. Another commenter suggested that the Q&A is unnecessarily 
limited by references to the declarations page and that that the 
Agencies should revise the Q&A to focus on the various forms of, and 
purposes for examining, evidence of coverage rather than emphasizing 
the declarations page. The Agencies note that this Q&A focuses on the 
declarations page because, prior to proposing this Q&A, the Agencies 
had received many questions requesting guidance on whether a 
declarations page provides sufficient information for a lender to 
determine whether a policy complies with the private flood insurance 
requirements of the Regulation. Q&A Private Flood Compliance 4 makes 
clear that the Act and Regulation do not specify the acceptable types 
of documentation on which a lender must rely when reviewing a flood 
insurance policy issued by a private insurer. If the necessary 
information is contained in other appropriate documentation, the lender 
need not rely on the declarations page.
    The Agencies are adopting this Q&A as proposed, with the change to 
the question discussed above, and with one technical change to the 
answer that amends the term ``compliance aid assurance clause'' to 
``compliance aid statement'' to be consistent with the Regulation.
    Private Flood Compliance 6. The Agencies proposed new Q&A Private 
Flood Compliance 6 to provide guidance on a lender's ability to accept 
multiple-peril policies. Specifically, the proposed answer clarified 
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.
    A commenter requested that the Q&A clarify that lenders are 
permitted to accept both standalone multiple-peril policies that 
address flood risks and policies that insure against other risks and 
that have a flood-related endorsement, as long as the mandatory or 
discretionary provisions of the Regulation are otherwise satisfied. The 
Agencies agree that lenders may accept multiple-peril policies that 
either address flood risks in the policy itself or address flood risks 
as an endorsement to the policy, and have amended to answer to clarify 
this.
    The Agencies are also making a technical correction to this Q&A by 
removing the phrase ``provided the policy meets the requirements under 
the Regulation.'' This phrase is redundant because the private flood 
insurance provisions of the Regulation already require the policy to 
meet the Regulation's requirements.
    The Agencies are adopting this Q&A with this amendment.
    Private Flood Compliance 7. Proposed new Q&A Private Flood 
Compliance 7 addressed the question of how the private flood insurance 
requirements of the Regulation 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 first reminded lenders that they 
must comply with the Federal flood insurance requirements. The proposed 
answer then noted that secondary market investor requirements are 
separate from the requirements of the Regulation, and that, if a lender 
plans to sell loans to such an investor, the lender should carefully 
review the investor's requirements and direct questions regarding these 
requirements to the appropriate entities. The Agencies did not receive 
any specific comment on proposed Q&A Private Flood Compliance 7. 
Therefore, the Agencies are adopting Q&A Private Flood Compliance 7 as 
proposed, with one technical change to the question. Specifically, the 
Agencies are amending the term ``compliance aid assurance clause'' to 
``compliance aid statement'' to be consistent with the Regulation.
    Private Flood Compliance 8. Proposed new Q&A Private Flood 
Compliance 8 provided guidance to servicers for loans covered by flood 
insurance mandated by the Act. Specifically, the proposed answer 
clarified 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

[[Page 32843]]

on behalf of other entities not supervised by the Agencies, the 
proposed answer stated that the servicer should comply with the terms 
of its contract with such an entity. The proposed answer suggested 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 did not receive any specific comment on 
proposed Q&A Private Flood Compliance 8. Therefore, the Agencies are 
adopting Q&A Private Flood Compliance 8 as proposed.
    Private Flood Compliance 9. Proposed new Q&A Private Flood 
Compliance 9 provided 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. Specifically, 
proposed new Q&A Private Flood Compliance 9 explained that a lender 
could determine whether an insurer is licensed, admitted, or otherwise 
approved in a particular State, or whether a surplus lines or 
nonadmitted alien insurer \30\ is permitted to issue an insurance 
policy in a particular State, by reviewing the website of the State 
insurance regulator where the collateral property is located or by 
contacting the State insurance regulator directly. Further, the 
proposed answer noted 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.\31\ The proposed answer stated 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 suggested that lenders 
could review the NAIC's Quarterly Listing of Alien Insurers.\32\
---------------------------------------------------------------------------

    \30\ 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.
    \31\ See https://content.naic.org/cis_consumer_information.htm.
    \32\ See https://www.naic.org/prod_serv_alpha_listing.htm#quarterly_alien.
---------------------------------------------------------------------------

    The Agencies received one comment requesting that the Agencies 
allow financial institutions to rely on the regulated insurance 
companies to comply with the lender's regulatory requirement to use a 
licensed insurance company because it is difficult to identify the 
insurer that is behind a specific flood insurance policy when the 
policy is issued by a syndicate of an alien insurer. As indicated 
above, if there is a compliance aid statement, and the lender is 
accepting the policy under mandatory acceptance, no further review is 
required to determine the status of the insurer. See Q&A Mandatory 6. 
However, the Agencies do not agree that the lender can waive its duty 
to verify whether an insurer is licensed, admitted, or otherwise 
approved in a particular State, or whether a surplus lines or 
nonadmitted alien insurer is permitted to issue an insurance policy in 
a particular State, if there is no compliance aid statement or if the 
lender is choosing to conduct its own review of whether the policy must 
be accepted under the mandatory acceptance provision or may be accepted 
under the discretionary acceptance provision. The Agencies are adopting 
Q&A Private Flood Compliance 9 as proposed.
    Private Flood Compliance 10. Proposed new Q&A Private Flood 
Compliance 10 addressed whether lenders may accept policies issued by 
private insurers that are surplus lines insurers for noncommercial 
residential properties. The proposed answer explained 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, the proposed answer confirmed 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, which the Agencies noted in the preamble to the 
March 2021 Proposed Questions and Answers and in the proposed answer is 
consistent with the Act and the Regulation.\33\ Specifically, the 
Agencies explained that 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 noted 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.''
---------------------------------------------------------------------------

    \33\ 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).
---------------------------------------------------------------------------

    As the Agencies discussed in the preamble to the March 2021 
Proposed Questions and Answers, 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 
noted 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.
    In the preamble to the March 2021 Proposed Questions and Answers, 
the Agencies provided an example to illustrate this concept, noting 
that under section 1776 of the California Insurance Code, the 
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].'' \34\ In 
addition,

[[Page 32844]]

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].'' \35\ However, as discussed in the March 2021 Proposed 
Questions and Answers, 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.
---------------------------------------------------------------------------

    \34\ Cal. Ins. Code Section 1776.
    \35\ Id.
---------------------------------------------------------------------------

    Some commentors suggested that the Agencies consider removing or 
redrafting the Q&A because it suggests that lenders have an independent 
obligation to verify the eligibility of surplus lines insurers seeking 
to write flood coverage. The Agencies decline to make the suggested 
changes noting that, absent a compliance aid statement under the 
mandatory acceptance provision, the lender is required under the 
Regulation to verify the insurer's eligibility, as discussed above in 
connection with Q&A Private Flood Compliance 9. One commenter also 
suggested shortening the answer to only include the first sentence. The 
Agencies intentionally included the more detailed answer based on 
questions the Agencies have received and do not elect to shorten it. 
Therefore, the Agencies are adopting Q&A Private Flood Compliance 10 as 
proposed with one minor non-substantive edit to the question.

Private Flood Compliance 11 (Proposed as Q&As Mandatory 2 and 
Discretionary 4).

    Proposed Q&A Mandatory 2 and proposed Q&A Discretionary 4 addressed 
lender requirements for reviewing flood insurance policies issued by 
private insurers. Because both proposed Q&As discussed similar issues, 
the Agencies are combining these two Q&As and renumbering them as Q&A 
Private Flood Compliance 11.
    Proposed new Q&A Mandatory 2 addressed when a lender must review a 
flood insurance policy issued by a private insurer to make sure the 
policy meets the mandatory acceptance criteria, other than at loan 
origination. The proposed answer provided that other than at loan 
origination, a lender must review a flood insurance policy issued by a 
private insurer to determine whether it meets the mandatory acceptance 
criteria when the policy comes up for renewal, or any time the borrower 
presents the lender with any new flood insurance policy issued by a 
private insurer. The proposed answer clarified that a lender must 
review the policy in these instances regardless of whether a triggering 
event occurred (making, increasing, extending or renewing a loan).
    The proposed answer further explained that 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 and clarified that 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. The proposed answer indicated 
that 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 and further indicated that if the borrower does not 
purchase flood insurance that complies with the Regulation, the lender 
must purchase insurance on the borrower's behalf.
    The proposed answer also clarified that if a lender 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 proposed answer indicated 
that the lender must document its conclusion regarding sufficiency of 
protection of the loan in writing.
    Proposed Q&A Discretionary 4 addressed 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 provision. The proposed answer 
provided 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 must review the 
policy upon renewal to ensure that it continues to meet the 
discretionary acceptance requirements. The proposed answer also stated 
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.
    One commenter to proposed Q&A Mandatory 2 stated its belief that a 
private policy should be reviewed either at every policy renewal or 
when making, increasing, extending or renewing a loan but believes it 
would be best if the policy is reviewed when making, increasing, 
extending or renewing a loan. This commenter also stated that in 
connection with a renewal of a policy, a lender should be able to rely 
on its prior review in connection with mandatory acceptance to be 
consistent with the proposed answer to Q&A Mandatory 2 that allows a 
lender to rely on its prior review in connection with discretionary 
acceptance. Some commenters indicated that proposed Q&As Mandatory 2 
and Discretionary 4 suggest that there is a distinction between the 
level of review required in connection with making, increasing, 
extending or renewing a loan (triggering event) and the level of review 
required to accept a new policy during the loan term or renewal of the 
policy that had initially been accepted, and recommended that the 
Agencies revise the answers to clarify the level of review required in 
connection with a triggering event and the renewal of coverage. Some 
commenters noted that in connection with private flood insurance, a 
private flood insurance policy must be reviewed for both the 
acceptability of the policy (i.e., whether the policy meets the 
definition of ``private flood insurance'') and sufficiency (i.e., the 
amount and term of coverage), and they requested guidance on whether 
there is a distinction between the review required in connection with a 
triggering event and upon renewal of the policy. One commenter 
appreciated the statement in proposed Q&A Mandatory 2 that ``the lender 
may rely on its previous review, provided there are no changes to the 
terms of the policy'' and recommended that the Agencies provide 
additional detail as to what elements of the prior review may be relied 
on during review of the same policy at renewal. Other commenters stated 
that proposed Q&A Mandatory 2 conflicts with proposed Q&A Applicability 
8, which stated that ``[a]part from the requirements mandated when a 
loan is made, increased, extended or renewed, a lender need only review 
and take action

[[Page 32845]]

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.'' These commenters recommended that the Agencies clarify that 
a private policy must be reviewed upon the making, increasing, 
extending or renewing of a loan, and otherwise may be reviewed 
periodically consistent with safety and soundness principles. These 
commenters also suggested that the Q&A refer to acceptance ``criteria'' 
rather than ``requirements'' unless referring to a specific required 
action. The commenters noted that proposed Q&A Discretionary 4 draws a 
distinction between origination and renewal, yet there is no statutory 
requirement to review policies at renewal. The commenters suggested the 
Agencies remove the requirement that the lender must review the policy 
upon renewal, and instead state that the lender should have procedures 
to ensure that the policy continues to meet the discretionary 
acceptance criteria.
    Based on the comments, the Agencies agree that a lender should be 
able to rely at renewal on a prior review of a private policy in 
connection with mandatory acceptance and discretionary acceptance. 
Accordingly, the Agencies are combining the guidance contained in 
proposed Q&A Mandatory 2 with proposed Q&A Discretionary 4 and are 
removing the language in the first paragraph of the proposed answer to 
Q&A Mandatory 2 that would have required a lender to review a private 
policy to determine whether it meets the mandatory acceptance criteria 
when the policy comes up for renewal. To improve readability, the 
Agencies are removing the reference in proposed Q&A Mandatory 2 to 
``making, increasing, extending or renewing a loan'' after the term 
``triggering event'' in the first paragraph. Additionally, the Agencies 
are amending the term ``compliance aid assurance clause'' in the first 
paragraph of proposed Q&A Mandatory 2 to ``compliance aid statement'' 
to be consistent with the Regulation.
    The Agencies also are revising and broadening the second paragraph 
of the answer to proposed Q&A Mandatory 2 to provide that if a lender 
has previously reviewed the flood insurance policy under any of the 
private flood provisions of the Regulation--the mandatory acceptance 
provision, the discretionary acceptance provision, or the mutual aid 
plan provision, the lender may rely on its prior review, provided there 
are no changes to the terms of the policy that would affect acceptance 
under the Regulation. The Agencies also are removing the phrase ``to 
ensure that the policy meets the private flood insurance requirements 
of the Regulation'' in this paragraph of proposed Q&A Mandatory 2 
because it is redundant. The answer for Q&A Private Flood Compliance 11 
provides that the lender should have effective internal controls in 
place through appropriate policies, procedures, training and monitoring 
to ensure compliance with the requirements of the Regulation. The 
Agencies interpret the Regulation to provide that when there are no 
changes to the terms of the policy that would affect acceptance under 
the Regulation, the lender's previous written documentation will 
constitute the documentation required under the Regulation each time 
the policy comes up for renewal and are amending the answer to address 
this issue. The Agencies believe that the answer properly distinguishes 
``criteria'' from ``requirements'' under the Regulation and therefore 
decline to change this term as requested by the commenter.
    Finally, a few commenters to proposed Q&A Mandatory 2 stated that 
references to force placement in the proposed Q&A seemed unnecessary 
and further complicate the message as to the level of review needed 
upon the renewal of a private insurance policy. As the answer to Q&A 
Private Flood Compliance 11 provides that in connection with a policy 
renewal a lender may rely on a previous review of the policy provided 
that there are no changes to the terms of the policy that would affect 
acceptance under the Regulation, the Agencies are not including the 
language regarding force placement that was proposed in Q&A Mandatory 
2.
    With these amendments, the Agencies are adopting Q&A Private Flood 
Compliance 11.

Section VI. Standard Flood Hazard Determination Form (SFHDF)

    Proposed section IV included questions and answers related to use 
of the Standard Flood Hazard Determination Form (SFHDF). The Agencies 
proposed to move existing section XII to section IV for organizational 
purposes. Accordingly, this proposal redesignated existing Q&As 65 
through 68 as Q&As SFHDF 1 through 4, respectively. The Agencies 
proposed changes to the Q&As in this section in the July 2020 Proposed 
Questions and Answers. Because the Agencies are combining the July 2020 
Proposed Questions and Answers and the March 2021 Proposed Questions 
and Answers into one Interagency Questions and Answers document, the 
Agencies are renumbering this SFHDF section as Section VI in the 2022 
Interagency Questions and Answers and streamlining the title.
    SFHDF 1. The Agencies proposed to redesignate existing Q&A 65 as 
Q&A SFHDF 1 with only minor language modifications and no intended 
change in substance or meaning. This Q&A addresses whether the SFHDF 
replaces the borrower notification form. The Agencies received no 
specific comments on this Q&A and are adopting Q&A SFHDF 1 as proposed.
    SFHDF 2. The Agencies proposed to redesignate existing Q&A 66 as 
Q&A SFHDF 2 with only minor language modifications and no intended 
change in substance or meaning. This Q&A addresses whether a lender may 
provide a copy of the SFHDF to the borrower. The Agencies received two 
comments on this proposed Q&A. Both commenters suggested removing the 
phrase ``so they can better understand their flood risk'' from the 
answer as the lender need not contemplate a borrower's intended use of 
a flood determination and there may be other reasons for providing a 
flood determination to a borrower. One commenter suggested that 
references to FEMA's Letter of Determination Review (LODR) process be 
removed from the answer as it falls outside the scope of the question. 
In consideration of the comments received, the Agencies are removing 
the language regarding the borrower's understanding of their flood risk 
and limiting references to the LODR to note only that a lender would 
need to make a flood determination available to a borrower under this 
FEMA process. With these amendments and some minor non-substantive 
edits, the Agencies are adopting Q&A SFHDF 2.
    SFHDF 3. The Agencies proposed to redesignate existing Q&A 67 as 
Q&A SFHDF 3 with only minor language modifications and no intended 
change in substance or meaning. This Q&A addresses the use of an SFHDF 
in electronic format. The Agencies received no specific comments on 
this Q&A and are adopting Q&A SFHDF 3 as proposed.
    SFHDF 4. The Agencies proposed to redesignate existing Q&A 68 as 
Q&A SFHDF 4 with only minor language modifications and no intended 
change in substance or meaning. This Q&A addresses the circumstances 
when a lender may rely on a previous SFHDF. The Agencies received one 
specific comment on this proposed Q&A. The commenter suggested 
clarifying the Q&A to note that an SFHDF may be reused for the same 
collateral on a subsequent loan secured by the same

[[Page 32846]]

collateral. The Agencies note that the existing Q&A states ``if the 
same lender makes multiple loans to the same borrower secured by the 
same secured real estate, the lender may rely on its previous 
determination'' if the other requirements referenced in the answer are 
satisfied. Therefore, no changes to the Q&A are needed to address this 
comment and the Agencies are adopting Q&A SFHDF 4 as proposed.

Section VII. Flood Insurance Determination Fees (Fees)

    The Agencies proposed in the July 2020 Proposed Questions and 
Answers to move existing section XIII, which contains questions and 
answers related to flood insurance determination fees, to proposed 
section V for organizational purposes. Because the Agencies are 
combining the July 2020 Proposed Questions and Answers and the March 
2021 Proposed Questions and Answers into one document, the Agencies are 
renumbering this Fees section as Section VII in the 2022 Interagency 
Questions and Answers.
    Fees 1. The Agencies proposed to redesignate existing Q&A 69 as Q&A 
Fees 1 with only minor changes and no intended change in substance or 
meaning. This Q&A addresses when a lender or servicer can charge a 
borrower a fee for making a flood determination. The Agencies did not 
receive any specific comment on proposed Q&A Fees 1, and are adopting 
it as proposed.
    Fees 2. The Agencies proposed to redesignate existing Q&A 70 as Q&A 
Fees 2 with only minor changes and no intended change in substance or 
meaning. This Q&A addresses whether charges made for life-of-loan 
reviews by flood determination firms may be passed along to the 
borrower. The Agencies did not receive any specific comment on proposed 
Q&A Fees 2 and are adopting it as proposed.

Section VIII. Flood Zone Discrepancies (Zone)

    The Agencies proposed to redesignate the Q&As in existing section 
XIV, which addresses flood zone discrepancies, as section VI, and to 
redesignate current Q&As 71 and 72 as Q&As Zone 1 and 2. The Agencies 
also proposed to add new Q&A Zone 3 to address borrower disputes of a 
lender's flood zone determination. The Agencies proposed these changes 
in the July 2020 Proposed Questions and Answers. Because the Agencies 
are combining the July 2020 Proposed Questions and Answers and the 
March 2021 Proposed Questions and Answers into one document, the 
Agencies are renumbering this Zone section as Section VIII in the 2022 
Interagency Questions and Answers.
    One commenter said that it supported the changes to this section 
because it is frustrating for agents when lenders demand that specific 
flood zones appear on a declarations page; the commenter believes that 
lenders should be concerned only with whether the structure is in an 
SFHA and the limit on the policy. Another commenter stated that all 
three Q&As in this section provide consistent clarification that the 
SFHDF is the dominant form when discrepancies arise.
    Zone 1. The Agencies proposed to redesignate existing Q&A 71 as Q&A 
Zone 1. Q&A 71 addresses what a lender should do when there is a 
discrepancy between the flood hazard zone designation on the flood 
determination form and the flood insurance policy declarations page. 
The Agencies proposed to revise the answer to Q&A 71 to reflect a 
change in the Agencies' expectations regarding a lender's obligation in 
the event of such a discrepancy. The proposal stated that a lender is 
no longer required to attempt to resolve the discrepancy but that the 
lender should consider documenting the discrepancy in the loan file. 
The proposal further stated that 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 is not 
otherwise required to attempt to resolve the discrepancy as previously 
indicated in current Q&A 71.
    Since the Agencies proposed Q&A Zone 1 in July 2020, FEMA has begun 
to implement Risk Rating 2.0 effective October 1, 2021.\36\ Under Risk 
Rating 2.0, the determination of insurance premiums for NFIP policies 
no longer relies on the flood zone. As such, the flood zone is no 
longer included on the declarations page for NFIP policies issued under 
Risk Rating 2.0. Consistent with changes brought on by Risk Rating 2.0, 
and after additional review, the Agencies are further revising this 
question and answer. Specifically, the Agencies are removing references 
to the declarations page and simplifying the answer to state that a 
lender need not reconcile or otherwise be concerned with a flood zone 
discrepancy to be in compliance with the Act and the Regulation. 
Finally, the Agencies are replacing references to the flood zone ``on 
the flood insurance policy declarations page'' with the flood zone 
``associated with a flood insurance policy'' as a clarifying change.
---------------------------------------------------------------------------

    \36\ See https://www.fema.gov/flood-insurance/risk-rating.
---------------------------------------------------------------------------

    Several commenters stated that they appreciate the Agencies' change 
in position that a lender is no longer required to reconcile 
discrepancies between the SFHDF and the declarations page.
    Some commenters sought clarification of this proposed Q&A they 
believed its language erroneously suggested that force placement is 
appropriate to cover a loss that has already occurred when a premium 
deficiency is discovered during the claim handling process. One 
commenter stated that the force placement requirement should apply 
during the life of the loan, whenever a discrepancy arises (such as 
with a policy renewal or replacement or a remapping event), not just if 
a discrepancy arises in connection with the making, increasing, 
refinancing, or extending of a loan (a triggering event). Another 
commenter stated that if permitted by the security instrument, a lender 
could satisfy its statutory and regulatory obligations by advancing the 
funds necessary to pay the additional premium. This commenter suggested 
adding language to the Q&A that would expressly permit this 
alternative. The Agencies note that lenders no longer need to be 
concerned with potential misratings resulting from an incorrect flood 
zone for NFIP policies due to changes made by FEMA in Risk Rating 2.0; 
therefore, the Agencies are revising the final Q&A to reflect this 
change.
    A commenter asked if this Q&A should be understood to mean the 
lender is no longer required to send to the insurance agent and/or the 
underwriter a reminder of FEMA's letter of April 18, 2008 (W-
08021).\37\ Another commenter asked if the lender is allowed to 
continue the existing practice with respect to discrepancies, including 
providing notification to the insurance agent or company. A third 
commenter asked whether the guidance should speak to the lender 
addressing a discrepancy at the time it is discovered rather than at 
the time of a potential loss, which could benefit both the lender and 
the borrower. In response, the Agencies affirm that there is no 
expectation that lenders will continue the existing practice, or take 
any other action, with respect to discrepancies

[[Page 32847]]

beyond what is described in this Q&A. The Agencies believe that Q&A 71, 
which sets forth expectations for resolving discrepancies, is 
unnecessarily burdensome. However, a lender is not prohibited from 
continuing the existing practice or otherwise attempting to resolve a 
discrepancy at any time. The Agencies are making no changes to the Q&A 
in response to these comments.
---------------------------------------------------------------------------

    \37\ FEMA letter W-08021, dated April 16, 2008, set forth 
procedures for insurance companies relating to flood zone 
discrepancies. FEMA's letter attached a Financial Institution 
Letter, FIL-114-2007, issued by the FDIC and dated December 21, 
2007, regarding managing risks associated with lapses in flood 
insurance coverage. FEMA letter W-08021 was archived in April 2018, 
and FIL-114-2007 was deactivated on December 1, 2018.
---------------------------------------------------------------------------

    A few commenters asked the Agencies to clarify that before it 
initiates the force placement process, the lender or servicer must 
first receive notice that the borrower is not paying the additional 
premium and must determine that the coverage is inadequate. As noted 
above, for NFIP policies, lenders no longer need to be concerned with 
potential misratings resulting from an incorrect flood zone due to 
changes made by FEMA in Risk Rating 2.0; therefore, the Agencies are 
revising Q&A Zone 1 accordingly. In light of these revisions, there is 
no longer a need to address these comments regarding force placement in 
this context.
    One commenter requested that the Agencies clarify that the 
reference to the ``appropriate amount of insurance coverage'' refers to 
the dollar limit of flood insurance required. The Agencies confirm that 
this language refers to the dollar amount of the required insurance 
coverage. The Agencies are making no changes to the Q&A in response to 
this comment.
    One commenter sought clarification on how to handle zone 
discrepancies arising from flood insurance policies issued by private 
insurers, and another commenter stated that providing flexibility on 
how discrepancies are resolved with regard to flood insurance policies 
issued by private insurers is important. The Agencies note that 
companies that issue private flood insurance policies have discretion 
in how they may require lenders to handle flood insurance 
discrepancies. Accordingly, the Agencies are unable to provide 
clarification or guidance on this matter. Lenders may want to contact 
the insurers for information. The Agencies are making no changes to the 
Q&A in response to this comment.
    One commenter asked the Agencies to add a statement regarding the 
acceptability of Newly Mapped rated policies that show a non-SFHA zone 
as the ``rated'' flood zone. The statement would provide that as long 
as the ``current'' flood zone matches the lender's determined zone, the 
policy satisfies the mandatory purchase requirement. The Agencies note 
that this request concerns FEMA policy, not Agency policy, and an 
Agency response to the request is beyond the scope of this Q&A.
    The Agencies are adopting Q&A Zone 1 with the revisions discussed 
above.
    Zone 2. The Agencies proposed to redesignate existing Q&A 72 as Q&A 
Zone 2. This Q&A addresses whether a lender is in violation of the 
Regulation if there is a discrepancy between the flood zone on the 
flood determination form and the policy declarations page. The Agencies 
proposed to revise this answer to reflect a change in the Agencies' 
views on this question. The proposed Q&A clarified 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. This proposed change is consistent with the 
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, discussed in connection with Q&A Zone 1, 
above. The Agencies received no specific comments on proposed Q&A Zone 
2 and are adopting it as proposed with two changes. First, as in Q&A 
Zone 1, the Agencies are replacing references to the flood zone ``on 
the flood insurance policy declarations page'' with the flood zone 
``associated with a flood insurance policy'' to conform with changes 
made by FEMA in Risk Rating 2.0.\38\ Second, the Agencies are removing 
the language on documentation to reflect the changes made to Q&A Zone 
1.
---------------------------------------------------------------------------

    \38\ See https://www.fema.gov/flood-insurance/risk-rating.
---------------------------------------------------------------------------

    Zone 3. The Agencies proposed new Q&A Zone 3 to 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. One commenter was 
strongly in favor of this Q&A. Another commenter appreciated the 
guidance and suggested adding emphasis in the first paragraph to the 
possible role of the flood determination vendor in resolving a dispute 
so that the dispute does not need to be elevated to FEMA. The Agencies 
encourage the parties to take appropriate actions to try to resolve 
disputes, and in some situations the appropriate actions could include 
seeking assistance from the vendor. However, the Agencies do not 
endorse particular actions, as appropriate actions are specific to 
particular situations. Accordingly, the Agencies are making no changes 
to this Q&A in response to this comment.
    Another commenter said that although the Q&A is helpful, the 
statement that ``sufficient coverage must be in place . . . until FEMA 
has determined that the building is not in an SFHA,'' may result in 
significant closing delays. The commenter requested that the Agencies 
carefully consider this potential delay and evaluate potential 
opportunities to mitigate these negative effects. As the Regulation 
requires and the proposed Q&A states, if 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 until FEMA has determined that the building 
is not in an SFHA. The Agencies are unable to mitigate the effects of 
any delays in the FEMA review process and are making no changes to the 
Q&A in response to this comment.
    For the reasons discussed above, the Agencies are adopting Q&A Zone 
3 as proposed, with one minor edit to remove the reference to Q&A Zone 
1.

Section IX. Notice of Special Flood Hazards and Availability of Federal 
Disaster Relief (Notice)

    The Agencies proposed moving existing section XV to the proposed 
new section VII. This proposed new section includes existing Q&As 73 
through 75 and 78 through 80, which were redesignated as proposed Q&As 
Notice 1 through 3 and Notice 5 through 7, respectively. Existing Q&As 
76 and 77 were combined into Q&A Notice 4. The Agencies proposed 
changes to the Q&As in this section in the July 2020 Proposed Questions 
and Answers. Because the Agencies are combining the July 2020 Proposed 
Questions and Answers and the March 2021 Proposed Questions and Answers 
into one document, the Agencies are renumbering this Notice section as 
Section IX in the 2022 Interagency Questions and Answers.
    Notice 1. The Agencies proposed to redesignate existing Q&A 73 as 
Q&A Notice 1, with minor language modifications for purposes of clarity 
with no change in meaning or substance. This Q&A explains that the 
Notice of Special Flood Hazards does not have to be provided to each 
borrower for a real estate related loan. In a transaction involving 
multiple borrowers, the lender need only provide the notice to any one 
of the borrowers in the transaction. The Agencies received one comment 
on this Q&A. The commenter asked the Agencies to clarify whether an 
electronic notice must meet the requirements of the Electronic 
Signatures in Global and National Commerce Act (E-Sign Act). The

[[Page 32848]]

Agencies find that the requirements of the E-Sign Act are outside the 
scope of the Q&As and are adopting Q&A Notice 1 as proposed.
    Notice 2. The Agencies proposed to redesignate existing Q&A 74 as 
Q&A Notice 2. This Q&A discusses the notice requirement for lenders 
making loans on mobile homes. In the proposal, the Agencies proposed to 
amend the Q&A to conform more closely to the Regulation. Proposed Q&A 
Notice 2 states 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.
    The Agencies received a number of comments for this Q&A. The 
majority of commenters to this Q&A asked the Agencies to further define 
``reasonable time.'' One commenter stated that proper compliance with 
the Regulation should not be dependent on an inconsistent 
interpretation of ``reasonable time'' from each of the Agencies. 
Another commenter believed lenders were frequently cited for not timely 
providing the Notice of Special Flood Hazards, even though no specific 
time frame is included in the Act or Regulation. This commenter 
cautioned the Agencies against using a time frame that would be 
unreasonable in certain situations, such as a refinance. A third 
commenter stated that it is common for a lender to receive an updated 
flood determination less than 10 days before closing. In such a case, 
the commenter suggested that ``reasonable'' would be the time between 
the revised finding and closing.
    The Agencies also received two comments requesting the addition of 
a new Q&A to address the timing of when a lender must provide the 
Notice of Special Flood Hazards to the borrower. One commenter pointed 
out that the same comment was made in 2009 and stated that there should 
be an explicit reference to the fact that a notice period of fewer or 
greater than 10 days may also be ``reasonable'' according to 
circumstances. Another commenter noted that while a ten-day notice 
period is not a requirement of the Regulation, the ten-day period 
appears to be a well-established and generally accepted time period. 
Therefore, this commenter recommended the Agencies incorporate a new 
Q&A and provided sample language.
    The Agencies acknowledge the difficulties lenders face with no 
defined period in the Act or the Regulation and have decided to modify 
the final Q&A Notice 2 to further define ``reasonable time.'' 
Therefore, in the final Q&A, the Agencies are incorporating language 
from the Interagency Examination Procedures for the Flood Disaster 
Protection Act \39\ and the preamble to the 2009 Interagency Questions 
and Answers, both of which provided guidance on what constitutes a 
``reasonable'' notice. This language is similar to the commenter's 
suggested language for a new Q&A.
---------------------------------------------------------------------------

    \39\ The Task Force on Consumer Compliance of the FFIEC adopted 
revised interagency examination procedures for the Flood Disaster 
Protection Act in 2019. All of the Agencies, except the FCA, are 
members of the FFIEC.
---------------------------------------------------------------------------

    Specifically, the Agencies are making three changes to the final 
Q&A Notice 2. First, the Agencies are revising the question to ask when 
a lender should provide the Notice of Special Flood Hazards to the 
borrower, and how this requirement applies in situations regarding 
mobile homes where the lender may not know where the home is to be 
located until just prior to, or sometimes after, the time of loan 
closing. Second, the Agencies are amending the answer to state that 
what constitutes ``reasonable'' notice will necessarily vary according 
to the circumstances of particular transactions. A lender should bear 
in mind, however, that a borrower should receive a timely notice to 
ensure that (1) the borrower has the opportunity to become aware of the 
borrower's responsibilities under the Act; and (2) where applicable, 
the borrower can purchase flood insurance before completion of the loan 
transaction. Lastly, the Agencies are revising the answer to state that 
the Agencies generally regard 10 calendar days before loan closing as a 
``reasonable'' time interval.
    In addition to comments regarding ``reasonable time,'' one 
commenter asked the Agencies to amend their examination manuals to 
reflect how lenders and/or their servicers are frequently unaware of 
mobile home movement(s) and may only learn of changes afterwards. The 
commenter wanted the examination manuals to align examiner methods with 
the realities of the business processes. The commenter explained that 
``home only'' transactions, where loans are secured by mobile homes not 
located on a permanent foundation, raise safety and soundness concerns 
for lenders. The Agencies do not believe this information is 
appropriate for their examination manuals. These types of situations 
are fact specific and cannot be addressed in the Interagency Questions 
and Answers or examination guidance.
    Another commenter preferred the existing Q&A 74 as written, rather 
than the proposed Q&A Notice 2. This commenter believed that existing 
Q&A 74 gives the lender flexibility to provide the Notice of Special 
Flood Hazards to the borrower ``as soon as practicable after 
determination that the mobile home will be located in an SFHA,'' and it 
further provided that ``lenders should use their best efforts to 
provide adequate notice of flood hazards to borrowers'' as early as 
possible. The commenter stated that the existing Q&A 74 allows lenders 
the flexibility to incorporate their flood insurance compliance into 
the realities experienced in their business operations. The commenter 
recommended the Agencies revise this Q&A to retain this flexibility. As 
stated in the July 2020 Proposed Questions and Answers, the purpose of 
the proposed changes to existing Q&A 74 is to conform to the 
Regulation. The proposed answer, with the changes explained above, is 
consistent with the Regulation, and the Agencies decline to make any 
further changes that would be inconsistent with the Regulation.
    Notice 3. The Agencies proposed to redesignate existing Q&A 75 as 
Q&A Notice 3 with no changes. This Q&A addresses when the lender is 
required to provide notice to the servicer of a loan that flood 
insurance is required. The Agencies received no specific comments on 
this Q&A and are adopting the Q&A as proposed.
    Notice 4. The Agencies proposed to consolidate existing Q&As 76 and 
77 for organizational reasons into Q&A Notice 4, with no substantive 
changes. This Q&A discusses the appropriate form of notice to the 
servicer and whether it is necessary to provide a notice to a servicer 
affiliated with the lender. The Agencies received no specific comments 
to this Q&A and are adopting the Q&A as proposed.
    Notice 5. The Agencies proposed to redesignate existing Q&A 78 as 
Q&A Notice 5. This Q&A considers how long a lender must maintain the 
record of receipt by the borrower of the notice. The Agencies proposed 
amending this Q&A to list examples of what constitutes an acceptable 
record of receipt. The Agencies received one specific comment for 
proposed Q&A Notice 5. This commenter stated this proposed Q&A 
acknowledges that borrowers may be provided with an electronic notice. 
Therefore, this commenter recommended that for further clarity, the 
Agencies add an electronic example to the list in the answer. The 
Agencies agree with the commenter and are revising the answer's list of 
examples to include the

[[Page 32849]]

borrower's electronic signature that acknowledges receipt.
    Notice 6. The Agencies proposed to redesignate existing Q&A 79 as 
Q&A Notice 6, with non-substantive edits to provide additional clarity. 
This Q&A addresses whether a lender can rely on a previous notice if it 
is less than seven years old and it is the same property, same 
borrower, and same lender. The Agencies received no specific comments 
on this Q&A and are adopting it as proposed with one minor non-
substantive edit.
    Notice 7. The Agencies proposed to redesignate existing Q&A 80 as 
Q&A Notice 7 with non-substantive edits to provide additional clarity. 
This Q&A discusses whether the use of the sample form notice is 
mandatory. The Agencies received no specific comments on this Q&A and 
are adopting it as proposed.

Section X. Determining the Appropriate Amount of Flood Insurance 
Required (Amount)

    The Agencies proposed moving existing section II to a new section 
VIII and amending the section heading for streamlining purposes. The 
Agencies also proposed to redesignate existing Q&As 8, 9 and 11 through 
17 as Amount 1, Amount 2, and Amount 3 through 9 respectively. The 
Agencies proposed changes to the Q&As in this section in the July 2020 
Proposed Questions and Answers. Because the Agencies are combining the 
July 2020 Proposed Questions and Answers and the March 2021 Proposed 
Questions and Answers into one document, the Agencies are renumbering 
this Amount section as Section X in the 2022 Interagency Questions and 
Answers.
    Amount 1. The Agencies proposed to redesignate existing Q&A 8 as 
Q&A Amount 1. This Q&A addresses the maximum limit of coverage 
available for the particular type of property under the Act. The 
Agencies proposed to revise this Q&A to discuss NFIP coverage limits 
more fully and to include coverage for condominiums and contents 
coverage. One commenter suggested that the Agencies address commercial 
condominiums in the listed examples of coverage amount calculations to 
clarify that the NFIP does not provide coverage for such units other 
than contents coverage. The Agencies agree that clarification is needed 
with respect to non-residential condominiums and have added a new Q&A 
in Section XII, Q&A Condo and Co-Op 9, to clarify that there is no 
mandatory purchase requirement for a loan secured by an individual non-
residential condominium unit. The Agencies are adopting Q&A Amount 1 as 
proposed, with minor non-substantive edits.
    Amount 2. The Agencies proposed to redesignate existing Q&A 9, 
which defines ``insurable value,'' to Q&A Amount 2. The Agencies 
proposed to remove references in this Q&A to the rescinded FEMA 
Mandatory Purchase of Flood Insurance Guidelines and to provide greater 
clarity with no intended change in substance or meaning. One commenter 
requested clarification as to whether a lender or servicer may rely on 
the replacement cost value listed on the flood insurance policy 
declarations page to establish ``insurable value.'' The Agencies are 
revising the final answer to clarify that a lender may rely on the 
replacement cost value stated on the declarations page if the 
declarations page includes such information. As noted in the proposed 
Q&A, the Agencies recognize that the ``insurable value'' of a building 
may be established by any reasonable approach, as long as such approach 
can be supported.
    Several commenters noted that since most home hazard insurance 
policies do cover foundations, the insurable value on a home hazard 
insurance policy may align with a flood insurance policy without the 
need for an adjustment. Based on the comment received, the Agencies 
have revisited the proposed answer and are removing the language that 
stated that hazard policies do not cover foundations in the final 
answer.
    Some commenters raised concerns about language in the second 
paragraph in this Q&A that indicated that it would be reasonable for 
lenders, in determining the amount of flood insurance required, to 
consider the extent of recovery allowed under the NFIP or a flood 
insurance policy issued by a private insurer for the type of property 
being insured. These commenters noted that the settlement basis for an 
insurance policy is a separate and distinct concept from the insurable 
value of a building and has no impact on insurable value. While the 
Agencies had included such language in the answer to provide further 
background, the Agencies believe information on the extent of recovery 
allowed under the NFIP or a flood insurance policy issued by a private 
insurer is not necessary to answer the question. Accordingly, the 
Agencies are deleting this language in the final Q&A. The Agencies are 
adopting proposed Q&A Amount 2 with the revisions discussed above.
    Amount 3. The Agencies proposed to redesignate existing Q&A 11, 
which provides examples of residential buildings, as Q&A Amount 3. The 
Agencies proposed to revise this Q&A 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. The Agencies did not receive any specific comment on proposed 
Q&A Amount 3. Additionally, the Agencies note that the proposed answer 
was based on language included in an earlier version of the NFIP Flood 
Insurance Manual and that the manual has since been revised. 
Accordingly, the Agencies are making some non-substantive edits to the 
final answer to be consistent with the terminology used in the most 
recent version of the NFIP Flood Insurance Manual. The Agencies are 
adopting this Q&A as proposed, subject to edits noted above.
    Amount 4. The Agencies proposed to redesignate existing Q&A 12, 
which provides examples of non-residential buildings, as Q&A Amount 4. 
The Agencies proposed to revise this Q&A to provide a more detailed 
definition of non-residential building based on the NFIP Flood 
Insurance Manual. A few commenters requested that the Agencies revise 
the answer to remove the language stating that a non-residential 
building is one in which the named insured is a commercial enterprise. 
To address this comment, the Agencies are adding language in the answer 
to clarify that the description of a non-residential building is based 
on language in the NFIP Flood Insurance Manual and are revising the 
answer to more clearly indicate that the building need not be one in 
which the named insured is a commercial enterprise. Another commenter 
requested that the Agencies clarify that the lender may rely on 
borrower or agent assertions as to percentage of residential and 
commercial usage of a given property. The Agencies note that although a 
lender may rely on borrower or agent assertions as to percentage of 
residential and commercial usage of a given property, such language is 
not included in the NFIP Flood Insurance Manual. Therefore, the 
Agencies do not believe it would be appropriate to add such language to 
the answer.
    Additionally, the Agencies note that the language in the proposed 
answer was based on language included in an earlier version of the NFIP 
Flood Insurance Manual and that the manual has since been revised. 
Accordingly, the Agencies are revising the final answer to be 
consistent with the most recent version of the NFIP Flood Insurance 
Manual. The Agencies are adopting the Q&A as proposed, subject to the 
edits discussed above and minor non-substantive edits.

[[Page 32850]]

    Amount 5. The Agencies proposed to redesignate existing Q&A 13 as 
Q&A Amount 5 and to revise it to provide greater clarity with no 
intended change in substance or meaning. This Q&A addresses how much 
insurance is required on a building located in an SFHA in a 
participating community. The Agencies received no specific comment on 
this Q&A and are adopting it as proposed, with a minor non-substantive 
edit.
    Amount 6. The Agencies proposed to redesignate existing Q&A 14 as 
Q&A Amount 6 and to revise it to provide greater clarity with no 
intended change in substance or meaning. This Q&A addresses flood 
insurance requirements when the real estate security contains more than 
one building located in an SFHA in a participating community. The 
Agencies received no specific comment on this Q&A and are adopting it 
as proposed, with a minor non-substantive edit.
    Amount 7. The Agencies proposed to redesignate existing Q&A 15 as 
Q&A Amount 7 and to revise it by making minor language modifications, 
with no intended change in substance or meaning. This Q&A addresses the 
flood insurance requirements where the insurable value of a building or 
mobile home securing a designated loan is less than the outstanding 
principal balance of the loan. The last sentence in this Q&A states 
that since the NFIP policy does not cover land value, lenders determine 
the amount of insurance necessary based on the insurable value of the 
improvements. One commenter suggested that the Agencies change 
``improvements'' to ``building'' because ``improvements'' would include 
items that, like land itself, are not insurable under the NFIP for 
flood loss, such as fencing or paving. The Agencies agree with the 
commenter and are revising the final answer accordingly. The Agencies 
otherwise are adopting Q&A Amount 7 as proposed.
    Amount 8. The Agencies proposed to redesignate existing Q&A 16 as 
Q&A Amount 8 and to revise it to provide greater clarity with no 
intended change in substance or meaning. This Q&A addresses whether a 
lender may require more flood insurance than the minimum required by 
the Regulation. The Agencies received no specific comment on this Q&A 
and are adopting it as proposed.
    Amount 9. The Agencies proposed to redesignate existing Q&A 17 as 
Q&A Amount 9 and to revise it by making minor language modifications, 
with no intended change in substance or meaning. This Q&A addresses 
lender considerations regarding the amount of the deductible on a flood 
insurance policy purchased by a borrower. One commenter recommended 
that the Agencies add language to Q&A Amount 9 to clarify that the 
answer refers to the maximum deductible offered by the NFIP as some 
private insurers offer higher deductibles than are offered under the 
NFIP. The Agencies decline to make this change as Q&A Amount 9 is not 
limited to policies issued by the NFIP.
    Related to the topic addressed in Q&A Amount 9, one commenter 
recommended that the Agencies include a new Q&A that describes the 
function of a deductible and explains the role of the deductible in a 
safety and soundness consideration rather than discussing the 
deductible as related to the adequacy of coverage in satisfaction of 
the mandatory purchase requirement. The Agencies decline to add a new 
Q&A to address this topic as the topic is outside the scope of these 
Interagency Questions and Answers. Another commenter raised an issue 
that is related to, but distinct from the issue addressed in Q&A Amount 
9. To address the issue raised by this commenter, the Agencies have 
added new Q&A Amount 10, discussed below. The Agencies therefore are 
adopting Q&A Amount 9 as proposed.
    New Amount 10. In response to a comment raised on proposed Q&A 
Amount 9 that is related to, but distinct from the issue addressed in 
Q&A Amount 9, the Agencies have added new Q&A Amount 10. This commenter 
noted that the Agencies originally based the answer included in Q&A 
Amount 9 on guidance which assumed that the property is a single 
building covered by a single flood insurance policy. However, this 
commenter noted that it is common for flood insurance policies issued 
by private insurers to include multiple buildings of varying value. The 
commenter recommended that the Q&A clarify that it is acceptable to 
have buildings or structures included on the policy that have a value 
lower than the deductible amount of the policy. The commenter also 
recommended that the Agencies provide that the lender may not allow the 
borrower to use a deductible amount equal to the aggregate insurable 
value of the property to avoid the mandatory purchase requirement for 
flood insurance. The Agencies recognize that many flood insurance 
policies issued by private insurers, such as blanket insurance policies 
purchased by some commercial borrowers, are single policies that 
provide coverage for: (i) Two or more kinds of properties in the same 
location; (ii) the same kind of property in two or more locations; or 
(iii) two or more different kinds of properties in two or more 
locations. Blanket policies often cover multiple perils such as flood, 
earthquake, fire, etc. and are often used to insure commercial real 
estate such as multifamily housing, office buildings, hotels, or 
resorts. Such blanket multi-peril policies may also be used to insure a 
company's chain of locations or franchised properties.
    The Agencies understand that generally, the deductible for a 
blanket flood insurance policy or multi-peril policy is in the form of 
a per-occurrence deductible that is applied to the covered loss arising 
from that occurrence. For example, a flood event that damages multiple 
buildings covered by this type of blanket flood insurance or multi-
peril policy would incur the deductible once, not per building, and 
buildings covered under the terms of this type of policy are insured by 
the policy regardless of the policy deductible amount. The Agencies 
further understand that these types of private blanket flood insurance 
policies and blanket multi-peril policies provide coverage for each 
building covered by such a policy, without regard to the deductible and 
regardless of whether any individual building covered under the policy 
has a value that may be lower than the amount of the deductible.
    Accordingly, the Agencies have included new Q&A Amount 10 to 
address the acceptability of a blanket flood insurance policy or 
blanket multi-peril policy that includes a deductible that may be 
higher than the insurable value of any individual building covered by 
the policy. The Q&A provides that a lender may accept a blanket flood 
insurance policy or blanket multi-peril policy that includes a per-
occurrence deductible, regardless of whether any building covered by 
the policy has an insurable value lower than the amount of the 
deductible. The answer also provides that a lender may not allow the 
borrower to use a deductible amount equal to the aggregate insurable 
value of the property to avoid the mandatory purchase requirement. In 
addition, the answer provides that a lender should determine the 
reasonableness of the deductible on a case-by-case basis, taking into 
account the risk that such deductible would pose to the borrower and 
the lender.

Section XI. Flood Insurance Requirements for Construction Loans 
(Construction)

    The Agencies proposed to move the prior section IV to the new 
section IX and redesignated prior Q&As 19 through 23 as Q&As 
Construction 1 through 5,

[[Page 32851]]

respectively, and added a new construction-related Q&A, as Q&A 
Construction 6. The Agencies proposed changes to the Q&As in this 
section in the July 2020 Proposed Questions and Answers. Because the 
Agencies are combining the July 2020 Proposed Questions and Answers and 
the March 2021 Proposed Questions and Answers into one document, the 
Agencies are renumbering this Construction section as Section XI in the 
2022 Interagency Questions and Answers.
    Construction 1. The Agencies proposed to redesignate existing Q&A 
19 as Q&A Construction 1 and to make minor non-substantive wording 
changes for clarity. This Q&A addresses the applicability of the flood 
insurance requirements to a loan secured only by land that will be 
developed into buildable lot(s). The Agencies did not receive any 
specific comment on Q&A Construction 1 and are adopting it as proposed.
    Construction 2. The Agencies proposed to redesignate existing Q&A 
20 as Q&A Construction 2 and to make minor wording changes for clarity. 
This Q&A addresses whether a loan secured or to be secured by a 
building in the course of construction that is located or to be located 
in an SFHA in which flood insurance is available under the Act is a 
designated loan. The Agencies did not receive any specific comment on 
Q&A Construction 2 and are adopting it as proposed.
    Construction 3. The Agencies proposed to redesignate existing Q&A 
21 as Q&A Construction 3 and to the revise the language by removing 
direct reference to the NFIP Flood Insurance Manual with no intended 
change in substance or meaning. This Q&A addresses whether a building 
in the course of construction that is located in an SFHA in which flood 
insurance is available under the Act is eligible for coverage under an 
NFIP policy. The Agencies received two comments on this Q&A. One 
commenter suggested that the Agencies edit the question to clarify that 
it is describing when construction is covered against loss by an NFIP 
policy. The commenter explained that the word ``eligible'' as used in 
the question could refer to the obligation to obtain insurance under 
the rule or coverage being effective under the policy. The Agencies 
clarify that proposed Q&A Construction 3 is addressing eligibility for 
coverage and not the obligation to obtain coverage nor the 
effectiveness of the coverage. The Agencies are revising the answer in 
final Q&A Construction 3 to explain when the NFIP will insure a 
building in the course of construction based on when the building is 
walled and roofed as well as when materials or supplies are eligible 
for coverage.
    A commenter suggested that the answer to this Q&A, which states 
that ``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,'' does not accurately describe 
what happens to NFIP coverage when construction is halted. 
Specifically, this commenter requested that the Agencies clarify that 
NFIP coverage ceases on day 91 of halted construction, as provided in 
the NFIP Flood Insurance Manual, and not on the day construction is 
halted for a period exceeding 90 days. In response to this comment, the 
Agencies are revising the answer in final Q&A Construction 3 to include 
the specific language from the NFIP Flood Insurance Manual that details 
the effect of a halt in construction on NFIP coverage. Specifically, 
buildings in the course of construction that are not walled and roofed 
are not eligible for coverage when construction stops for more than 90 
days and/or if the lowest floor for rating purposes is below the Base 
Flood Elevation.
    With these changes, the Agencies are adopting Q&A Construction 3.
    Construction 4. The Agencies proposed to redesignate existing Q&A 
22 as Q&A Construction 4. This Q&A addresses when a lender must 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. As in existing Q&A 22, the proposed answer 
provides that a lender may either require borrowers to have a flood 
insurance policy in place at the time of loan origination or allow a 
borrower to defer the purchase of flood insurance until either after 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 the Base Flood Elevation, when the building is walled and 
roofed. However, when flood insurance is deferred, the lender must 
require the borrower to have flood insurance in place before the lender 
disburses funds to pay for building construction (except as necessary 
to pour the slab or perform preliminary site work, such as laying 
utilities, clearing brush, or the purchase and/or delivery of building 
materials).
    The Agencies proposed to revise the answer to incorporate the 
NFIP's removal of the waiver of the 30-day waiting period and to 
provide other clarifications. In particular, the Agencies proposed 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 further 
stated 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. If the lender allows the borrower to defer the purchase of flood 
insurance, 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 in light of the NFIP 30-day 
waiting period requirement, instead of no later than when the 
foundation slab has been poured and/or an EC has been issued as under 
existing Q&A 22.
    One commenter asked the Agencies to clarify at exactly what point 
in time insurance is required if the lender chooses to defer the 
purchase of flood insurance, or whether the timing of this purchase is 
in the lender's discretion. This commenter also stated that the 
proposed answer contradicts itself by stating that, in order to comply 
with the Regulation, 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, such as foundations, 
walls and roofs. Another commenter suggested that the Agencies clarify 
the phrase ``as necessary'' in the statement in the proposed answer 
regarding exceptions to fund disbursement. The Agencies note that under 
both the existing and the proposed answer, a lender has the option to 
defer the requirement to purchase flood insurance until either one of 
the following events occur: 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 the Base Flood Elevation, 
when the building is walled and roofed. Further, the answer provides 
that pouring the slab or performing preliminary site work, such as 
laying utilities, clearing brush, or the purchase and/or delivery of 
building materials is exempted from the requirement to have flood 
insurance in place before the disbursement of funds. To address the 
commenter's concern

[[Page 32852]]

regarding the phrase ``as necessary,'' the Agencies are replacing this 
phrase with ``for funds to be used'' in the final Q&A.
    The Agencies also are revising the answer to specifically reference 
the NFIP 30-day waiting period to provide further explanation and are 
making minor wording changes for clarity.
    With the changes described above, the Agencies are adopting Q&A 
Construction 4.
    Construction 5. The Agencies proposed to redesignate existing Q&A 
23 as Q&A Construction 5. This Q&A addresses the application of FEMA's 
30-day waiting period when deferring the purchase of the flood 
insurance policy in connection with a construction loan. The Agencies 
proposed to revise this Q&A to reflect the NFIP's change in policy 
regarding the 30-day waiting period. Specifically, the proposed answer 
indicated that the 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. One commenter suggested that language should be 
added to allow lenders to rely on agent representations regarding the 
application of a waiting period, referencing the NFIP Flood Insurance 
Manual. The Agencies note that the NFIP Flood Insurance Manual permits 
insurers to rely on an insurance agent's representation that there is 
no waiting period in connection with the insured's application for 
flood insurance on or before the closing date of the loan transaction. 
Therefore, reliance on an agent's representation would not apply in the 
context of a construction loan where the lender allows the borrower to 
defer the purchase of flood insurance after the closing date. 
Accordingly, the Agencies believe that permitting agent reliance in 
this Q&A is not appropriate and are not adding language to the Q&A to 
address this comment.
    The Agencies also proposed to state in the answer that 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. After further review, the Agencies have 
decided to amend this statement so that it more clearly answers the 
question being asked, specifically, the application of the NFIP waiting 
period when the purchase of the flood insurance policy is delayed. The 
final answer states that 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 after making, increasing, renewing 
or extending the loan. Further, as noted in the NFIP Flood Insurance 
Manual, the answer states that a borrower must apply for flood 
insurance on or before the closing date of a loan transaction for the 
NFIP 30-day waiting period to be waived. With these changes, the 
Agencies are adopting Q&A Construction 5.
    Construction 6. The Agencies proposed new Q&A Construction 6 to 
explain when a lender must begin escrowing flood insurance premiums and 
fees if the borrower defers the purchase of flood insurance in 
connection with a construction loan. Specifically, this Q&A provides 
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, 
unless one of the escrow exceptions applies. The Agencies received one 
comment requesting that the Agencies clarify that the question only 
applies to designated loans that do not otherwise qualify for an 
exception to the mandatory escrow requirement. The Agencies do not 
believe that further elaboration is necessary because the answer as 
proposed references the escrow exceptions. Accordingly, the Agencies 
are adopting Q&A Construction 6 as proposed with minor non-substantive 
clarifications.

Section XII. Flood Insurance Requirements for Residential Condominiums 
and Co-Ops (Condo and Co-Op)

    The Agencies proposed moving existing section VI to the new section 
X and expanding the heading to section X to include other multi-family 
dwellings such as cooperatives. Proposed section X included existing 
Q&As 26 through 33, redesignated as proposed Q&As Condo and Co-Op 1 
through 8, respectively and also one new Q&A. The Agencies proposed 
changes to the Q&As in this section in the July 2020 Proposed Questions 
and Answers. Because the Agencies are combining the July 2020 Proposed 
Questions and Answers and the March 2021 Proposed Questions and Answers 
into one document, the Agencies are renumbering this Condo and Co-Op 
section as Section XII in the 2022 Interagency Questions and Answers.
    Condo and Co-Op 1. The Agencies proposed to redesignate existing 
Q&A 26 as Q&A Condo and Co-Op 1, with minor revisions to provide 
greater clarity and accurate references with no intended change in 
substance or meaning. This Q&A discusses whether residential 
condominiums, including multi-story condominium complexes, are subject 
to the statutory and regulatory requirements for flood insurance. The 
Agencies received no specific comment on Q&A Condo and Co-Op 1 and are 
adopting it as proposed.
    Condo and Co-Op 2. The Agencies proposed to redesignate existing 
Q&A 27, which describes an NFIP Residential Condominium Building 
Association Policy (RCBAP), as Q&A Condo and Co-Op 2 with no changes. 
The Agencies received no specific comment on Q&A Condo and Co-Op 2 and 
are adopting it as proposed.
    Condo and Co-Op 3. The Agencies proposed to redesignate existing 
Q&A 28 as Q&A Condo and Co-Op 3, with minor revisions to provide 
greater clarity and accurate references with no intended change in 
substance or meaning. This Q&A addresses the amount of flood insurance 
coverage that a lender must require with respect to residential 
condominium units, including those located in multi-story condominium 
complexes, to comply with the mandatory purchase requirements under the 
Act and Regulation. The Agencies received no specific comment on Q&A 
Condo and Co-Op 3 and are adopting it as proposed with minor non-
substantive edits.
    Condo and Co-Op 4. The Agencies proposed to redesignate existing 
Q&A 29, which discusses the action a lender must take if there is no 
RCBAP coverage, as Q&A Condo and Co-Op 4. The Agencies proposed minor 
revisions to provide greater clarity and accurate references, with no 
intended change in substance or meaning. Two commenters addressed this 
Q&A. The first commenter requested that the Agencies address commercial 
condominiums and clarify that there is no mandatory purchase 
requirement for loans secured by individual commercial condominium 
units since the NFIP does not provide coverage for such units other 
than contents coverage. The Agencies agree with this commenter and are 
adding a new Q&A, Condo and Co-Op 9 that addresses the flood insurance 
requirements for loans secured by non-residential condominium units, 
described below.
    The second commenter recommended that the Agencies clearly state 
that the mandatory purchase requirement only applies to non-residential 
condominium unit owners where the loan is also secured by condominium 
contents since contents coverage is the only coverage available from 
the NFIP. The Agencies

[[Page 32853]]

disagree with this commenter. Flood insurance on condominium contents 
is only required when the loan is secured by a building in an SFHA in 
which flood insurance is available under the Act and the loan also 
takes a security interest in the contents. As indicated above, the NFIP 
does not provide coverage for non-residential condominium units located 
in either a residential or non-residential condominium building. 
Therefore, the mandatory purchase requirement does not apply.
    However, in reviewing this Q&A, and in light of new Condo and Co-Op 
9, the Agencies believe that rewording the question would provide 
additional clarity. Therefore, the Agencies are revising the question 
in the final Q&A to ask what action must a lender take for an 
individual residential unit owner in a residential condominium building 
with no RCBAP coverage. The Agencies also are replacing the term 
``individual unit owner/borrower'' with ``individual unit owner,'' for 
clarity. The Agencies are adopting Q&A Condo and Co-Op 4 as revised.
    Condo and Co-Op 5. The Agencies proposed to redesignate Q&A 30 as 
Q&A Condo and Co-Op 5 with minor revisions to provide greater clarity 
and accurate references, with no intended change in substance or 
meaning. This Q&A discusses the action a lender must take if the RCBAP 
coverage is insufficient to meet the Regulation's mandatory purchase 
requirements for a loan secured by an individual residential 
condominium unit. The Agencies received one comment on this Q&A. The 
commenter expressed concern with the part of the answer that encourages 
lenders to apprise borrowers of an additional risk of loss that may 
arise when the unit owner purchases a separate policy because the RCBAP 
coverage is insufficient. The commenter believes this adds a new 
expectation that is not required by the Act or Regulation. The 
commenter also stated that lenders are not in the best position, nor do 
they have the level of insurance knowledge, to communicate the risk of 
loss to the borrower and therefore suggested the Agencies remove this 
expectation from the Q&A. The Agencies disagree with this commenter. 
The Agencies are only encouraging lenders to provide this information, 
not requiring that they do so. The Agencies therefore are adopting this 
Q&A as proposed with minor non-substantive edits.
    Condo and Co-Op 6. The Agencies proposed to redesignate existing 
Q&A 31 as Q&A Condo and Co-Op 6 with minor revisions to provide greater 
clarity and no intended change in substance or meaning. This Q&A 
addresses what a lender must do when a loan secured by a residential 
condominium unit is in a complex whose condominium association allows 
its existing RCBAP to lapse. The Agencies received no specific comment 
on proposed Q&A Condo and Co-Op 6 and are adopting it as proposed with 
minor non-substantive edits.
    Condo and Co-Op 7. The Agencies proposed to redesignate existing 
Q&A 32 as Q&A Condo and Co-Op 7 with minor revisions to provide greater 
clarity and no intended change in substance or meaning. This Q&A 
addresses how the RCBAP's co-insurance penalty applies in the case of 
residential condominiums, including those located in multi-story 
condominium complexes. The Agencies received no specific comment on 
Condo and Co-Op 7 and are adopting it as proposed.
    Condo and Co-Op 8. The Agencies proposed to redesignate existing 
Q&A 33 as Q&A Condo and Co-Op 8 with minor revisions to provide greater 
clarity and no intended change in substance or meaning. This Q&A 
addresses the major factors that are involved with coverage limitations 
of the individual unit owner's dwelling policy with respect to the 
condominium association's RCBAP coverage. The Agencies received no 
specific comment on proposed Q&A Condo and Co-Op 8 and are adopting it 
as proposed.
    New Condo and Co-Op 9. In response to public comment, as described 
above, the Agencies are adopting new Q&A Condo and Co-Op 9 to clarify 
the flood insurance requirements for non-residential condominium units 
as well as residential condominium units located in a non-residential 
condominium building. The answer provides that coverage is not 
available under the NFIP for an individual residential condominium unit 
or a non-residential condominium unit located in a non-residential 
condominium building. The answer further provides that NFIP coverage 
also is not available for a non-residential condominium unit located in 
a residential condominium building. Therefore, a loan secured by one of 
these types of units is not a designated loan under the Regulation, and 
the mandatory flood insurance requirement does not apply.
    Condo and Co-Op 10 (Proposed Condo and Co-Op 9). The Agencies 
proposed a new Q&A, designated as Q&A Condo and Co-Op 9 in the 
proposal, to address flood insurance requirements for loans secured by 
a unit in a cooperative building located in an SFHA. The proposed 
answer provided 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. One 
commenter asked the Agencies to clarify that since loans to cooperative 
unit owners secured by the owner's share in the cooperative are not 
designated loans, lenders do not need to verify building-level 
coverage. The Agencies agree that lenders do not need to verify 
coverage on a cooperative building when a loan is secured by a share in 
a cooperative because this is not a designated loan subject to the Act 
or Regulation. However, the Agencies do not believe it is necessary to 
include this in the answer. The Agencies therefore are adopting this 
Q&A as proposed but renumbered as Q&A Condo and Co-Op 10 in the 2022 
Interagency Questions and Answers and with a minor non-substantive 
change.

Section XIII. 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)

    The Agencies proposed to amend the heading to this section for 
clarity. The Agencies also proposed to redesignate existing section 
VII, which addresses Flood Insurance Requirements for Home Equity 
Loans, Lines of Credit, Subordinate Liens, and Other Security Interests 
in Collateral, as section XI. This proposed section included current 
Q&As 34, 35 and 36-43, which were redesignated as Q&As Other Security 
Interests 1, Other Security Interests 2, and Other Security Interests 4 
through 9 and 11 through 12, respectively. The Agencies also proposed 
to amend the heading to this section for clarity. The Agencies proposed 
changes to the Q&As in this section in the July 2020 Proposed Questions 
and Answers. Because the Agencies are combining the July 2020 Proposed 
Questions and Answers and the March 2021 Proposed Questions and Answers 
into one document, the Agencies are renumbering this Other Security 
Interests section as Section XIII in the 2022 Interagency Questions and 
Answers.
    Other Security Interests 1. The Agencies proposed to redesignate 
existing Q&A 34 as Q&A Other Security Interests 1 with no substantive 
changes. This Q&A addresses whether a home equity loan is considered a 
designated loan that requires flood insurance. The Agencies received 
one supportive

[[Page 32854]]

comment for this Q&A and are adopting it as proposed.
    Other Security Interests 2. The Agencies proposed to redesignate 
existing Q&A 35 as Q&A Other Security Interests 2, with no substantive 
changes. This Q&A addresses if 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, requires a 
flood determination under the Regulation. The Agencies received one 
supportive comment for this Q&A and are adopting it as proposed.
    Other Security Interests 3. The Agencies proposed new Q&A Other 
Security Interests 3, which addresses flood insurance coverage 
requirements for a line of credit secured by improved real property 
located in an SFHA. The proposed answer provided alternative approaches 
depending on when the lender requires flood insurance to be in place. 
The Agencies received two specific comments for this proposed Q&A.
    One commenter raised concerns about the language in the Q&A that 
indicated a lender may ``actively review'' its records ``throughout the 
year'' to determine if the appropriate amount of insurance is in place, 
and strongly recommended the Agencies define these terms for clarity. 
The commenter stated that while this review provides the lender 
flexibility, it could result in a different coverage requirement 
(assuming the loan balance is the lesser of the three components) and 
could result in force placement several times throughout the life of 
the loan. This commenter also stated that the Agencies should remove 
the Q&A's language about informing the borrower of insurance risks 
because it is a new expectation from the Agencies and because 
monitoring for insurance risks is not the lender's area of specialty. 
If such notice expectation is retained, the commenter requested more 
detail regarding the timing and content of such notice.
    The Agencies emphasize that the answer lists alternative 
approaches. Lenders may choose the option that works best for them and 
are not obligated to choose the second option where the lender actively 
reviews its records throughout the year. The Agencies anticipate that 
most lenders will choose the first option and believe that the answer 
provides enough guidance as proposed.
    Another commenter recommended that the Agencies clarify that the 
active review applies only to the amount of coverage and does not 
trigger a new determination. The commenter explained that there are 
continuing concerns regarding the burdens the Regulation places on 
junior lienholders to obtain information and concessions from senior 
lienholders regarding flood insurance. The Agencies believe that the 
proposed answer clearly provides that the review is about the amount of 
coverage and is not a triggering event requiring a new determination. 
Therefore, the Agencies have decided not to make any changes in 
response to these comments and are adopting Q&A Other Security 
Interests 3 as proposed.
    Other Security Interests 4. The Agencies proposed to redesignate 
Q&A 36 as Q&A Other Security Interests 4, with only minor changes and 
no intended change in substance or meaning. This Q&A considers how much 
flood insurance is required when a lender makes, increases, extends or 
renews a second mortgage secured by a building or mobile home located 
in an SFHA.
    The Agencies received two specific comments for proposed Q&A Other 
Security Interests 4. One commenter recommended that the Agencies 
reconsider their approach to this question. The commenter believed that 
the Q&A continues to create practical challenges for the flood 
insurance operating model. For instance, the commenter explained that 
flood insurance administrators handling the junior lien are also 
required to monitor senior liens and corresponding coverage 
shortcomings to establish the proper amount of necessary coverage, even 
though the senior lien entity may not have a contractual relationship 
with the junior lien administrator. The commenter also explained that 
junior lien flood insurance administrators and/or insurers direct claim 
payments to their insured policyholders, not senior lienholders with 
which they have no contractual arrangement. Therefore, the commenter 
recommended an approach that requires each lienholder (and any servicer 
or administrator) to assure sufficient flood insurance coverage for 
their respective exposure in their lien position.
    The Agencies acknowledge that although following the guidance in 
Q&A Other Security Interests 4 may be difficult for the junior 
lienholder, the junior lienholder is responsible for making sure the 
collateral is covered by the proper amount of flood insurance. As 
previously stated in the preamble to the 2009 Interagency Questions and 
Answers, the Agencies believe that, given the provisions of an NFIP 
policy, a lender cannot comply with Federal flood insurance 
requirements when it makes, increases, extends, or renews a loan by 
requiring the borrower to obtain NFIP flood insurance solely in the 
amount of the outstanding principal balance of the lender's junior lien 
without regard to the flood insurance coverage on any liens senior to 
that of the lender.\40\ A junior lienholder's failure to take such a 
step can leave that lienholder partially or even fully unprotected by 
the borrower's NFIP policy in the event of a flood loss.\41\ As such, 
the Agencies decline to include this commenter's suggested changes.
---------------------------------------------------------------------------

    \40\ 74 FR 35913, 35923-35924 (July 21, 2009).
    \41\ 74 FR 35913, 35924 (July 21, 2009).
---------------------------------------------------------------------------

    Another commenter stated that this proposed Q&A addresses the 
amount of coverage required when a lender makes, increases, extends, or 
renews a second mortgage. This commenter also stated that junior 
lienholders are not subject to the escrow requirements in the 
Regulation, and that the Agencies should not create such requirements 
through the Interagency Questions and Answers. As noted below in the 
discussion related to proposed Q&A Escrow 6, junior lienholders are 
generally not subject to the escrow requirements. The junior lienholder 
qualifies for the escrow requirement exception if there is adequate 
flood insurance coverage with respect to the loan issued by the primary 
lienholder.\42\ However, this Q&A Other Security Interests 4 explains 
the responsibilities of the junior lienholder when there is a 
triggering event under the Regulation. This Q&A does not create new 
requirements for junior lienholders, as explained above to the other 
commenter. Therefore, the Agencies are adopting Q&A Other Security 
Interests 4 as proposed.
---------------------------------------------------------------------------

    \42\ 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).
---------------------------------------------------------------------------

    Other Security Interests 5. The Agencies proposed to redesignate 
Q&A 37 as Q&A Other Security Interests 5, with no substantive changes. 
This Q&A discusses whether a lender has to make a new determination or 
adjust insurance coverage if a borrower requesting a loan secured by a 
junior lien provides evidence that flood insurance coverage is in 
place. The Agencies received no specific comments on this Q&A and are 
adopting it as proposed.
    Other Security Interests 6. The Agencies proposed to redesignate 
Q&A 38 as Q&A Other Security Interests 6, with no substantive changes. 
This Q&A addresses whether flood insurance is required 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. The Agencies

[[Page 32855]]

received no specific comments on this Q&A and are adopting it as 
proposed.
    Other Security Interests 7. The Agencies proposed to redesignate 
Q&A 39 as Q&A Other Security Interests 7. This Q&A considers if flood 
insurance is 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. The Agencies proposed to revise the Q&A to clarify the 
application of Federal flood insurance requirements when both a 
building and its contents secure a loan. The Agencies received no 
specific comments on this Q&A and are adopting it as proposed.
    Other Security Interests 8. The Agencies proposed to redesignate 
Q&A 40 as Q&A Other Security Interests 8, with no substantive changes. 
This Q&A provides that flood insurance is not required on contents 
securing a loan when the contents are stored in a building that does 
not also secure the loan. One commenter asked for clarification, 
stating that proposed Q&A Other Security Interests 10 appears to 
contradict proposed Q&A Other Security Interests 8 and may cause some 
confusion on how to handle contents located in a building in an SFHA. 
Q&A Other Security Interests 10 provides that flood insurance is 
required if the lender takes a security interest in contents located in 
a building in an SFHA securing the loan regardless of whether that 
security interest is perfected. The Agencies believe that the answers 
in both Q&As clearly provide that the building must secure the loan in 
order for flood insurance to be required for the contents located in 
that building. In addition, the Agencies do not think the Q&As are 
contradictory but provide complementary guidance. As such, the Agencies 
are adopting Q&A Other Security Interests 8 as proposed, with minor 
non-substantive edits.
    Other Security Interests 9. The Agencies proposed to redesignate 
Q&A 41 as Q&A Other Security Interests 9. This Q&A discusses whether 
the Regulation applies when the lender takes a security interest in a 
building or mobile home and contents located in an SFHA only as an 
``abundance of caution.'' The Agencies proposed to clarify the impact 
of including language regarding contents taken as security for a loan 
in the loan agreement. One commenter stated that it would be helpful if 
the Q&A provided further clarification with regard to the documentation 
that determines whether contents are taken as security for the loan. 
The commenter asked the Agencies to include language stating that the 
loan agreement, not the Uniform Commercial Code-1 or Deed of Trust, 
determines whether the contents are taken as security for the loan. The 
Agencies note that the answer already states that the language in the 
loan agreement is determinative and decline to include references to 
other documents.
    In connection with the proposed applicability Q&As, one commenter 
requested a change more relevant to Other Security Interests 9. 
Specifically, this commenter asked the Agencies to address situations 
where a lender obtains a security interest in contents when there is a 
cross collateralization clause or in an abundance of caution, 
specifically in situations in which the lender may not realize that a 
cross collateralization clause is in an old deed of trust, such as when 
the loan has been acquired from another bank as a result of a merger or 
if the security agreement is within the deed of trust instead of in a 
stand-alone document. The commenter recommended that contents coverage 
not be required under these situations. This commenter also asked the 
Agencies to exempt from the coverage requirements contents of limited 
value that might be included in a deed of trust out of an abundance of 
caution, and asked for additional clarification on this scenario. The 
Agencies note that under the Act and the Regulation, if a lender takes 
a security interest in a building and its contents located in an SFHA 
in which flood insurance is available under the Act, then flood 
insurance coverage is required for both the building and the 
contents.\43\ Therefore, the Agencies cannot exempt the building and 
its contents from required coverage even if the lender takes a security 
interest in the contents out of an abundance of caution. Lenders should 
review loan agreements and security instruments to verify that if they 
include language that takes a security interest in building and 
contents, flood insurance is purchased to cover the building and 
contents. If the lender does not secure a loan with building and 
contents, the loan agreement or security instrument should not include 
language to this effect, and language regarding taking contents as 
collateral should not be included out of an ``abundance of caution.'' 
The Agencies decline to make amendments to proposed Q&A Other Security 
Interests 9 based on this comment.
---------------------------------------------------------------------------

    \43\ 42 U.S.C. 4012a(b); 12 CFR 22.3(a); 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).
---------------------------------------------------------------------------

    Therefore, the Agencies are adopting Q&A Other Security Interests 9 
as proposed with clarifying amendments. To be more inclusive, the 
Agencies have added references to security instruments when discussing 
loan agreements and added references to improved real estate when 
discussing contents.
    Other Security Interests 10. The Agencies proposed new Q&A Other 
Security Interests 10, which addresses whether flood insurance is 
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. As noted in the preamble discussion of Q&A Other 
Security Interests 8, above, the Agencies received one comment on this 
Q&A indicating that Q&As Other Security Interests 8 and 10 are in 
conflict. As previously stated, the Agencies do not think the two Q&As 
are contradictory and are adopting Q&A Other Security Interests 10 as 
proposed with one clarifying amendment. To be more inclusive, the 
Agencies have added a reference to a security instrument when 
discussing the loan agreement.
    Other Security Interests 11. The Agencies proposed to redesignate 
Q&A 42 as Q&A Other Security Interests 11, with no substantive changes. 
This Q&A addresses whether a note on a single-family dwelling offered 
by a borrower as collateral for a loan is a designated loan that 
requires flood insurance if the lender does not take a security 
interest in the dwelling itself. The Agencies received no specific 
comments on this Q&A and are adopting it as proposed.
    Other Security Interests 12. The Agencies proposed to redesignate 
Q&A 43 as Q&A Other Security Interests 12, with no substantive changes. 
This Q&A discusses whether 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 would be considered a designated loan requiring flood 
insurance. The Agencies received no specific comments on this Q&A and 
are adopting Q&A Other Security Interests 12 as proposed.

Section XIV. Requirement To Escrow Flood Insurance Premiums and Fees--
General (Escrow)

    HFIAA significantly revised the escrow requirements for flood 
insurance premiums by introducing new escrow requirements not dependent 
on whether other insurance or taxes are escrowed, lender and loan-
related exceptions to the escrow requirements, and an escrow notice. 
Accordingly, the Agencies proposed in the July 2020 Proposed

[[Page 32856]]

Questions and Answers a number of new escrow-related Q&As and revisions 
to the existing escrow-related Q&As. Further, the Agencies proposed to 
reorganize these Q&As into three separate sections addressing escrow 
considerations. Specifically, proposed section XII included Q&As 
covering the general escrow requirements for flood insurance premiums 
and fees. Proposed section XIII included Q&As related to the small 
lender exception to flood insurance escrow requirements. Proposed 
section XIV included Q&As related to loan-related exceptions to the 
requirement to escrow flood insurance premiums and fees. These three 
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, as 
documented in the EGRPRA report.
    Proposed section XII included existing Q&As 51 and 52 and five new 
proposed Q&As pertaining to requirements to escrow flood insurance 
premiums and fees. In addition, the Agencies removed current Q&As 53 
and 54 because they are no longer applicable.
    Because the Agencies are combining the July 2020 Proposed Questions 
and Answers and the March 2021 Proposed Questions and Answers into one 
document, the Agencies are renumbering these Escrow-related sections as 
Sections XIV, XV, and XVI in the 2022 Interagency Questions and 
Answers.
    Escrow 1. The Agencies proposed to redesignate Q&A 52 as Q&A Escrow 
1. This Q&A addresses the general question of when a lender or servicer 
must establish an escrow account for flood insurance premiums and fees. 
The Agencies proposed to significantly revise the current Q&A to 
explain that the new escrow requirement applies only upon a triggering 
event that occurs on or after January 1, 2016 and would not apply if 
either the small lender exception or any of the loan-related exceptions 
apply. The proposed answer also addressed a lender's escrow obligations 
if the lender no longer qualifies for the small lender exception. The 
Agencies received one comment on this Q&A. The commenter requested that 
the Agencies expand the answer to explain that, if there is contractual 
authority to escrow and it is otherwise permitted by law, the lender 
may escrow flood premiums for safety and soundness reasons, even if the 
lender is not required to escrow under the Act and Regulation. The 
Agencies agree with the commenter that lenders could consider taking 
additional steps to ensure safety and soundness. However, the Agencies 
do not believe it is necessary to include this information in the 
answer as it is not relevant to the question asked in this Q&A. The 
Agencies are adopting this Q&A as proposed.
    Escrow 2. The Agencies proposed new Q&A Escrow 2 to clarify that a 
lender must escrow flood insurance premium payments even if it does not 
escrow for taxes or homeowner's insurance, and is not required by the 
Regulation to escrow for taxes or homeowner's insurance if it does 
escrow for flood insurance. The Agencies received no specific comments 
on this proposed Q&A and are adopting Q&A Escrow 2 as proposed with 
minor non-substantive edits.
    Escrow 3. The Agencies proposed new Q&A Escrow 3 to clarify 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. The Agencies received several comments on this Q&A. The 
commenters suggested the Agencies revise the answer to clarify that, if 
a lender is not eligible for the small servicer exemption, the RESPA 
requirements still apply.\44\ Specifically, the commenter noted that 
under Regulation X, which implements RESPA,\45\ the servicer must pay 
the borrower disbursements in a timely manner and the lender is 
required to continue to advance the funds from the escrow to pay the 
flood policy premium if the loan is current, even if the customer is 
not paying their escrow payments. As a result, the commenter noted that 
there would be no need to force place a flood insurance policy for a 
loan that has an escrow account as the premium for the borrower's 
policy would be paid. Another commenter noted that lenders that qualify 
for the small creditor exemption, in general, use provisions in a legal 
agreement or security document that allows the lender to make a 
protective advance to pay for insurance premiums to protect their 
collateral interest and therefore no escrow account would be required. 
The Agencies disagree with the commenters by noting that RESPA does not 
apply to flood insurance required under the Act.\46\ Further, under the 
Act and Regulation, the lender must escrow force-placed flood insurance 
premiums and fees because there is no exception for force-placed 
insurance. Finally, another commenter suggested that the force 
placement of flood insurance is not a triggering event that would 
trigger escrow requirements. The Agencies have addressed this comment 
in proposed Q&A Applicability 13 above and Q&A Force Placement 10 
discussed below. The commenter further recommended that the Agencies 
clarify that when a property is mapped in an SFHA, such event is not a 
triggering event that would trigger the escrow requirements. The 
Agencies note that proposed Q&A Applicability 13 and Q&A Escrow 4 
address this issue. The Agencies therefore are adopting this Q&A as 
proposed.
---------------------------------------------------------------------------

    \44\ 12 U.S.C. 2601 et seq.
    \45\ 12 CFR 1024.17(k)(1).
    \46\ 12 CFR 1024.37(a)(2)(i).
---------------------------------------------------------------------------

    Escrow 4. The Agencies proposed new Q&A Escrow 4 to address whether 
flood insurance premium payments must be escrowed when a loan has not 
experienced a triggering event but it 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 explained 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 
received one comment on this Q&A. The commenter stated that the Q&A is 
confusing as the question includes references to the loan being 
remapped into an SFHA but does not specify that remapping and 
assumptions of the loan by a new borrower are merely examples of non-
triggering events. The commenter further noted that the answer does not 
address assumptions or remapping. The Agencies agree with the commenter 
that providing examples of non-triggering events in the question may 
lead to confusion. Therefore, the Agencies are revising the question in 
the final Q&A by removing the examples of non-triggering events.
    Escrow 5. The Agencies proposed to redesignate Q&A 51 as Q&A Escrow 
5. The Agencies also proposed to revise this Q&A 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. The Agencies 
received no specific comments on this proposed Q&A and are adopting Q&A 
Escrow 5 as proposed, with a minor non-substantive edit.
    Escrow 6. The Agencies proposed new Q&A Escrow 6 to address the 
situation in which a junior lienholder determines

[[Page 32857]]

that the primary lienholder does not have sufficient flood insurance 
coverage in place and is also not escrowing for flood insurance. The 
proposed answer clarified 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 premium. The proposed answer also 
indicated 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. The Agencies 
received two comments on this Q&A. The commenters noted that the answer 
assumes the junior lienholder is notified regarding any lapse in 
coverage, despite the primary lienholder having no obligation to inform 
the junior lienholder of a lapse in coverage. Further, the commenters 
noted that junior lienholders are not given notice if or when the first 
lien is paid off or in the event of failure to escrow. The commenters 
also noted that there is no specific requirement in the Act or 
Regulation that requires junior lienholders to escrow. Therefore, the 
commenters conclude that the Agencies should not imply an expectation 
to escrow in the Q&A. The Agencies disagree with the commenters. The 
junior lienholder qualifies for the escrow requirement exception if 
there is adequate flood insurance coverage with respect to the loan 
issued by the primary lienholder.\47\ Therefore, to qualify for the 
exception not to escrow, the junior lienholder would need to ensure 
that the borrower has obtained an insurance coverage amount that meets 
the mandatory purchase requirement. The Agencies therefore are adopting 
this Q&A as proposed.
---------------------------------------------------------------------------

    \47\ 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).
---------------------------------------------------------------------------

    Escrow 7. The Agencies proposed new Q&A Escrow 7 to address whether 
a lender or its servicer must escrow when real property securing the 
loan is not located in an SFHA, but the borrower chooses to buy flood 
insurance. The proposed answer clarified that a lender or its servicer 
is not required to escrow premium payments in this situation but may 
choose to do so. The Agencies received no specific comments on this 
proposed Q&A and are adopting it as proposed.

Section XV. Requirement To Escrow Flood Insurance Premiums and Fees--
Small Lender Exception (Escrow Small Lender Exception)

    Proposed new section XIII included seven new Q&As related to the 
small lender exception to the requirement to escrow flood insurance 
premiums. The Agencies proposed the Q&As in this section in the July 
2020 Proposed Questions and Answers. As indicated above, the Agencies 
are renumbering this section as Section XV in the 2022 Interagency 
Questions and Answers.
    Several commenters suggested that as this section consists of Q&As 
that are fundamentally escrow-related, the Agencies should combine them 
with the Escrow Q&As. One of these commenters said that this change 
would also reduce confusion with the Exemptions section of the Q&As. 
The Agencies decline to make this change because the Agencies believe 
that more specific topic categories make it easier for users to find 
relevant guidance. To clarify that this topic relates to escrows, 
however, the Agencies are changing the heading of this section from 
``Small Lender Exception'' to ``Escrow Small Lender Exception.'' This 
change also affects the name of each individual Q&A.
    Escrow Small Lender Exception 1. The Agencies proposed this new Q&A 
to specify that the $1 billion threshold for the small lender exception 
is based on assets held at the regulated financial institution level 
and not at the holding company level. The Agencies received no specific 
comments on this Q&A and are adopting it as proposed.
    Escrow Small Lender Exception 2. The Agencies proposed this new Q&A 
to address 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 \48\ or under specific Federal 
housing programs prior to July 6, 2012. The proposed answer clarified 
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. The Agencies received no 
specific comments on this Q&A and are adopting it as proposed, with 
minor formatting changes.
---------------------------------------------------------------------------

    \48\ 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).
---------------------------------------------------------------------------

    Escrow Small Lender Exception 3. The Agencies proposed this new Q&A 
to address whether a lender is disqualified from the exemption if it 
escrowed funds on behalf of a third party. The Agencies' proposed 
answer drew a distinction based on whether the lender established an 
individual escrow account for the loan. Specifically, the proposed 
answer provided that if a lender collected escrow funds at closing and 
maintained servicing of the loan, 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. 
The proposed answer further provided that 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 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.
    A commenter asked the Agencies to clarify what constitutes 
``establishing an individual escrow account.'' The commenter asserted 
that for lenders subject to the escrow requirements, RESPA requires the 
lender to create and provide an initial escrow statement and to collect 
the initial escrow deposit. The originating lender then holds this 
deposit until the loan is sold. If the sale of the loan is delayed and 
the first payment is received by the original lender, the lender also 
must hold this payment. The commenter asked the Agencies to provide 
direction on how these funds should be held so as not to constitute 
``establishing an individual escrow account.'' In response, the 
Agencies state that determining what constitutes an individual escrow 
account is beyond the scope of these Interagency Questions and Answers.
    A commenter asked the Agencies to clarify or provide examples of 
the term ``as soon as reasonably practicable.'' By this term, the 
Agencies mean that there were no unreasonable delays considering the 
facts and circumstances of the situation. Whether the lender 
transferred the funds to the third party ``as soon as reasonably 
practicable'' is not a bright-line determination, and the Agencies 
believe there is no meaningful way to provide further clarification or 
examples.
    The Agencies are adopting this new Q&A as proposed.

[[Page 32858]]

    Escrow Small Lender Exception 4. The Agency proposed this new Q&A 
to address whether a lender is eligible for the escrow small lender 
exception if it escrows only upon a borrower's request. The proposed 
answer reiterated the explanation in the preamble to the 2015 Final 
Rule 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. The proposed answer also 
explained that 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.
    The Agencies believe that the proposed question and the first 
sentence of the proposed answer, as described above, are confusing 
because they are written in the present tense, even though under the 
Regulation a lender's current escrow policy--whether it is to escrow 
upon a borrower' request or whether it is to consistently and uniformly 
require escrow--is not relevant to whether the small lender escrow 
exception applies to the lender. Rather, only a lender's escrow policy 
on or before July 6, 2012, is relevant.
    Accordingly, in the final Q&A, the Agencies are revising the 
question to ask if a lender is eligible for the small lender exception 
if, on or before July 6, 2012, it offered escrow accounts only upon a 
borrower's request. The Agencies are revising the first sentence of the 
answer to state that if, on or before July 6, 2012, a lender offered 
escrow accounts only upon the request of borrowers, that practice did 
not constitute a consistent or uniform policy of requiring escrow and 
the lender is eligible for the exception, provided all other conditions 
for the exception are met. The Agencies are retaining the second 
sentence of the answer as proposed. That sentence reiterates the 
Regulation, which provides that 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.
    A commenter stated that while the Q&A provided helpful guidance, 
additional clarity regarding whether a policy ``consistently and 
uniformly require[s]'' the establishment of an escrow account would be 
helpful. The commenter asked for additional information to aid lenders 
in better understanding the intent of this language and suggested that 
the Agencies provide examples of policies that do and do not satisfy 
this provision.
    Consistent with the Regulation, the revisions to the Q&A clarify 
that a lender's escrow policy after July 6, 2012, is not relevant to 
whether the escrow small lender exception applies. In addition, the 
final Q&A clearly states that a lender's policy, on or before July 6, 
2012, of offering escrow accounts only upon the request of borrowers 
did not constitute a ``consistent or uniform'' policy of requiring 
escrow. In specific response to the commenter, for policies other than 
those in which a lender offered escrow accounts only upon the request 
of borrowers before July 6, 2012, the Agencies believe that whether a 
policy consistently and uniformly required escrow accounts is not a 
bright-line determination, and the Agencies do not believe they can 
provide meaningful examples. The Agencies are adopting this new Q&A 
with the revisions discussed above.
    Escrow Small Lender Exception 5. The Agencies proposed this new Q&A 
to address whether the option to escrow notice 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 clarified 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 are 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 also clarified that the 
option to escrow notice requirement does not apply to loans or lenders 
that are excepted by the Regulation from the escrow requirement, nor 
does it apply to loans not subject to the mandatory flood insurance 
purchase requirement. The Agencies received no specific comments on 
this Q&A and are adopting it as proposed.
    Escrow Small Lender Exception 6. The Agencies proposed this new Q&A 
to 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. The Agencies received no 
specific comments on this new Q&A and are adopting it as proposed.
    Escrow Small Lender Exception 7. The Agencies proposed this new Q&A 
to clarify 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. The Agencies received no specific comments on 
this new Q&A and are adopting it as proposed.

Section XVI. Requirement To Escrow Flood Insurance Premiums and Fees--
Escrow Loan Exceptions (Escrow Loan Exceptions)

    Proposed new section XIV included existing Q&As 55 and 56 and three 
new Q&As, all regarding the loan-related exceptions to the escrow 
requirement. The Agencies proposed changes to the Q&As in this section 
in the July 2020 Proposed Questions and Answers. The Agencies are 
changing the proposed heading of this section from ``Loan Exceptions'' 
to ``Escrow Loan Exceptions'' to provide further clarity. Further, in 
response to a comment on proposed Q&As Escrow Loan Exceptions 1 and 5, 
discussed below, the Agencies are reordering the questions from general 
to specific, so that proposed Escrow Loan Exceptions Q&As 4 and 5 
become Q&As Escrow Loan Exceptions Q&As 3 and 2, respectively, with the 
remaining Q&As renumbered accordingly. This reordering provides a more 
logical flow of the Escrow Loan Exception questions. As indicated 
above, the Agencies are renumbering this section as Section XVI in the 
2022 Interagency Questions and Answers.
    Escrow Loan Exceptions 1. The Agencies proposed to redesignate 
existing Q&A 55 as proposed Q&A Loan Exceptions 1. The Agencies revised 
this Q&A 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 clarified 
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. The Agencies received a few comments on this Q&A. One commenter 
stated that this Q&A is helpful and appropriate. Another commenter 
noted that this proposed

[[Page 32859]]

Q&A mirrors proposed Escrow Loan Exceptions 5 and suggested that the 
Agencies reorder the questions so that the two Q&As would appear in 
close sequence. As indicated above, the Agencies agree and are moving 
proposed Q&A Loan Exceptions 5 so that it directly follows Q&A Escrow 
Loan Exceptions 1. Further, the Agencies also are removing references 
to ``multi-family'' properties in Q&A Escrow Loan Exceptions 1 as the 
Q&A can apply to more than the ``multi-family'' context. Another 
commenter suggested providing the definition of ``residential 
property'' or clarify that lenders may rely on assertions from the 
borrower or insurance agent regarding the property's intended use. As 
noted in Q&A Exemptions 1, a structure that is part of a 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. The Agencies are 
adding a cross reference to Q&A Exemptions 1 in this Q&A to address 
this comment. With these changes, the Agencies are adopting Q&A Escrow 
Loan Exceptions 1.
    Escrow Loan Exceptions 2 (Proposed Loan Exceptions 5). The Agencies 
proposed a new Q&A, designated as Q&A Loan Exceptions 5 in the 
proposal, to discuss whether there is an exception to the escrow 
requirement for loans secured by multi-family buildings. The Agencies 
clarified 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 apply to loans 
for units in multi-family residential buildings.
    As discussed above, and at the request of a commenter, the Agencies 
are re-numbering proposed Q&A Loan Exceptions 5 as Q&A Escrow Loan 
Exceptions 2 to ensure logical flow and clarity. The Agencies also are 
clarifying the question in this Q&A to ask whether escrow accounts for 
flood insurance premiums and fees are required for loans secured by 
particular units located in multi-family buildings by focusing this Q&A 
on escrow requirement for only loans secured by particular units 
located in multi-family buildings and removing the reference to the 
exception for commercial loans in the question. Q&A Escrow Loan 
Exceptions 1 would cover commercial loans secured by residential 
buildings. The Agencies are also adding a cross reference to Escrow 
Loan Exceptions 1 for reader reference. With these revisions, the 
Agencies are adopting renumbered Q&A Escrow Loan Exceptions 2.
    Escrow Loan Exceptions 3 (Proposed Loan Exceptions 4). The Agencies 
proposed to redesignate existing Q&A 56 as proposed Q&A Loan Exceptions 
4 in the proposal. The Agencies proposed to revise this Q&A to address 
an escrow account for insured real property covered by an RCBAP. The 
proposed answer noted 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. The Agencies 
received positive comment on this Q&A and are adopting it as proposed, 
but renumbering as Q&A Escrow Loan Exceptions 3.
    Escrow Loan Exceptions 4 (Proposed Loan Exceptions 2). The Agencies 
proposed a new Q&A, designated as Q&A Loan Exceptions 2 in the 
proposal, to clarify 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. The Agencies received positive 
comment on this Q&A and are adopting it as proposed, but renumbered as 
Q&A Escrow Loan Exceptions 4.
    Escrow Loan Exceptions 5 (Proposed Loan Exceptions 3). The Agencies 
proposed a new Q&A, designated as Q&A Loan Exceptions 3 in the 
proposal, to 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. The Agencies received one specific comment on 
this proposed Q&A. This commenter stated that this Q&A provides 
important clarification regarding escrow obligations and loan 
documentation regarding the payoff of a senior lien. The Agencies are 
adopting this Q&A as proposed, but renumbered as Q&A Escrow Loan 
Exceptions 5.

Section XVII. Force Placement of Flood Insurance (Force Placement)

    The Agencies proposed to move current section X, which includes 
current Q&As 57 through 62, to proposed section XV, and add 10 new 
Q&As. The Agencies proposed changes to the Q&As in this section in the 
July 2020 Proposed Questions and Answers. As discussed in the preamble 
to the July 2020 Proposed Questions and Answers, this set of Q&As would 
respond to a request for more guidance related to force placement of 
flood insurance from commenters through the EGRPRA process.\49\ 
Commenters were appreciative of the Agencies including Q&As on force 
placement and generally found these Q&As to be helpful. Because the 
Agencies are combining the July 2020 Proposed Questions and Answers and 
the March 2021 Proposed Questions and Answers into one document, the 
Agencies are renumbering this Force Placement section as Section XVII 
in the 2022 Interagency Questions and Answers.
---------------------------------------------------------------------------

    \49\ See FFIEC Joint EGRPRA Report to Congress, March 2017 at 6, 
55-56, 124-25, https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.
---------------------------------------------------------------------------

    Force Placement 1. The Agencies proposed to redesignate current Q&A 
57, re-proposed in 2011 but not finalized, as proposed Q&A Force 
Placement 1. This proposed Q&A discussed 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. One commenter agreed with the Agencies' statement in the 
answer that neither the Act nor the Regulation require lenders to 
monitor flood insurance over the life of the loan. The commenter, 
however, stated its belief that a lender's safety and soundness is not 
protected by the lender monitoring for flood insurance but by 
contracting with lender-placed insurance providers to ensure that flood 
insurance is automatically and continuously provided on all collateral 
in the lender's portfolio upon any lapse or insufficiency in flood 
insurance coverage procured by the borrower. Consequently, the 
commenter recommended that the Agencies add language discussing the 
safety and soundness benefits of lender-placed insurance for lenders 
and the benefit provided to borrowers in the Q&As. The Agencies decline 
to add the suggested language as the Agencies believe this statement is 
outside the scope of the force-placed flood insurance requirement in 
the Regulation.
    Another commenter noted that the proposed answer states that the 
lender may provide the amount of flood insurance needed in the force 
placement notice and that if the lender or servicer

[[Page 32860]]

is aware that the borrower has obtained insurance that otherwise 
satisfies the flood insurance requirements but in an insufficient 
amount, the lender or servicer should inform the borrower that an 
additional amount of insurance is needed to comply with the Regulation. 
Because the amount of the insurance is not required to be included in 
the force placement notice, the commenter requested that the Agencies 
remove from the answer all references to including the amount in the 
force placement notice. However, the Agencies note that the answer does 
not require inclusion of this information. The Agencies continue to 
believe this information may be helpful to borrowers to the extent a 
lender chooses to include it in the force placement notice. Therefore, 
the Agencies are continuing to include this recommendation in the final 
Q&A Force Placement 1.
    A few commenters suggested that the Agencies amend the last 
sentence of the proposed answer, which provided that 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 
before force-placing flood insurance. Specifically, these commenters 
expressed concern about the use of the phrase ``is aware'' and 
suggested the Agencies use ``determines'' instead. The Agencies 
disagree and believe that the use of the word ``determines'' would 
suggest that there is a new force placement determination necessitating 
a new force placement notice, and as discussed in detail below in 
connection with Q&A Force Placement 6, potentially could be interpreted 
as allowing lenders to ``restart'' the clock that would extend the time 
period beyond the 45 days permitted under the Regulation in which the 
lender or its servicer must force place flood insurance. Thus, the 
Agencies' use of a term other than ``determines'' is deliberate, and 
the Agencies are not modifying the language as suggested.
    For the reasons discussed above, the Agencies are adopting Q&A 
Force Placement 1 as proposed.
    Force Placement 2. The Agencies proposed new Q&A Force Placement 2 
to clarify when a lender must provide a force placement notice to a 
borrower. The proposed answer provided 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. The proposed answer also 
stated that if there is a brief delay in providing the notice, the 
Agencies would expect the lender or servicer to provide a reasonable 
explanation for the delay and provided as an example for the delay the 
lender using batch processing to send the force placement notice to its 
borrowers. Several commenters requested that the Agencies amend the 
language from ``brief delay'' to ``reasonable delay.'' The Agencies 
disagree with these commenters and are retaining ``brief delay'' to 
emphasize to lenders that the delay should not be long. Another 
commenter also suggested that the Agencies provide additional examples 
of explanations for delays in providing the force placement notice 
other than batch processing of force placement notices. In response to 
this commenter, the Agencies are amending the proposed answer to 
include manual exception processing as another example. The Agencies 
are adopting Q&A Force Placement 2 with this change.
    Force Placement 3. The Agencies proposed to redesignate existing 
Q&A 58 as proposed Q&A Force Placement 3 without any change. Proposed 
Q&A Force Placement 3 discussed whether a servicer could force place 
flood insurance on behalf of a lender. The Agencies did not receive any 
specific comment on Q&A Force Placement 3, and are adopting it as 
proposed.
    Force Placement 4. The Agencies proposed new Q&A Force Placement 4, 
which discussed 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. Proposed Q&A Force Placement 
4 was based on proposed Q&A 60 from 2011, which the Agencies did not 
finalize. The Agencies received one specific comment on this proposed 
Q&A, agreeing that the Agencies' wording reflects the intent of the Act 
and Regulation that lenders ensure that notice be provided upon 
determining that the flood insurance policy has actually lapsed or is 
insufficient. Therefore, the Agencies are adopting Q&A Force Placement 
4 as proposed.
    Force Placement 5. The Agencies proposed to redesignate existing 
Q&A 61 as proposed Q&A Force Placement 5 with minor revisions for 
clarity and no change in meaning or substance. This Q&A addresses when 
a lender must have flood insurance in place if the borrower has not 
obtained adequate insurance within 45 days of notification. A commenter 
recommended that the answer be updated to reflect information on the 
effective date of coverage, the timing for placing coverage, and the 
process for placing coverage. Given that lenders' particular processes 
may differ in force-placing flood insurance, the Agencies believe that 
amending the answer to include details on these additional steps would 
be confusing and that it is unnecessary to discuss how the lender 
complies with the Regulation. Therefore, the Agencies are adopting Q&A 
Force Placement 5 as proposed.
    Force Placement 6. The Agencies proposed new Q&A Force Placement 6 
to 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. Some commenters 
suggested that the Agencies reconsider the answer to permit subsequent 
determinations within the force placement process. As discussed above 
in connection with Q&A Force Placement 1, however, the Agencies do not 
believe that the answer should be amended to essentially permit lenders 
to extend the time to force place beyond the 45 days allowed by the Act 
and the Regulation, which would put both the borrower and the lender at 
greater risk of the property not being covered by sufficient flood 
insurance for longer periods of time. Therefore, the Agencies are 
adopting Q&A Force Placement 6 as proposed.
    Force Placement 7. The Agencies proposed new Q&A Force Placement 7, 
which addressed when a force-placed policy should begin to provide 
coverage after an existing policy expires. The proposed answer also 
gave an example of the timing for the new policy. A few commenters 
stated that the Agencies' proposed example was not consistent with how 
policies expire and become effective in practice and that the answer 
needs to specifically include the time of day that the existing policy 
expires and the new policy becomes effective. One of these commenters 
noted that an expiring policy expires and a newly effective policy 
generally takes effect at 12:01 a.m. on the same date. As recommended 
by these commenters, the Agencies are revising the answer in Q&A Force 
Placement 7 to include an

[[Page 32861]]

example that provides if a policy expires at 12:01 a.m. on a certain 
day, the new policy should be effective as of 12:01 a.m. of the same 
day.
    Force Placement 8. The Agencies proposed to redesignate existing 
Q&A 59 as proposed Q&A Force Placement 8. In the July 2020 Proposed 
Questions and Answers, the Agencies significantly revised this Q&A to 
discuss more fully the minimum amount of flood insurance coverage that 
is statutorily required and to illustrate this point through a 
hypothetical example. The proposed answer stated 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 premiums and fees that will be added to the loan balance.
    Several commenters recommended that the Agencies revise proposed 
Q&A Force Placement 8, as well as Q&A Force Placement 10, to 
consistently use the term ``outstanding principal balance,'' which is 
the term used in the Regulation to determine the amount of minimum 
flood insurance coverage required. The proposed answer used 
``outstanding principal balance'' interchangeably with ``loan 
balance.'' Similarly, commenters stated that the Agencies should amend 
the answer to use the term ``capitalized'' rather than ``added.'' These 
commenters stated that, consistent with accounting standards, fees, 
secured advances, interest and other amounts authorized by a loan 
agreement are treated distinctly from the outstanding principal balance 
of the loan unless they are capitalized into the outstanding principal 
balance. As a result, these commenters contended that fees that have 
not been capitalized into the outstanding principal balance should not 
be taken into account when determining the minimum amount of required 
flood insurance.
    The Agencies agree with these commenters and are revising Q&A Force 
Placement 8 as suggested to consistently use the term ``outstanding 
principal balance'' and provide that if the outstanding principal 
balance is used as the basis for determining the minimum amount of 
required flood insurance, then the lender should take into account any 
premiums and fees that have been capitalized into the outstanding 
principal balance in determining the required minimum amount. For 
consistency, the Agencies also are making these changes in terminology 
in Q&A Force Placement 10, as discussed below. With the changes 
discussed above, the Agencies are adopting Q&A Force Placement 8, with 
a minor non-substantive change.
    Force Placement 9. The Agencies proposed to redesignate existing 
Q&A 62 as proposed Q&A Force Placement 9. This Q&A addresses when a 
lender or its servicer may charge the borrower for the cost of force-
placed flood insurance. The proposed answer clarified that a lender or 
servicer may charge a borrower for the cost of force-placed flood 
insurance beginning on the date of lapse or insufficient coverage, and 
would not need to wait 45 days after providing notification to force 
place insurance. As the Agencies stated in the preamble to the July 
2020 Proposed Questions and Answers, 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 further explained 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 or insufficient coverage, 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.
    Several commenters suggested that the Agencies include an example 
with specific dates in the answer to Q&A Force Placement 9 to 
illustrate when it may be appropriate for a lender to ``backdate'' a 
force-placed flood insurance policy and charge the borrower. However, 
the Agencies note that evaluating such actions by a lender depends on 
the specific facts and circumstances. As a result, the Agencies believe 
that including a particular example in the answer that would not be 
broadly applicable would not provide helpful guidance.
    Although the Regulation states that a lender may charge a borrower 
for the cost of force-placed insurance beginning on the date of lapse 
or insufficient coverage, the Agencies note that significant 
``backdating'' of flood insurance policies could indicate that there 
are weaknesses with the lender's compliance management system. 
Therefore, rather than providing an example, which would be of limited 
utility, the Agencies are adding language stating that a lender's or 
servicer's frequent need to purchase policies on a borrower's behalf 
having coverage that precedes the date of purchase may, depending upon 
the facts and circumstances, indicate that there are weaknesses within 
the lender's or servicer's compliance management system. The Agencies 
believe that the addition of this language to Q&A Force Placement 9 
would provide guidance on the Agencies' supervision of such practices 
and would be more helpful than a specific example.
    Some commenters suggested that the Agencies amend the last sentence 
of the proposed answer, which stated that 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. These commenters noted that a policy may provide coverage 
effective to a date that precedes the date purchased. The Agencies 
decline to make this change. If there is no coverage for the borrower 
prior to purchase of the policy, such as coverage that may be provided 
under a dual interest master policy, then it would be inappropriate for 
a lender to charge a borrower for coverage the borrower did not have.
    With the addition discussed above, the Agencies are adopting Q&A 
Force Placement 9.
    Force Placement 10. The Agencies proposed new Q&A Force Placement 
10 to discuss various methods of charging a borrower for the amount of 
force-placed flood insurance policy premiums and fees and when such 
methods would constitute an ``increase'' that would trigger the 
applicability of certain flood insurance regulatory requirements. 
Proposed Q&A Force Placement 10 described three options that the 
Agencies understand lenders may use to charge a borrower for force-
placed flood insurance: adding the premium and fees to the ``mortgage 
loan balance;'' adding premiums and fees to an unsecured account; or 
billing the premium and fees directly to the borrower.
    As discussed above with respect to Q&A Force Placement 8, several 
commenters requested that the Agencies consistently use the term 
``outstanding loan balance'' and to distinguish between instances when 
fees from force-placed flood insurance are ``capitalized'' into the 
outstanding loan balance and when they are not. For the reasons 
discussed in connection with Q&A Force Placement 8, the Agencies are

[[Page 32862]]

revising Q&A Force Placement 10 to incorporate these changes in 
terminology. The Agencies also are revising the discussion of the 
second method to refer more generally to adding premiums and fees to an 
account, rather than an ``unsecured'' account, as the Agencies 
understand that amounts advanced to cover premiums and fees that have 
not been capitalized into the outstanding principal balance may still 
be secured by the property.
    One of these commenters also noted that lenders may advance funds 
to cover force-placed flood insurance premiums and fees through an 
advance of the borrower's escrow account. The commenter further stated 
that such a method also would not cause an increase in the outstanding 
principal balance, and as a result, should not be considered an 
``increase'' that would trigger the applicability of certain flood 
insurance regulatory requirements. The Agencies agree and are including 
this method as another example in Q&A Force Placement 10. With the 
changes discussed above, the Agencies are adopting Q&A Force Placement 
10.
    Force Placement 11. The Agencies proposed new Q&A Force Placement 
11, which addressed 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 provided that, as stated in the 
Regulation, a lender is required to refund premiums paid by a borrower 
for force-placed flood insurance during any period of overlap with 
borrower-purchased flood insurance. The proposed answer stated 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. The proposed answer also discussed 
documentation with respect to situations not involving a lender's 
refund of premiums for force-placed insurance.
    Several commenters requested guidance on whether and how Q&A Force 
Placement 11 applies to reviewing flood insurance policies issued by 
private insurers to determine whether they meet the private flood 
insurance requirements of the Regulation. In response, the Agencies are 
clarifying that the answer in Q&A Force Placement 11 relates to 
ascertaining the sufficiency of the policy to meet the mandatory flood 
insurance purchase requirement to determine whether a refund is 
required. In addition, the Agencies are including a cross-reference to 
Q&A Private Flood Compliance 5 for guidance relating to evaluating 
whether the policy meets the private flood insurance requirements of 
the Regulation.
    Another commenter suggested that the Agencies require that the 
declarations page also include the coverage amount, deductible, and 
term of the policy. However, as noted, for the refund provision of the 
force placement requirement, the Act and the Regulation state that for 
purposes of confirming a borrower's existing flood insurance coverage, 
a lender or its servicer shall 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. Therefore, the Agencies cannot mandate 
that the declarations page include any additional information.
    Force Placement 12. The Agencies proposed new Q&A Force Placement 
12 to address whether a lender is required to refund any premiums to 
the borrower if the 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. The proposed answer clarified that the lender 
must refund any premiums and fees paid by the borrower for force-placed 
insurance that overlaps with a borrower-purchased flood insurance 
policy within 30 days of receipt of a confirmation of a borrower's 
existing flood insurance coverage. The lender must provide this refund 
to the borrower within the specified time period under the Regulation 
without exception, even when the lender has not yet received a refund 
from the insurance provider of the force-placed flood insurance policy. 
One commenter agreed with the proposed answer but thought the question 
proposed by the Agencies for Q&A Force Placement 12 was confusing and 
suggested that the Agencies reword the question. The Agencies agree 
with the commenter and are revising the question in Q&A Force Placement 
12 to be similar to the language suggested by the commenter. Thus, the 
question, as adopted, asks if a lender receives confirmation of a 
borrower's existing flood insurance coverage evidencing an overlap in 
coverage with a force-placed flood insurance policy, but the lender 
does not receive a refund from the insurance provider of the force-
placed flood insurance policy in a timely manner, is the lender still 
obligated to refund any premiums for overlapping coverage to the 
borrower within 30 days. The Agencies are adopting Q&A Force Placement 
12 with the change to the question discussed above.
    Force Placement 13. The Agencies proposed new proposed Q&A Force 
Placement 13 to explain that a lender can rely on a force-placed flood 
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. The proposed answer also suggested that lenders could 
encourage the borrower to purchase his or her own policy, likely at a 
reduced cost, prior to the loan closing. One commenter specifically 
agreed with the Agencies' proposed answer to the question. Another 
commenter suggested that the Agencies amend the answer to clearly note 
that the lender's encouragement of the borrower to purchase his or her 
own policy is at the lender's discretion. The Agencies are amending the 
answer in Q&A Force Placement 13 to include the phrase ``at its 
discretion'' to make clear that this suggested encouragement is 
optional. This same commenter also noted that stating that a borrower-
purchased flood insurance policy would ``likely'' be at a reduced cost 
compared to the force-placed flood insurance policy may not always be 
true. In response, the Agencies are amending the language in Q&A Force 
Placement 13 to state that a borrower-purchased flood insurance policy 
``may be available at a lower premium amount'' to soften the language 
and also make it consistent with similar language in Q&A Force 
Placement 14.
    Another commenter suggested that the Agencies remove the term 
``refinances'' from the proposed answer because the commenter did not 
believe that a refinancing is always a triggering event. The Agencies 
do not agree with this commenter's characterization of a refinancing. A 
refinancing is the termination of an old loan contract and the making 
of a new loan in its place; as a result, a refinancing is the 
``making'' of a loan and does trigger flood insurance requirements 
under the Regulation. The Agencies are adding language to the Q&A to 
make this position clear. In addition, based on this comment, the 
Agencies reexamined the references to loan modifications in Q&A Force 
Placement 13 and are making revisions to the answer to clarify that the 
loan modifications discussed in the answer are only those that would 
result in the increase, renewal, or extension of a loan; in other 
words, those loan

[[Page 32863]]

modifications that would constitute a triggering event under the 
Regulation. The Agencies are also adding cross references to Q&As 
Applicability 6 and Applicability 13. Finally, the Agencies are making 
a minor non-substantive change to the answer.
    Force Placement 14. The Agencies proposed new Q&A Force Placement 
14 in response to an issue raised by EGRPRA commenters.\50\ Under the 
proposed answer, a lender is not required to send a notice prior to 
force-placing insurance at the expiration of a force-placed policy, but 
the lender or its servicer, at its discretion, may notify the borrower 
about its plan to renew the force-placed policy. Commenters to the July 
2020 Proposed Questions and Answers appreciated the flexibility and 
clarity provided in the proposed answer and noted that lenders 
typically choose one of two methods to notify borrowers of renewal of a 
lender-placed policy: (1) Renewal with a pre-expiration notice; or (2) 
renewal with a post-expiration notice. One of these commenters 
suggested language to expand the answer to explain these notice cycle 
methods. However, the Agencies note that the proposed answer already 
states that 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. Therefore, the answer already contemplates both 
notice cycle methods, and the Agencies are adopting Q&A Force Placement 
14 as proposed.
---------------------------------------------------------------------------

    \50\ See FFIEC Joint EGRPRA Report to Congress, March 2017 at 
124, https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.
---------------------------------------------------------------------------

    Force Placement 15. The Agencies proposed new Q&A Force Placement 
15 to 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. One commenter agreed with the Agencies' 
statement that neither the Act nor the Regulation require lenders to 
monitor flood insurance over the life of the loans but recommended that 
the answer be combined into the answer for Q&A Force Placement 1. The 
commenter also stated that the term ``life-of-loan'' monitoring is 
generally associated only with monitoring changes in flood zone maps. 
The Agencies believe that it is important to distinguish the guidance 
provided in Q&A Force Placement 15 from the general discussion on force 
placement in Q&A Force Placement 1. Consequently, the Agencies are 
keeping Q&A Force Placement 15 as a separate Q&A. However, to clarify 
that the ``life of loan'' monitoring referenced in Q&A Force Placement 
15 is ``life of loan'' monitoring related to continuous coverage rather 
than monitoring for map changes, the Agencies are amending the question 
to denote that the Q&A concerns ``life of loan'' monitoring for 
continuous coverage of designated loans. With this change, the Agencies 
are adopting Q&A Force Placement 15.
    Force Placement 16. The Agencies proposed new Q&A Force Placement 
16 to address what a lender or its servicer must do if it receives a 
notice indicating that a property will be remapped into an SFHA as of a 
future effective date. Many commenters stated that lenders do not 
always receive advance notice of a remapping and requested that the 
Agencies also provide guidance to lenders when they receive notice that 
a property already has been remapped. In response to commenters' 
suggestions, the Agencies are expanding Q&A Force Placement 16 to 
include guidance on a lender's or servicer's responsibility when it 
receives notice after a property securing a designated loan has been 
remapped. In those cases, lenders should follow the requirements 
outlined in Q&A Force Placement 1. The adopted answer also adds a 
cross-reference to Q&A Force Placement 9 to address questions regarding 
when the lender or servicer may charge the borrower for a force-placed 
flood insurance policy.
    One commenter was confused by the proposed answer's statement that 
the effective date of future remap is the date the lender or servicer 
must determine sufficiency of flood insurance coverage, but also 
providing that the lender or servicer may immediately force-place flood 
insurance as of the remapping effective date. The commenter stated that 
as written, the proposed answer seemed to suggest that two different 
effective dates are possible. To clarify, the Agencies' are amending 
the answer to state that as of the effective date of the remapping, if 
the lender makes a determination that the property securing a 
designated loan is not covered by sufficient flood insurance, the 
lender or servicer must begin the force placement process and may 
charge the borrower for the force-placed insurance policy.
    With the changes described above, the Agencies are adopting Q&A 
Force Placement 16.
    Other Comments. One commenter stated that the Q&As on force 
placement should generally reflect a consistent treatment of the 
sequence of the force placement process beginning with determination of 
absent or insufficient coverage, then notice, and finally placement of 
flood insurance throughout the duration of the loan. The Agencies have 
reviewed the force placement Q&As generally to ensure that they reflect 
this sequence. This commenter also requested that the Agencies define 
what lender actions constitute making a ``determination'' that flood 
insurance is absent or inadequate and whether that determination is 
conditional. The Agencies do not believe it is possible to define all 
instances of when a lender ``determines'' flood insurance is absent or 
inadequate and that determination is not necessarily ``conditioned'' on 
any specific actions or events.
    Another commenter urged the Agencies to clarify when the 
insufficiency or inadequacy of a flood insurance policy necessitates 
starting the force placement process, such as when a lender receives a 
new flood insurance policy or when a flood insurance policy is renewed 
and coverage is determined insufficient or inadequate. The Agencies 
decline to limit determination of insufficiency or inadequacy of a 
flood insurance policy to the instances described by the commenter. 
Under the Regulation, this determination can occur at any point during 
the life of the loan.

XVIII. Flood Insurance Requirements in the Event of the Sale or 
Transfer of a Designated Loan and/or Its Servicing Rights (Servicing)

    The Agencies proposed to move current section VIII, which provides 
guidance on flood insurance requirements in the event of the sale or 
transfer of a designated loan and/or its servicing rights, to proposed 
section XVI, and to redesignate current Q&As 44 through 50 as Q&As 
Servicing 1 through 7, respectively. The Agencies proposed changes to 
the Q&As in this section in the July 2020 Proposed Questions and 
Answers. The Agencies proposed to revise these questions and answers to 
account for the change in the title of the head of FEMA from 
``Director'' to ``Administrator'' and received no specific comment on 
that proposed revision, which is included in the final Interagency 
Questions and Answers. Because the Agencies are combining the July 2020 
Proposed Questions and Answers and the March 2021 Proposed Questions 
and Answers into one document, the Agencies are renumbering this 
Servicing section as Section XVIII in the 2022 Interagency Questions 
and Answers.
    One commenter recommended that the Agencies clarify whether all 
Q&As in this section apply to flood insurance policies issued by 
private insurers. In response, the Agencies are revising the Q&As where 
appropriate to clarify that

[[Page 32864]]

the requirement that a regulated lender must provide notice of a new 
servicer's identity to the Administrator of FEMA (or the 
Administrator's designee) applies to NFIP policies. In the case of a 
flood insurance policy issued by a private insurer, the lender should 
provide notice of a new servicer's identity to the flood insurance 
provider, as FEMA does not accept these notices for policies issued by 
private insurers. If the lender did not provide notice of a new 
servicer's identity to the flood insurance provider, the provider would 
be unable to properly administer the policy, such as by providing 
notice to the servicer about the expiration of the flood insurance 
policy. The burden of such notification should be minor because 
exchanges of information between the lender and the insurance provider 
ordinarily occur as a matter of routine. Where appropriate, the final 
Servicing Q&As contain revisions that incorporate this clarification. 
These revisions are discussed below.
    Servicing 1. The Agencies proposed to redesignate existing Q&A 44 
as proposed Q&A Servicing 1. This proposed Q&A explained how the flood 
insurance requirements under the Regulation apply to lenders under two 
scenarios involving loan servicing. The Agencies received no specific 
comments on Q&A Servicing 1. However, the Agencies are clarifying in 
the final Q&A the applicability of the notice requirements to flood 
insurance policies issued by private insurers, as discussed above. The 
Agencies are adopting Servicing 1 with this change and with other minor 
non-substantive revisions.
    Servicing 2. The Agencies proposed to redesignate existing Q&A 45 
as proposed Q&A Servicing 2. This proposed Q&A addressed the question 
of when a lender must provide notice to FEMA or its designee when that 
lender will be the servicer of the loan. Several commenters recommended 
that the Agencies clarify in the answer that the notice requirement 
does not apply where the flood insurance policy is issued by a private 
insurer. The commenter stated that there appears to be no reason to 
notify FEMA or its designee that the lender is the servicer of the loan 
when the property securing the loan is not insured by an NFIP policy. 
In the alternative, a commenter suggested that the Agencies could add a 
new Q&A to the Private Flood Compliance Q&As that provides this 
clarification. This commenter also asserted that the Agencies should 
make a technical change to the Regulation to remedy the situation. 
Another commenter also identified this concern but did not provide 
specific suggestions or recommendations.
    In response to these comments, the Agencies are clarifying the 
answer to provide that in the case of a flood insurance policy issued 
by a private insurer, the lender should provide notice of a new 
servicer's identity to the flood insurance provider. The Agencies also 
state in the revised answer that if the lender does not provide this 
notice to the flood insurance provider, the provider will be unable to 
properly administer the policy, such as by providing notice to the 
servicer about the expiration of the flood insurance policy. Revising 
the Regulation to address this point is beyond the scope of the 
Interagency Questions and Answers.
    One commenter interpreted the Regulation to indicate that the 
process of acquiring or revising a flood insurance policy will fulfill 
the initial notification requirement. The commenter noted that the 
Regulation provides no exception for the notice when dealing with a 
scenario where an RCBAP provides sufficient coverage (i.e., no 
additional individual flood insurance policy is required). The 
commenter stated that in this scenario, the Administrator of FEMA or 
the Administrator's designee would not receive notice, since a flood 
insurance policy is not purchased or updated. The commenter asked for 
clarification of the Agencies' expectation in this scenario. In 
response to this comment, the Agencies clarify that if a unit owner 
does not purchase or update a separate policy, then no notice is 
required. However, notice would be required if the unit owner purchases 
or updates a separate dwelling policy. The Agencies are not changing 
the Q&A in response to this comment.
    The Agencies are adopting this Q&A with the changes discussed 
above, along with minor technical, non-substantive changes.
    Servicing 3. The Agencies proposed to redesignate existing Q&A 46 
as proposed Q&A Servicing 3. This proposed Q&A explained that a RESPA 
Notice of Transfer sent to the Administrator of FEMA (or the 
Administrator's designee, i.e., the insurance provider) satisfies the 
requirements of the Act. The Agencies received no specific comments on 
Q&A Servicing 3 and are adopting it with a minor non-substantive change 
to the question but otherwise as proposed.
    Servicing 4. The Agencies proposed to redesignate existing Q&A 47 
as proposed Q&A Servicing 4. This proposed Q&A explained that delivery 
of the notice can be delivered electronically, including by batch 
transmission. The Agencies received no specific comments on Q&A 
Servicing 4 and are adopting it as proposed.
    Servicing 5. The Agencies proposed to redesignate existing Q&A 48 
as proposed Q&A Servicing 5. This proposed Q&A addressed the question 
of whether a lender is required to provide notice to the Administrator 
or the Administrator's designee (i.e., the insurance provider) if a 
loan and its servicing rights are sold by the lender. The Agencies 
received no specific comments on Q&A Servicing 5. In the final Q&A, the 
Agencies are clarifying the applicability of the notice requirement to 
flood insurance policies issued by private insurers, as discussed 
above. With this change, the Agencies are adopting Q&A Servicing 5 
otherwise as proposed.
    Servicing 6. The Agencies proposed to redesignate existing Q&A 49 
as proposed Q&A Servicing 6. This proposed Q&A addressed the question 
of whether a lender is required to provide notice when the servicer, 
not the lender, sells or transfers the servicing rights to another 
servicer. The proposed answer provided that after servicing rights are 
sold or transferred, the subsequent notification obligations applicable 
in connection with NFIP policies are the responsibility of the new 
servicer. The Agencies received no specific comments on Q&A Servicing 
6. In the final Q&A, the Agencies are clarifying that in connection 
with a flood insurance policy issued by a private insurer the Agencies 
do not expect the lender to provide notice to the private insurance 
provider of any subsequent sale or transfer of the servicing rights 
because the new servicer should provide this notice. With this change, 
and a minor non-substantive edit, the Agencies are adopting Q&A 
Servicing 6 otherwise as proposed.
    Servicing 7. The Agencies proposed to redesignate existing Q&A 50 
as proposed Q&A Servicing 7. This proposed Q&A addressed the 
responsibilities of the parties for notifying the Administrator's 
designee (i.e., the insurance provider) in the event of a merger or 
acquisition of one lender with another. The Agencies received no 
specific comments on Q&A Servicing 7. In the final Q&A, the Agencies 
are clarifying the applicability of the notice requirement to flood 
insurance policies issued by private insurers, as discussed above. With 
this change, the Agencies are adopting Q&A Servicing 7 otherwise as 
proposed.

[[Page 32865]]

Section XIX. Mandatory Civil Money Penalties (Penalty)

    Section XVII includes questions and answers related to mandatory 
civil penalties. For organizational purposes, the Agencies proposed to 
move existing section XVI to proposed section XVII and redesignated 
existing Q&As 81 and 82 as proposed Q&A Penalty 1 and 2, respectively. 
The Agencies proposed changes to the Q&As in this section in the July 
2020 Proposed Questions and Answers. Because the Agencies are combining 
the July 2020 Proposed Questions and Answers and the March 2021 
Proposed Questions and Answers into one document, the Agencies are 
renumbering this Penalty section as Section XIX in the 2022 Interagency 
Questions and Answers.
    Penalty 1. The Agencies proposed to redesignate existing Q&A 81 as 
proposed Penalty 1. This Q&A discusses which violations of the Act can 
result in a mandatory civil money penalty. The Agencies proposed to 
update this Q&A to reflect, as provided in the Biggert-Waters Act: (1) 
the increased maximum civil money penalty that the Agencies may impose 
per violation when there is a pattern or practice of flood violations; 
and (2) the elimination of the limit on the total amount of penalties 
that the Agencies may assess against a regulated lending institution 
during any calendar year.\51\ Specifically, proposed Q&A Penalty 1 
provides that the civil money penalty amount cannot exceed $2,000 per 
violation and that there is no ceiling on the total penalty amount that 
a Federal supervisory agency can assess for a pattern or practice of 
violations. This Q&A also notes that each Agency adjusts the limit 
pursuant to the Federal Civil Penalties Inflation Adjustment Act of 
1990. For purposes of clarity and accuracy, the Agencies also proposed 
minor revisions with no intended change in substance or meaning. The 
Agencies received no specific comments on this Q&A and are adopting Q&A 
Penalty 1 as proposed, with the addition of more specific citations to 
the Federal Civil Penalties Inflation Adjustment Act of 1990.
---------------------------------------------------------------------------

    \51\ See 42 U.S.C. 4012a(f)(5). See also Public Law 112-141, 126 
Stat. 916 (2012).
---------------------------------------------------------------------------

    Penalty 2. The Agencies proposed to redesignate existing Q&A 82 as 
proposed Q&A Penalty 2 with only minor revisions, with no intended 
change in substance or meaning. This Q&A addresses what constitutes a 
``pattern or practice'' of violations for which civil money penalties 
must be imposed under the Act. The Agencies received no specific 
comments on this Q&A and are adopting it as proposed.

Redesignation Table

    The following redesignation table is provided as an aid to assist 
the public.

------------------------------------------------------------------------
      2009 & 2011 Interagency Q&A              2022 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 X. Determining the
 Amount of Flood Insurance Required       Appropriate Amount of Flood
 Under the Act and Regulation.            Insurance Required.
Section II, Question 8.................  Section X, Amount 1
Section II, Question 9.................  Section X, Amount 2
Section II, Question 10................  Deleted
Section II, Question 11................  Section X, Amount 3
Section II, Question 12................  Section X, Amount 4
Section II, Question 13................  Section X, Amount 5
Section II, Question 14................  Section X, Amount 6
Section II, Question 15................  Section X, Amount 7
Section II, Question 16................  Section X, Amount 8
Section II, Question 17................  Section X, 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 XI, Flood Insurance
 Requirements for Construction Loans.     Requirements for Construction
                                          Loans.
Section IV, Question 19................  Section XI, Construction 1
Section IV, Question 20................  Section XI, Construction 2
Section IV, Question 21................  Section XI, Construction 3
Section IV, Question 22................  Section XI, Construction 4
Section IV, Question 23................  Section XI, Construction 5
------------------------------------------------------------------------
Section V. Flood Insurance Requirements
 for Non-Residential Buildings.
Section V, Question 24.................  Section I, Applicability 2
Section V, Question 25.................  Section I, Applicability 3
------------------------------------------------------------------------
Section VI. Flood Insurance              Section XII. Flood Insurance
 Requirements for Residential             Requirements for Residential
 Condominiums.                            Condominiums and Co-Ops.
Section VI, Question 26................  Section XII, Condo and Co-Op 1
Section VI, Question 27................  Section XII, Condo and Co-Op 2
Section VI, Question 28................  Section XII, Condo and Co-Op 3

[[Page 32866]]

 
Section VI, Question 29................  Section XII, Condo and Co-Op 4
Section VI, Question 30................  Section XII, Condo and Co-Op 5
Section VI, Question 31................  Section XII, Condo and Co-Op 6
Section VI, Question 32................  Section XII, Condo and Co-Op 7
Section VI, Question 33................  Section XII, Condo and Co-Op 8
------------------------------------------------------------------------
Section VII. Flood Insurance             Section XIII. 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 XIII, Other Security
                                          Interests 1
Section VII, Question 35...............  Section XIII, Other Security
                                          Interests 2
Section VII, Question 36...............  Section XIII, Other Security
                                          Interests 4
Section VII, Question 37...............  Section XIII, Other Security
                                          Interests 5
Section VII, Question 38...............  Section XIII, Other Security
                                          Interests 6
Section VII, Question 39...............  Section XIII, Other Security
                                          Interests 7
Section VII, Question 40...............  Section XIII, Other Security
                                          Interests 8
Section VII, Question 41...............  Section XIII, Other Security
                                          Interests 9
Section VII, Question 42...............  Section XIII, Other Security
                                          Interests 11
Section VII, Question 43...............  Section XIII, Other Security
                                          Interests 12
------------------------------------------------------------------------
Section VIII. Flood Insurance            Section XVIII. 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 XVIII, Servicing 1
Section VII, Question 45...............  Section XVIII, Servicing 2
Section VII, Question 46...............  Section XVIII, Servicing 3
Section VII, Question 47...............  Section XVIII, Servicing 4
Section VII, Question 48...............  Section XVIII, Servicing 5
Section VII, Question 49...............  Section XVIII, Servicing 6
Section VII, Question 50...............  Section XVIII, Servicing 7
------------------------------------------------------------------------
Section IX. Escrow Requirements........  Section XIV-XVI. Requirement to
                                          Escrow Flood Insurance
                                          Premiums and Fees.
Section IX, Question 51................  Section XIV, Escrow 5
Section IX, Question 52................  Section XIV, Escrow 1
Section IX, Question 53................  Deleted
Section IX, Question 54................  Deleted
Section IX, Question 55................  Section XVI, Escrow Loan
                                          Exceptions 1
Section IX, Question 56................  Section XVI, Escrow Loan
                                          Exceptions 4
------------------------------------------------------------------------
Section X. Force Placement.............  Section XVII. Force Placement
                                          of Flood Insurance.
Section X, Question 57.................  Section XVII, Force Placement 1
Section X, Question 58.................  Section XVII, Force Placement 3
Section X, Question 59.................  Section XVII, Force Placement 8
Section X, Question 60.................  Section XVII, Force Placement 4
Section X, Question 61.................  Section XVII, Force Placement 5
Section X, Question 62.................  Section XVII, Force Placement 9
------------------------------------------------------------------------
Section XI. Private Flood Insurance....  Section III-V. Private Flood
                                          Insurance.
Section XI, Question 63................  Deleted
Section XI, Question 64................  Section I, Applicability 14
Section XII. Required Use of Standard    Section VI. Standard Flood
 Flood Hazard Determination Form          Hazard Determination Form
 (SFHDF).                                 (SFHDF).
Section XII, Question 65...............  Section VI, SFHDF 1
Section XII, Question 66...............  Section VI, SFHDF 2
Section XII, Question 67...............  Section VI, SFHDF 3
Section XII, Question 68...............  Section VI, SFHDF 4
------------------------------------------------------------------------
Section XIII. Flood Determination Fees.  Section VII. Flood Insurance
                                          Determination Fees.
Section XIII, Question 69..............  Section VII, Fees 1
Section XIII, Question 70..............  Section VII, Fees 2
------------------------------------------------------------------------
Section XIV. Flood Zone Discrepancies..  Section VIII. Flood Zone
                                          Discrepancies.
Section XIV, Question 71...............  Section VIII, Zone 1
Section XIV, Question 72...............  Section VIII, Zone 2
------------------------------------------------------------------------
Section XV. Notice of Special Flood      Section IX. Notice of Special
 Hazards and Availability of Federal      Flood Hazards and Availability
 Disaster Relief.                         of Federal Disaster Relief.
Section XV, Question 73................  Section IX, Notice 1
Section XV, Question 74................  Section IX, Notice 2
Section XV, Question 75................  Section IX, Notice 3
Section XV, Question 76................  Section IX, Notice 4
Section XV, Question 77................  Section IX, Notice 4
Section XV, Question 78................  Section IX, Notice 5
Section XV, Question 79................  Section IX, Notice 6

[[Page 32867]]

 
Section XV, Question 80................  Section IX, Notice 7
------------------------------------------------------------------------
Section XVI. Mandatory Civil Money       Section XIX. Mandatory Civil
 Penalties.                               Money Penalties.
Section XVI, Question 81...............  Section XIX, Penalty 1
Section XVI, Question 82...............  Section XIX, 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.\1\ 
``Lenders'' refers only to regulated lending institutions as defined in 
the Act.\2\ ``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 (SFHA) in which flood insurance is available under the Act. The 
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) (collectively, ``the Agencies'') are 
providing answers to questions pertaining to the following topics:
---------------------------------------------------------------------------

    \1\ 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).
    \2\ 42 U.S.C 4003(a)(10).

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

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

    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 an SFHA. 
Nonetheless, a lender, using the Standard Flood Hazard Determination 
Form, must still determine whether the building or mobile home is 
located in an SFHA.\3\ 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.\4\ In this 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.
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    \3\ 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).
    \4\ 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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    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.\5\ 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.\6\ 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. See also Q&A Exemptions 
1.
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    \5\ 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).
    \6\ 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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    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 a building securing the loan is in 
an SFHA.\7\ In cases in which the loan is secured by multiple buildings 
and some of the buildings are located in an SFHA

[[Page 32868]]

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.\8\ For 
example, assume a loan is secured by five buildings as follows:
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    \7\ 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).
    \8\ 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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     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. In addition, 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.
    Further, if any portion of a building is located in an SFHA in 
which flood insurance is available under the Act, the flood insurance 
requirement applies even if the entire structure is not located in the 
SFHA. However, a building located on a portion of a plat or lot that is 
not in an SFHA is not subject to the mandatory flood insurance purchase 
requirement even if a portion of the plat or lot not containing a 
building extends into an SFHA.\9\
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    \9\ See 42 U.S.C. 4012a(b); FEMA Standard Flood Hazard 
Determination Form.
---------------------------------------------------------------------------

    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.
    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.\10\ A lender's purchase of a loan does not fall within 
any of those categories.
---------------------------------------------------------------------------

    \10\ 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.\11\ 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.\12\
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    \11\ 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).
    \12\ 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. If a loan is being restructured or modified, does 
that constitute a triggering event under the Regulation?
    It depends. If a loan modification or restructuring involves 
recapitalizing into the loan's outstanding principal balance: (1) 
Delinquent payments and other amounts due under the loan and the 
maturity date of the loan otherwise stays the same, or (2) amounts that 
were otherwise originally contemplated to be part of the loan pursuant 
to the contract with the borrower and the maturity date of the loan 
otherwise stays the same, the Regulation would not apply because the 
modification or restructuring would not increase, extend, or renew the 
terms of the loan.
    In contrast, if the loan modification or restructuring changes 
terms of the loan such as by increasing the outstanding principal 
balance beyond what was contemplated as part of the loan under the 
contract with the borrower, or by extending the maturity date of the 
loan, the Regulation would apply because the lender increased or 
extended the terms of the loan beyond what was originally contemplated 
to be part of the loan.\13\
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    \13\ 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 advancing the 
funds.\14\ A loan made through a table funding process is treated as 
though the party advancing the funds has originated the loan.\15\ 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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    \14\ 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).
    \15\ 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,\16\ 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.\17\ 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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    \16\ 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).
    \17\ 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

[[Page 32869]]

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.\18\ Federal flood insurance requirements also would 
apply when a group of lenders refinances, extends, renews or increases 
a loan.\19\ 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. 
This due diligence and monitoring is especially important when the lead 
lender itself is not subject to Federal flood insurance requirements.
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    \18\ 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).
    \19\ 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. This due diligence is especially 
important when the lead lender itself is not subject to Federal 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 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,\20\ provide timely, complete, and accurate notices to 
borrowers,\21\ and comply with other applicable parts of the 
Regulation.
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    \20\ 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).
    \21\ 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

[[Page 32870]]

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.\22\ 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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    \22\ 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 13. What is a ``triggering event'' under the 
Regulation? If there is a triggering event, what is required under the 
Regulation?
    Under the Regulation, a triggering event occurs when a designated 
loan is made, increased, extended, or renewed (also known as a ``MIER'' 
or ``MIRE'' event).\23\ If a triggering event occurs with respect to a 
designated loan, the lender must comply with the Regulation as 
applicable, including the mandatory flood insurance purchase 
requirement, the requirement to provide the Notice of Special Flood 
Hazards to the borrower, the requirement to notify the Administrator of 
the Federal Emergency Management Agency (FEMA) or the Administrator's 
designee (the insurance provider) in writing of the identity of the 
servicer of the loan, and the requirement to escrow for a loan secured 
by residential property, unless either the lender or the loan qualifies 
for an exception.\24\
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    \23\ 12 CFR 22.3(a); 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).
    \24\ See 12 CFR part 22 (OCC); 12 CFR 208.25 (Board); 12 CFR 
part 339 (FDIC); 12 CFR part 614 (FCA); and 12 CFR part 760 (NCUA).
---------------------------------------------------------------------------

    Examples of events that are not considered triggering events for 
purposes of the Regulation include: The purchase of a loan from another 
lender (see Q&A Applicability 5); a loan restructuring or modification 
that does not increase the amount of the loan nor extend or renew the 
terms of the loan (see Q&A Applicability 6); the assumption of the loan 
by another borrower; the remapping of a building securing the loan into 
an SFHA; the acquisition by a lender of an interest in a loan either by 
participation or syndication (see Q&A Applicability 9); a cashless roll 
(see Q&A Applicability 10); certain automatic extensions of credit (see 
Q&A Applicability 11); And certain treatments of force placement 
premiums and fees (see Q&A Force Placement 10).
    APPLICABILITY 14. May a lender rely on an insurance policy 
providing portfolio-wide coverage to meet the flood insurance purchase 
requirement or the force placement requirement under the Regulation?
    It depends. A lender may not rely on an insurance policy providing 
portfolio-wide coverage to meet the flood insurance purchase or force 
placement requirements if the policy only provides coverage to the 
lender (``single interest''). When a flood insurance policy has expired 
and the borrower has failed to renew coverage, 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,\25\ 
and may not rely on an insurance policy that provides portfolio-wide 
coverage as a substitute for a force-placed policy.
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    \25\ 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).
---------------------------------------------------------------------------

    In contrast, lenders may purchase a master flood insurance policy 
that provides coverage for its entire portfolio and covers both the 
lender and the borrower (``dual interest''). Such policies provide 
coverage for the entire portfolio as well as individual coverage, and 
include the issuance of an individual property policy or certificate 
after the required notice period.
    APPLICABILITY 15. 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.\26\ 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 of the property transfers to the new owner based on State 
law.
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    \26\ 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).
---------------------------------------------------------------------------

    ``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.
    For transactions where there is no transfer of property ownership, 
such as a refinance, and the borrower is purchasing a new flood 
insurance policy or is required to increase flood insurance coverage, 
the lender should use the loan's consummation date as the effective 
date for the flood insurance policy, as noted above.
    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.

II. Exemptions From the Mandatory Flood Insurance Purchase Requirements 
(Exemptions)

    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.\27\ 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.\28\ 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

[[Page 32871]]

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.\29\ 
See also Q&A Exemptions 2. 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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    \27\ 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).
    \28\ 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).
    \29\ 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).
---------------------------------------------------------------------------

    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.\30\ 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.\31\ 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.
---------------------------------------------------------------------------

    \30\ 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).
    \31\ 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).
---------------------------------------------------------------------------

    EXEMPTIONS 3. Is a flood hazard determination required even where 
the secured property may contain detached structures for which coverage 
is not required under the Regulation?
    Yes, as required under the Regulation, a flood hazard determination 
is needed to determine whether a building or mobile home securing a 
loan is or will be located in an SFHA where flood insurance is 
available under the Act.
    In order to determine whether the exemption for non-residential 
detached structures that are part of a residential property may apply, 
a flood hazard determination must be conducted first, without regard to 
whether there may be any detached structures that could be exempt.\32\
---------------------------------------------------------------------------

    \32\ 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).
---------------------------------------------------------------------------

    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 property and does not serve as 
a residence, the lender is no longer mandated by the Act to require 
flood insurance on that structure.\33\ 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.
---------------------------------------------------------------------------

    \33\ 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).
---------------------------------------------------------------------------

    EXEMPTIONS 5. In the event that a triggering event has occurred, is 
the lender required to review the intended use of each detached 
structure?
    Yes, a lender must examine the status of a detached structure upon 
a qualifying triggering event to determine whether the detached 
structure exemption still applies.\34\ See Applicability 13. There is 
no duty to monitor the status of a detached structure following the 
lender's initial determination unless a triggering event occurs. 
However, regardless of the absence of a duty to monitor the status of a 
detached structure 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.
---------------------------------------------------------------------------

    \34\ 12 CFR 22.3(a) and 22.4(c) (OCC); 12 CFR 208.25(c)(1) and 
208.25(d)(3) (Board); 12 CFR 339.3(a) and 339.4(c) (FDIC); 12 CFR 
614.4930(a) and 614.4932(c) (FCA); and 12 CFR 760.3(a) and 760.4(c) 
(NCUA).
---------------------------------------------------------------------------

    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.\35\ 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.\36\ 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.\37\
---------------------------------------------------------------------------

    \35\ 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).
    \36\ Id.
    \37\ 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).
---------------------------------------------------------------------------

    EXEMPTIONS 7. If a loan is secured by a residential property and 
the primary residential structure 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.\38\ 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. See the NFIP Flood Insurance Manual. In this case, the other 
building would not qualify as a detached structure because it is 
attached to the primary residential

[[Page 32872]]

structure by a stairway or covered walkway and does not stand alone.
---------------------------------------------------------------------------

    \38\ 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).
---------------------------------------------------------------------------

III. Private Flood Insurance--Mandatory Acceptance (Mandatory)

    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, as long as the policy meets the 
amount of insurance required 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. 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 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.\39\ The flood insurance purchase requirement 
does not apply within non-participating communities, where NFIP 
insurance is not available under the Act. See Q&A Applicability 1. 
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.
---------------------------------------------------------------------------

    \39\ Public Law 93-234, 87 Stat. 975 (1973).
---------------------------------------------------------------------------

    MANDATORY 3. Did the Agencies intend the compliance aid statement 
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 statement to act 
as a conformity clause. Rather, the compliance aid statement 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 statement is intended to leverage 
the expertise of insurers to assist lenders in satisfying the ``private 
flood insurance'' definition of the Regulation.
    MANDATORY 4. Is a lender required to accept a flood insurance 
policy issued by a private insurer that includes the compliance aid 
statement? Conversely, may a lender reject a flood insurance policy 
issued by a private insurer solely because it does not contain the 
compliance aid statement?
    If a flood insurance policy issued by a private insurer includes 
the compliance aid statement, the lender may choose to rely upon the 
statement and would not need to review the policy further to determine 
if the policy meets the definition of ``private flood insurance.''
    However, the lender is not required to accept this policy based 
upon inclusion of the compliance aid statement alone and may choose to 
make its own determination about whether the policy meets the 
definition of ``private flood insurance'' or whether the policy is 
acceptable under the discretionary acceptance or mutual aid 
criteria.\40\
---------------------------------------------------------------------------

    \40\ See 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).
---------------------------------------------------------------------------

    If a flood insurance policy issued by a private insurer does not 
include the compliance aid statement, the lender may not reject the 
policy solely because it does not include this statement. The lender is 
not relieved from the requirement to accept a policy that meets the 
definition of ``private flood insurance,'' as long as the policy meets 
the amount of insurance required under the Regulation.\41\ Further, the 
lender may determine the policy is acceptable under the discretionary 
acceptance or mutual aid criteria.
---------------------------------------------------------------------------

    \41\ 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).
---------------------------------------------------------------------------

    MANDATORY 5. If a flood insurance policy issued by a private 
insurer includes the compliance aid statement, 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 
statement, further review is not necessary in order for the lender to 
determine that a policy meets the definition of ``private flood 
insurance.'' \42\ It is important to note that, in order for the lender 
to rely on the compliance aid statement without further review of the 
policy, the language of the compliance aid statement must be stated in 
the policy, or as an endorsement to the policy, as set forth in the 
Regulation.\43\ If the language is different from the compliance aid 
statement set forth in the Regulation, the lender cannot rely on the 
protections of the compliance aid statement 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 statement 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 
statement included in the Regulation. See also Q&A Mandatory 6.
---------------------------------------------------------------------------

    \42\ 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).
    \43\ 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).
---------------------------------------------------------------------------

    MANDATORY 6. Under the Regulation, what additional reviews does a 
lender need to conduct if the flood insurance policy issued by a 
private insurer includes the compliance aid statement?
    Although a lender may rely on the compliance aid statement to 
determine that a flood insurance policy meets the definition of 
``private flood insurance'' in the Regulation, the lender must also 
ensure that the amount of insurance 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.\44\ See also Q&A Mandatory 5.
---------------------------------------------------------------------------

    \44\ 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 7. If a flood insurance policy issued by a private issuer 
does not include a compliance aid statement, 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.\45\ 
However, 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.\46\
---------------------------------------------------------------------------

    \45\ 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).
    \46\ 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

[[Page 32873]]

acceptance provision, the Regulation requires the lender to document 
that the policy provides sufficient protection of the loan.\47\ See 
also Q&A Discretionary 2.
---------------------------------------------------------------------------

    \47\ 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 8. If a lender only receives a declarations page without 
receiving a copy of the policy, and the declarations page includes the 
compliance aid statement, may the lender accept the policy?
    If the compliance aid statement is included on the declarations 
page, a lender may determine the policy meets the definition of 
``private flood insurance'' without further review. However, a lender 
also must ensure that the policy meets the amount of insurance required 
under the Regulation. See Q&A Mandatory 6.
    MANDATORY 9. May a lender accept a private flood insurance policy 
that includes a compliance aid statement, 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, but contains a compliance aid statement, lenders may accept 
the policy as long as the policy complies with the Regulation and 
applicable State laws. See Q&A Private Flood Compliance 10.

IV. Private Flood Insurance--Discretionary Acceptance (Discretionary)

    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 
Discretionary 4. This review may be performed and recorded 
electronically. 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 Discretionary 4.
    DISCRETIONARY 4. What are some factors to consider when determining 
whether a flood insurance policy issued by a private insurer under the 
discretionary acceptance provision or a mutual aid plan 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 deductible is 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.

V. Private Flood Insurance--General Compliance (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 provide coverage 
at least as broad as the coverage provided under an SFIP for the same 
type of property, including a deductible that 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.\48\ 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.
---------------------------------------------------------------------------

    \48\ 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).
---------------------------------------------------------------------------

     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,

[[Page 32874]]

consistent with safety and soundness principles.\49\ 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 safety and 
soundness principles.
---------------------------------------------------------------------------

    \49\ 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).
---------------------------------------------------------------------------

    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.\50\ However, a lender may accept a 
private flood insurance policy covering multiple buildings regardless 
of whether any single building covered by the policy has an insurable 
value lower than the amount of the per occurrence deductible. See Q&A 
Amount 9, Q&A Amount 10, and Q&A Private Flood Compliance 2.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 SFIP?
    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 SFIP, 
which includes a requirement that the private flood insurance policy 
contain a deductible no higher than the specified maximum deductible 
for an SFIP.\51\ The lender may require a borrower's private flood 
insurance policy deductible to be lower than the maximum deductible for 
an SFIP 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.
---------------------------------------------------------------------------

    \51\ 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).
---------------------------------------------------------------------------

    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.\52\ See also Q&A Private Flood 
Compliance 1.
---------------------------------------------------------------------------

    \52\ 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).
---------------------------------------------------------------------------

    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 issued by private insurers. 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.
    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 
private flood insurance 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 private 
flood insurance 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. See also Q&A Private 
Flood Compliance 5.
    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 private flood insurance requirements of 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 
statement, 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, either in the policy or as an endorsement, under the 
private flood insurance provisions of the Regulation.
    PRIVATE FLOOD COMPLIANCE 7. How do the private flood insurance 
requirements of the Regulation, especially the compliance aid 
statement, 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

[[Page 32875]]

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.\53\
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    \53\ https://www.naic.org/prod_serv_alpha_listing.htm#quarterly_alien.
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    PRIVATE FLOOD COMPLIANCE 10. May lenders accept policies issued by 
private insurers that are surplus lines insurers for noncommercial 
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.'' \54\ 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.'' \55\
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    \54\ See 84 FR 4953, 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).
    \55\ See 84 FR 4953, 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 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. When must a lender review a flood 
insurance policy issued by a private insurer under the private flood 
insurance requirements of the Regulation?
    Any time the borrower presents the lender with a new flood 
insurance policy issued by a private insurer, regardless of whether a 
triggering event occurred, the lender must review the policy to 
determine whether it meets the private flood insurance requirements of 
the Regulation.\56\ 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 statement.\57\ 
If there is no compliance aid statement, or the lender chooses not to 
rely on the compliance aid statement, the lender must conduct its own 
review to determine if the policy meets the mandatory acceptance 
criteria. See Q&A Mandatory 4. 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. See also Q&A Mandatory 7. If the policy 
does not meet the mandatory acceptance, discretionary acceptance, or 
mutual aid plan criteria, the lender may not accept the policy.\58\
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    \56\ 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).
    \57\ 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).
    \58\ 12 CFR 22.3(c) (OCC); 12 CFR 208.25(c) (Board); 12 CFR 
339.3(c) (FDIC); 12 CFR 614.4930(c) (FCA); and 12 CFR 760.3(c) 
(NCUA).
---------------------------------------------------------------------------

    If the lender has previously reviewed the flood insurance policy 
under the mandatory acceptance provision, the discretionary acceptance 
provision, or the mutual aid plan provision the lender may rely on its 
previous review, provided there are no changes to the terms of the 
policy that would affect the acceptance under the Regulation. The 
lender's previous written documentation will constitute the 
documentation required under the Regulation each time the policy comes 
up for renewal. The lender should have effective internal controls in 
place through appropriate policies, procedures, training, and 
monitoring to ensure compliance with the requirements of the 
Regulation.

VI. 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.\59\ 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.\60\
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    \59\ 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).
    \60\ 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?

[[Page 32876]]

    Yes. Although not a statutory requirement, a lender may provide a 
copy of the flood determination to the borrower. 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. The Agencies note that 
under the FEMA process for a Letter of Determination Review (LODR), a 
lender would need to make the determination available to the borrower.
    SFHDF 3. May the SFHDF be used in electronic format?
    Yes.\61\ 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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    \61\ 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.

VII. Flood Insurance Determination Fees (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.\62\
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    \62\ 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).
---------------------------------------------------------------------------

    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 monitoring fee may be charged only if the events specified in the 
answer to Q&A Fees 1 occur.\63\ 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.\64\
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    \63\ 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).
    \64\ 12 U.S.C. 2607. See 12 CFR 1024.14(c).
---------------------------------------------------------------------------

VIII. Flood Zone Discrepancies (Zone)

    ZONE 1. Does a lender need to reconcile a discrepancy between the 
flood zone designation on the flood determination form and the flood 
zone associated with a flood insurance policy?
    No, a lender need not reconcile or otherwise be concerned with a 
flood zone discrepancy. For NFIP policies issued under FEMA's Risk 
Rating 2.0--Equity in Action (Risk Rating 2.0), \65\ premium rates are 
no longer determined by the flood zone in which the property is 
located. Moreover, the flood zone is no longer included on the 
declarations page for NFIP policies issued under Risk Rating 2.0.
---------------------------------------------------------------------------

    \65\ See https://www.fema.gov/flood-insurance/risk-rating.
---------------------------------------------------------------------------

    Flood insurance policies issued by a private insurer may still 
include the flood zone on the declarations page. Further, NFIP policies 
that have not been issued or renewed under Risk Rating 2.0 will include 
the flood zone on the declarations page.\66\ In these cases, lenders 
also need not reconcile any discrepancy.
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    \66\ New NFIP policies starting October 1, 2021 have been issued 
under Risk Rating 2.0. NFIP policies that renew between October 1, 
2021, and March 31, 2022, may or may not be renewed under Risk 
Rating 2.0. All NFIP policies that renew on or after April 1, 2022 
will be renewed under Risk Rating 2.0.
---------------------------------------------------------------------------

    The flood zone determination is still necessary to determine if a 
property is located in an SFHA. 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.\67\ For disputes regarding whether a property is located in 
an SFHA, see Q&A Zone 3.
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    \67\ 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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    ZONE 2. Is a lender in violation of the Regulation if there is a 
discrepancy

[[Page 32877]]

between the flood zone on the SFHDF and the flood zone associated with 
a flood insurance policy?
    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 
associated with the policy. See Q&A Zone 1.
    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.\68\
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    \68\ 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. Notice of Special Flood Hazards and Availability of Federal 
Disaster Relief (Notice)

    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.\69\ 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.
---------------------------------------------------------------------------

    \69\ 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. When should a lender provide the Notice of Special Flood 
Hazards to the borrower? How does this requirement apply in situations 
regarding mobile homes where the lender may not know where the home is 
to be located until just prior to, or sometimes after, the time of loan 
closing?
    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.\70\ What constitutes ``reasonable'' 
notice will necessarily vary according to the circumstances of 
particular transactions. A lender should bear in mind, however, that a 
borrower should receive timely notice to ensure that (1) the borrower 
has the opportunity to become aware of the borrower's responsibilities 
under the Act; and (2) where applicable, the borrower can purchase 
flood insurance before completion of the loan transaction. The Agencies 
generally regard 10 calendar days as a ``reasonable'' time interval.
---------------------------------------------------------------------------

    \70\ 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).
---------------------------------------------------------------------------

    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.
    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 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.\71\ If the borrower 
fails to purchase flood insurance coverage within 45 days after 
notification, the lender must force-place the insurance.\72\
---------------------------------------------------------------------------

    \71\ 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).
    \72\ 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.\73\
---------------------------------------------------------------------------

    \73\ 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.\74\
---------------------------------------------------------------------------

    \74\ 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.\75\
---------------------------------------------------------------------------

    \75\ 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.\76\ 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; the borrower's electronic 
signature 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

[[Page 32878]]

they must be able to retrieve the record within a reasonable time 
pursuant to a document request from their Federal supervisory agency.
---------------------------------------------------------------------------

    \76\ 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).
---------------------------------------------------------------------------

    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 waive 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.\77\
---------------------------------------------------------------------------

    \77\ 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).
---------------------------------------------------------------------------

    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,\78\ 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.\79\ Therefore, lenders should consult the Act and 
Regulation to determine the information needed.
---------------------------------------------------------------------------

    \78\ 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).
    \79\ 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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X. Determining the Appropriate Amount of Flood Insurance Required 
(Amount)

    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.\80\ The NFIP does not insure land; 
therefore, land values are not included in the calculation.\81\
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    \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).
    \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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    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.) \82\
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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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    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), the replacement cost value listed on the 
flood insurance policy declarations page, or any other reasonable 
approach, so long as it can be supported.
    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.

[[Page 32879]]

    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, containing 2-4 residential units and in which non-residential 
uses are limited to less than 25 percent of the building's total floor 
area. This category includes apartment buildings and condominium 
buildings. It excludes hotels and motels with normal room rentals for 
less than six months.
     An other residential building is a residential building 
containing five or more residential units or a mixed-use building in 
which the total floor area devoted to non-residential uses is less than 
25 percent of the building's total floor area. 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 six 
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 non-residential buildings?
    Pursuant to the NFIP Flood Insurance Manual, a non-residential 
building includes:
    1. A building in which the named insured is a commercial enterprise 
primarily carried out to generate income and the coverage is for:
     A building not designed for habitation or residential 
uses;
     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.
     The following buildings where the normal occupancy of a 
guest is less than six months: Condominium buildings, apartment 
buildings, hotels and motels, tourist homes, or rooming houses.
    2. Other non-residential buildings including, but not limited to 
the following: Houses of worship, schools, agricultural structures, 
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:
    [cir] The maximum limit available for the type of structure; or
    [cir] The ``insurable value'' of the structure.\83\
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    \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).
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    Example: (Calculating insurance required on a non-residential 
building):
    Loan security includes one equipment shed located in an SFHA in a 
participating community under the Regular Program.
     Outstanding loan principal 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 (non-residential building).
    [cir] Insurable value of the equipment shed is $30,000.
    The minimum amount of insurance required by the Regulation for the 
equipment shed is $30,000.
    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.\84\ The total 
amount of required flood insurance is the lesser of:
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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).
---------------------------------------------------------------------------

     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.\85\
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    \85\ See 42 U.S.C. 4012a; 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 $150,000 
secured by five non-residential 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 non-residential buildings (or $1.5 million total); or
    [cir] Insurable value ($100,000 for each non-residential 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.\86\ 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. \87\ Since the NFIP policy does not cover land 
value, lenders determine the amount of insurance necessary based on the 
insurable value of the building.
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    \86\ 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).
    \87\ 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

[[Page 32880]]

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.\88\
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    \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).
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    AMOUNT 10. Can a lender accept a blanket flood insurance policy or 
blanket multi-peril policy covering multiple buildings that includes a 
per-occurrence deductible, regardless of whether any single building 
covered by the policy has an insurable value lower than the amount of 
the deductible?
    Yes, a lender may accept a blanket flood insurance policy or 
blanket multi-peril policy covering multiple buildings that includes a 
per-occurrence deductible, regardless of whether any single building 
covered by the policy has an insurable value lower than the amount of 
the deductible. A blanket flood insurance policy or blanket multi-peril 
policy that includes a per-occurrence deductible provides coverage for 
each building covered by such a policy, regardless of whether any 
individual building covered under the policy has an insurable value 
that may be lower than the amount of the deductible. However, a lender 
may not allow the borrower to use a deductible amount equal to the 
aggregate insurable value of the property to avoid the mandatory 
purchase requirement. A lender should determine the reasonableness of 
the deductible on a case-by-case basis, taking into account the risk 
that such deductible would pose to the borrower and lender. See Q&A 
Amount 9.

XI. Flood Insurance Requirements for Construction Loans (Construction)

    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.\89\ 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.
---------------------------------------------------------------------------

    \89\ 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.\90\ 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.\91\ The lender must then comply 
with the mandatory purchase requirement under the Act and 
Regulation.\92\
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    \90\ 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).
    \91\ 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).
    \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).
---------------------------------------------------------------------------

    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. The NFIP will insure a building in the course of construction 
before it is walled and roofed using the NFIP-issued rates based on the 
construction designs and the intended use of the building. However, 
buildings in the course of construction that are not walled and roofed 
are not eligible for coverage when construction stops for more than 90 
days and/or if the lowest floor for rating purposes is below the Base 
Flood Elevation. The NFIP will not insure materials or supplies 
intended for use in such construction, alteration, or repair unless 
they are contained within an enclosed building on the premises or 
adjacent to the premises. (See NFIP Flood Insurance Manual; the NFIP 
Dwelling Form for an SFIP.)
    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.\93\ The NFIP provides that 
lenders may 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

[[Page 32881]]

at the time of a loss. (See NFIP Flood Insurance Manual.)
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    Alternatively, a lender may allow a borrower to defer the purchase 
of flood insurance until either after 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 the Base Flood 
Elevation, when the building is walled and roofed. However, in order to 
comply with the Regulation,\94\ 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 for 
funds to be used 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 in 
light of the NFIP 30-day waiting period requirement. (See NFIP Flood 
Insurance Manual.) See also Q&A Construction 5.
---------------------------------------------------------------------------

    \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).
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    CONSTRUCTION 5. Does the NFIP 30-day waiting period apply when the 
purchase of the flood insurance policy is deferred in connection with a 
construction loan?
    Yes. 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 after making, increasing, renewing, or extending the 
loan. A borrower must apply for flood insurance on or before the 
closing date of a loan transaction for the NFIP 30-day waiting period 
to be waived. See 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.\95\
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    \95\ 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).
---------------------------------------------------------------------------

XII. Flood Insurance Requirements for Residential Condominiums and CO-
Ops (Condo and Co-Op)

    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.\96\ 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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 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.\97\
---------------------------------------------------------------------------

    \97\ 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.\98\ 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.
---------------------------------------------------------------------------

    \98\ 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 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 Q&A Condo and Co-Op 4, or if the RCBAP

[[Page 32882]]

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)). See 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. For residential condominiums with no RCBAP 
coverage, what action must a lender take for an individual unit owner?
    If there is no RCBAP on the residential condominium building, then 
the lender must require the individual unit owner to obtain coverage in 
an amount sufficient to meet the requirements outlined in Q&A Condo and 
Co-Op 3.\99\
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    \99\ 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 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 RCBAP is insufficient to meet the Regulation's mandatory 
purchase requirements, then the lender should request that the 
individual unit owner 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 to purchase supplemental coverage in an amount 
sufficient to meet the Regulation's flood insurance requirements.\100\ 
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.
---------------------------------------------------------------------------

    \100\ 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 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 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

[[Page 32883]]

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 of the 
requirement to maintain flood insurance coverage sufficient to meet the 
Regulation's mandatory requirements.\101\ The lender should encourage 
the individual unit owner 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 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 of inadequate insurance 
coverage, the lender must force place the necessary flood insurance on 
the borrower's behalf.\102\
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    \101\ 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).
    \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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    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)
    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 are the flood insurance requirements for a 
residential condominium unit or a non-residential condominium unit 
located in a non-residential condominium building? What are the flood 
insurance requirements for a non-residential condominium unit located 
in a residential condominium building?
    Coverage is not available under the NFIP for an individual 
residential condominium unit or a non-residential condominium unit 
located in a non-residential condominium building. NFIP coverage is 
also not available for a non-residential condominium unit located in a 
residential condominium building. Therefore, a loan secured by one of 
these types of units is not a designated loan under the Regulation, and 
the mandatory flood insurance requirement does not apply. The Agencies 
note, however, that contents coverage is available through the NFIP for 
these types of units. See NFIP Flood Insurance Manual.
    CONDO AND CO-OP 10. 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.

[[Page 32884]]

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 non-residential 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.

XIII. 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)

    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.\103\
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    \103\ 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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    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.\104\ 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.
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    \104\ 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; \105\ or
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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).
---------------------------------------------------------------------------

     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.\106\
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    \106\ 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.\107\ The junior 
lienholder should also have the borrower add the junior lienholder's 
name as mortgagee/loss payee to the 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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    \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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    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

[[Page 32885]]

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.\108\ 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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    \108\ 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.'' \109\ 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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    \109\ 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.\110\ 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.
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    \110\ 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 A makes a loan for $200,000 that is secured by a 
warehouse with an insurable value of $150,000 and 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 located in Building B where 
building B does not secure the loan, is flood insurance required on the 
contents securing the loan?
    No. If collateral securing the loan is stored in Building B, where 
Building B 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.\111\
---------------------------------------------------------------------------

    \111\ 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).
---------------------------------------------------------------------------

    The language in the loan agreement or security instrument 
determines whether the improved real estate and contents are taken as 
security for the loan. If a lender intends to take a security interest 
in the improved real estate and contents, the loan agreement or 
security instrument should include language indicating that the 
improved real estate and contents are security for the loan. If the 
lender does not intend to take a security interest in either the 
improved real estate and/or contents, the loan agreement or security 
instrument 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 or

[[Page 32886]]

security instrument 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.\112\
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    \112\ 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.\113\ 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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    \113\ 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.\114\
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    \114\ 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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XIV. Requirement To Escrow Flood Insurance Premiums and Fees--General 
(Escrow)

    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.\115\
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    \115\ 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).
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    A lender is not required to escrow for flood insurance if it 
qualifies for the small lender exception \116\ or the loan qualifies 
for one of the following loan-related exceptions \117\ in the 
Regulation:
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    \116\ 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).
    \117\ 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.\118\ 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.\119\
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    \118\ 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).
    \119\ 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.\120\ 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.
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    \120\ 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).
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    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.\121\ The Act and Regulation do not include an exception to 
the escrow requirement for force-placed insurance.
---------------------------------------------------------------------------

    \121\ 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?
    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.\122\ 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; \123\ or (ii) the lender determines that 
a loan exception

[[Page 32887]]

to the escrow requirement no longer applies.\124\
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    \122\ 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).
    \123\ 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).
    \124\ 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 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.\125\ 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.
---------------------------------------------------------------------------

    \125\ 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 non-residential 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.\126\
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    \126\ 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.\127\ 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.\128\ 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.\129\
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    \127\ 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).
    \128\ 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).
    \129\ 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).
---------------------------------------------------------------------------

    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 renewed) on or after January 1, 
2016, unless either the lender or the loan qualifies for an 
exception.\130\ 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.
---------------------------------------------------------------------------

    \130\ 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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XV. Requirement To Escrow Flood Insurance Premiums and Fees--Escrow 
Small Lender Exception (Escrow Small Lender Exception)

    ESCROW 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.\131\ Therefore, the $1 billion requirement is calculated 
based on the assets held at the lending institution level, rather than 
at the holding company level.
---------------------------------------------------------------------------

    \131\ 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).
---------------------------------------------------------------------------

    ESCROW 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) U.S. Department of Agriculture (USDA) 
or Federal Housing Administration (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.\132\
---------------------------------------------------------------------------

    \132\ 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).
---------------------------------------------------------------------------

     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.
     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.
    ESCROW SMALL LENDER EXCEPTION 3. Is a lender disqualified

[[Page 32888]]

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.\133\
---------------------------------------------------------------------------

    \133\ 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.
    ESCROW SMALL LENDER EXCEPTION 4. Is a lender eligible for the small 
lender exception if, on or before July 6, 2012, it offered escrow 
accounts only upon a borrower's request?
    Yes. If, on or before July 6, 2012, a lender offered escrow 
accounts only upon the request of borrowers, this practice did not 
constitute a consistent or uniform policy of requiring escrow and the 
lender is eligible for the exception, provided all other conditions for 
the exception are met. 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.\134\
---------------------------------------------------------------------------

    \134\ 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).
---------------------------------------------------------------------------

    ESCROW 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.\135\ 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.\136\ 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 pursuant to the 
Regulation.\137\ 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.
---------------------------------------------------------------------------

    \135\ 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).
    \136\ 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).
    \137\ 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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    ESCROW 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 
Escrow 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.\138\ 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.
---------------------------------------------------------------------------

    \138\ 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).
---------------------------------------------------------------------------

    ESCROW 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.\139\
---------------------------------------------------------------------------

    \139\ 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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XVI. Requirement To Escrow Flood Insurance Premiums and Fees--Escrow 
Loan Exceptions (Escrow Loan Exceptions)

    ESCROW LOAN EXCEPTIONS 1. Are escrow accounts for flood insurance 
premiums and fees required for commercial loans that are secured by 
residential property?
    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.\140\ See Q&A 
Exemptions 1 for further information on the definition of residential 
property.
---------------------------------------------------------------------------

    \140\ 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).
---------------------------------------------------------------------------

    ESCROW LOAN EXCEPTIONS 2. Are escrow accounts for flood insurance 
premiums and fees required for loans secured by particular units 
located in multi-family buildings?
    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

[[Page 32889]]

condominium association, cooperative, homeowners association, or other 
applicable group provides an adequate policy and pays for the insurance 
as a common expense.\141\ See Q&A Exemptions 1. Otherwise, the escrow 
requirements generally would 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).
---------------------------------------------------------------------------

    ESCROW LOAN EXCEPTIONS 3. 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.\142\ 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.\143\ Lenders should 
exercise due diligence with respect to continuing compliance with the 
insurance requirements on the part of the condominium association.
---------------------------------------------------------------------------

    \142\ 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).
    \143\ 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).
---------------------------------------------------------------------------

    ESCROW LOAN EXCEPTIONS 4. 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.
    ESCROW LOAN EXCEPTIONS 5. 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).\144\ 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.
---------------------------------------------------------------------------

    \144\ 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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XVII. Force Placement Of Flood Insurance (Force Placement)

    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.\145\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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, there may be brief delays due to various lender processes, 
including but not limited to, batch processing and manual exception 
processing.
    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

[[Page 32890]]

the lender, following the procedures set forth in the Regulation.\146\
---------------------------------------------------------------------------

    \146\ 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.\147\ 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.\148\
---------------------------------------------------------------------------

    \147\ 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).
    \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).
---------------------------------------------------------------------------

    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.\149\ 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.
---------------------------------------------------------------------------

    \149\ 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.\150\ 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.
---------------------------------------------------------------------------

    \150\ 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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    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.\151\
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    \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).
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    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.\152\
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    \152\ 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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    For example, if the previous policy expires at 12:01 a.m., the 
lender's new force-placed policy should not begin to provide coverage 
until 12:01 a.m. of the same day. If the lender did force place at a 
date and time that would result in the force-placed policy providing 
overlapping coverage, the lender should not charge the borrower for the 
period of overlapping coverage.
    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.'' 
\153\ 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 outstanding principal 
balance plus any additional force-placed premium and fees capitalized 
into the outstanding principal balance.\154\
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    \153\ 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).
    \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)
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    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 an SFHA 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 Regulation. 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.\155\
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    \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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    If the lender intends to capitalize the premium for the force-
placed policy into the outstanding principal balance, the lender must 
ensure that the policy is issued in an amount sufficient to cover the 
anticipated higher outstanding principal balance, including the force-
placed policy premium, even if the capitalization 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 flood 
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

[[Page 32891]]

notification to force place insurance.\156\ 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 remapping, 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. A lender's or servicer's frequent need to purchase 
policies on a borrower's behalf having coverage that precedes the date 
of purchase may, depending upon the facts and circumstances, indicate 
that there are weaknesses within the lender's or servicer's compliance 
management system.
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    \156\ 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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    FORCE PLACEMENT 10. Does capitalizing the flood insurance premium 
into the outstanding principal 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 an SFHA is not covered by any or adequate flood 
insurance.\157\ 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.\158\
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    \157\ 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).
    \158\ 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) Capitalizing the 
premium and fees into the outstanding principal balance; (2) adding the 
premium and fees to a separate account; (3) advancing funds from the 
escrow account to pay for the premiums and fees of the force-placed 
flood insurance; or (4) billing the borrower directly for the premiums 
and fees of the force-placed flood insurance policy. The treatment of 
force-placed flood insurance premiums and fees depends on the method 
the lender chooses for charging the borrower.
Premium and Fees Capitalized Into Outstanding Principal 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 capitalization of the flood insurance 
premiums and fees into the outstanding principal 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 advancement of funds in the loan 
contract, the capitalization of flood insurance premiums and fees into 
the borrower's outstanding principal 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 Account
    If the lender accounts for and tracks the amount owed on the force-
placed flood insurance premium and fees in a separate account, this 
approach does not result in an increase in the loan balance and, 
therefore, is not considered a triggering event.
Premium and Fees Advanced From the Borrower's Escrow Account
    If the lender's loan contract with the borrower permits the lender 
to advance the premiums and fees for the force-placed flood insurance 
from the borrower's escrow account, this approach does not increase the 
outstanding principal balance and 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 
outstanding principal 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.\159\ The Regulation does not require that the 
declarations page contain any additional information in order to 
ascertain whether the policy meets the mandatory flood insurance 
purchase requirement to determine whether a refund is required. See Q&A 
Private Flood Compliance 5 for further guidance regarding evaluation 
under the private flood insurance requirements of the Regulation.
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    \159\ 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).
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    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 receives a confirmation, consistent 
with the Regulation, of a borrower's existing flood insurance coverage 
evidencing an overlap with a force-placed flood insurance policy, but 
the lender does not receive a refund from the insurance provider of the 
force-placed flood insurance policy in a timely manner, is the lender 
still required to refund any premiums for overlapping coverage to the 
borrower within 30 days?

[[Page 32892]]

    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.\160\
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    \160\ 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 existing 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.'' \161\ 
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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    \161\ 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 refinance is the ``making'' of a loan, and a loan modification 
that increases, renews, or extends a loan is a triggering event for the 
flood insurance requirements. See Applicability 6 and Applicability 13. 
Therefore, 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.\162\ At that time, the lender, at its discretion, could encourage 
the borrower to purchase his or her own policy, which may be available 
for a lower premium amount.
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    \162\ 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 for continuous coverage of designated loans?
    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 has been or will be remapped 
into an SFHA, 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.\163\ 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 that remaps 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 
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.\164\ 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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    \163\ 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).
    \164\ 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, if the 
lender makes a determination that the property securing a designated 
loan is not covered by sufficient flood insurance, the lender or 
servicer must begin the force placement process and may charge the 
borrower for the force-placed insurance.\165\ 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.\166\
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    \165\ 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).
    \166\ 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 lender or its servicer receives notice after a property has 
been remapped into an SFHA, then the lender or its servicer must 
determine whether the property securing the loan is covered by 
sufficient flood insurance. The lender or its servicer must begin the 
notice and force placement process, as detailed in Q&A Force Placement 
1, if the property is uninsured or underinsured.\167\ See also Q&A 
Force Placement 9.
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    \167\ 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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XVIII. Flood Insurance Requirements in the Event of the Sale or 
Transfer of a Designated Loan and/or Its Servicing Rights (Servicing)

    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?

[[Page 32893]]

    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 the Administrator 
of FEMA or its designee if the policy is an NFIP policy.\168\ In the 
case of a flood insurance policy issued by a private insurer, the 
lender should provide notice of the identity of the new servicer to the 
private insurer. Once the regulated lender has sold the loan and the 
servicing rights, the lender has no further obligation regarding flood 
insurance on the loan.
---------------------------------------------------------------------------

    \168\ 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, and 
the policy is an NFIP policy, the regulated lender must notify the 
Administrator of FEMA or its designee of the identity of the new 
servicer.\169\ In the case of a flood insurance policy issued by a 
private insurer, the lender should provide notice of the identity of 
the new servicer to the private insurer. 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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    \169\ 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.\170\ 
Those requirements only are triggered when a regulated lender makes, 
increases, extends, or renews a designated loan.\171\ 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,\172\ then the regulated lender must comply with the 
Regulation, including force placing insurance, if necessary.\173\ 
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.\174\
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    \170\ 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).
    \171\ 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).
    \172\ 42 U.S.C. 4012a(e)(1).
    \173\ 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).
    \174\ 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 the Administrator of 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.\175\
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    \175\ 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?
    Under the Regulation, the Administrator's designee is the insurance 
company issuing the flood insurance policy.\176\ The borrower's 
purchase of an NFIP policy (or the lender's force placement of an NFIP 
policy) will constitute notice to the Administrator of FEMA when the 
lender is servicing that loan.
---------------------------------------------------------------------------

    \176\ 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).
---------------------------------------------------------------------------

    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.\177\
---------------------------------------------------------------------------

    \177\ 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).
---------------------------------------------------------------------------

    In the case of a flood insurance policy issued by a private 
insurer, the lender should provide notice to the flood insurance 
provider. If the lender does not provide this notice to the flood 
insurance provider, the provider will be unable to properly administer 
the policy, such as by providing notice to the servicer about the 
expiration of the flood insurance policy.
    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 
requirements 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.

[[Page 32894]]

    SERVICING 4. Can delivery of the notice be made electronically, 
including batch transmission?
    Yes. The Regulation specifically permits transmission by electronic 
means.\178\ 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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    \178\ 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, in the case of an NFIP policy.\179\ 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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    \179\ 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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    In the case of a flood insurance policy issued by a private 
insurer, the lender should provide notice to the flood insurance 
provider. If the lender does not provide this notice to the flood 
insurance provider, the provider will be unable to properly administer 
the policy, such as by providing notice to the servicer about the 
expiration of the flood insurance policy.
    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, the subsequent 
notification obligations applicable in connection with NFIP policies 
are the responsibility of the new servicer.\180\ The obligation of the 
lender 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.\181\ 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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    \180\ 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).
    \181\ 12 U.S.C. 4104a(b)(1).
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    Similarly, for a flood insurance policy issued by a private 
insurer, if a lender sells or transfers the servicing rights, the 
Agencies do not expect the lender to provide notice to the insurance 
provider of any subsequent sale or transfer of the servicing rights.
    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 
in connection with NFIP policies 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.
    Similarly, for a flood insurance policy issued by a private 
insurer, the successor lender should provide notice to the flood 
insurance provider in the event that notification is not provided by 
the acquired lender prior to the effective date of the acquisition or 
merger.

XIX. Mandatory Civil Money Penalties (Penalty)

    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).\182\ As required by the Act, the 
penalties must be paid into the National Flood Mitigation Fund.\183\
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    \182\ Public Law 101-410, Oct. 5, 1990, 104 Stat. 890. This act 
was amended by the Federal Civil Penalties Inflation Adjustment Act 
Improvements Act of 2015, Public Law 114-74, Title VII, section 
701(b), Nov. 2, 2015, 129 Stat. 599. 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.
    \183\ 42 U.S.C. 4012a(f)(8).
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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:
     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);

[[Page 32895]]

     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.

Michael J. Hsu,
Acting Comptroller of the Currency.By order of the Board of Governors 
of the Federal Reserve System.
Ann E. Misback,
Secretary of the Board. Federal Deposit Insurance Corporation.
    Dated at Washington, DC, on January 27, 2022.
James P. Sheesley,
Assistant Executive Secretary.
    Dated at McLean, VA, this 9 day of May 2022.
Ashley Waldron,
Secretary, Farm Credit Administration Board.
Melane Conyers-Ausbrooks,
Secretary of the Board, National Credit Union Administration.
[FR Doc. 2022-10414 Filed 5-27-22; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 7535-01-P; 6705-01-P