Federal Agencies Propose Revisions to Interagency Q&As Regarding Flood Insurance

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Recently federal agencies proposed revisions to the Interagency Questions and Answers Regarding Flood Insurance. The agencies are the Comptroller of the Currency, Farm Credit Administration, FDIC, Federal Reserve Board, and National Credit Union Administration.

The proposed revisions would (1) revise and reorganize the existing Q&As into new categories by subject to enhance clarity and understanding for users, and (2) introduce new Q&As on the escrow of flood insurance premiums, force placement of flood insurance, and the detached structures exemption. Once finalized, the new Q&As will supersede the 2009 and the 2011 Interagency Questions and Answers, and supplement other guidance or interpretations issued by the agencies relative to loans in areas having special flood hazards. The agencies also announced that they plan to issue separately for notice and comment another set of proposed Q&As relating to the private flood insurance rule adopted by the agencies in 2019. However, the current proposed Q&As address private flood insurance in certain contexts.

As proposed, the Q&As would be divided into the following 17 categories:

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

Certain topics addressed by the proposed Q&As include the following:

NFIP Temporarily Unavailable. To address the potential for lapses in the authorization for the National Flood Insurance Program (NFIP), a proposed Q&A would provide that 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 flood insurance requirements without requiring flood insurance coverage. However, lenders would need to continue to make flood zone determinations, provide timely, complete, and accurate notices to borrowers, and comply with other applicable parts of the flood insurance requirements.

Private Flood Insurance Sufficiency. With regard to private flood insurance, one proposed Q&A would provide that some factors, among others, that a lender could consider in determining whether a private policy provides sufficient protection of a loan may include whether:

  • A policy’s deductibles are reasonable based on the borrower’s financial condition;
  • The insurer provides adequate notice of cancellation to the mortgagor and mortgagee to allow for timely force placement of flood insurance, if necessary;
  • 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;
  • The flood insurance policy complies with applicable state insurance laws; and
  • The private insurance company has the financial solvency, strength, and ability to satisfy claims.

Effective Date of Flood Insurance. To provide guidance regarding when a flood insurance policy must be effective, a proposed Q&A would provide as follows:

  • 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.
  • “Wet funding” and “dry funding,” which varies by state, refer to when a mortgage is considered officially closed. In a “wet” settlement state, the signing of closing documents, funding, and transfer of title occur all on the same day. By contrast, in a “dry” settlement state, documents are signed on one date, but loan funding and/or transfer of title/recording occur on subsequent date(s). Therefore, in “dry” settlement states, the “closing date” is the date of property transfer, regardless of loan signing or funding date.
  • It is also important to note that the application and premium payment for NFIP flood insurance must be provided at or prior to the closing date because this affects 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.

Detached Structures. Among several proposed Q&As on the detached structure exemption, one would provide that even if coverage is not required on a detached structure, because a flood hazard determination is often needed to identify the number and types of structures on the property, conducting a flood hazard determination remains necessary for the lender to be able to comply with the flood insurance requirements.

Other Q&As. Among other proposed Q&As, there are Q&As that would address:

  • When a lender must require flood insurance in connection with a loan secured by a building in the course of construction.
  • The agencies’ expectations regarding a lender’s obligation when there is a discrepancy between the flood determination form and the flood insurance policy.
  • That 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 flood insurance requirements.
  • That when a loan is secured by a building located in a special flood hazard area and also the contents of the building, flood insurance is required on the contents regardless of whether the security interest in the contents is perfected.
  • That multi-family buildings or mixed-use properties are included in the definition of “residential improved real estate” and therefore are subject to the requirement to escrow for flood insurance premiums unless an exception applies.
  • That when a junior lienholder determines that the primary lienholder does not have sufficient flood insurance coverage in place and is also not escrowing for flood insurance, the junior lienholder would need to ensure that adequate flood insurance is in place and also would need to escrow for that flood insurance.
  • That construction-to-permanent loans that have a construction phase before the loan converts into permanent financing do not qualify for the 12-month exception from the flood insurance premium escrow requirement, even if one phase of the loan is for 12 months or less.
  • That while a lender or servicer may send a force-placement of insurance notice to the borrower 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.
  • That a lender, or a servicer acting on its behalf, may force place insurance and charge the borrower for the cost of premiums and fees incurred by the lender or servicer in purchasing the flood insurance on the borrower’s behalf at any time starting from the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount. The lender or servicer would not have to wait 45 days after providing the required notification to the borrower.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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