For the first time in nearly a decade, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Farm Credit Administration, and the National Credit Union Administration (the Agencies) have proposed new, revised, and reorganized guidance on flood insurance (the Q&As). The Agencies published a first set of 118 proposed Q&As in July 2020, and a second set of 24 proposed Q&As relating to private insurance specifically on March 11, 2021. After the Q&As are consolidated into a single set and finalized, they will supersede the Current Q&As and supplement other guidance issued by the Agencies relating to flood insurance compliance.
In the first set of proposed Q&As, 41 entirely new Q&As cover topics that have long caused headaches and confusion for those required to comply with flood insurance requirements, including topics such as force-placement procedures, the detached structure exemption to the mandatory purchase of flood insurance requirement, and escrow of flood insurance premiums. The Agencies also propose substantively updating a number of existing Q&As from 2009 and 2011 (the Current Q&As) to clarify expectations of the Agencies, as well as reorganizing the Q&As by 17 subjects to make them easier to navigate. One important proposed revision would relieve lenders from the obligation to resolve discrepancies between flood determination forms and flood insurance policies. Instead, if a flood determination form indicates a building securing a designated loan is in a special flood hazard area (SFHA), the proposed answer states the lender must require flood insurance coverage. Previously, regulatory guidance described a process the lender would need to go to through to attempt to resolve the discrepancy, including potentially requesting that the Federal Emergency Management Agency (FEMA) review the determination form and come to a decision regarding its accuracy. Under the proposed revisions, a lender would have to attempt to resolve a discrepancy only if a borrower disputes the flood zone listed on a flood determination form. Another proposed revision would clarify that a lender is not automatically in violation of the Agencies’ flood insurance regulations simply because there is a discrepancy between the flood zone listed on a flood determination form versus on a policy declarations page.
All of the proposed Q&As in the second set are new and cover acceptance of flood insurance policies issued by private insurers pursuant to the Agencies’ 2019 private flood insurance rule (the Private Flood Insurance Rule), which requires lenders to accept “private flood insurance” as that term is defined in the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act). The proposed Q&As would confirm that if a private flood insurance policy, an endorsement to that policy, or the policy’s declarations pages include the compliance aid assurance clause set forth in the Private Flood Insurance Rule, then a lender need not conduct any further review of the policy to determine that it meets the definition of “private flood insurance” under the Biggert-Waters Act. One important proposed Q&A would confirm that lenders can choose to only accept private insurance policies with such language in satisfaction of the mandatory acceptance provisions of the Private Flood Insurance Rule, which would greatly simplify the review process such a lender would need to take to determine if a private policy meets the definition of “private flood insurance” under the Biggert-Waters Act. Another proposed Q&A would provide that for a loan serviced on behalf of a regulated lending institution, a servicer must comply with flood insurance requirements in determining whether a private flood insurance policy is acceptable. Alternatively, for a loan serviced on behalf of an entity not supervised by the Agencies, a servicer “should comply with the terms of its contract with such an entity” and that entity’s servicing guidance, if any.
Comments are no longer being accepted on the proposed Q&As.
The National Flood Insurance Act of 1968, Flood Disaster Protection Act of 1973, and National Flood Insurance Reform Act of 1994 require flood insurance on improved real estate or mobile homes located, or to be located, in a SFHA in a community participating in the National Flood Insurance Program (NFIP) that secures loans made, increased, renewed or extended by a federally regulated lending institution. Following promulgation of these laws and related regulations, the Agencies published and revised Q&As in 1997, 2009, and 2011. Congress then passed the Biggert-Waters Act and the 2014 Homeowner Flood Insurance Affordability Act which: (1) required the Agencies to issue two new rules; (i) one regarding escrow of flood insurance premiums; and (ii) another directing regulated lending institutions to accept private flood insurance; (2) provided additional clarity regarding the force-placement requirement; and (3) created the detached structures exemption from the mandatory flood insurance purchase requirements. The Agencies issued final rules in 2015 and 2019, accordingly.
In light of the significant changes to flood insurance requirements over the years—and following additional requests from the industry for more guidance—the Agencies have submitted the latest sets of Q&As for public comment which reorganize and revise the Current Q&As, introduce new Q&As, and, overall, provide greater clarity to industry lenders and servicers.
Reorganization of the Q&As Generally
The Agencies propose reorganizing the Q&As by category to enhance clarity and make it easier to find information relating to specific flood insurance topics. In addition, instead of the Q&As being numbered sequentially throughout all categories (e.g., 1-77 as with the 2009 Q&As), the Q&As will be designed by category and then number (e.g., Q&As Applicability 1-12, Q&As Exemptions 1-7, etc.). The new designation system is intended to allow the Agencies to remove or add new Q&As into particular categories without necessitating renumbering of all Q&As.
Reorganized Categories and New Q&As
Below are the twenty proposed categories of reorganized interagency Q&As, along with identification of new Q&As and key revisions of Current Q&As.
1. Determining the Applicability of Flood Insurance Requirements for Certain Loans (Applicability)
The proposed Applicability section contains twelve Q&As, three of which are new. It includes Current Q&As 1-7 relating to flood insurance requirements for residential buildings, and Current Q&As 24-25 relating to flood insurance requirements for nonresidential buildings—re-designated as Q&As Applicability 1-9. Of note:
- Current Q&A 2, re-designated as Q&A Applicability 4, would be expanded to state that a lender, as a condition for extending a loan, may require flood insurance for property outside of SFHAs for risk management purposes.
- Q&A Applicability 10 is intended to address a lender’s obligations when participating in a multi-tranche credit facility. The proposed answer provides that a multi-tranche credit facility is analogous to a loan syndication or participation. The Agencies do not expect a lender participating in one tranche in a multi-tranche credit facility to comply with flood insurance requirements in connection with a triggering event that occurs in a tranche in which the lender does not participate. The Agencies do expect a lender participating in a multi-tranche credit facility to perform upfront due diligence to determine whether the lead lender has in place proper controls to monitor the loan on an ongoing basis for flood insurance compliance.
- Q&A Applicability 11 would clarify that an automatic extension of a credit facility contemplated by the original loan agreement would not constitute a triggering event for purposes of federal flood insurance requirements.
- Q&A Applicability 12 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 otherwise subject to flood insurance requirements without requiring flood insurance coverage. However, lenders would need to continue to make flood zone determinations, provide notices to borrowers, and comply with other aspects of the flood insurance requirements.
2. Exemptions from the Mandatory Flood Insurance Purchase Requirements (Exemptions)
The proposed Exemptions section contains seven Q&As, six of which are new and relate to detached structures, which has been area of uncertainty for lenders.
- Current Q&A 18, re-designated as Q&A Exemption 1, would be revised to list the detached structure exemption as an exemption to the mandatory purchase requirement in addition to exemptions for state-owned property and loans with a principal balance of less than $5,000 and an original repayment term of one year or less.
- Q&A Exemption 2 would provide that lenders do not have to take a security interest in primary residential structures for detached structures to qualify for the detached structure exemption.
- Q&A Exemption 3 would clarify that although flood insurance is not required for any detached structure, flood hazard determination forms are still required for such structures.
- Q&A Exemption 4 would provide that a lender may cancel flood insurance on an eligible detached structure that is currently insured, but may want to continue to require coverage if such a structure is of high value and, therefore, coverage may be mutually beneficial to the borrower and lender.
- Q&A Exemption 5 would state that although there is no duty to monitor the status of a detached structure, sound risk management practices may prompt a lender to conduct periodic reviews to determine the need for flood insurance because a detached structure could be re-mapped into an SFHA.
- Q&A Exemption 6 would clarify that there is no exemption to flood insurance requirements based solely on the analysis of whether or not a structure contributes value to the overall property securing the loan.
- Q&A Exemption 7 would further clarify a structure is “detached” from a primary residential structure if it is “not joined by any structural connection”—including a stairway or covered walkway—and “stands alone.” This seems to clarify requirements around so called “garden apartment” complexes.
3. Coverage – NFIP/Private Flood Insurance (Coverage)
The proposed Coverage section contains three Q&As, two of which are new. It also includes Current Q&A 64, non-substantively revised and re-designated as Q&A Coverage 2. Current Q&A 63, which would otherwise appear in the section, is deleted as inconsistent with the Agencies’ 2019 private flood insurance rule.
- Q&A Coverage 1 would discuss five factors a lender may consider in determining whether a flood insurance policy issued by a private insurer or mutual aid plan satisfies flood insurance requirements: (1) whether the policy’s deductibles are reasonable based on the borrower’s financial condition; (2) whether the insurer provides adequate notice of cancellation to the mortgagor and mortgagee to allow for timely force placement of flood insurance, if necessary; (3) whether the terms and conditions with respect to payment per occurrence or per loss and aggregate limits are adequate to protect the interest in the collateral; (4) whether the policy complies with applicable state insurance laws; and (5) whether the private insurer has the financial solvency, strength, and ability to satisfy claims.
- Q&A Coverage 3 would clarify that a lender should use the loan closing date—i.e., the date ownership of the property transfers to the new owner based on state law—to determine the date by which mandatory flood insurance is required to be in place.
4. Required Use of Standard Flood Hazard Determination Form (SFHDF)
The proposed SFHDF section contains four Q&As:
- Current Q&As 65-68 re-designated as Q&As SFHDF 1-4, with only minor, non-substantive modifications.
5. Flood Insurance Determination Fees (Fees)
Similarly, the proposed Fees section contains two Q&As:
- Current Q&As 69-70 re-designated as Q&As Fees 1-2, with only minor, non-substantive edits.
6. Flood Zone Discrepancies (Zone)
The proposed Zone section contains three Q&As, one of which is new, and the other two of which have been substantively revised. The proposed Zone section would relieve lenders and servicers of the burden of needing to “resolve” discrepancies between flood determination forms and flood insurance policies unless there is a dispute with a borrower relating to a determination form.
- The Agencies propose revising Current Q&A 71, re-designated as Q&A Zone 1, to reflect the Agencies’ changed expectations regarding a lender’s obligation when there is a discrepancy between the flood determination form and the flood insurance policy. In particular, the revisions would relieve lenders from the obligation to attempt to resolve discrepancies between flood determination forms and flood insurance policies. Instead, if the flood determination form indicates that a building securing the loan is in a SFHA, the lender must require appropriate flood insurance coverage. In addition, the Agencies encourage lenders to record any discrepancy in the loan file.
- Current Q&A 72, re-designated as Q&A Zone 2, would clarify that a lender is not in violation of the Agencies’ flood insurance regulations simply because there is a discrepancy between the flood zone on the flood determination form and on the policy declarations page.
- Q&A Zone 3 would provide that if the flood zone determination form specifies that a building securing the loan is in a SFHA but the borrower disputes the determination, the parties involved in making the determination should then attempt to resolve the discrepancy before contacting FEMA for a final determination if they are unsuccessful. Until FEMA determines the building is not in a SFHA, sufficient coverage must be in place.
7. Notice of Special Flood Hazards and Availability of Federal Disaster Relief (Notice)
The proposed Notice section contains seven Q&As: Current Q&As 73-76 and 78-80, re-designated as Q&As Notice 1-7. Revisions are mostly to provide clarity and improve readability, with no intended changes to meaning.
- Current Q&A 74, re-designated as Q&A Notice 2, would be revised to state that if a lender making a loan on a mobile home determines the mobile home will be located in a SFHA just prior to closing, the lender may need to delay closing until after the Notice of Special Flood Hazard has been provided (since the form must be provided within a reasonable time before completion of the transaction).
- Current Q&A 78, re-designated as Q&A Notice 5, would be updated to provide examples of what constitutes an acceptable record of a borrower’s receipt of the Notice of Special Flood Hazards (for example, the borrower’s signed or initialed acknowledgement, or a certified return receipt if the form was mailed to the borrower).
8. Determining the Appropriate Amount of Flood Insurance Required (Amount)
The proposed Amount section contains nine Q&As: Current Q&As 8-9 and 11-17, re-designated as Q&As Amount 1-9. Revisions are mostly non-substantive, with two exceptions.
- Current Q&A 8, re-designated as Q&A Amount 1, would be revised to explain NFIP coverage limits in more detail.
- Similarly, Current Q&As 11-12, re-designated as Q&As Amount 3-4, would be updated to include more detailed definitions of the terms “single family dwelling”, “2-4 family residential building”, “other residential building” and “nonresidential building”.
9. Flood Insurance Requirements for Construction Loans (Construction)
The proposed Construction section contains six Q&As, one of which is new. It contains Current Q&As 19-23, re-designated as Q&As Construction 1-5. Revisions to Q&As Construction 1-3 only contain minor, clarifying changes.
- Current Q&A 22, re-designated as Q&A Construction 4, would be revised to provide that if a lender requires flood insurance in connection with a loan secured by a building in the course of construction, the borrower should obtain a provisional rating based on construction designs and intended use to enable placement of coverage prior to receipt of the Elevation Certificate. Alternatively, a lender may allow a borrower to delay obtaining coverage until either a foundation slab has been poured or an Elevation Certificate has been issued, or, if the building will have its lowest floor below the Base Flood Elevation, when the building is walled and roofed. In the alternative scenario, the lender should ensure the borrower obtains flood insurance coverage no later than thirty days prior to disbursement of funds to the borrower.
- Current Q&A 23, re-designated as Q&A Construction 5, would be revised to clarify that under the NFIP, a thirty-day waiting period applies if a lender allows a borrower to delay the purchase of flood insurance in connection with a construction loan (NFIP flood insurance policies not issued in conjunction with the making, increasing, extending or renewing of a loan have a thirty-day waiting period.).
- Q&A Construction 6 would provide that if a lender allows a borrower to delay obtaining coverage until either a foundation slab has been poured 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, the lender must begin escrowing insurance premiums and fees at the time of purchase of flood insurance (unless one of the escrow exceptions, discussed in more detail below, applies).
10. Flood Insurance Requirements for Residential Condominiums and Co-Ops (Condo and Co-Op)
The proposed Condo and Co-Op section contains nine Q&As, one of which is new. It contains Current Q&As 26-33, re-designated as Q&As Condo and Co-Op 1-8, with only minor modifications.
- Q&A Condo and Co-Op 9 would explain that a loan secured by a share in a cooperative building located in a SFHA is not a designated loan subject to federal flood insurance laws or regulations because the unit owner only owns the right to occupy a unit, and not title to the building, based on the cooperative ownership structure.
11. Flood Insurance Requirements for Home Equity Loans, Lines of Credit, Subordinate Liens, and Other Security Interests in Collateral Located in SFHA (Other Security Interests)
The proposed Other Security Interests section contains twelve Q&As, two of which are new. It contains Current Q&As 34-43, re-designated as Q&As Other Security Interests 1, 2, 4-9, and 11-12, most of which would remain substantively unchanged.
- Q&A Other Security Interests 3 would address the amount of flood insurance coverage required for a line of credit secured by improved real property located in a SFHA and provide: (1) that upon origination, a lender may require flood insurance covering the total amount of all loans or the maximum amount of flood insurance coverage available, whichever is less; or (2) “actively review its records throughout the year” to ensure “the appropriate amount of flood insurance coverage is maintained, considering the draws made against the line or repayments made to the account.” Additionally, lenders and servicers “should be prepared to initiate force-placement procedures if at any time” they determine there is a “lack of adequate flood insurance coverage for a designated line of credit”.
- Current Q&A 39, re-designated as Q&A Other Security Interests 7, would be revised to clarify how flood insurance may be provided for a building and contents securing a loan when the building is located in a SFHA. Under the proposed Q&A, both the building and the contents would 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.” The proposed Q&A then references Q&A Amount 6 for additional guidance, which describes methods for allocating flood insurance coverage among multiple buildings.
- Current Q&A 41, re-designated as Q&A Other Security Interests 9, would be revised to state that flood insurance laws and regulations apply even when a lender takes a security interest in improved real estate and contents located in a SFHA only as an “abundance of caution”.
- Q&A Other Security Interests 10 would note that flood insurance is required if a lender takes a security interest in contents in a building in a SFHA—regardless of whether the security interest in the contents is perfected.
12. Requirements to Escrow Flood Insurance Premiums and Fees – General (Escrow)
The proposed Escrow section contains seven Q&As, five of which are new, and all of which are intended to cover the general escrow requirement for flood insurance premiums and fees. It contains Current Q&As 51-52, re-designated as Q&As Escrow 5 and Escrow 1, respectively. In addition, Current Q&As 53 and 54 would be removed as no longer applicable.
- Current Q&A 52, re-designated as Q&A Escrow 1, would be revised to address when escrow accounts for flood insurance premiums and fees must be established—i.e., upon a triggering event, unless an exception to flood insurance escrow requirements applies (and thereafter maintained throughout duration of the loan).
- Q&A Escrow 2 would clarify that a lender must escrow flood insurance premium payments even if it does not escrow for taxes or homeowner’s insurance.
- Q&A Escrow 3 would require a lender to escrow force-placed flood insurance premium payments.
- Q&A Escrow 4 would clarify that the following events do not constitute a triggering event: (1) modification of a loan without increase, extension, or renewal; (2) assumption of the loan by another borrower; or (3) re-mapping of a building into a SFHA.
- Current Q&A 51, re-designated as Q&A Escrow 5, would be revised to clarify that “residential improved real estate” subject to the escrow requirement includes multi-family buildings and mixed-use properties.
- Q&A Escrow 6 would clarify that if a junior lienholder determines that the primary lienholder does not have sufficient flood insurance in place and is not escrowing for flood insurance, the junior lienholder must ensure that proper flood insurance is in place and escrow for that insurance. However, this would not apply to a junior lien that is a home equity line of credit (home equity lines of credit are eligible for a separate escrow exception).
- Q&A Escrow 7 would state a lender or servicer is not required to escrow when real property securing a loan is not located in an SFHA, but the borrower chooses to buy flood insurance anyway.
13. Requirement to Escrow Flood Insurance Premiums and Fees – Small Lender Exception (Small Lender Exception)
The proposed Small Lender Exception section contains seven entirely new Q&As.
- Q&A Small Lender Exception 1 would specify that the $1 billion threshold for the small lender exception would be based on assets held at the regulated financial institution level and not at the company holding level.
- Q&A Small Lender Exception 2 would clarify that the exception is dependent on a small lender not being 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.
- Q&A Small Lender Exception 3 would explain a lender would not qualify for the exception if it collected escrowed funds on a mortgage loan on behalf of a third party at closing and maintained servicing of the loan because the lender would have had a policy of consistently requiring the deposit of funds in an escrow account by establishing escrow accounts that the lender would service.
- Q&A Small Lender Exception 4 would note a lender only escrowing upon a borrower’s request could be eligible for the small lender exception if the other requirements are met.
- Q&A Small Lender Exception 5 would Clarify that now that January 1, 2016 has passed, the option to escrow notice requirement (lenders or their servicers are required to offer and make available the option to escrow flood insurance premiums and fees for designated loans as of January 1, 2016 or July 1 of the first year in which the lender no qualifies for the small lender exception) only applies to lenders who no longer qualify for the small lender exception due to change in status.
- Q&A Small Lender Exception 6 would explain that even when a borrower has previously waived escrow for flood insurance, a lender is required to send the borrower a notice of the option to escrow flood insurance premium payments if the small lender exception no longer applies; and
- Q&A Small Lender Exception 7 would clarify that lenders who qualify for the small lender exception do not have to provide borrowers either the escrow notice or the option to escrow notice.
14. Requirement to Escrow Flood Insurance Premiums and Fees – Loan Exceptions (Loan Exceptions)
The proposed Loan Exceptions section contains five Q&As, three of which are new, and all of which relate to loan-related exceptions to the flood insurance escrow requirements. It contains Current Q&As 55 and 56, re-designated as Q&As Loan Exceptions 1 and Loan Exceptions 4, respectively.
- Current Q&A 55, re-designated as Q&A Loan Exceptions 1, would be revised to clarify that extensions of credit primarily for business, commercial, or agricultural purposes are not subject to the escrow requirement even if such loans are secured by residential improved real estate or a mobile home.
- Q&A Loan Exceptions 2 would state that construction-permanent loans (i.e., “loans that have a construction phase of approximately one year before the loan converts into permanent financing”), do not qualify for the 12-month exception from escrow.
- Q&A Loan Exceptions 3 would require a subordinate lienholder to begin to escrow as soon as reasonably possible after it becomes aware that it has moved into the primary lien position on a designated loan subject to the escrow requirements.
- Current Q&A 56, re-designated as Q&A Loan Exceptions 4, would be revised to address escrow requirements for insured real property covered by a Residential Condominium Building Association Policy.
- Q&A Loan Exceptions 5 would clarify that extensions of credit primarily for business, commercial, or agricultural purposes, even when secured by residential improved real estate such as a multi-family building, are not subject to escrow requirements. In addition, escrow requirements do not apply to a loan secured by a particular unit in a multi-family residential building if a condominium association, cooperative, homeowners association, or other applicable group provides an adequate policy and pays for the insurance as a common expense.
15. Force Placement of Flood Insurance (Force Placement)
The proposed Force Placement section contains sixteen Q&As, ten of which are new. Current Q&As 58 and 61, re-designated as Q&As Force Placement 3 and 5, would remain unchanged or contain only minor revisions, respectively.
- Current Q&A 57, re-designated as Q&A Force Placement 1, would be revised to discuss in more detail requirements that must be fulfilled before force placement can occur, as well as notice lenders or servicers must provide prior to force placing insurance.
- Q&A Force Placement 2 requires a lender, or its servicer, to send the borrower the force-placement notice upon making a determination that building or mobile home and any relevant contents securing the designated loan are not covered by flood insurance or covered by an insufficient amount of flood insurance.
- Current Q&A 60, re-designated as Q&A Force Placement 4, would clarify that a lender or servicer may send a force-placement notice to a borrower prior to expiration of flood insurance coverage as a courtesy, but the lender or servicer must still send a notice upon determining the flood insurance policy has actually lapsed or is determined to be insufficient in order to meet the notice requirement.
- Q&A Force Placement 6 would state that once a lender determines 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, 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. Thus, Q&A Force Placement 6 would prevent lenders from extending the 45-day force-placement period by sending multiple notices.
- Q&A Force Placement 7 would explain that a force-placed policy should begin to provide coverage the day after the borrower’s existing policy expires. A lender or its servicer must refund a borrower for any periods of overlapping coverage between the borrower’s policy and the force-placed policy.
- Current Q&A 59, re-designated as Q&A Force Placement 8, would be revised to discuss more fully the minimum amount of flood insurance that is statutorily required and provides a hypothetical example relating to when the outstanding principal balance (OPB) serves as the basis for the minimum amount of required flood insurance. In particular, the proposed answer would illustrate that when a loan’s OPB is the basis for flood insurance coverage, the lender must ensure that a force-placed policy covers the existing loan balance plus any additional force-placed premium and fees that will be added to the loan balance.
- Current Q&A 62, re-designated as Q&A Force Placement 9, would provide a lender or servicer may charge a borrower for force-placed coverage beginning on the date of lapse or insufficient coverage.
- Q&A Force Placement 10 would cover when adding force-placed policy premium and fees to the OPB would constitute an “increase”, triggering regulatory requirements, in instances where premiums and fees are added to the mortgage balance without a specific provision allowing the lender or servicer to advance funds to pay for flood insurance premiums and fees.
- Q&A Force Placement 11 would provide that a lender is required to refund premiums paid by a borrower for force-placed insurance during any period of overlap with borrower-purchased insurance, and must accept a policy declarations page from the borrower including the policy number and identity of the insurer or its agent as evidence of coverage (the declarations page need not include any additional information). In addition, it is appropriate but not required for lenders to accept flood insurance applications and evidence of premium payment as proof of purchase for new policies.
- Q&A Force Placement 12 would reinforce that a lender is to refund and premiums and fees paid for by the borrower for force-placed insurance for any overlap period within 30 days of receipt of a confirmation of a borrower’s existing flood insurance coverage.
- Q&A Force Placement 13 would allow a lender to rely on a force-placed insurance policy to satisfy the mandatory purchase requirement for a refinance or loan modification if the borrower does not purchase his or her own policy.
- Q&A Force Placement 14 would explain the process for renewing force-placed coverage and corresponding notice requirements.
- Q&A Force Placement 15 notes that many lenders implement “life-of-loan” monitoring for safety and soundness purposes even though there is no requirement to monitor flood insurance coverage for the life of a loan.
- Q&A Force Placement 16 would clarify that when a lender or servicer receives a notice of remapping stating a property will be remapped into a SFHA on a future effective date, the effective date of the map change is the relevant date for the lender or servicer to determine whether the property is covered by sufficient flood insurance. If the borrower does not purchase flood insurance to begin on the effective date, the lender or its servicer must send the force-placement notice to the borrower.
16. Flood Insurance Requirements in the Event of the Sale or Transfer of a Designated Loan and/or Its Servicing Rights (Servicing)
The proposed Servicing section contains seven Q&As:
- Current Q&As 44-50, re-designated as Q&As Servicing 1-7, with non-substantive edits mostly for clarity.
17. Mandatory Civil Money Penalties (Penalty)
The proposed Penalty section contains two Q&As:
- Current Q&As 81-82, re-designated as Q&As Penalty 1-2, with only minor, non-substantive modifications.
18. Private Flood Insurance – Mandatory Acceptance (Mandatory)
The proposed Mandatory section contains nine new Q&As.
- Mandatory Q&A 1 would confirm that a lender can choose to only accept private insurance policies pursuant to the mandatory acceptance provision of the Private Flood Insurance Rule.
- Mandatory Q&A 2 would explain that lenders must review private flood insurance policies at origination, at policy renewal, at any time a borrower presents a new private flood insurance policy, and any time a triggering event occurs (making, increasing, extending, or renewing a loan). Under the Private Flood Insurance Rule, lenders may conclude that a policy meets the definition of “private flood insurance” under the Biggert-Waters Act if the policy, or an endorsement, includes the compliance aid assurance clause set forth in the Private Flood Insurance Rule. If a policy does not, lenders may still choose to accept it pursuant to discretionary acceptance or mutual aid plan criteria set out in the Private Flood Insurance Rule.
- Mandatory Q&A 3 would clarify that a lender need not change its policy of not originating mortgages in areas where NFIP insurance is unavailable because of the Biggert-Waters Act’s private flood insurance requirements.
- Mandatory Q&A 4 would state that the Private Flood Insurance Rule’s compliance aid assurance clause is meant to facilitate lenders’ and consumers’ ability to recognize policies that meet the definition of “private flood insurance” under the Biggert-Waters Act and to “promote consistent acceptance” of policies that include such language.
- Mandatory Q&A 5 would explain that if a private flood insurance policy does not contain the compliance aid assurance clause language set forth in the Private Flood Insurance Rule, a lender must review the policy to determine if it meets the requirements for private flood insurance before rejecting the policy. Conversely, if a policy does include such language, the lender is not required to accept the policy if it analyzes the policy and determines it does not meet other requirements for private flood insurance.
- Mandatory Q&A 6 would confirm that if a private flood insurance policy, or an endorsement, includes the compliance aid assurance clause set forth in the Private Flood Insurance Rule, then a lender need not conduct any further review of the policy to determine that it meets the definition of “private flood insurance” under the Biggert-Waters Act.
- Mandatory Q&A 7 would clarify that even after a lender determines a private insurance policy meets the definition of “private flood insurance” under the Biggert-Waters Act, it must still review other aspects of the policy to ensure it meets necessary requirements, including, for example that it accurately lists the borrower’s name and property address, etc.
- Mandatory Q&A 8 would state that lenders may first review a private flood insurance policy to determine if they can accept a policy under discretionary acceptance criteria; however, if a policy is not accepted under discretionary acceptance criteria, lenders are also required determine whether they must accept the policy pursuant to mandatory acceptance criteria.
- Mandatory Q&A 9 would explain that if a declarations page for a policy includes the compliance aid assurance clause set forth in the Private Flood Insurance Rule, then a lender need not conduct any further review of the policy to determine that it meets the definition of “private flood insurance” under the Biggert-Waters Act.
19. Private Flood Insurance – Discretionary Acceptance (Discretionary)
The proposed Discretionary section contains four new Q&As.
- Discretionary Q&A 1 would confirm that it is at the lender’s discretion to accept a policy meeting discretionary acceptance criteria so long as the policy does not also meet mandatory acceptance criteria.
- Discretionary Q&A 2 would state that a lender must document its conclusion that a policy provides sufficient protection of a loan when it accepts that policy under discretionary acceptance criteria, “consistent with safety and soundness principles”.
- Discretionary Q&A 3 would explain that lenders can rely on licensing or other processes relied upon by a State’s insurance regulator in their evaluations as to an insurer’s solvency, strength, and ability to satisfy claims.
- Discretionary Q&A 4 would state that lenders must re-review a policy previously accepted pursuant to discretionary acceptance criteria to ensure that it continues to meet discretionary acceptance criteria upon renewal, and also re-document its conclusion regarding sufficiency of the protection of the loan in writing upon each renewal.
20. Private Flood Insurance – Private Flood Compliance (Private Flood Compliance)
The proposed Private Flood Compliance section contains eleven new Q&As.
- Private Flood Compliance Q&A 1 would explain that a private flood insurance policy must contain a deductible no higher than the specified maximum deductible for any total coverage amount up to the maximum available under the NFIP. A policy with a coverage amount exceeding that available under the NFIP may have a deductible exceeding the maximum deductible under the NFIP, so long as the deductible is still reasonable based on the borrower’s financial condition and other factors.
- The Agencies specifically noted that this proposed Q&A provides different guidance than previously provided by the Agencies: Previously, the Agencies said that for private flood insurance policies with amounts exceeding the maximum coverage available under the NFIP, lenders should still match NFIP deductibles for the amount up to the maximum coverage amount under the NFIP, but could exceed the maximum deductible for an NFIP policy for the coverage over the maximum coverage amount available under the NFIP. This change in guidance was the result of the Agencies determining that “tiered deductibles are not common and the guidance [previously] provided . . . may not be practicable.”
- Private Flood Compliance Q&A 2 would state that a lender may require lower deductibles for private flood insurance policies than applicable to NFIP policies.
- Private Flood Compliance Q&A 3 would clarify that the flood insurance laws and regulations currently do not prohibit lenders from charging “limited, reasonable fees” to borrowers for contracting with third parties for flood determinations, life-of-loan monitoring, and review of flood insurance policies.
- Private Flood Compliance Q&A 4 would state that when a private flood insurance policy is not available for review prior to closing, lenders should determine whether they have sufficient other evidence on hand to determine that the policy meets requirements. If they do not, they should “timely request addition information as necessary to complete [their] review.”
- Private Flood Compliance Q&A 5 would explain that declarations pages for private flood insurance policies may or may not provide enough information for a lender to determine compliance with flood insurance requirements.
- Private Flood Compliance Q&A 6 would confirm that lenders may accept multiple-peril policies issued by private insurers to satisfy the mandatory purchase requirement.
- Private Flood Compliance Q&A 7 would reiterate that “[l]enders must comply with Federal flood insurance requirements”, and then would clarify that requirements from secondary market investors (e.g., Fannie Mae and Freddie Mac) “are separate”. Accordingly, if a lender plans to sell a loan to such an investor it should direct flood insurance related questions “to the appropriate entit[y]”.
- Private Flood Compliance Q&A 8 would provide that for a loan serviced on behalf of a regulated lending institution, a servicer must comply with flood insurance requirements in determining whether a private flood insurance policy is acceptable. For a loan serviced on behalf of an entity not supervised by the Agencies, a servicer “should comply with the terms of its contract with such an entity” and that entity’s servicing guidance, if any.
- Private Flood Compliance Q&As 9 through 11 would describe various ways lenders can determine whether a private insurer is licensed, admitted, or otherwise approved to do business in a particular State.
Once finalized, the new Q&As will provide much needed guidance to regulated lending institutions, servicers, and insurers. Revised and reorganized, they will also provide greater clarity and be substantially easier to navigate.
It is important that regulated lending institutions have strong flood insurance compliance programs, and the Agencies encourage parties with unanswered questions or other comments relating to flood insurance to submit them for review. Instructions for doing so are provided in the corresponding Federal Register publications.
Elena F. Mitchell is an Associate, and Neil T. Bloomfield is a Member, of the Charlotte, N.C.-based law firm Moore and Van Allen PLLC. They would like to thank Suha Najjar, a law student at the University of South Carolina graduating in 2021, for her assistance in writing this article.