[Federal Register Volume 73, Number 56 (Friday, March 21, 2008)]
[Notices]
[Pages 15259-15278]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-5787]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket ID OCC-2008-0002]

FEDERAL RESERVE SYSTEM

[Docket No. OP-1311]

FEDERAL DEPOSIT INSURANCE CORPORATION

RIN 3064-ZA00

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[Docket ID OTS-2008-0001]

FARM CREDIT ADMINISTRATION

RIN 3052-AC46

NATIONAL CREDIT UNION ADMINISTRATION

RIN 3133-AD41


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

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

ACTION: Notice and request for comment.

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SUMMARY: The OCC, Board, FDIC, OTS, FCA, and NCUA (collectively, the 
Agencies) are soliciting comment on proposed revisions to the 
Interagency Questions and Answers Regarding Flood Insurance 
(Interagency Questions and Answers). To help financial institutions 
meet their responsibilities under Federal flood insurance legislation 
and to increase public understanding of their flood insurance 
regulations, the staffs of the Agencies have prepared proposed new and 
revised guidance addressing the most frequently asked questions and 
answers about flood insurance. The proposed revised Interagency 
Questions and Answers contain staff guidance for agency personnel, 
financial institutions, and the public.

DATE: Comments must be submitted on or before May 20, 2008.

ADDRESSES: OCC: Because paper mail in the Washington, DC area and at 
the Agencies is subject to delay, commenters are encouraged to submit 
comments by e-mail, if possible. Please use the title ``Loans in Areas 
Having Special Flood Hazards; Interagency Questions and Answers 
Regarding Flood Insurance'' to facilitate the organization and 
distribution of the comments. You may submit comments by any of the 
following methods:
     E-mail: regs.comments@occ.treas.gov.
     Mail: Office of the Comptroller of the Currency, 250 E 
Street, SW., Mail Stop 1-5, Washington, DC 20219.
     Fax: (202) 874-4448.
     Hand Delivery/Courier: 250 E Street, SW., Attn: Public 
Information Room, Mail Stop 1-5, Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2008-0002'' in your comment. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this notice by any of the following methods:
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC's Public Information Room, 250 E 
Street, SW., Washington, DC. For security reasons, the OCC requires 
that visitors make an appointment to inspect comments. You may do so by 
calling (202) 874-5043. Upon arrival, visitors will be required to 
present valid government-issued photo identification and submit to 
security screening in order to inspect and photocopy comments.
     Docket: You may also view or request available background 
documents and project summaries using the methods described above.
    Board: You may submit comments, identified by Docket No. OP-1311, 
by any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@federalreserve.gov. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information.
    Public comments may also be viewed electronically or in paper in 
Room MP-500 of the Board's Martin Building (20th and C Streets, NW.) 
between 9 a.m. and 5 p.m. on weekdays.
    FDIC: You may submit comments, identified by RIN number 3064-ZA00 
by any of the following methods:
     Agency Web site: http://www.fdic.gov/regulations/laws/
federal/propose.html. Follow instructions for submitting comments on 
the Agency Web Site.
     E-mail: Comments@FDIC.gov. Include the RIN number in the 
subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
     Hand Delivery/Courier: Guard station at the rear of the 
550 17th Street Building (located on F Street) on business days between 
7 a.m. and 5 p.m.
    Instructions: All submissions received must include the agency name 
and RIN number. All comments received will be posted without change to 
http://www.fdic.gov/regulations/laws/federal/propose.html including any 
personal information provided.
    OTS: You may submit comments, identified by OTS-2007-0001, by any 
of the following methods:
     E-mail: regs.comments@ots.treas.gov. Please include ID 
OTS-2008-0001 in the subject line of the message and include your name 
and telephone number in the message.
     Fax: (202) 906-6518.
     Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: OTS-2008-0001.
     Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation

[[Page 15260]]

Comments, Chief Counsel's Office, Attention: OTS-2008-0001.
     Instructions: All submissions received must include the 
agency name and docket number for this rulemaking. All comments 
received will be entered into the docket and posted on Regulations.gov 
without change, including any personal information provided. Comments, 
including attachments and other supporting materials received are part 
of the public record and subject to public disclosure. Do not enclose 
any information in your comment or supporting materials that you 
consider confidential or inappropriate for public disclosure.
    Viewing Comments Electronically: OTS will post comments on the OTS 
Internet Site at http://www.ots.treas.gov/
pagehtml.cfm?catNumber=67&an=1.
    Viewing Comments On-Site: You may inspect comments at the Public 
Reading Room, 1700 G Street, NW., by appointment. To make an 
appointment for access, call (202) 906-5922, send an e-mail to 
public.info@ots.treas.gov, or send a facsimile transmission to (202) 
906-6518. (Prior notice identifying the materials you will be 
requesting will assist us in serving you.) We schedule appointments on 
business days between 10 a.m. and 4 p.m. In most cases, appointments 
will be available the next business day following the date we receive a 
request.
    FCA: We offer a variety of methods for you to submit comments. For 
accuracy and efficiency reasons, we encourage commenters to submit 
comments by e-mail or through the Agency's Web site or the Federal 
eRulemaking Portal. You may also send comments by mail or by facsimile 
transmission. Regardless of the method you use, please do not submit 
your comment multiple times via different methods. You may submit 
comments by any of the following methods:
     E-mail: Send us an e-mail at regcomm@fca.gov.
     Agency Web Site: http://www.fca.gov. Once you are at the 
Web site, select ``Legal Info,'' then ``Pending Regulations and 
Notices.''
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Gary K. Van Meter, Deputy Director, Office of 
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, VA 22102-5090.
     Fax: (703) 883-4477. Posting and processing of faxes may 
be delayed. Please consider another means to comment, if possible.
    You may review copies of comments we receive at our office in 
McLean, Virginia, or from our Web site at http://www.fca.gov. Once you 
are in the Web site, select ``Legal Info,'' and then select ``Public 
Comments.'' We will show your comments as submitted, but for technical 
reasons we may omit items such as logos and special characters. 
Identifying information that you provide, such as phone numbers and 
addresses, will be publicly available. However, we will attempt to 
remove e-mail addresses to help reduce Internet spam.
    NCUA: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments,
     NCUA Web Site: http://www.ncua.gov/
RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
     E-mail: Address to regcomments@ncua.gov. Include ``[Your 
name] Comments on Flood Insurance, Interagency Questions & Answers'' in 
the e-mail subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Mary Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    Public Inspection: All public comments are available on the 
agency's Web site at http://www.ncua.gov/RegulationsOpinionsLaws/
comments as submitted, except as may not be possible for technical 
reasons. Public comments will not be edited to remove any identifying 
or contact information. Paper copies of comments may be inspected in 
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by 
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, 
call (703) 518-6546 or send an e-mail to OGCMail@ncua.gov.

FOR FURTHER INFORMATION CONTACT: OCC: Pamela Mount, National Bank 
Examiner, Compliance Policy, (202) 874-4428; or Margaret Hesse, Special 
Counsel, Community and Consumer Law Division, (202) 874-5750, Office of 
the Comptroller of the Currency, 250 E Street, SW., Washington, DC 
20219.
    Board: Vivian Wong, Senior Attorney, Division of Consumer and 
Community Affairs, (202) 452-2412; Anjanette Kichline, Senior 
Supervisory Consumer Financial Services Analyst, (202) 785-6054; or 
Brad Fleetwood, Senior Counsel, Legal Division, (202) 452-3721, Board 
of Governors of the Federal Reserve System, 20th Street and 
Constitution Avenue, NW., Washington, DC 20551. For the deaf, hard of 
hearing, and speech impaired only, teletypewriter (TTY), (202) 263-
4869.
    FDIC: Mira N. Marshall, Senior Policy Analyst (Compliance), 
Division of Supervision and Consumer Protection, (202) 898-3912; or 
Mark Mellon, Counsel, Legal Division, (202) 898-3884, Federal Deposit 
Insurance Corporation, 550 17th Street, NW., Washington, DC 20429. For 
the hearing impaired only, telecommunications device for the deaf 
(TDD): 800-925-4618.
    OTS: Ekita Mitchell, Consumer Regulations Analyst, (202) 906-6451; 
Glenn Gimble, Senior Project Manager, (202) 906-7158; or Richard S. 
Bennett, Senior Compliance Counsel, (202) 906-7409, Office of Thrift 
Supervision, 1700 G Street, NW., Washington, DC 20552.
    FCA: Mark L. Johansen, Senior Policy Analyst, Office of Regulatory 
Policy, (703) 993-4498; or Mary Alice Donner, Attorney Advisor, Office 
of General Counsel, (703) 883-4033, Farm Credit Administration, 1501 
Farm Credit Drive, McLean, VA 22102-5090. For the hearing impaired 
only, TDD: (703) 883-4444.
    NCUA: Moisette I. Green, Staff Attorney, Office of General Counsel, 
(703) 518-6540, National Credit Union Administration, 1775 Duke Street, 
Alexandria, VA 22314-3428.

SUPPLEMENTARY INFORMATION:

Background

    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 two federal flood insurance 
statutes, the National Flood Insurance Act of 1968 and the Flood 
Disaster Protection Act of 1973. The Reform Act required the OCC, 
Board, FDIC, OTS, and NCUA to revise their flood insurance regulations 
and required the FCA to promulgate flood insurance regulations for the 
first time. The OCC, Board, FDIC, OTS, NCUA, and FCA (collectively, 
``the Agencies'') fulfilled these requirements by issuing a joint final 
rule in the summer of 1996. See 61 FR 45684 (August 29, 1996).
    In connection with the 1996 joint rulemaking process, the Agencies 
received a number of requests to clarify specific issues covering a 
wide spectrum of the proposed rule's provisions. Many of these requests 
were addressed in the preamble to the joint final rule. The Agencies 
concluded, however, that given the number, level of detail, and 
diversity of subject matter of

[[Page 15261]]

the requests for additional information, guidance addressing the more 
technical compliance issues would be helpful and appropriate. 
Consequently, the Agencies decided to issue guidance to address these 
technical issues subsequent to the promulgation of the final rule (61 
FR at 45685-86). That objective was fulfilled by the initial release of 
the Interagency Questions and Answers in 1997 (1997 Interagency 
Questions and Answers) by the Federal Financial Institution Examination 
Council (FFIEC). 62 FR 39523 (July 23, 1997).
    In response to issues that have been brought to the attention of 
the Agencies in coordination with the Federal Emergency Management 
Agency (FEMA), the Agencies are releasing for public comment proposed 
revisions to the 1997 Interagency Questions and Answers.\1\ Among the 
changes the Agencies are proposing are the introduction of new 
questions and answers in a number of areas, including second lien 
mortgages, the imposition of civil money penalties, and loan 
syndications/participations. The Agencies are also proposing 
substantive modifications to questions and answers previously adopted 
in the 1997 Interagency Questions and Answers pertaining to 
construction loans and condominiums. Finally, the Agencies are 
proposing to revise and reorganize certain of the existing questions 
and answers to clarify areas of potential misunderstanding and to 
provide clearer guidance to users. It is the intention of the Agencies 
that after public comment has been received and considered, and the 
Interagency Questions and Answers have been adopted in final form, they 
will supersede the 1997 Interagency Questions and Answers and 
supplement other guidance or interpretations issued by the Agencies and 
FEMA.
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    \1\ The proposed Interagency Questions and Answers have been 
prepared by staff from the OCC, Board, FDIC, OTS, NCUA and FCA in 
consultation with and with the assistance of the FFIEC pursuant to 
12 U.S.C. 3305(g).
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    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 (codified at 42 U.S.C. 4001 
et seq.). ``Regulation'' refers to each agency's current final rule.\2\
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    \2\ The Agencies' rules are codified at 2 CFR part 22 (OCC), 12 
CFR part 208 (Board), 12 CFR part 339 (FDIC), 12 CFR part 572 (OTS), 
12 CFR part 614 (FCA), and 12 CFR part 760 (NCUA).
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Section-by-Section Analysis

Section I. Determining When Certain Loans Are Designated Loans for 
Which Flood Insurance Is Required Under the Act and Regulation

    The Agencies propose to eliminate current section I entitled 
``Definitions'' and replace it with new proposed section I to address 
more specific circumstances a lender may encounter when deciding 
whether a loan should be a designated loan for purposes of flood 
insurance. The Agencies are proposing to move the questions and answers 
currently in section I into subsequent sections for better 
organization. Meanwhile, questions and answers currently in other 
sections of the 1997 Interagency Questions and Answers that deal with 
determining when a loan is a designated loan under the Act and 
Regulation would be included in new section I.
    Specifically, proposed question 1, which covers the applicability 
of the Regulation to a loan in a nonparticipating community, would be 
moved from current question 1 of section II. Further, the Agencies 
propose to move current question 2 of section II, discussing whether a 
loan is a designated loan when a lender purchases a whole loan, to 
question 3 of new section I. Current question 9 of section I, 
discussing whether a loan is a designated loan when a lender 
restructures a loan, would be moved to question 4 of this new section 
I, and proposed question 5, which addresses table funded loans, would 
be moved from question 3 of current section II. In addition, minor 
nonsubstantive changes have been made to these moved questions and 
answers to provide additional clarity.
    The Agencies are also proposing to add two new questions and 
answers to this section in response to questions the Agencies have 
received from lenders. Proposed new question 2 explains that, upon a 
FEMA map change that results in a building or mobile home securing a 
loan being removed from a special flood hazard area (SFHA), the lender 
no longer must require mandatory flood insurance; however, the lender 
may choose to continue to require flood insurance for risk management 
purposes.
    Proposed new question 6 explains that portfolio reviews of existing 
loans are not required by the Act or Regulation; however, sound risk 
management practices may lead a lender to conduct periodic reviews. 
These two new questions and answers are based on current guidance the 
Agencies have provided to lenders.

Section II. Determining the Appropriate Amount of Flood Insurance 
Required Under the Act and Regulation

    Proposed section II would provide guidance on how lenders should 
determine the appropriate amount of flood insurance to require the 
borrower to purchase. The Agencies are proposing to retain existing 
questions 5 and 7 of section II in new section II and renumbering them 
as proposed questions 12 and 11, respectively. Although minor changes 
have been made to these two questions and answers for purposes of 
clarity, the changes are not substantive. Furthermore, part of the 
guidance currently provided in existing question 7 would be moved to 
proposed question 22 in section V, as discussed below.
    Proposed new question 7 would discuss what is meant by the 
``maximum limit of coverage available for the particular type of 
property under the Act.'' This concept is important because 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.'' Proposed question 7 would 
introduce and define the insurance term, ``insurable value,'' as it 
relates to the determination of the maximum limit of coverage available 
under the Act. Proposed question 7 would also introduce the terms, 
``residential building'' and ``nonresidential building.'' These terms 
would be more fully defined in proposed new questions 8 and 9 of this 
section, respectively.
    Proposed new question 10 would discuss how much flood insurance is 
required on a building located in an SFHA in a participating community. 
It would also provide an example showing how to calculate the amount of 
required flood insurance on a nonresidential building.
    Proposed new question 13 would clarify that a lender can require 
more flood insurance than the minimum required by the Regulation. The 
Regulation requires a minimum amount of flood insurance; however, 
lenders may require more coverage, if appropriate.
    Proposed new question 14 would address lender considerations 
regarding the amount of the deductible on a flood insurance policy 
purchased by a borrower. Generally, the guidance advises a lender to 
determine the reasonableness of the deductible on a case-by-case basis, 
taking into account

[[Page 15262]]

the risk that such a deductible would pose to the borrower and lender.

Section III. Exemptions from the mandatory flood insurance requirements

    As with current section III, proposed section III would contain 
only one question and answer, which describes the statutory exemptions 
from the mandatory flood insurance requirements. Proposed question and 
answer 15 under section III would be revised to provide greater 
clarity, with no intended change in substance or meaning.

Section IV. Flood insurance requirements for construction loans

    The Agencies are proposing a series of new and revised questions 
and answers to clarify the requirements regarding the mandatory 
purchase of flood insurance for construction loans to erect buildings 
that will be located in an SFHA. The Agencies believe that these 
questions and answers are necessary in light of recent concerns raised 
by some regulated lenders regarding borrowers' difficulties in 
obtaining flood insurance for construction loans at the time of loan 
origination.
    Existing question 2 in section I would be revised to provide 
greater clarity and would be moved to proposed question 16 under 
proposed section IV. The proposed answer to question 16 would revise 
the existing guidance to limit its scope and explain that a loan 
secured by raw land located in an SFHA is not a designated loan that 
would require flood insurance coverage. The remaining guidance 
currently in the answer to existing question 2 in section I would be 
discussed in subsequent questions and answers in section IV in the 
proposed document, as detailed below.
    Proposed question 17, derived from current question 1 in section I, 
would address 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 answer would provide that a lender must make a flood 
determination prior to loan origination for a construction loan. If the 
flood determination shows that the building securing the loan will be 
located in an SFHA, the lender must provide notice to the borrower, and 
must comply with the mandatory purchase requirements. Proposed question 
18 would explain that, generally, a building in the course of 
construction is eligible for coverage under a National Flood Insurance 
Program (NFIP) policy, and that coverage may be purchased prior to the 
start of construction.
    Proposed question 19 would address the timing of when flood 
insurance must be purchased for buildings under the course of 
construction. The Act and Regulation provide that lenders may not make, 
increase, extend, or renew any loan secured by improved real estate or 
a mobile home that is located or to be located in an SFHA unless the 
building is covered by adequate flood insurance. One way for lenders to 
comply with the mandatory purchase requirement for a loan secured by a 
building in the course of construction that is located in an SFHA is to 
require borrowers to have a flood insurance policy in place at the time 
of loan origination.
    Recently, lenders have informed agency staff, however, that 
borrowers have been encountering difficulties in obtaining flood 
insurance for construction loans at the time of loan origination due to 
insurers' refusals to write policies on undeveloped land until either 
an elevation certificate has been issued for the structure or at least 
two walls and a roof for the building have been erected. The Agencies 
have also received reports that borrowers who are able to obtain flood 
insurance for construction loans at loan origination often pay the 
highest premiums possible because elevations for the insured property 
have not yet been established.
    To address these concerns, the Agencies, in the answer to proposed 
question 19, would provide lenders with flexibility regarding the 
timing of the mandatory purchase requirement for construction loans by 
permitting lenders to allow borrowers to defer the purchase of flood 
insurance until a foundation slab has been poured and/or an elevation 
certificate has been issued. Lenders, however, must require the 
borrower to have flood insurance in place before funds are disbursed to 
pay for building construction on the property securing the loan (except 
as necessary to pour the slab or perform preliminary site work). A 
lender who elects this approach and does not require flood insurance at 
loan origination must have adequate internal controls in place to 
ensure compliance.
    The Agencies also propose to add new question 20 to clarify whether 
the 30-day waiting period for an NFIP policy applies when the purchase 
of flood insurance is deferred in connection with a construction loan 
since there has been confusion among lenders on this issue in the past. 
Per guidance from FEMA, the answer would provide that the 30-day 
waiting period would not apply in such cases.\3\ The NFIP would rely on 
the insurance agent's representation that the exception applies unless 
a loss has occurred during the first 30 days of the policy period.
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    \3\ FEMA, Mandatory Purchase of Flood Insurance Guidelines, 
(September 2007) at 30. FEMA has made available a new version of 
this booklet electronically at http://www.fema.gov/library/
viewRecord.do?id=2954. Hard copies are available by calling FEMA's 
Publication Warehouse at (800) 480-2520.
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Section V. Flood insurance requirements for agricultural buildings

    The Agencies are proposing a new section V to address the flood 
insurance requirements for agricultural buildings that are taken as 
security for a loan, but that have limited utility to a farming 
operation. The section would also address loans secured by multiple 
buildings where some buildings are located in a flood hazard area and 
some buildings are not.
    The proposed answer to new question 21 would explain that all 
buildings taken as security for a loan and located in an SFHA require 
flood insurance. Lenders have the option of carving a building from the 
security for a loan; however, the Agencies believe that it is typically 
inappropriate for credit risk management reasons to do so.
    The guidance in current question 7 under section II would be split 
between question 11 under proposed section II, as discussed above, and 
question 22 under proposed section V. The proposed answer to question 
22 would explain that a lender is always required to determine whether 
a building securing a loan is located in an SFHA, but that only those 
buildings located in an SFHA and within a participating community are 
required to have flood insurance. Flood insurance need not be required 
on those properties that (1) are not located in a special flood hazard 
area (whether or not within a participating community) or (2) are 
located in a special flood hazard area that is not within a 
participating community.

Section VI. Flood insurance requirements for residential condominiums

    For organizational purposes, the Agencies are proposing to 
consolidate questions and answers relating to the Regulation's flood 
insurance requirements for residential condominiums into a new section 
VI. In addition to modifying and expanding the two existing questions 
in the 1997 Interagency Questions and Answers on residential 
condominiums, the Agencies are proposing to add five additional

[[Page 15263]]

questions and answers to provide better clarity on the requirements.
    Proposed question and answer 24 would modify and expand current 
question 8 under section II to more completely address the Regulation's 
flood insurance requirements for residential condominium units. The 
proposed answer would first explain that the amount of flood insurance 
coverage on the condominium unit required by the Regulation is the 
lesser of the outstanding principal balance of the loan or the maximum 
amount of coverage available under the NFIP.
    The proposed answer would then explain that if the outstanding 
principal balance of the loan is greater than the maximum amount of 
coverage available under the NFIP, the lender must require a borrower 
whose loan is secured by a residential condominium unit to either:
     Ensure the condominium owners association has purchased an 
NFIP Residential Condominium Building Association Policy (RCBAP) 
covering either 100 percent of the insurable value (replacement cost) 
of the building, including amounts to repair or replace the foundation 
and its supporting structures, or an amount equal to the total number 
of units in the condominium building times $250,000, whichever is less; 
or
     Obtain an individual unit owner's dwelling policy in an 
amount sufficient to meet the Regulation's flood insurance 
requirements, if there is no RCBAP or the RCBAP coverage is less than 
either 100 percent of the insurable value (replacement cost) of the 
building or the amount equal to the total number of units in the 
condominium building times $250,000, whichever is less.
    The proposed answer revises and clarifies the current answer to 
question 8 under section II. The current answer provides that ``to meet 
federal flood insurance requirements, an RCBAP should be purchased in 
an amount of at least 80 percent of the replacement value of the 
building or the maximum amount available under the NFIP (currently 
$250,000 multiplied by the number of units), whichever is less.''
    The proposed question and answer recognizes that neither the Act 
nor the Regulation addresses explicitly the appropriate level of RCBAP 
coverage; rather, they address the general purchase requirement 
applicable to all types of buildings and mobile homes: The lesser of 
the outstanding principal balance of the loan or the maximum amount of 
insurance available under the NFIP. The proposed question and answer 
acknowledges the standard set forth in the Regulation, and clarifies 
that the maximum amount of insurance available under the NFIP for a 
residential condominium unit is the lesser of the maximum limit 
available for a residential condominium unit (currently, $250,000) or 
the insurable value of the unit (the replacement value of the building 
divided by the number of units).\4\ The proposed question and answer 
would also reflect that where the outstanding principal balance of the 
loan is greater than the maximum amount of coverage available under the 
NFIP, an RCBAP written at 80 percent of the replacement cost value of 
the building does not meet the Regulation's flood insurance 
requirements (unless that amount were equal to the maximum amount of 
insurance available under the NFIP, which is $250,000 multiplied by the 
number of units), whereas the current answer suggested that such a 
coverage level was adequate. While FEMA's recent guidance prescribes 80 
percent replacement cost value coverage as the minimum amount necessary 
to avoid imposition of a co-insurance penalty at the time of loss,\5\ 
proposed answer 24 clarifies that this amount of insurance is 
insufficient to comply with the Act's and Regulation's minimum 
requirements. The proposed answer would provide that where the 
outstanding principal balance of the loan is greater than the maximum 
amount of coverage available under the NFIP and the RCBAP is written at 
less than 100 percent of the insurable value (replacement cost) of the 
building or an amount equal to $250,000 multiplied by the number of 
units, whichever is less, the lender must require the borrower to 
obtain an individual unit owner's dwelling policy to meet the 
Regulation's flood insurance requirements.
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    \4\ In recent guidance, FEMA expressly discusses the statutory 
standard for determining the required amount of flood insurance for 
a condominium. FEMA Mandatory Purchase of Flood Insurance 
Guidelines, at 46.
    \5\ FEMA's recent guidance encourages condominium associations 
to obtain 100 percent coverage. Id. at 47.
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    The Agencies are proposing the modification contained in proposed 
question 24 and its answer to be in accordance with the general 
mandatory purchase requirement in the Regulation. As FEMA has noted:

    Although unit owners have a shared interest in the common areas 
of the condominium building, as well as in their own unit, unit 
owners are unable to individually protect such common areas. 
Therefore, the RCBAP, insured to its full replacement cost value 
(RCV) to the extent possible under the NFIP, is the correct way to 
insure a residential condominium building against flood loss. A 
properly placed RCBAP protects the financial interests of the 
association, unit owners, and lenders and also satisfies the 
statutory requirements.\6\
---------------------------------------------------------------------------

    \6\ See id. at 46.

    The Agencies plan that any guidance adopted as final in question 
and answer 24 would apply to any loan that is made, increased, 
extended, or renewed after the effective date of the revised guidance. 
The Agencies further plan that the revised guidance would apply to any 
loan made prior to the effective date of the revised guidance, which a 
lender determines to be covered by flood insurance in an amount less 
than required by the Regulation, as set forth in proposed question and 
answer 24, at the first flood insurance policy renewal period following 
the effective date of the revised guidance.
    Proposed question 27 would modify and expand current question 9 
under section II to address lenders' options when a loan secured by a 
residential condominium unit is in a multi-unit complex whose 
condominium association allows its existing flood insurance policy to 
lapse. Specifically, if the borrower/unit owner or the condominium 
association fails to purchase adequate flood insurance within 45 days 
of the lender's notification of inadequate insurance coverage, the 
lender must force place flood insurance to cover the unit owner's 
dwelling in an amount adequate to meet the Regulation's flood insurance 
requirements.
    The Agencies are also proposing five new questions and answers to 
address additional issues regarding flood insurance requirements for 
residential condominiums. Proposed new question 23 would be added to 
specifically affirm that the mandatory flood insurance purchase 
requirements under the Act and Regulation apply to loans secured by 
individual residential condominium units, including those in multi-
story condominium complexes located in an SFHA in which flood insurance 
is available under the Act.
    Proposed new question 25 would address lenders' options when a loan 
secured by a residential condominium unit is in a multi-unit complex 
whose condominium association does not obtain or maintain the amount of 
flood insurance coverage required under the Regulation. Specifically, 
it would provide that a lender must require the borrower to purchase an 
individual unit owner's dwelling policy in an amount sufficient to meet 
the Regulation's flood insurance requirements. The proposed answer 
would also detail what is considered an adequate amount of flood 
insurance under the Regulation and provide an example.

[[Page 15264]]

    Proposed new question 26 would address the steps 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 proposed answer would also summarize 
some of the risks to which the lender and the individual unit owner/
borrower may be exposed should a loss occur where the condominium 
association did not maintain adequate flood insurance coverage under an 
RCBAP.
    Proposed new question 28 would be added to explain how the RCBAP's 
co-insurance penalty applies when, at the time of loss, the RCBAP's 
coverage amount is less than 80 percent of either the building's 
replacement cost or the maximum amount of flood insurance available for 
that building under the NFIP (whichever is less). Examples of how to 
calculate the penalty would also be provided. Proposed new question 29 
would be added to explain the interplay between the individual unit 
owner's dwelling policy coverage limitations and the RCBAP.

Section VII. Flood insurance requirements for home equity loans, lines 
of credit, subordinate liens, and other security interests in 
collateral located in an SFHA

    Proposed new Section VII, which addresses flood insurance 
requirements for home equity loans, lines of credit, subordinate liens, 
and other security interests in collateral located in an SFHA, would 
include seven questions from current section I and parts of two 
questions from current section V. Specifically, current questions 3, 4, 
5, 6, 7, 8, and 10 would be renumbered as questions 30, 31, 34, 35 and 
36, 37, 38, and 39 respectively. Current question 5 in section V would 
be split into proposed questions 32 and 33.
    Proposed questions and answers 30, 31, and 39 would include minor 
wording changes without any intended change in substance or meaning. 
Proposed question 32 would expand on part of current section V, 
question 5, but would not change the substance of the answer. New 
question 34 would be revised to clarify the issue discussed in current 
question 5 of section I without any change in substance or meaning. New 
questions 35 and 36 would be added to clarify the issues discussed in 
current question 6 of section I.

Section VIII. Flood insurance requirements for loan syndications/
participations

    The Agencies are proposing to include a new section VIII and new 
question 40 in response to questions from lenders. The proposed 
question and answer would explain that, with respect to loan 
syndications and participations, individual participating lenders are 
responsible for ensuring compliance with flood insurance requirements. 
The Agencies believe that the risk of flood loss can be a significant 
threat to the value of improved real property securing loans, 
especially in light of many recent catastrophic flood-related events 
such as Hurricane Katrina. Therefore, the Agencies believe that each 
lender in a loan participation/syndication arrangement that is secured 
by improved real property located in a special flood hazard area should 
be responsible for ensuring that the respective interest of the lender 
in the collateral that secures the lender's portion of the loan is 
protected against the risk of flood loss, at least to the amount 
required by the Regulation. This does not mean that each lender in a 
syndication or participant in a loan must individually undertake such 
activities as obtaining a flood determination or monitoring whether 
flood insurance premiums are paid. Rather, it means that the 
participating lender should perform upfront due diligence to ensure 
both that 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 on-going basis for compliance with the flood 
insurance requirements. The participating lender should require as a 
condition to the participation, syndication or other credit risk 
sharing agreement that the lead lender or agent will provide 
participating lenders with sufficient information on an ongoing basis 
to monitor compliance with flood insurance requirements.

Section IX. Flood insurance requirements in the event of the sale or 
transfer of a designated loan and/or its servicing rights

    The heading to proposed section IX has been modified to provide 
greater clarity with no intended change in substance or meaning. The 
current questions 1, 2, 3, 4, 5, and 6 under current section IX would 
be renumbered as proposed questions 42, 43, 44, 45, 46, and 47, 
respectively, with minor revisions to questions and answers 42 and 46 
to provide greater clarity, with no intended change in substance or 
meaning. Proposed section IX would also incorporate and expand current 
question 6 under section II as proposed question and answer 41. 
Proposed question 41 would expound on the two scenarios from current 
question 6 to provide greater clarity, with no intended change in 
substance or meaning.

Section X. Escrow requirements

    Current section IV on escrow requirements would be moved to 
proposed section X but would remain largely unchanged. Question 1 under 
current section IV, relating to the date loan originations were subject 
to the escrow requirement, would be deleted, as it is now obsolete. 
Questions 2 through 7 under current section IV would be renumbered as 
proposed questions 48 through 53, respectively, with minor changes for 
greater clarity with no intended change in substance or meaning.

Section XI. Forced placement of flood insurance

    For organizational purposes, the Agencies are proposing to move 
existing questions 1, 2, and 3 in Part VI to questions 54, 55, and 56 
in section XI of the proposed document, respectively. The Agencies are 
proposing minor revisions to proposed question and answer 54 to provide 
greater clarity, with no intended change in substance or meaning.

Section XII. Gap insurance policies

    The Agencies are proposing to add a new section and question and 
answer on the appropriateness of gap or blanket insurance policies, 
often purchased by lenders to ensure adequate life-of-loan flood 
insurance coverage for designated loans, as a result of questions 
received by the Agencies on such policies. Gap or blanket insurance 
policies are lender-paid private policies that are meant to cover a 
lender's entire portfolio of loans for insurance shortfalls or expired 
policies.
    The proposed answer to question 57 of section XII would explain 
that, generally, gap or blanket insurance is not an adequate substitute 
for NFIP insurance, as a gap or blanket policy typically protects only 
the lender's, not the borrower's interest, and cannot be transferred 
when a loan is sold. The question and answer would acknowledge, 
however, that in limited circumstances, a gap or blanket policy may 
satisfy flood insurance obligations in instances where NFIP and private 
insurance for the borrower are otherwise unavailable.

Section XIII: Required use of the Standard Flood Hazard Determination 
Form (SFHDF)

    Current section V would be moved to proposed section XIII, and 
questions 1,

[[Page 15265]]

2, 3, and 4 of current section V would be renumbered as proposed 
questions 58, 59, 60, and 61, respectively. The Agencies are proposing 
some minor changes to the answers for these questions to provide 
additional clarity with no intended change in substance or meaning. For 
organizational purposes, the guidance found in question 5 of current 
section V would be moved to proposed questions 32 and 33 under proposed 
section VII, as discussed above.

Section XIV. Flood determination fees

    Current section VII would be moved to proposed section XIV. 
Questions 1 and 2 in current section VII would be renumbered as 
questions 62 and 63, respectively, with only minor language 
modifications, with no intended change in substance or meaning.

Section XV. Flood zone discrepancies

    The Agencies are proposing a new section and two new questions 
concerning issues where there is a discrepancy between the flood hazard 
zone designation on a flood hazard determination form and the flood 
hazard zone designation on the flood insurance policy. Proposed new 
question 64 would address how lenders should respond when confronted 
with a discrepancy between the flood hazard zone designations on the 
flood hazard determination form and the flood insurance policy. The 
question discusses the legitimate reasons why such discrepancies may 
exist and describes how to resolve differences if there is no 
legitimate reason for them. Proposed question 65 discusses when such 
flood zone discrepancies in a loan portfolio will result in a finding 
that the lender violated federal flood insurance requirements. If there 
are repeated instances in the lender's loan portfolio of discrepancies 
between the flood hazard zone listed on a flood hazard determination 
and the flood hazard zone listed on a flood insurance policy, and the 
lender has not taken steps to resolve such discrepancies, then an 
agency may find that the lender has violated the mandatory purchase 
requirements.

Section XVI. Notice of special flood hazards and availability of 
Federal disaster relief

    The Agencies propose to move current section VIII to proposed 
section XVI. Therefore, questions 1, 2, 3, 4, 5, and 6 under current 
section VIII would be renumbered as proposed questions 66, 67, 68, 69, 
70, and 71, respectively, with nonsubstantive changes made to provide 
additional clarity to the answers. For organizational purposes, 
question 1 under current section X would be consolidated under this new 
section XVI and renumbered as question 73. Furthermore, a new question 
72 is proposed to be added to clarify that the Notice of Special Flood 
Hazards must be provided to the borrower each time a loan is made, 
increased, extended, or renewed, even when a new determination is not 
required.

Section XVII. Mandatory civil money penalties

    The Agencies are proposing a new section and two new questions 
concerning the imposition of mandatory civil money penalties for 
violations of the flood insurance requirements. Proposed new question 
74 would list the sections of the Act that trigger mandatory civil 
money penalties when examiners find a pattern or practice of violations 
of those sections. The question would also include information about 
statutory limits on the amount of such penalties. Proposed new question 
75 would discuss the general standards the Agencies consider when 
determining whether violations constitute a pattern or practice for 
which civil money penalties are mandatory. These considerations are not 
dispositive of individual cases, but serve as a reference point for 
reviewing the particular facts and circumstances.

Redesignation Table

    The following redesignation table is provided as an aide to assist 
the public in reviewing the proposed revisions to the 1997 Interagency 
Questions and Answers.

------------------------------------------------------------------------
            Current                             Proposed
------------------------------------------------------------------------
Section I. Definitions:
    Section I, Question 1.....  Section IV, Question 17.
    Section I, Question 2.....  Section IV, Question 16.
    Section I, Question 3.....  Section VII, Question 30.
    Section I, Question 4.....  Section VII, Question 31.
    Section I, Question 5.....  Section VII, Question 34.
    Section I, Question 6.....  Section VII, Question 35; and Section
                                 VII, Question 36.
    Section I, Question 7.....  Section VII, Question 37.
    Section I, Question 8.....  Section VII, Question 38.
    Section I, Question 9.....  Section I, Question 4.
    Section I, Question 10....  Section VII, Question 39.
Section II. Requirement to
 Purchase Flood Insurance
 Where Available:
    Section II, Question 1....  Section I, Question 1.
    Section II, Question 2....  Section I, Question 3.
    Section II, Question 3....  Section I, Question 5.
    Section II, Question 4....  Deleted as obsolete.
    Section II, Question 5....  Section II, Question 12.
    Section II, Question 6....  Section IX, Question 41.
    Section II, Question 7....  Section II, Question 11; and Section V,
                                 Question 22.
    Section II, Question 8....  Section VI, Question 24.
    Section II, Question 9....  Section VI, Question 27.
Section III. Exemptions.......  Section III. Exemptions from the
                                 mandatory flood insurance requirements.
    Section III, Question 1...  Section III, Question 15.
Section IV. Escrow              Section X. Escrow requirements.
 Requirements.
    Section IV, Question 1....  Deleted as obsolete.
    Section IV, Question 2....  Section X, Question 48.
    Section IV, Question 3....  Section X, Question 49.

[[Page 15266]]

 
    Section IV, Question 4....  Section X, Question 50.
    Section IV, Question 5....  Section X, Question 51.
    Section IV, Question 6....  Section X, Question 52.
    Section IV, Question 7....  Section X, Question 53.
Section V. Required Use of      Section XIII. Required use of Standard
 Standard Flood Hazard           Flood Hazard Determination Form
 Determination Form (SFHDF).     (SFHDF).
    Section V, Question 1.....  Section XIII, Question 58.
    Section V, Question 2.....  Section XIII, Question 59.
    Section V, Question 3.....  Section XIII, Question 60.
    Section V, Question 4.....  Section XIII, Question 61.
    Section V, Question 5.....  Section VII, Question 32; and Section
                                 VII, Question 33.
Section VI. Forced Placement    Section XI. Forced placement of flood
 of Flood Insurance.             insurance.
    Section VI, Question 1....  Section XI, Question 54.
    Section VI, Question 2....  Section XI, Question 55.
    Section VI, Question 3....  Section XI, Question 56.
Section VII. Determination      Section XIV. Flood determination fees.
 Fees.
    Section VII, Question 1...  Section XIV, Question 62.
    Section VII, Question 2...  Section XIV, Question 63.
Section VIII. Notice of         Section XVI. Notice of special flood
 Special Flood Hazards and       hazards and availability of Federal
 Availability of Federal         disaster relief.
 Disaster Relief.
    Section VIII, Question 1..  Section XVI, Question 66.
    Section VIII, Question 2..  Section XVI, Question 67.
    Section VIII, Question 3..  Section XVI, Question 68.
    Section VIII, Question 4..  Section XVI, Question 69.
    Section VIII, Question 5..  Section XVI, Question 70.
    Section VIII, Question 6..  Section XVI, Question 71.
Section IX. Notice of           Section IX. Flood insurance requirements
 Servicer's Identity.            in the event of the sale or transfer of
                                 a designated loan and/or its servicing
                                 rights.
    Section IX, Question 1....  Section IX, Question 42.
    Section IX, Question 2....  Section IX, Question 43.
    Section IX, Question 3....  Section IX, Question 44.
    Section IX, Question 4....  Section IX, Question 45.
    Section IX, Question 5....  Section IX, Question 46.
    Section IX, Question 6....  Section IX, Question 47.
Section X Appendix A to the     Section XVI. Notice of special flood
 Regulation-Sample Form of       hazards and availability of Federal
 Notice of Special Flood         disaster relief.
 Hazards and Availability of
 Federal Disaster Relief
 Assistance.
    Section X, Question 1.....  Section XVI, Question 73.
------------------------------------------------------------------------

Public Comments

    The Agencies invite public comment on the proposed new and revised 
Interagency Questions and Answers. If financial institutions, bank 
examiners, community groups, or other interested parties have 
unanswered questions or comments about the Agencies' flood insurance 
regulations, they should submit them to the Agencies. The Agencies will 
consider including these questions and answers in the final guidance.

Solicitation of Comments Regarding the Use of ``Plain Language''

    Section 722 of the Gramm-Leach-Bliley Act of 1999, 12 U.S.C. 4809, 
requires the federal banking Agencies to use ``plain language'' in all 
proposed and final rules published after January 1, 2000. Although this 
proposed guidance is not a proposed rule, comments are nevertheless 
invited on whether the proposed interagency questions and answers are 
stated clearly and effectively organized, and how the guidance might be 
revised to make it easier to read.
    The text of the proposed Interagency Questions and Answers follows:

Interagency Questions and Answers Regarding Flood Insurance

    The Interagency Questions and Answers are organized by topic. Each 
topic addresses a major area of the revised 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 by the National Flood Insurance Reform Act of 1994 (codified at 
42 U.S.C. 4001 et seq.). ``Regulation'' refers to each agency's current 
final rule.\7\ The OCC, Board, FDIC, OTS, NCUA, and FCA (collectively, 
``the Agencies'') are providing answers to questions pertaining to the 
following topics:
---------------------------------------------------------------------------

    \7\ The Agencies' rules are codified at 12 CFR part 22 (OCC), 12 
CFR part 208 (Board), 12 CFR part 339 (FDIC), 12 CFR part 572 (OTS), 
12 CFR part 614 (FCA), and 12 CFR part 760 (NCUA).

I. Determining when certain loans are designated loans for which 
flood insurance is required under the Act and Regulation.
II. Determining the appropriate amount of flood insurance required 
under the Act and Regulation.
III. Exemptions from the mandatory flood insurance requirements.
IV. Flood insurance requirements for construction loans.
V. Flood insurance requirements for agricultural buildings.
VI. Flood insurance requirements for

[[Page 15267]]

residential condominiums.
VII. Flood insurance requirements for home equity loans, lines of 
credit, subordinate liens, and other security interests in 
collateral located in an SFHA.
VIII. Flood insurance requirements for loan syndications/
participations.
IX. Flood insurance requirements in the event of the sale or 
transfer of a designated loan and/or its servicing rights.
X. Escrow requirements.
XI. Forced placement of flood insurance.
XII. Gap insurance policies.
XIII. Required use of Standard Flood Hazard Determination Form 
(SFHDF).
XIV. Flood determination fees.
XV. Flood zone discrepancies.
XVI. Notice of special flood hazards and availability of Federal 
disaster relief.
XVII. Mandatory civil money penalties.

I. Determining When Certain Loans Are Designated Loans for Which Flood 
Insurance is Required Under the Act and Regulation

    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)?
    Answer: Yes. The Regulation does apply; however, a lender need not 
require borrowers to obtain flood insurance for a building or mobile 
home located in a community that does not participate in the NFIP, even 
if the building or mobile home securing the loan is located in a 
Special Flood Hazard Area (SFHA). Nonetheless, a lender, using the 
standard Special Flood Hazard Determination Form (SFHDF), must still 
determine whether the building or mobile home is located in an SFHA. If 
the building or mobile home is determined to be located in an SFHA, a 
lender is required to notify the borrower. In this case, a lender, 
generally, may make a conventional loan without requiring flood 
insurance, if it chooses to do so. However, a lender may not make a 
Government-guaranteed or insured loan, such as an SBA, VA, or FHA, loan 
secured by a building or mobile home located in an SFHA in a community 
that does not participate in the NFIP. See 42 U.S.C. 4106(a). Also, a 
lender is responsible for exercising sound risk management practices to 
ensure that it does not make a loan secured by a building or mobile 
home located in an SFHA where no flood insurance is available, if doing 
so would be an unacceptable risk.
    2. What is a lender's responsibility if a particular building or 
mobile home that secures a loan, due to a map change, is no longer 
located within an SFHA?
    Answer: The lender is no longer obligated to require mandatory 
flood insurance; however, the borrower can elect to convert the 
existing NFIP policy to a Preferred Risk Policy. For risk management 
purposes, the lender may, by contract, continue to require flood 
insurance coverage.
    3. Does 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, from another lender trigger any requirements under the 
Regulation?
    Answer: 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, generally, are triggered when a lender makes, increases, 
extends, or renews a designated loan. A lender's purchase of a loan 
does not fall within any of those categories.
    However, if a lender becomes aware at any point during the life of 
a designated loan that flood insurance is required, the lender must 
comply with the Regulation, including force placing insurance, if 
necessary. Depending upon the circumstances, safety and soundness 
considerations may sometimes necessitate such due diligence upon 
purchase of a loan as to put the lender on notice of lack of adequate 
flood insurance. If the purchasing lender subsequently extends, 
increases, or renews a designated loan, it must also comply with the 
Regulation.
    4. Does the Regulation apply to loans that are being restructured 
because of the borrower's default on the original loan?
    Answer: Yes, 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.
    5. Are table funded loans treated as new loan originations?
    Answer: Yes. Table funding, as defined under HUD's Real Estate 
Settlement Procedure Act (RESPA) rule, 24 CFR 3500.2, is a settlement 
at which a loan is funded by a contemporaneous advance of loan funds 
and the assignment of the loan to the person advancing the funds. A 
loan made through a table funding process is treated as though the 
party advancing the funds has originated the loan. 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.
    6. Is a lender required to perform a review of its, or its 
servicer's, existing loan portfolio for compliance with the flood 
insurance requirements under the Act and Regulation?
    Answer: No. Apart from the requirements mandated when a loan is 
made, increased, extended, or renewed, a regulated 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. 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.

II. Determining the Appropriate Amount of Flood Insurance Required 
Under the Act and Regulation

    7. 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''?
    Answer: ``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 single-family and two-to-four 
family dwellings and other residential buildings located in a 
participating community under the regular program, the maximum cap is 
$250,000. For nonresidential structures located in a participating 
community under the regular program, the maximum cap is $500,000. (In 
participating communities that are under the emergency program phase, 
the caps are $35,000 for single-family and two-to-four family dwellings 
and other residential structures, and $100,000 for nonresidential 
structures).
    In addition to the maximum caps under the NFIP, the Regulation also 
provides that ``flood insurance coverage under the Act is limited to 
the overall value of the property securing the designated loan minus 
the value of the land on which the property is located,'' which is 
commonly referred to as the ``insurable value'' of a structure. The 
NFIP does not insure land; therefore, land values should not be 
included in

[[Page 15268]]

the calculation. An NFIP policy will not cover an amount exceeding the 
``insurable value'' of the structure. 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 property 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 property, 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 property 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).

    8. What are examples of residential buildings?
    Answer: Residential buildings include one-to-four family dwellings; 
apartment or other residential buildings containing more than four 
dwelling units; condominiums and cooperatives in which at least 75 
percent of the square footage is residential; hotels or motels where 
the normal occupancy of a guest is six months or more; and rooming 
houses that have more than four roomers. A residential building may 
have incidental non-residential use, such as an office or studio, as 
long as the total area of such incidental occupancy is limited to less 
than 25 percent of the square footage of the building.
    9. What are examples of nonresidential buildings?
    Answer: Nonresidential buildings include small business concerns, 
churches, schools, farm buildings (including grain bins and silos), 
pool houses, clubhouses, recreational buildings, mercantile structures, 
agricultural and industrial structures, warehouses, hotels and motels 
with normal room rentals for less than six months' duration, nursing 
homes, and mixed-use buildings with less than 75 percent residential 
square footage.
    10. How much insurance is required on a building located in an SFHA 
in a participating community?
    Answer: 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 (see Question 7).
    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 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.
    11. Is flood insurance required for each building when the real 
estate secu rity contains more than one building located in an SFHA in 
a participating community? If so, how much coverage is required?
    Answer: Yes. The lender must determine the amount of insurance 
required on each building and add these individual amounts together. 
The total amount of required flood insurance 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 structures or
    [cir] the ``insurable value'' of the structures (see Question 7).
    The amount of total required flood insurance can be allocated among 
the secured buildings in varying amounts, but all buildings in an SFHA 
must have some coverage.
    Example: Lender makes a loan in the principal amount of $150,000 
secured by five nonresidential buildings, only three of which are 
located in SFHAs within participating communities.
     Outstanding loan principal is $150,000
     Maximum amount of insurance available under the NFIP
    [cir] Maximum limit available for the type of structure is $500,000 
per building (non-residential buildings); or
    [cir] Insurable value (for each non-residential building for which 
insurance is required, which is $100,000, 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 by flood 
insurance.
    12. If the insurable value of a building or mobile home, located in 
an SFHA in which flood insurance is available under the Act, 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?
    Answer: No. The Regulation provides that the amount of flood 
insurance must be at least equal to the lesser of the outstanding 
principal balance of the designated loan or the maximum limit of 
coverage available for a particular type of property under the Act. The 
Regulation also provides that flood insurance coverage under the Act is 
limited to the overall value of the property securing the designated 
loan minus the value of the land on which the building or mobile home 
is located. Since the NFIP policy does not cover land value, lenders 
should determine the amount of insurance necessary based on the 
insurable value of the improvements.
    13. Can a lender require more flood insurance than the minimum 
required by the Regulation?
    Answer: Yes. Lenders are permitted to require more flood insurance 
coverage than required by the Regulation. The borrower or lender may 
have to seek such coverage outside the NFIP. Each 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. Lenders should avoid creating situations where a 
building is being ``over-insured''.
    14. Can a lender allow the borrower to use the maximum deductible 
to reduce the cost of flood insurance?
    Answer: Yes. However, it is not a sound business practice for a 
lender to allow the borrower to use the maximum deductible amount in 
every situation. 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

[[Page 15269]]

insurable value of the property to avoid the mandatory purchase 
requirement for flood insurance.

III. Exemptions From the Mandatory Flood Insurance Requirements

    15. What are the exemptions from coverage?
    Answer: There are only two exemptions from the purchase 
requirements. The first applies to state-owned property covered under a 
policy of self-insurance satisfactory to the Director of FEMA. 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.

IV. Flood Insurance Requirements for Construction Loans

    16. Is a loan secured by raw land that 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?
    Answer: No. A designated loan is defined as 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. Any loan secured by 
only raw 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.
    17. 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?
    Answer: Yes. Therefore, 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. 
If so, then the loan is a designated loan and the lender must provide 
the requisite notice to the borrower prior to loan origination that 
mandatory flood insurance is required. The lender must then comply with 
the mandatory purchase requirement under the Act and Regulation.
    18. 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?
    Answer: Yes. FEMA's Flood Insurance Manual, under general rules, 
states: buildings in the course of construction that have yet to be 
walled and roofed are eligible for coverage except when construction 
has been halted for more than 90 days and/or if the lowest floor used 
for rating purposes is below the Base Flood Elevation (BFE). Materials 
or supplies intended for use in such construction, alteration, or 
repair are not insurable unless they are contained within an enclosed 
building on the premises or adjacent to the premises.
    Flood Insurance Manual at p. GR 4 (October 2006). The definition 
section of the 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.'' Flood Insurance 
Manual at p. DEF 9. While 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.
    19. 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?
    Answer: 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. One way for lenders to comply 
with the mandatory purchase requirement for a loan secured by a 
building in the course of construction that is located in an SFHA is to 
require borrowers to have a flood insurance policy in place at the time 
of loan origination.
    Alternatively, a lender may allow a borrower to defer the purchase 
of flood insurance until a foundation slab has been poured and/or an 
elevation certificate has been issued, provided that the lender 
requires 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) on the property securing the loan. If the lender 
elects this approach and does not require flood insurance to be 
obtained at loan origination, then it must have adequate internal 
controls in place at origination to ensure that the borrower obtains 
flood insurance no later than when the foundation slab has been poured 
and/or an elevation certificate has been issued.
    20. Does the 30-day waiting period apply when the purchase of the 
flood insurance policy is deferred in connection with a construction 
loan?
    Answer: No. The NFIP will rely on an insurance agent's 
representation on the application for flood insurance that the purchase 
of insurance has been properly deferred unless there is a loss during 
the first 30 days of the policy period. In that case, the NFIP will 
require documentation of the loan transaction, such as settlement 
papers, before adjusting the loss.

V. Flood Insurance Requirements for Agricultural Buildings

    21. Some agricultural operations have buildings on their farms with 
limited utility to the farming operation and, in many cases, the farmer 
would not replace such buildings if lost in a flood. Is a lender 
required to mandate flood insurance for such buildings?
    Answer: Yes. Under the Regulation, lenders must require flood 
insurance on real estate improvements when those improvements are part 
of the property securing the loan and are located in an SFHA in a 
participating community. The Act does not differentiate agricultural 
lending from other types of lending.
    The lender may consider ``carving out'' buildings from the security 
it takes on the loan. However, the lender should fully analyze the 
risks of this option. In particular, a lender should consider whether 
it would be able to market the property securing its loan in the event 
of foreclosure. Additionally, the lender should consider any local 
zoning issues or other issues that would affect its collateral.
    22. What are a lender's requirements under the Regulation for a 
loan secured by multiple agricultural buildings located throughout a 
large geographic area where 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 several jurisdictions or counties 
where some of the communities participate in the NFIP, and others do 
not?
    Answer: A lender is required to make a determination as to whether 
the property securing the loan is in an SFHA. If secured property is 
located in an SFHA, but not in a participating

[[Page 15270]]

community, no flood insurance is required, although a lender can 
require the purchase of flood insurance (from a private insurer) as a 
matter of safety and soundness. Conversely, where a secured property is 
located in a participating community but not in an SFHA, no insurance 
is required. A lender must provide appropriate notice and require the 
purchase of flood insurance for designated loans located in an SFHA in 
a participating community. Agricultural buildings that are part of the 
loan's security and are located in an SFHA in a participating community 
are required to have flood insurance.

VI. Flood Insurance Requirements for Residential Condominiums

    23. Are residential condominiums, including multi-story condominium 
complexes, subject to the statutory and regulatory requirements for 
flood insurance?
    Answer: 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. The mandatory purchase requirements also apply 
to loans secured by other condominium property, such as loans to a 
developer for construction of the condominium or loans to a condominium 
association.
    24. 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 condominium complexes, to comply with the 
mandatory purchase requirements under the Act and the Regulation?
    Answer: 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.
    Assuming that the outstanding principal balance of the loan is 
greater than the maximum amount of coverage available under the NFIP, 
the lender must require a borrower whose loan is secured by a 
residential condominium unit to either:
     Ensure the condominium owners association has purchased an 
NFIP Residential Condominium Building Association Policy (RCBAP) 
covering either 100 percent of the insurable value (replacement cost) 
of the building, including amounts to repair or replace the foundation 
and its supporting structures, or the total number of units in the 
condominium building times $250,000, whichever is less; or
     Obtain a dwelling policy if there is no RCBAP, as 
explained in Question 25, or if the RCBAP coverage is less than 100 
percent of the replacement cost value of the building or the total 
number of units in the condominium building times $250,000, whichever 
is less, as explained in Question 26.
    The RCBAP, which is a master policy for condominiums issued by 
FEMA, may only be purchased by the condominium owners association. The 
RCBAP covers both the common and individually owned building elements 
within the units, improvements within the units, and contents owned in 
common. 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.
    The dwelling policy provides individual unit owners with 
supplemental building coverage to the RCBAP. The policies are 
coordinated such that the dwelling policy purchased by the unit owner 
responds to shortfalls on building coverages 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.
    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 
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).)
    The guidance in question and answer 24 will apply to any loan that 
is made, increased, extended, or renewed after the effective date of 
the revised guidance. Further, the guidance will apply to any loan made 
prior to the effective date of the guidance, which a lender determines 
to be covered by flood insurance in an amount less than required by the 
Regulation, and as set forth in proposed question and answer 24, at the 
first flood insurance policy renewal period following the effective 
date of the revised guidance.
    25. What action must a lender take if there is no RCBAP coverage?
    Answer: If there is no RCBAP, either because the condominium 
association will not obtain a policy or because individual unit owners 
are responsible for obtaining their own insurance, then the lender must 
require the individual unit owner/borrower to obtain a dwelling policy 
in an amount sufficient to meet the requirements outlined in Question 
24.
    Example: The lender makes a loan in the principal amount of 
$175,000 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, there is no 
RCBAP.
     Outstanding principal balance of loan is $175,000.
     Maximum amount of coverage available under the NFIP, which 
is the lesser of:
    [cir] Maximum limit available for the residential condominium unit 
is $250,000; or
    [cir] Insurable value of the unit based on 100 percent of the 
building's replacement cost value ($10 million / 50 = $200,000).
    The lender must require the individual unit owner/borrower to 
purchase a flood insurance dwelling policy in the amount of $175,000, 
since there is no RCBAP, to satisfy the Regulation's mandatory flood 
insurance requirement. (This is the lesser of the outstanding principal 
balance

[[Page 15271]]

($175,000), the maximum coverage available under the NFIP ($250,000), 
or the insurable value ($200,000).)
    26. 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?
    Answer: 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 the 
individual unit owner/borrower to ask the condominium association to 
obtain additional coverage that would be sufficient to meet the 
Regulation's requirements (see Question 24). If the condominium 
association does not obtain sufficient coverage, then the lender must 
require the individual unit owner/borrower to purchase a dwelling 
policy in an amount sufficient to meet the Regulation's flood insurance 
requirements. The amount of coverage under the dwelling policy 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 requirements (see Question 24).
    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 
is $250,000; or
    [cir] Insurable value of the unit based on 100 percent of the 
building's replacement value ($10 million / 50 = $200,000).
    The lender must require the individual unit owner/borrower to 
purchase a flood insurance dwelling policy in the amount of $40,000 to 
satisfy the Regulation's mandatory flood insurance 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 dwelling 
policy that provides for adequate flood insurance coverage under the 
Regulation will satisfy the Regulation's mandatory flood insurance 
requirements, the lender and the individual unit owner/borrower may 
still be exposed to additional risk of loss. Lenders are encouraged to 
apprise borrowers of this risk. The dwelling policy provides individual 
unit owners with supplemental building coverage to the RCBAP. The 
policies are coordinated such that the dwelling policy purchased by the 
unit owner responds to shortfalls on building coverages 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.
    The risk arises because the individual unit owner's dwelling policy 
may contain claim limitations that prevent the dwelling policy from 
covering the individual unit owner's share of the co-insurance penalty, 
which is triggered when the amount of insurance under the RCBAP is less 
than 80 percent of the building's replacement cost value at the time of 
loss. In addition, following a major flood loss, the insured unit owner 
may have to rely upon the condominium association's and other unit 
owners' financial ability to make the necessary repairs to common 
elements in the building, such as electricity, heating, plumbing, 
elevators, etc. It is incumbent on the lender to understand these 
limitations.
    27. What must a lender do when a loan secured by a residential 
condominium unit is in a complex whose condominium association allows 
its existing RCBAP to lapse?
    Answer: If a lender determines at any time during the term of a 
designated loan that the loan is not covered by flood insurance or is 
covered by such insurance in an amount less than that required under 
the Act and the Regulation, the lender must notify the individual unit 
owner/borrower of the requirement to maintain flood insurance coverage 
sufficient to meet the Regulation's mandatory requirements. The lender 
should encourage the individual unit owner/borrower to work with the 
condominium association to acquire a new RCBAP in an amount sufficient 
to meet the Regulation's mandatory flood insurance requirement (see 
Question 24). Failing that, the lender must require the individual unit 
owner/borrower to obtain a flood insurance dwelling policy in an amount 
sufficient to meet the Regulation's mandatory flood insurance 
requirement (see Questions 25 and 26). If the borrower/unit owner or 
the condominium association fails to purchase flood insurance 
sufficient to meet the Regulation's mandatory requirements within 45 
days of the lender's notification to the individual unit owner/borrower 
of inadequate insurance coverage, the lender must force place the 
necessary flood insurance.
    28. How does the RCBAP's co-insurance penalty apply in the case of 
residential condominiums, including those located in multi-story 
condominium complexes?
    Answer: 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 co-insurance penalty, is determined as follows 
(subject to all other relevant conditions in this 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 co-insurance 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). Unit owners' dwelling policies will not cover 
any

[[Page 15272]]

assessment that may be imposed to cover the costs of repair that are 
not covered by the RCBAP.

    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 co-insurance 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.
    29. What are the major factors involved with the individual unit 
owner's dwelling policy's coverage limitations with respect to the 
condominium association's RCBAP coverage?
    Answer: The following examples demonstrate how the unit owner's 
dwelling policy may cover in certain loss situations:
    Example 1: (RCBAP insured to at least 80 percent of building 
replacement cost)
     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: (RCBAP insured to less than 80 percent of building 
replacement cost)
     If the unit owner purchases building coverage under the 
dwelling policy and there is an RCBAP that was insured to less than 80 
percent of the building replacement cost value at the time of loss, the 
loss assessment coverage cannot be used to reimburse the association 
for its co-insurance penalty.
     Loss assessment is available only to cover the building 
damages in excess of the 80-percent required amount at the time of 
loss. Thus, the covered damages to the condominium association building 
must be greater than 80 percent of the building replacement cost value 
at the time of loss before the loss assessment coverage under the 
dwelling policy becomes available. Under the dwelling policy, covered 
repairs to the unit, if applicable, would have priority in payment over 
loss assessments against the unit owner.
    Example 3: (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 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.

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

    30. Is a home equity loan considered a designated loan that 
requires flood insurance?
    Answer: 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.
    31. 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?
    Answer: 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 when application is made for the loan, draws against an 
approved line do not require further determinations. 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 the response to Question 61 in Section XIII. Required use of 
Standard Flood Hazard Determination Form).
    32. When a lender makes a second mortgage secured by a building or 
mobile home located in an SFHA, how much flood insurance must the 
lender require?
    Answer: A 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 a residential building and $500,000 for a nonresidential building), 
or the insurable value of the building or mobile home. The lender on 
the second mortgage cannot comply with the Act and Regulation by 
requiring flood insurance 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.
    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. 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 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 the entire $100,000 of the 
loss payment towards its principal balance of $100,000, while Lender B 
would receive only $25,000 of the loss payment toward its principal 
balance of $50,000.
    Example 2: Lender A, who is not directly covered by the Act or 
Regulation, makes a first mortgage with a principal balance of $100,000 
and does not require flood insurance. Lender B, who is directly covered 
by the Act and Regulation, issues a second mortgage with a principal 
balance of $50,000. The insurable value of the residential building 
securing the loans is $200,000. Lender B must ensure that flood 
insurance in the amount of $150,000 is purchased and maintained. If 
Lender B were to require flood insurance only in an amount equal to the 
principal balance of the second

[[Page 15273]]

mortgage ($50,000), 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 $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 real property with a fair market value of $150,000. The 
insurable value of the residential building on the real property is 
$90,000; however, Lender A improperly required only $70,000 of flood 
insurance coverage. 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 is purchased and maintained on 
the secured property to comply with the Act and Regulation.
    33. If a borrower requesting a home equity 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?
    Answer: 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 home equity loan, a new determination would be 
required because this lender would be deemed to be ``making'' a new 
loan. In either situation, the lender will need to determine whether 
the amount of insurance in force is sufficient to cover the lesser of 
the combined outstanding principal balance of all loans (including the 
home equity loan), the insurable value, or the maximum amount of 
coverage available on the improved real estate.
    34. 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?
    Answer: 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 such loan'' is covered by flood insurance for the term of the 
loan. In this example, the collateral is not the type that could secure 
a designated loan because it does not include a building or mobile 
home; rather, the collateral is the inventory alone.
    35. 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?
    Answer: Yes. Flood insurance is required for the building located 
in the SFHA and any contents stored in that building.
    36. If a loan is secured by Building A, which is located in an 
SFHA, and contents, which are located in Building B, is flood insurance 
required on the contents securing a loan?
    Answer: No. If collateral securing the loan is stored in Building 
B, which does not secure the loan, then flood insurance is not required 
on those contents whether or not Building B is located in an SFHA.
    37. Does the Regulation apply where the lender takes a security 
interest in a building or mobile home located in an SFHA only as an 
``abundance of caution''?
    Answer: Yes. The Act and Regulation look to the collateral securing 
the loan. If the lender takes a security interest in improved real 
estate located in an SFHA, then flood insurance is required.
    38. 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?
    Answer: No. A designated loan is a loan secured by a building or 
mobile home. In this example, the lender did not take a security 
interest in the building; therefore, the loan is not a designated loan.
    39. 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?
    Answer: Yes. The making of a loan on condition of a personal 
guarantee by a third party and further secured by improved real estate, 
which is located in an SFHA, owned by that third party is so closely 
tied to the making of the loan that it is considered a designated loan 
that requires flood insurance.

VIII. Flood Insurance Requirements for Loan Syndications/Participations

    40. How do the Agencies enforce the mandatory purchase requirements 
under the Act and Regulation when a lender participates in a loan 
syndication/participation?
    Answer: Although a syndication/participation agreement may assign 
compliance duties to the 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 ensuring compliance with the Act and Regulation.
    Therefore, the Agencies will examine whether the regulated 
institution/participating lender has performed upfront due diligence to 
ensure both that 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 on-going 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 to ensure compliance with flood insurance requirements 
over the term of the loan.

IX. Flood Insurance Requirements in the Event of the Sale or Transfer 
of a Designated Loan and/or its Servicing Rights

    41. 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 lender makes the initial 
flood determination, provides the borrower with appropriate notice, and 
flood insurance is obtained. The lender initially services the loan; 
however, the lender subsequently sells both the loan and the servicing 
rights to a non-regulated 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?
    Answer: The 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 lender sells or transfers 
the loan and servicing rights, the lender must provide notice of the 
identity of the new servicer to FEMA or its designee.

[[Page 15274]]

    If the lender retains ownership of the loan and only transfers or 
sells the servicing rights to a non-regulated party, the lender must 
notify FEMA or its designee of the identity of the new servicer. The 
servicing contract should require the servicer to comply with all the 
requirements that are imposed on the lender as owner of the loan, 
including escrow of insurance premiums and forced placement of 
insurance, if necessary.
    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, forced placement, and 
flood hazard determination fee provisions of the Act and Regulation 
primarily so that they may perform the administrative tasks for the 
lender, without fear of liability to the borrower for the imposition of 
unauthorized charges. In addition, the preamble to the Regulation 
emphasizes 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 lender or from other commonly accepted standards for performance of 
servicing obligations. The lender remains ultimately liable for 
fulfillment of those responsibilities, and must take adequate steps to 
ensure that the loan servicer will maintain compliance with the flood 
insurance requirements.
    Scenario 2: A non-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 non-regulated lender does not 
make an initial flood determination or notify the borrower of the need 
to obtain insurance. The non-regulated 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?
    Answer: 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 any requirements under the Regulation, such as making a new 
flood determination or requiring a borrower to purchase flood 
insurance. The Regulation's requirements are triggered when a lender 
makes, increases, extends, or renews a designated loan. A 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, then the 
lender must comply with the Regulation, including force placing 
insurance, if necessary. Similarly, if the lender subsequently extends, 
increases, or renews a designated loan, the lender must also comply 
with the Regulation.
    Where a regulated lender purchases only the servicing rights to a 
loan originated by a non-regulated lender, the regulated lender is 
obligated only 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 lender must notify 
FEMA or its designee of the identity of the new servicer, if required 
to do so by the servicing contract with the owner of the loan.
    42. When a lender makes a designated loan and will be servicing 
that loan, what are the requirements for notifying the Director of FEMA 
or the Director's designee?
    Answer: FEMA stated in a June 4, 1996, letter that the Director's 
designee is the insurance company issuing the flood insurance policy. 
The borrower's purchase of a policy (or the lender's forced placement 
of a policy) will constitute notice to FEMA when the lender is 
servicing that loan.
    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.
    43. Would a RESPA Notice of Transfer sent to the Director of FEMA 
(or the Director's designee) satisfy the regulatory provisions of the 
Act?
    Answer: 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.
    44. Can delivery of the notice be made electronically, including 
batch transmissions?
    Answer: Yes. The Regulation specifically permits transmission by 
electronic means. A timely batch transmission of the notice would also 
be permissible, if it is acceptable to the Director's designee.
    45. If the loan and its servicing rights are sold by the lender, is 
the lender required to provide notice to the Director or the Director's 
designee?
    Answer: Yes. 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.
    46. Is a lender required to provide notice when the servicer, not 
the lender, sells or transfers the servicing rights to another 
servicer?
    Answer: No. After servicing rights are sold or transferred, 
subsequent notification obligations are the responsibility of the new 
servicer. The obligation of the lender to notify the Director or the 
Director's designee of the identity of the servicer transfers to the 
new servicer. The duty to notify the Director or the Director's 
designee of any subsequent sale or transfer of the servicing rights and 
responsibilities belongs to that servicer. For example, a financial 
institution makes and services the loan. It then sells the loan in the 
secondary market and also sells the servicing rights to a mortgage 
company. The financial institution notifies the Director's designee 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 Director's designee. If the mortgage company later sells the 
servicing rights to another firm, the mortgage company, not the 
financial institution, is responsible for notifying the Director's 
designee of the identity of the new servicer.
    47. In the event of a merger of one lending institution with 
another, what are the responsibilities of the parties for notifying the 
Director's designee?
    Answer: If an institution is acquired by or merges with another 
institution, the duty to provide notice for the loans being serviced by 
the acquired institution will fall to the successor institution in the 
event that notification is not provided by the acquired institution 
prior to the effective date of the acquisition or merger.

X. Escrow Requirements

    48. 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?
    Answer: ``Residential improved real estate'' is defined under the 
Regulation as ``real estate upon which a home or other residential 
building is located or to be located.'' A loan secured by residential 
improved real estate located or to be located in an SFHA in which flood 
insurance is available is a

[[Page 15275]]

designated loan. Lenders are required to escrow flood insurance 
premiums and fees for any mandatory flood insurance for such loans if 
the lender requires the escrow of taxes, hazard insurance premiums or 
other loan charges for loans secured by residential improved real 
estate.
    Multi-family buildings. 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. The 
preamble to the Regulation indicates that single-family dwellings 
(including mobile homes), two-to-four family dwellings, and multi-
family properties containing five or more residential units are covered 
under the Act's escrow provisions. If the building securing the loan 
meets the Regulation's definition of residential improved real estate, 
and the lender requires the escrow of other items, such as taxes or 
hazard insurance premiums, then the lender is required to also escrow 
premiums and fees for flood insurance.
    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.'' For example, a building having a 
retail store on the ground level with a small upstairs apartment used 
by the store's owner generally is considered a commercial enterprise 
and consequently would not constitute a residential building under the 
definition. If the primary use of a mixed-use property is for 
residential purposes, the Regulation's escrow requirements apply. (See 
Questions 8 and 9 for examples of residential and nonresidential 
buildings.)
    49. When must escrow accounts be established for flood insurance 
purposes?
    Answer: Lenders should look to the definition of ``federally 
related mortgage loan'' contained in the Real Estate Settlement 
Procedures Act (RESPA) to see whether a particular loan is subject to 
Section 10. Generally, for flood insurance purposes, only loans on one-
to-four family dwellings will be subject to the escrow requirements of 
RESPA. (This includes individual units of condominiums. Individual 
units of cooperatives, although covered by Section 10 of RESPA, are not 
insured for flood insurance purposes.)
    Loans on multi-family dwellings with five or more units are not 
covered by RESPA requirements. Pursuant to the Regulation, however, 
lenders must escrow premiums and fees for any required flood insurance 
if the lender requires escrows for other purposes, such as hazard 
insurance or taxes. This requirement pertains to any loan, including 
those subject to RESPA. The preceding paragraph addresses the 
requirement for administering loans covered by RESPA. The preamble to 
the Regulation contains a more detailed discussion of the escrow 
requirements.
    50. Do voluntary escrow accounts established at the request of the 
borrower trigger a requirement for the lender to escrow premiums for 
required flood insurance?
    Answer: No. If escrow accounts for other purposes are established 
at the voluntary request of the borrower, the lender is not required to 
establish escrow accounts for flood insurance premiums. Examiners 
should review the loan policies of the lender and the underlying legal 
obligation between the parties to the loan to determine whether the 
accounts are, in fact, voluntary. For example, when a lender's loan 
policies require borrowers to establish escrow accounts for other 
purposes and the contractual obligation permits the lender to establish 
escrow accounts for those other purposes, the lender will have the 
burden of demonstrating that an existing escrow was made pursuant to a 
voluntary request by the borrower.
    51. Will premiums paid for credit life insurance, disability 
insurance, or similar insurance programs be viewed as escrow accounts 
requiring the escrow of flood insurance premiums?
    Answer: No. Premiums paid for these types of insurance policies 
will not trigger the escrow requirement for flood insurance premiums.
    52. Will escrow-type accounts for commercial loans, secured by 
multi-family residential buildings, trigger the escrow requirement for 
flood insurance premiums?
    Answer: It depends. Escrow-type accounts established in connection 
with the underlying agreement between the buyer and seller, or that 
relate to the commercial venture itself, such as ``interest reserve 
accounts,'' ``compensating balance accounts,'' ``marketing accounts,'' 
and similar accounts are not the type of accounts that constitute 
escrow accounts for the purpose of the Regulation. However, escrow 
accounts established for the protection of the property, such as 
escrows for hazard insurance premiums or local real estate taxes, are 
the types of escrow accounts that trigger the requirement to escrow 
flood insurance premiums.
    53. What requirements for escrow accounts apply to properties 
covered by RCBAPs?
    Answer: RCBAPs are policies purchased by the condominium 
association on behalf of itself and the individual unit owners in the 
condominium. 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 a loan for the purchase of a condominium unit and when 
dues to the condominium association apply to the RCBAP premiums, an 
escrow account is not required. Lenders should exercise due diligence 
with respect to continuing compliance with the insurance requirements 
on the part of the condominium association.

XI. Forced Placement of Flood Insurance

    54. What is the requirement for the forced placement of flood 
insurance under the Act and Regulation?
    Answer: The Act and Regulation require a lender to force place 
flood insurance, if all of the following circumstances occur:
     The lender determines at any time during the life of the 
loan that the property securing the loan is located in an SFHA;
     The community in which the property is located 
participates in the NFIP;
     The lender determines that flood insurance coverage is 
inadequate or does not exist; and
     After required notice, the borrower fails to purchase the 
appropriate amount of coverage.
    A lender must notify the borrower of the required amount of flood 
insurance that must be obtained within 45 days after notification. The 
notice to the borrower must also state that if the borrower does not 
obtain the insurance within the 45-day period, the lender will purchase 
the insurance on behalf of the borrower and may charge the borrower the 
cost of premiums and fees to obtain the coverage. If adequate insurance 
is not obtained within the 45-day period, then the insurance must be 
force placed. Standard Fannie Mae/Freddie Mac documents permit the 
servicer or lender to add those charges to the principal amount of the 
loan.
    FEMA developed the Mortgage Portfolio Protection Program (MPPP) to 
assist lenders in connection with forced placement procedures. FEMA 
published these procedures in the Federal Register on August 29, 1995 
(60 FR 44881). Appendix A of the FEMA publication contains examples of 
notification letters to be used in connection with the MPPP.
    55. Can a servicer force place on behalf of a lender?

[[Page 15276]]

    Answer: Yes. Assuming the statutory prerequisites for forced 
placement are met, and subject to the servicing contract between the 
lender and the servicer, the Act clearly authorizes servicers to force 
place flood insurance on behalf of the lender, following the procedures 
set forth in the Regulation.
    56. When forced placement occurs, what is the amount of insurance 
required to be placed?
    Answer: The amount of flood insurance coverage required is the same 
regardless of how the insurance is placed. (See Section II. Determining 
the appropriate amount of flood insurance required under the Act and 
Regulation.)

XII. Gap Insurance Policies

    57. May a lender rely on a gap or blanket insurance policy to meet 
its obligation to ensure that its designated loans are covered by an 
adequate amount of flood insurance over the life of the loans?
    Answer: Generally no. Gap or blanket insurance typically is not an 
adequate substitute for NFIP insurance. Among other things, a gap or 
blanket policy typically protects only the lender's, not the 
borrower's, interest and, therefore, may not be transferred when a loan 
is sold. The presence of a gap or blanket policy may serve as a 
disincentive for the lender or its servicer to perform its due 
diligence and ensure that there is adequate coverage for a designated 
loan. Finally, a lender that substitutes a gap or blanket policy for an 
individual flood insurance policy would be unable to sell the loan in 
the secondary market, since Fannie Mae and Freddie Mac will not accept 
loans that are covered solely by a gap or blanket policy.
    In limited circumstances, a gap or blanket policy may satisfy a 
lender's flood insurance obligations, when NFIP and private insurance 
is otherwise unavailable. For example, when a designated loan does not 
have sufficient coverage, but the borrower refuses to increase coverage 
under his NFIP insurance, a gap or blanket policy may be appropriate 
when the lender is unable to force-place private insurance for some 
reason. Similarly, when a policy has expired, and the borrower has 
failed to renew coverage, gap or blanket coverage may be adequate 
protection for the lender for the 15-day gap in coverage between the 
end of the 30-day ``grace'' period after the NFIP policy expiration and 
the end of the 45-day force placement notice period. However, the 
lender must force place adequate coverage in a timely manner, as 
required, and may not rely on the gap or blanket coverage on an on-
going basis.

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

    58. Does the SFHDF replace the borrower notification form?
    Answer: No. The notification form is used to notify the borrower(s) 
that he or she is purchasing improved property located in an SFHA. The 
financial regulatory Agencies, in consultation with FEMA, included a 
revised version of the sample borrower notification form in Appendix A 
to the Regulation. The SFHDF is used by the lender to determine whether 
the property securing the loan is located in an SFHA.
    59. Is the lender required to provide the SFHDF to the borrower?
    Answer: No. While it may be a common practice in some areas for 
lenders to provide a copy of the SFHDF to the borrower to give to the 
insurance agent, lenders are neither required nor prohibited from 
providing the borrower with a copy of the form. In the event a lender 
does provide the SFHDF to the borrower, the signature of the borrower 
is not required to acknowledge receipt of the form.
    60. May the SFHDF be used in electronic format?
    Answer: Yes. FEMA, in the final rule adopting the SFHDF 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, however, that the lender must be able 
to reproduce the form upon receiving a document request by its federal 
supervisory agency.
    61. Section 528 of the Act, 42 U.S.C. 4104b(e), permits a lender to 
rely on a previous flood determination using the SFHDF when it is 
increasing, extending, renewing or purchasing 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. May a lender rely on a previous determination 
for a refinancing or assumption of a loan?
    Answer: It depends. 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. A loan refinancing or assumption made by a 
lender different from the one who obtained the original determination 
constitutes a new loan, thereby requiring a new determination.

XIV. Flood Determination Fees

    62. When can lenders or servicers charge the borrower a fee for 
making a determination?
    Answer: There are four instances under the Act and Regulation when 
the borrower can be charged a specific 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 is prompted by a revision or 
updating by FEMA of floodplain areas or flood-risk zones;
     When the determination is prompted by FEMA's publication 
of notices or compendia that affect the area in which the security 
property is located; or
     When the determination results in forced placement of 
insurance.
    Loan or other contractual documents between the parties may also 
permit the imposition of fees.
    63. May charges made for life of loan reviews by flood 
determination firms be passed along to the borrower?
    Answer: Yes. 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. The fee 
charged for the service at loan closing is a composite one for 
conducting both the original and subsequent reviews. Charging a fee for 
the original determination is clearly within the permissible purpose 
envisioned 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 monitoring fee may be charged 
only if the events specified in the answer to Question 62 occur.

XV. Flood Zone Discrepancies

    64. What should a lender do when there is a discrepancy between the 
flood hazard zone designation on the flood

[[Page 15277]]

determination form and the flood insurance policy?
    Answer: Lenders should have a process in place to identify and 
resolve such discrepancies. In attempting to resolve a particular 
discrepancy, a lender should determine whether there may be a 
legitimate reason for a discrepancy.
    The flood determination form designates a flood hazard zone where 
the building or mobile home is actually located based on the latest 
FEMA information; the flood insurance policy designates the flood 
hazard zone for purposes of rating the degree of flood hazard risk. The 
two respective flood hazard zone designations may legitimately differ 
by virtue of the NFIP's ``Grandfather Rule,'' which provides for the 
continued use of a rating on an insured property when the initial flood 
insurance policy was issued prior to changes in the hazard rating for 
the particular flood zone where the property is located. The 
Grandfather Rule allows policyholders who have maintained continuous 
coverage and/or who have built in compliance with the Flood Insurance 
Rate Map to continue to benefit from the prior, more favorable rating 
for particular pieces of improved property. A discrepancy caused as a 
result of the application of the NFIP's Grandfather Rule is reasonable 
and acceptable. In such an event where the lender determines that there 
is a legitimate reason for the discrepancy, it should document its 
findings.
    If the lender is unable to reconcile a discrepancy between the 
flood hazard zone designation on the flood determination form and the 
flood insurance policy and there is no legitimate reason for the 
discrepancy, the lender and borrower may jointly request that FEMA 
review the determination. This procedure is intended to confirm or 
disprove the accuracy of the original determination. The procedures for 
initiating a FEMA review are found at 44 CFR 65.17. This request must 
be submitted within 45 days of the lender's notification to the 
borrower of the requirement to obtain flood insurance.
    65. Can a lender be found in violation of the requirements of 
federal flood insurance regulations if, despite the lender's diligence 
in making the flood hazard determination, notifying the borrower of the 
risk of flood and the need to obtain flood insurance, and requiring 
mandatory flood insurance, there is a discrepancy between the flood 
hazard zone designation on the flood determination form and the flood 
insurance policy?
    Answer: Yes. As noted in Question 64 above, lenders should have a 
process in place to identify and resolve such discrepancies. If a 
lender is able to resolve a discrepancy--either by finding a legitimate 
reason for such discrepancy or by attempting to resolve the discrepancy 
by contacting FEMA to review the determination, then no violation will 
be cited. However, if more than occasional, isolated instances of 
unresolved discrepancies are found in a lender's loan portfolio, the 
Agencies may cite the lender for a violation of the mandatory purchase 
requirements. Failure to resolve such discrepancies could result in the 
lender's collateral not being covered by the amount of legally required 
flood insurance.

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

    66. Does the notice have to be provided to each borrower for a real 
estate related loan?
    Answer: No. In a transaction involving multiple borrowers, the 
lender need only provide the notice 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 will be provided. The notice must be provided to a borrower when 
the lender determines that the property securing the loan is or will be 
located in an SFHA.
    67. Lenders making loans on mobile homes may not always know where 
the home is to be located until just prior to, or sometimes after, the 
time of loan closing. How is the notice requirement applied in these 
situations?
    Answer: When it is not reasonably feasible to give notice before 
the completion of the transaction, the notice requirement can be met by 
lenders in mobile home loan transactions if notice is provided to the 
borrower as soon as practicable after determination that the mobile 
home will be located in an SFHA. Whenever time constraints can be 
anticipated, regulated lenders should use their best efforts to provide 
adequate notice of flood hazards to borrowers at the earliest possible 
time. 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, as indicated in the preamble to the Regulation, 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 appropriate notice must be 
given to the borrower under those provisions. If the borrower fails to 
purchase flood insurance coverage within 45 days after notification, 
the lender must force place the insurance.
    68. When is the lender required to provide notice to the servicer 
of a loan that flood insurance is required?
    Answer: 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.
    69. What will constitute appropriate form of notice to the 
servicer?
    Answer: 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.
    70. In the case of a servicer affiliated with the lender, is it 
necessary to provide the notice?
    Answer: Yes. The Act requires the lender to notify the servicer of 
special flood hazards and the Regulation reflects this requirement. 
Neither contains an exception for affiliates.
    71. How long does the lender have to maintain the record of receipt 
by the borrower of the notice?
    Answer: The record of receipt provided by the borrower must be 
maintained for the time that the lender owns the loan. Lenders may keep 
the record in the form that best suits the lender's business practices. 
Lenders may retain the record electronically, but they must be able to 
retrieve the record within a reasonable time pursuant to a document 
request from their federal supervisory agency.
    72. Can a lender rely on a previous notice if it is less than seven 
years old and it is the same property, same borrower, and same lender?
    Answer: No. The preamble to the Regulation states that subsequent 
transactions by the same lender with respect to the same property will 
be treated as a renewal and will require no new determination. However, 
neither the Regulation nor the preamble addresses waiving the 
requirement to

[[Page 15278]]

provide the notice to the borrower. Therefore, the lender must provide 
a new notice to the borrower, even if a new determination is not 
required.
    73. Is use of the sample form of notice mandatory?
    Answer: No. Although lenders are required to provide a notice to a 
borrower when it makes, increases, extends, or renews a loan secured by 
an improved structure located in an SFHA, use of the sample form of 
notice provided in Appendix A 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 must provide the borrower 
with at least the minimum information required by the Act and 
Regulation. Therefore, lenders should consult the Act and Regulation to 
determine the information needed.

XVII. Mandatory Civil Money Penalties

    74. What violations of the Act can result in a mandatory civil 
money penalty?
    Answer: A pattern or practice of violations of any of the following 
requirements of the Act and their implementing Regulations triggers a 
mandatory civil money penalty:
    (i) Purchase of flood insurance where available (42 U.S.C. 
4012a(b));
    (ii) Escrow of flood insurance premiums (42 U.S.C. 4012a(d));
    (iii) Forced placement of flood insurance (42 U.S.C. 4012a(e));
    (iv) Notice of special flood hazards and the availability of 
Federal disaster relief assistance (42 U.S.C. 4104a(a)); and
    (v) Notice of servicer and any change of servicer (42 U.S.C. 
4101a(b)).
    The Act states that any regulated lending institution found to have 
a pattern or practice of certain violations ``shall be assessed a civil 
penalty'' by its Federal supervisor in an amount not to exceed $350 per 
violation, with a ceiling per institution of $100,000 during any 
calendar year (42 U.S.C. 4012a(f)(5)). This limit has since been raised 
to $385 per violation, and the annual ceiling to $125,000 pursuant to 
the Federal Civil Penalties Inflation Adjustment Act of 1990, as 
amended by the Debt Collection Improvement Act of 1996, 28 U.S.C. 2461 
note. Lenders pay the penalties into the National Flood Mitigation Fund 
held by the Department of the Treasury for the benefit of FEMA.
    75. What constitutes a ``pattern or practice'' of violations for 
which civil money penalties must be imposed under the Act?
    Answer: The Act does not define ``pattern or practice.'' The 
Agencies make a determination of whether one 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 assessing 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 financial institution 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 financial institution's control;
     Whether the conduct appears to be grounded in a written or 
unwritten policy or established practice;
     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 financial institution's operations);
     Whether the number of instances of noncompliance is 
significant relative to the total number of applicable transactions. 
(Depending on the circumstances, however, violations that involve only 
a small percentage of an institution's total activity could constitute 
a pattern or practice);
     Whether a financial institution was cited for violations 
of the Act and Regulation at prior examinations and the steps taken by 
the financial institution to correct the identified deficiencies;
     Whether a financial institution's internal and/or external 
audit process had not identified and addressed deficiencies in its 
flood insurance compliance; and
     Whether the financial institution lacks generally 
effective flood insurance compliance policies and procedures and/or a 
training program for its employees.
    Although these guidelines and 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.
    End of text of the Interagency Questions and Answers Regarding 
Flood Insurance.

    Dated: March 5, 2008.
John C. Dugan,
Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve 
System, March 12, 2008.
Jennifer J. Johnson,
Secretary of the Board.

    Dated at Washington, DC, this 14th day of March, 2008. Federal 
Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.

    Dated: February 5, 2008.

    By the Office of Thrift Supervision.
John M. Reich,
Director.

    Dated: March 13, 2008.
Roland E Smith,
Secretary, Farm Credit Administration Board.

    By the National Credit Union Administration Board, on March 13, 
2008.
Mary F. Rupp,
Secretary of the Board.
 [FR Doc. E8-5787 Filed 3-20-08; 8:45 am]
BILLING CODES 4810-33-P; 6210-01-P; 6714-01-P; 6720-01-P; 6705-01-P; 
7535-01-P