35914 Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 

DEPARTMENT OF THE TREASURY 

Office of the Comptroller of the 

Currency 

[Docket ID OCC 2009–0014] 

FEDERAL RESERVE SYSTEM 

[Docket No. R–1311] 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

RIN 3064–ZA00 

DEPARTMENT OF THE TREASURY 

Office of Thrift Supervision 

[Docket ID OTS–2009–0005] 

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. 

SUMMARY: The OCC, Board, FDIC, OTS, 

FCA, and NCUA (collectively, the 

Agencies) are issuing final revisions to 

the Interagency Questions and Answers 

Regarding Flood Insurance (Interagency 

Questions and Answers). The Agencies 

are also soliciting comments on 

proposed revisions to the Interagency 

Questions and Answers. To help 

financial institutions meet their 

responsibilities under Federal flood 

insurance legislation and to increase 

public understanding of the flood 

insurance regulation, the Agencies are 

finalizing new and revised guidance, as 

well as proposing new and revised 

guidance that address the most 

frequently asked questions about flood 

insurance. The revised Interagency 

Questions and Answers contain staff 

guidance for agency personnel, financial 

institutions, and the public. 

DATES: Effective date: September 21, 

2009. Comment due date: Comments on 

the proposed questions and answers 

must be submitted on or before 

September 21, 2009. 

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 2–3, Washington, DC 20219. 

• Fax: (202) 874–5274. 

• Hand Delivery/Courier: 250 E 

Street, SW., Attn: Communications 

Division, Mail Stop 2–3, Washington, 

DC 20219. 

Instructions: You must include 

‘‘OCC’’ as the agency name and ‘‘Docket 

Number OCC–2009–0014’’ in your 

comment. In general, OCC will enter all 

comments received into the docket and 

publish them on the Regulations.gov 

Web site without change, including any 

business or personal information that 

you provide such as name and address 

information, e-mail addresses, or phone 

numbers. Comments received, including 

attachments and other supporting 

materials, are part of the public record 

and subject to public disclosure. Do not 

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 

Communications Division, 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 in 

advance (202) 874–4700. 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. R–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.Regulation.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/Regulation/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/Regulation/laws/federal/ 

propose.html including any personal 

information provided. 

OTS: You may submit comments, 

identified by OTS–2009–0005, by any of 

the following methods: 

• E-mail: 

regs.comments@ots.treas.gov. Please 

include ID OTS–2009–0005 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– 

2009–0005. 

• Hand Delivery/Courier: Guard’s 

Desk, East Lobby Entrance, 1700 G 


hsrobinson on PROD1PC76 with NOTICES
Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 35915 

Street, NW., from 9 a.m. to 4 p.m. on 

business days, Attention: Regulation 

Comments, Chief Counsel’s Office, 

Attention: OTS–2009–0005. 

Instructions: All submissions received 

must include the agency name and 

docket number for this rulemaking. All 

comments received will be posted 

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/ 

?p=opencomment1. 

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 email 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 

Regulation and Notices.’’ 

• Federal eRulemaking Portal: http:// 

www.Regulation.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 email 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.Regulation.gov. Follow the 

instructions for submitting comments. 

• NCUA Web Site: http:// 

www.ncua.gov/ 

RegulationOpinionsLaws/ 

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/ 

RegulationOpinionsLaws/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; Tracy 

Anderson, Senior Supervisory 

Consumer Financial Services Analyst 

(202) 736–1921; 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, Chief, 

Compliance Policy Section, 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 

Regulation Analyst, (202) 906–6451; 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: Justin M. Anderson, Staff 

Attorney, Office of General Counsel, 

(703) 518–6540; or Pamela Yu, Staff 

Attorney, Office of General Counsel, 

(703) 518–6593, 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 a flood 

insurance regulation 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. The Agencies addressed 

many of these requests in the preamble 

to the joint final rule. The Agencies 

concluded, however, that given the 


hsrobinson on PROD1PC76 with NOTICES
35916 Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 

1The 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). 

number, level of detail, and diversity of 

the requests, guidance addressing the 

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). The 

Federal Financial Institutions 

Examination Council (FFIEC) fulfilled 

that objective through the initial release 

of the Interagency Questions and 

Answers in 1997 (1997 Interagency 

Questions and Answers). 62 FR 39523 

(July 23, 1997). 

In response to issues that had been 

raised, the Agencies, in coordination 

with the Federal Emergency 

Management Agency (FEMA), released 

for public comment proposed revisions 

to the 1997 Interagency Questions and 

Answers. 73 FR 15259 (March 21, 2008) 

(March 2008 Proposed Interagency 

Questions and Answers). Among the 

changes the Agencies proposed were 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 also proposed substantive 

modifications to questions and answers 

previously adopted in the 1997 

Interagency Questions and Answers 

pertaining to construction loans and 

condominiums. Finally, the Agencies 

proposed to revise and reorganize 

certain of the existing questions and 

answers to clarify areas of potential 

misunderstanding and to provide 

clearer guidance to users. 

The Agencies received and 

considered comments from 59 public 

commenters, and are now adopting the 

Interagency Questions and Answers, 

comprising 77 questions and answers, 

revised as appropriate based on 

comments received. The Agencies made 

nonsubstantive revisions to certain 

answers upon further consideration 

either to more directly respond to the 

question asked or to provide additional 

clarity. The Agencies are also proposing 

five new questions and answers for 

public comment. These Interagency 

Questions and Answers supersede the 

1997 Interagency Questions and 

Answers and supplement other 

guidance or interpretations issued by 

the Agencies and FEMA. 

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 flood 

insurance rule.1

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 proposed this new 

section to address specific 

circumstances a lender may encounter 

when deciding whether a loan should 

be a designated loan for purposes of 

flood insurance. The proposed new 

section was intended to replace the 

previous section I in the 1997 

Interagency Questions and Answers 

entitled ‘‘Definitions’’ and to 

incorporate existing questions from 

other sections addressing this topic and 

two new questions. 

Proposed question and answer 1 

addressed the applicability of the 

Regulation to loans made in a 

nonparticipating community. One 

commenter suggested the Agencies 

mention that a lender may choose to 

require private flood insurance per its 

loan agreement with the borrower, for 

buildings or mobile homes located 

outside a community in the National 

Flood Insurance Program (NFIP). The 

Agencies agree that lenders have such 

discretion, but do not believe that the 

question and answer requires further 

elaboration. Another commenter 

suggested the Agencies mention that 

Government Sponsored Enterprises 

(GSEs), such as Fannie Mae and Freddie 

Mac, may not purchase loans made on 

properties in a Special Flood Hazard 

Area (SFHA) in communities that do not 

participate in the NFIP. The Act does 

require GSEs to have procedures in 

place to ensure that purchased loans are 

in compliance with the mandatory 

purchase requirements. The Agencies 

do not believe that further elaboration is 

necessary and adopt the question and 

answer as proposed. 

Proposed question and answer 2 

explained that, upon a FEMA map 

change that results in a building or 

mobile home securing a loan being 

removed from an SFHA, a lender is no 

longer obligated to require mandatory 

flood insurance. However, the lender 

may choose to continue to require flood 

insurance for risk management 

purposes. The Agencies received one 

comment from an industry group 

suggesting the guidance in proposed 

question and answer 2 be amended to 

add language encouraging lenders to 

promptly remove the flood insurance 

requirement from a loan when the 

building or mobile home securing the 

loan is removed from an SFHA by way 

of a map change. The decision to require 

flood insurance in these instances is 

typically made on a case-by-case basis, 

depending on a lender’s risk 

management practices. The Agencies do 

not believe that a blanket statement 

encouraging lenders to remove flood 

insurance in such instances is an 

appropriate position; therefore, the 

question and answer is adopted as 

proposed. 

Proposed question and answer 3 

addressed whether a lender’s purchase 

of a loan, secured by a mobile home or 

building located in an SFHA in which 

flood insurance is available under the 

Act, from another lender triggers any 

requirements under the Regulation. The 

Agencies received several comments 

opposing the reference to safety and 

soundness necessitating a due diligence 

review prior to purchasing the loan. The 

Agencies note that although lenders are 

not required to review loans for flood 

insurance compliance prior to purchase, 

depending upon the circumstances, 

safety and soundness considerations 

may sometimes necessitate such due 

diligence. As such, the Agencies do not 

concur with the commenter’s opposition 

and adopt question and answer 3 as 

proposed. 

The Agencies are adopting a new 

question and answer 4 addressing 

syndicated and participation loans 

following question and answer 3, which 

deals with purchased loans, to 

emphasize the need for similar 

treatment of purchased loans and 

syndicated and participation loans. The 

new question and answer was initially 

proposed as question and answer 40 

under section VIII. Proposed section VIII 

on loan syndications and participations 

and the accompanying question and 

answer are removed and the remaining 

sections are renumbered accordingly. 

Proposed question and answer 40 

explained that, with respect to loan 

syndications and participations, 

individual participating lenders are 

responsible for ensuring compliance 

with flood insurance requirements. The 

proposed answer further explained that 

participating lenders may fulfill this 

obligation by performing upfront due 

diligence to ensure that the lead lender 

or agent has undertaken the necessary 

activities to make sure that appropriate 

flood insurance is obtained and has 

adequate controls to monitor the loan(s) 

on an on-going basis. 

The Agencies received several 

comments from financial institutions 

and industry trade groups opposing the 


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Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 35917 

differences between the guidance in 

proposed question and answer 3 

regarding the purchase of a loan and the 

guidance in proposed question and 

answer 40. A majority of the 

commenters argued that loan 

participations and syndications should 

be treated the same as other loan 

purchases for purposes of flood 

insurance. Several of these commenters 

suggested that the Agencies’ proposed 

treatment of loan syndications and 

participations appeared to be 

inconsistent with proposed question 

and answer 3 pertaining to purchased 

loans. 

In response to these comments, the 

Agencies are revising the relevant 

question and answer to reflect that, as 

with purchased loans, the acquisition by 

a lender of an interest in a loan either 

by participation or syndication, after 

that loan has been made, does not 

trigger the requirements of the Act and 

Regulation, such as making a new flood 

determination or requiring a borrower to 

purchase flood insurance. Nonetheless, 

as with purchased loans, depending 

upon the circumstances, safety and 

soundness considerations may 

sometimes necessitate that the lender 

undertake due diligence to protect itself 

against the risk of flood or other types 

of loss. 

If a regulated lender is involved in the 

making of the underlying loan, but does 

not purchase a loan participation or 

syndication after the loan has been 

made, the flood requirements of the Act 

and Regulation would apply to the 

lender. The Agencies believe that 

lenders who pool or contribute funds 

that will be advanced simultaneously to 

a borrower as a loan secured by 

improved real estate would all be 

considered to have ‘‘made’’ the loan 

under the Act and Regulation. In such 

circumstances, each participating lender 

in a loan participation or syndication is 

responsible for compliance with the Act 

and Regulation. This does not mean that 

each participating lender must 

separately obtain a flood determination 

or monitor whether flood insurance 

premiums are paid. Rather, it means 

that each participating lender subject to 

Federal flood insurance requirements 

should perform upfront due diligence to 

ensure both that the lead lender or agent 

has undertaken the necessary activities 

to make sure that the borrower obtains 

appropriate flood insurance and that the 

lead lender or agent has adequate 

controls to monitor the loan(s) on an ongoing basis for compliance with the 

flood insurance requirements. The 

participating lender should require as a 

condition to the loan-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. A written 

representation provided by the lead 

lender or syndication agent certifying 

that the borrower has obtained 

appropriate flood insurance would be 

sufficient. Alternatively, the lead lender 

or syndication agent could provide 

participants and syndication lenders 

with a copy of the declaration page or 

other proof of insurance. The Agencies 

have incorporated minor revisions to 

the question and answer to clarify this 

guidance. 

Proposed question and answer 4 (final 

question and answer 5) addressed the 

applicability of the Regulation to loans 

being restructured because of the 

borrower’s default on the original loan. 

In light of the many loan modifications 

being made, the Agencies have revised 

the question to address loan 

modifications as well as loans being 

restructured because of the borrower’s 

default on the original loan. The 

guidance provided in the answer is 

applicable to either situation. The 

Agencies received one comment asking 

whether capitalization of a loan in the 

event of a default would constitute an 

increase in the loan, triggering the 

requirements of the Regulation. If the 

capitalization results in an increase in 

the outstanding principal balance of the 

loan, then the requirements of the 

Regulation will apply. Conversely, a 

loan restructure that does not result in 

an increase in the amount to the loan (or 

an extension of the term of the loan) 

will not trigger the requirements of the 

Regulation. The Agencies do not believe 

further elaboration addressing this 

comment is necessary. The Agencies 

adopt the question and answer as 

proposed with the changes made to 

include loan modifications, as well as 

restructuring of loans. 

Proposed question and answer 5 (final 

question and answer 6), addressed 

whether table funded loans are treated 

as new loan originations. The Agencies 

did not receive any substantive 

comments and adopt the question and 

answer as proposed. 

Proposed question and answer 6 (final 

question and answer 7) explained that a 

lender is not required to perform a 

review of its existing loan portfolio for 

purposes of the Act or Regulation; 

however, sound risk management 

practices may lead a lender to conduct 

periodic reviews. The Agencies received 

several comments opposing the 

reference to safety and soundness 

necessitating a due diligence review of 

a lender’s portfolio. Although lenders 

are not required to review existing loan 

portfolios for flood insurance 

compliance under the Act or Regulation, 

the Agencies believe safety and 

soundness considerations may 

sometimes necessitate such due 

diligence and therefore adopt the 

question and answer as proposed. 

Section II. Determining the Appropriate 

Amount of Flood Insurance Required 

Under the Act and Regulation 

The Agencies proposed this section to 

provide guidance on how lenders 

should determine the appropriate 

amount of flood insurance to require the 

borrower to purchase. The Agencies 

received numerous comments on this 

proposed section. As a result of these 

comments, the Agencies have made 

both significant revisions to proposed 

questions and answers as well as 

proposed new questions and answers 

submitted for comment to provide 

greater clarity on this important area. 

The proposed new questions and 

answers are addressed in the 

SUPPLEMENTARY INFORMATION

immediately following the 

Redesignation Table. 

Proposed question and answer 7 (final 

question and answer 8) addressed what 

is meant by the ‘‘maximum limit of 

coverage available for the particular 

type of property under the Act.’’ The 

first part of the question and answer 

discussed the maximum caps on 

insurance available under the Act. The 

Agencies did not receive any 

substantive comments on this part of the 

question and answer and adopt it as 

proposed in final question and answer 

8. The second part of the question and 

answer discussed the maximum limits 

on the coverage in the context of the 

regulation that 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,’’ commonly 

referred to as insurable value. In 

response to the numerous comments 

received on the insurable value part of 

the proposed question and answer, the 

Agencies are proposing new questions 

and answers 9 and 10 for public 

comment. The Agencies otherwise 

adopt question and answer 7 (final 

question and answer 8) as proposed. 

Proposed questions and answers 8 

and 9 (final questions and answers 11 

and 12 respectively) more fully defined 

the terms ‘‘residential building’’ and 

‘‘nonresidential building.’’ One 

commenter suggested that the Agencies 

define residential and nonresidential 

buildings based on the percentage of the 

building used in a certain way to 

account for mixed use buildings. 


hsrobinson on PROD1PC76 with NOTICES
35918 Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 

Proposed question and answer 8 (final 

question and answer 11) provides that a 

residential building may have incidental 

nonresidential use as long as such 

incidental use is limited to less than 25 

percent of the square footage of the 

building. A mixed use residential 

building where greater than 25 percent 

of the square footage of the building is 

devoted to incidental nonresidential use 

will be considered a nonresidential 

building. Proposed question and answer 

9 (final question and answer 12) 

provides that a mixed use 

nonresidential building with less than 

75 percent of the square footage of the 

building used for residential purposes 

will still be considered nonresidential. 

The commenter also asked whether a 

farm house is residential or 

nonresidential. If the farmhouse is used 

as a dwelling, then it will be considered 

residential. 

Another commenter asked whether a 

lender is obligated to determine the 

amount of nonresidential use in a 

residential building and whether there 

are any record maintenance 

requirements. Typically, whether a 

building is nonresidential or residential 

is of most importance in determining 

the maximum limits of a general 

property form NFIP policy. A residential 

building covered under a general 

property form will have a maximum 

coverage limit of $250,000, while a 

nonresidential building covered under 

the same type of policy will have a 

maximum coverage limit of $500,000. 

Therefore, the lender needs to know 

whether the building is considered 

residential or nonresidential when it 

determines the amount of flood 

insurance coverage to require. Finally, a 

commenter asked whether a designated 

loan, secured by a residential building 

and a detached nonresidential building, 

such as a garage, would require separate 

nonresidential coverage on the detached 

nonresidential building. If the 

residential building is a one-to-four 

family dwelling that is covered by a 

dwelling form NFIP policy, that policy 

will cover a detached garage at the same 

location as the dwelling, up to 10 

percent of the limit of liability on the 

dwelling, so long as the detached garage 

is not used or held for use as a 

residence, a business or for farming 

purposes. In other cases, the lender 

must require the borrower to obtain 

coverage for each building securing the 

loan. The Agencies believe no further 

clarification is necessary and adopt the 

questions and answers as proposed. 

Proposed question and answer 10 

(final question and answer 13) 

illustrated how to apply the ‘‘maximum 

limit of coverage available for the 

particular type of building under the 

Act.’’ The majority of the comments 

received are addressed in the discussion 

below pertaining to new proposed 

questions and answers 9 and 10. The 

Agencies adopt question and answer 10 

(final question and answer 13) as 

proposed. 

Proposed questions and answers 11 

and 12 (final questions and answers 14 

and 15 respectively) were originally 

adopted in the 1997 Interagency 

Questions and Answers. The changes 

proposed by the Agencies in March 

2008 were designed to provide greater 

clarity with no intended change in 

substance and meaning. 

Four commenters addressed proposed 

question and answer 11, which dealt 

with flood insurance requirements 

where a designated loan is secured by 

more than one building. One commenter 

supported the proposed question and 

answer, but suggested that where the 

collateral is worthless and would not be 

replaced, lenders should not have to 

require the borrower to obtain flood 

insurance. The Agencies are proposing 

questions 9 and 10 for public comment 

to address the issue of determining 

insurable value for certain 

nonresidential buildings that include 

certain low-value nonresidential 

buildings. Another commenter asked 

whether a lender would be liable if the 

lender allocates the overall required 

flood insurance over several buildings 

and one building suffers flood damage 

and is underinsured. In such a 

circumstance, the lender would have 

complied with the Act and the 

Regulation. Of course, the lender has the 

option to require the borrower to obtain 

more flood insurance coverage than the 

minimum amount required if the lender 

believes there is a high risk of flood loss 

(see final question and answer 16). Two 

commenters suggested that the Agencies 

should explain how the lender should 

allocate the required amount of coverage 

for multiple buildings of different 

values that secure a single loan. One of 

these commenters suggested that 

allocation could be made by a square 

footage method. The Agencies agree that 

this is one reasonable method that could 

be used. Other methods may include a 

value-based method, splitting the total 

coverage pro rata based on replacement 

cost value, or a functionality method, 

requiring a higher proportional share of 

coverage to those buildings that are 

most important to the ongoing operation 

of the borrower. The apportionment of 

the required coverage in any particular 

situation should reflect consideration by 

both the lender and borrower of their 

needs and risks. The Agencies believe 

no further clarification is necessary but 

revised the answer to address the 

technical issue that single-family 

dwellings are considered residential if 

less than 50 percent of the square 

footage is used for an incidental 

nonresidential purpose. 

Twenty commenters addressed 

proposed question and answer 12, 

which addressed the flood insurance 

requirements where the insurable value 

of a building securing a designated loan 

is less than the outstanding principal 

balance of the loan. The comments 

generally raised concerns about the lack 

of a definition of ‘‘insurable value,’’ 

discussed above in connection with 

proposed question and answer 7. As 

previously mentioned, the Agencies are 

proposing new questions and answers 9 

and 10 for public comment to address 

the issue of insurable value. One 

commenter also asked whether the 

Agencies will require a lender to review 

flood insurance policies annually at 

renewal and increase coverage as the 

replacement cost value increases. The 

Agencies typically will not require such 

a review. However, if at any time during 

the term of the loan, the lender 

determines that flood insurance 

coverage is insufficient, the lender must 

comply with the force placement 

procedures in the Regulation. The 

Agencies believe no further clarification 

is necessary and adopt the question and 

answer as proposed. 

Proposed question and answer 13 

(final question and answer 16) clarified 

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. 

Two commenters asked the Agencies to 

specify that lenders may never require 

coverage that exceeds the insurable 

value of a building. As stated in the 

question and answer, lenders should 

avoid creating situations where a 

building is over-insured. Further, the 

Agencies state in final question and 

answer 8 that ‘‘an NFIP policy will not 

cover an amount exceeding the 

insurable value of the structure.’’ 

Another commenter asked what 

penalties, if any, would be imposed on 

a lender that requires over insurance. 

The Agencies note that there are no 

penalties for over insurance under the 

Act and Regulation. However, there may 

be penalties for over-insurance under 

applicable State law. Finally, a 

commenter suggested that flood 

insurance should not be required where 

the collateral building is worthless and 

would not be replaced. The Agencies 

are proposing questions 9 and 10 for 

public comment to address the issue of 


hsrobinson on PROD1PC76 with NOTICES
Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 35919 

determining insurable value for certain 

nonresidential buildings that include 

certain low value nonresidential 

buildings. Other than a nonsubstantive 

revision to provide additional clarity, 

the Agencies adopt the question and 

answer as proposed. 

Proposed question and answer 14 

(final question and answer 17) 

addressed lender considerations 

regarding the amount of the deductible 

on a flood insurance policy purchased 

by a borrower. Generally, the proposed 

guidance advised a lender to 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. The 

Agencies received nine comments 

addressing proposed question and 

answer 14. Four commenters suggested 

that borrowers with low-value buildings 

should be able to choose a deductible 

that exceeds the value of the building 

with a result that flood insurance would 

not be required. The Act and Regulation 

require flood insurance on all buildings 

at the lesser of the outstanding principal 

balance of the loan or the maximum 

amount available under the Act. A high 

deductible does not provide a de facto 

waiver of this requirement. One 

commenter suggested that the Agencies’ 

position regarding not allowing a de 

facto waiver of the flood insurance 

requirement on low-value buildings 

based on the deductible amount 

contradicts the NFIP’s policy of 

following the standard practice in the 

financial industry of allowing lenders to 

dictate the amount of the deductible 

according to the authority found in the 

loan agreement. Other commenters 

stated that a lender should not be 

required to determine deductibles on a 

case-by-case basis but rather through 

adoption of credit guidelines that apply 

across-the-board to all loans. In general, 

the Agencies agree that lenders may 

adopt credit guidelines that apply to 

most loans. However, such guidelines 

cannot work to waive the flood 

insurance requirements of the Act and 

Regulation. Finally, one commenter 

suggested that the Agencies should 

mention that the GSEs may have 

maximum allowable deductibles. The 

Agencies decline to revise the question 

and answer based on this comment 

because information about GSE 

requirements is outside the scope of this 

guidance. The Agencies adopt the 

question and answer as proposed. 

Section III. Exemptions From the 

Mandatory Flood Insurance 

Requirements 

This section contains only one 

question and answer, which describes 

the statutory exemptions from the 

mandatory flood insurance 

requirements. Proposed question and 

answer 15 (final question and answer 

18) was revised from the 1997 

Interagency Questions and Answers to 

provide greater clarity, with no intended 

change in substance or meaning. The 

Agencies did not receive any 

substantive comments and adopt the 

question and answer as proposed. 

Section IV. Flood Insurance 

Requirements for Construction Loans 

The Agencies proposed this new 

section to clarify the requirements 

regarding the mandatory purchase of 

flood insurance for construction loans to 

erect buildings that will be located in an 

SFHA in light of concerns raised by 

some regulated lenders regarding 

borrowers’ difficulties in obtaining flood 

insurance for construction loans at the 

time of loan origination. The Agencies 

received a number of comments on the 

proposed questions and answers 

concerning construction loans. Several 

commenters asked for guidance in 

determining the appropriate amount of 

flood insurance for a loan secured by a 

building during the course of 

construction. This guidance is provided 

in the discussion of the proposed new 

questions and answers 9 and 10 for 

public comment that addresses 

insurable value. 

Proposed question and answer 16 

(final question and answer 19) revises 

existing guidance to limit its scope and 

explained that a loan secured only by 

land located in an SFHA is not a 

designated loan that would require 

flood insurance coverage. The Agencies 

received one comment addressing this 

question and answer from a financial 

institution commenter that asked 

whether a loan secured by developed 

land without a structure on it, which, 

during the course of the loan, will not 

have any structure on it, necessitates a 

flood determination as it is considered 

residential real estate. The Agencies 

believe that the commenter has raised a 

valid point and have revised the 

proposed question and answer by 

removing the reference to ‘‘raw’’ land. 

The revised question and answer 

discusses loans secured only by ‘‘land.’’ 

Since a designated loan is a loan 

secured by a building or mobile home 

that is located or to be located in an 

SFHA, any loan secured only by land 

that is located in an SFHA is not a 

designated loan since it is not secured 

by a building or mobile home. In the 

case of this particular comment, the 

loan is not secured by either a building 

or mobile home; therefore, it is not a 

designated loan. The Agencies adopt the 

question and answer as proposed with 

the modification described above. 

Proposed question and answer 17 

(final question and answer 20) 

addressed 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 proposed answer 

provided 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. 

One financial institution commenter 

asked whether the lender/servicer must 

provide continuing flood insurance 

coverage where a structure in an SFHA 

covered by flood insurance is 

considered a total loss/demolished and 

only the land remains and the structure 

is to be rebuilt. The Agencies believe 

that if there is remaining insurable value 

in the building, flood insurance should 

continue to be maintained. If the 

building has no remaining insurable 

value, then flood insurance is not 

required. Under these circumstances, 

the total loss situation is akin to a loan 

secured only by land located in an 

SFHA, which is addressed in final 

question and answer 19 discussed 

above, and is not a designated loan that 

would require flood insurance coverage. 

If the building is a total loss/demolished 

and has no remaining insurable value, 

but a new structure is going to be built 

in its place, it should be treated like a 

new construction loan as discussed 

below in proposed question and answer 

19 (final question and answer 22). To 

the extent that any new structure that 

will be built is, or will be, located in an 

SFHA, then the lender must provide 

notice to the borrower, and must 

comply with the mandatory purchase 

requirements as outlined in proposed 

questions and answers 18 and 19 (final 

questions and answers 21 and 22). The 

lender can, of course, elect to maintain 

the flood insurance that had previously 

been in place on the prior demolished 

structure to avoid having to monitor the 

reconstruction as discussed below. 

Another financial institution 

commenter asked whether a building in 

the course of construction that will be 

a condominium building when finished 

can be insured under a Residential 

Building Condominium Association 

Policy (RCBAP) during the construction 

period. The RCBAP can be sold to a 

condominium association only. 

Therefore, unless the building is under 


hsrobinson on PROD1PC76 with NOTICES
35920 Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 

2FEMA, Mandatory Purchase of Flood Insurance 

Guidelines (September 2007) at GLS—1–2. FEMA 

has made this booklet available 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. 

3FEMA, Mandatory Purchase of Flood Insurance 

Guidelines, at 30–31. 

4FEMA, Mandatory Purchase of Flood Insurance 

Guidelines, at 30. 

the condominium form of ownership 

with a condominium association formed 

at the time of construction, no RCBAP 

can be written. If there is no 

condominium association, the lender 

should require the builder/developer to 

obtain flood insurance under the NFIP 

General Property form or private 

equivalent. If the building will be a 

residential condominium, then the 

lender must require flood insurance to 

meet the statutory requirements, up to 

the $250,000 flood insurance limit 

under the NFIP for an ‘‘other 

residential’’ building. 

Finally, a loan servicer commenter 

asked the Agencies to clarify when flood 

insurance coverage takes effect when a 

lender opts to require flood insurance at 

origination of a construction loan. This 

comment is addressed in final question 

and answer 21. The Agencies adopt the 

final question and answer 20 as 

proposed. 

Proposed question and answer 18 

(final question and answer 21) 

explained that, generally, a building in 

the course of construction is eligible for 

coverage under an NFIP policy, and that 

coverage may be purchased prior to the 

start of construction. One financial 

institution commenter asked whether 

the definition of a ‘‘building’’ in the 

proposed question and answer has the 

same meaning as FEMA’s definition in 

its Mandatory Purchase of Flood 

Insurance Guidelines.2 The Agencies 

believe that the definitions of 

‘‘building,’’ as well as the definition of 

‘‘building in the course of 

construction,’’ used by FEMA are fully 

consistent with the definition in the 

Regulation. The Agencies adopt the 

question and answer as proposed with 

only minor clarifications to the citation 

of FEMA’s Flood Insurance Manual. 

Proposed question and answer 19 

(final question and answer 22), 

addressed when flood insurance must 

be purchased for buildings under the 

course of construction. The answer 

provided lenders with flexibility 

regarding the timing of the mandatory 

purchase requirement for construction 

loans in response to concerns raised by 

lenders that borrowers have 

encountered difficulties in obtaining 

flood insurance for construction loans at 

the time of origination. Specifically, the 

Agencies proposed to permit 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 

choosing this option, 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. 

Moreover, lenders must still ensure that 

the required flood determination is 

completed at origination and that notice 

is given to borrowers if the property is 

located in an SFHA. 

A financial institution and a financial 

institution membership organization 

commented that requiring lenders to 

have monitoring procedures in place to 

ensure that the borrower obtains flood 

insurance as soon as the foundation is 

complete or the elevation certificate 

issued is too burdensome. The Agencies 

note that if a lender determines that this 

option is too burdensome they may 

continue the practice of requiring flood 

insurance at origination. The monitoring 

procedures are only necessary in the 

event that lenders choose to require 

flood insurance at the time the 

foundation pad is completed and/or the 

elevation certificate is obtained. 

Therefore, the Agencies believe that no 

revision to the proposed question and 

answer is necessary. 

Several commenters, including four 

financial institutions and a law firm that 

advises financial institutions, asked the 

Agencies for clarification regarding the 

‘‘timing’’ options available for 

determining whether flood insurance is 

required for buildings in the course of 

construction, that is, the foundation 

alone and/or the issuance of an 

elevation certificate. Either the pouring 

of the foundation slab or the issuance of 

an elevation certificate provides 

sufficient information for a lender to 

determine whether the collateral 

building is located in an SFHA for 

which flood insurance is required. The 

Agencies believe that no further 

elaboration is necessary to address this 

issue in the question and answer. 

Finally, one individual commenter 

indicated that it is unclear whether an 

NFIP policy can be purchased before 

two walls and a roof have been erected. 

FEMA guidance provides that buildings 

yet to be walled and roofed are generally 

eligible for coverage after an elevation 

certificate is obtained or a foundation 

slab is poured, except where either 

construction is halted for more than 90 

days or if the lowest floor used for rating 

purposes is below Base Flood Elevation 

(BFE). If the lowest floor is under BFE, 

then the building must be walled and 

roofed before flood insurance coverage 

is available.3 The Agencies believe that 

the commenter has raised a valid point 

and have clarified the proposed 

question and answer accordingly. The 

Agencies otherwise adopt the question 

and answer as proposed. 

The Agencies also proposed new 

question and answer 20 (final question 

and answer 23) 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 

provided that the 30-day waiting period 

would not apply in such cases.4 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. The Agencies did not receive 

any substantive comments and adopt 

the question and answer as proposed. 

Section V. Flood Insurance 

Requirements for Nonresidential 

Buildings 

The Agencies proposed this new 

section 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, and loans secured by 

multiple buildings where some are 

located in an SFHA and others are not. 

Six commenters suggested that this 

section should be broadened to include 

all nonresidential buildings, including 

multiple nonresidential buildings over a 

large geographic area, not just those 

related to agriculture. The Agencies 

concur and have changed the title to 

section V to read ‘‘Flood Insurance 

Requirements for Nonresidential 

Buildings’’ and modified proposed 

questions and answers 21 and 22 (final 

question and answers 24 and 25) 

accordingly. Several commenters asked 

for guidance in determining the 

appropriate amount of flood insurance 

for loans secured by a nonresidential 

building, particularly for nonresidential 

buildings of low to no value. The 

Agencies are proposing questions 9 and 

10 for public comment to address the 

issue of determining insurable value for 

certain nonresidential buildings that 

include certain low value nonresidential 

buildings. 


hsrobinson on PROD1PC76 with NOTICES
Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 35921 

5FEMA, Flood Insurance Manual, GR 2. 

6FEMA Memorandum for Write Your Own 

(WYO) Principal Coordinators and NFIP Servicing 

Agent (Apr. 18, 2004) (subject: Oct. 1, 2007 Program 

changes). 

Proposed question and answer 21 

(final question and answer 24) 

explained that all buildings taken as 

security for a loan and located in an 

SFHA require flood insurance. The 

question and answer also explained that 

lenders may consider ‘‘carving out’’ a 

building from the security for a loan; 

however, it may be inappropriate for 

credit risk management reasons to do so. 

One commenter questioned whether 

lenders need to require flood insurance 

when the collateral is only a building 

(in the commenter’s case, a grain bin) 

and not the real property where the 

building is located. Further, the 

commenter stated that they only use a 

UCC fixture filing to secure the 

building. Flood insurance is required for 

any building taken as collateral when 

that building is located in an SFHA in 

a participating community. This 

requirement is not predicated on 

whether the underlying real estate is 

also included in the loan collateral or 

the method used by the lender to secure 

its collateral. FEMA answered the 

question of whether a grain bin is a 

building by specifically including a 

grain bin in its definition of a 

nonresidential building, therefore flood 

insurance is required.5

A commenter stated that if the value 

of a building is worthless or nearly zero 

then flood insurance should not be 

required. The Act requires all buildings 

located in an SFHA and in a 

participating community to have flood 

insurance with only two exemptions— 

when a building is State-owned and 

covered by self-insurance satisfactory to 

the Director of FEMA; and when the 

original loan balance is $5,000 or less 

and the original repayment term is one 

year or less. All other buildings are 

required to be covered by flood 

insurance. The Agencies are proposing 

questions 9 and 10 for public comment 

to address the issue of determining 

insurable value for certain 

nonresidential buildings that include 

certain low value nonresidential 

buildings. 

Another commenter suggested that in 

determining ‘‘insurable value,’’ 

institutions should be permitted to 

place good faith reliance on insurance 

agents who are better equipped to make 

these determinations. Federally 

regulated lenders may solicit assistance 

when evaluating insurable value and 

this assistance could include an 

insurance professional. However, it is 

ultimately the lender’s responsibility to 

determine the insurable value of a 

building and, as such, it must concur 

with the determination. The same 

commenter also asked the Agencies to 

explain the rationale for treating hazard 

insurance and flood insurance 

differently. The reason for treating flood 

insurance and hazard insurance 

differently is that flood insurance 

includes coverage for the repair or 

replacement cost of the foundation and 

supporting structures whereas hazard 

insurance typically does not include 

coverage of the foundation. Therefore, 

the calculation of insurable value for 

flood insurance includes these repair or 

replacement costs while the calculation 

of insurable value for hazard insurance 

does not. 

Lastly, a commenter suggested that 

the Agencies include additional 

questions and answers about other 

problems that arise between lenders and 

insurance companies, such as insurance 

companies requiring higher amounts of 

coverage than the appraised value of a 

structure of minimal value. The amount 

of flood insurance required by the Act 

is the lesser of the outstanding principal 

balance of the loan, the maximum 

allowed under the Act, or the insurable 

value. The appraised market value of 

the structure is not a factor in 

determining the amount of required 

insurance. The Agencies adopt question 

and answer 21 with the changes made 

to include all nonresidential buildings 

and not just agricultural buildings. 

Proposed question and answer 22 

(final question and answer 25) 

addressed the flood insurance 

requirements for multiple agricultural 

buildings located throughout a large 

geographic area, some in an SFHA and 

some not. One commenter suggested 

that the Agencies modify the first 

sentence in the proposed answer to refer 

to ‘‘improved property’’ rather than 

‘‘property.’’ The Agencies concur with 

this recommendation and have inserted 

‘‘improved real estate’’ in the place of 

the term ‘‘property’’ throughout the 

answer. The term ‘‘improved real 

estate,’’ instead of the suggested 

‘‘improved property,’’ was added 

because it is the term used in the Act. 

A commenter asked the Agencies to 

address the situation where an 

insurance company requires flood 

insurance on all buildings on the 

property, not just those inside an SFHA 

and another commenter asked the 

Agencies to mention that a lender can 

require flood insurance on buildings not 

located in an SFHA. The Act does not 

prohibit a lender from requiring more 

flood insurance than the minimum 

required by the Act; a lender may have 

legitimate business reasons for requiring 

more flood insurance than that required 

by the Act and neither the Act nor the 

Regulation prohibits this additional 

flood insurance. Finally, a commenter 

suggested that the Agencies modify the 

second to last sentence in the answer to 

refer to ‘‘improved property securing the 

loan’’ rather than ‘‘designated loan.’’ 

The Agencies have deleted this sentence 

entirely as it is not needed to answer the 

question. The Agencies adopt the 

question and answer with the 

modifications discussed above. 

Section VI. Flood Insurance 

Requirements for Residential 

Condominiums 

The Agencies proposed this new 

section to address flood insurance 

requirements for residential 

condominiums. The proposed section 

contained two previously existing 

questions and answers, which were 

modified and expanded, and five new 

questions and answers. The Agencies 

received numerous comments 

addressing this section. 

A number of commenters addressed 

the 2007 FEMA requirement that 

insurance companies providing a 

Residential Building Association Policy 

(RCBAP) include the replacement cost 

value of the condominium building and 

the number of units in the building on 

the declaration page.6 Two commenters 

suggested that the Agencies should 

enforce this requirement over all 

insurance companies. The Agencies 

strongly support this FEMA 

requirement; however, the Agencies 

may only enforce the requirement 

against those entities over which the 

Agencies have jurisdiction. 

Proposed question and answer 23 

(final question and answer 26) 

explained that residential 

condominiums were subject to the 

statutory and regulatory requirements 

for flood insurance. The Agencies 

received only one comment addressing 

this question and answer, which was in 

agreement with the guidance. The 

Agencies adopt the question and answer 

as proposed. 

One commenter suggested that an 

RCBAP should be described in a 

separate question and answer in this 

section. Although the RCBAP was 

described within the proposed 

questions and answers, the Agencies 

have compiled the information from 

proposed questions and answers 24 and 

25 into new question and answer 27 to 

specifically describe an RCBAP, and 

renumbered the remaining questions 

and answers accordingly. 

Proposed question and answer 24 

(final question and answer 28) 


hsrobinson on PROD1PC76 with NOTICES
35922 Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 

7See FEMA, Mandatory Purchase of Flood 

Insurance Guidelines at 48–49; FEMA Flood 

Insurance Manual at p. POL 8 (FEMA’s Flood 

Insurance Manual is updated every six months). 

discussed the amount of flood insurance 

that a lender must require with respect 

to residential condominium units to 

comply with the mandatory purchase 

requirements under the Act and the 

Regulation. The Agencies received a 

number of comments addressing various 

aspects of this question and answer. 

Several commenters suggested that 

lenders should be able to rely on the 

replacement cost value and number of 

units provided on the declaration page 

of the RCBAP in determining the 

insurable value of a condominium unit. 

The Agencies generally agree that a 

lender may rely on the replacement cost 

value and number of units provided on 

the declaration page unless it has reason 

to believe that such amounts conflict 

with other available information. If 

there is a conflict, the lender should 

notify the borrower of the facts that 

cause the lender to believe there is a 

conflict. If the lender believes that the 

borrower is underinsured, it should 

require the purchase of a Dwelling 

Policy for supplemental coverage. The 

Agencies have modified the question 

and answer accordingly. 

Several commenters asked about other 

types of valuation information that may 

be appropriate to use in determining the 

insurable value of a condominium unit 

when the insurance provider does not 

include the replacement cost value and 

number of units on the RCBAP’s 

declaration page. While the Agencies 

believe that the question and answer 

does not require further elaboration on 

this point, the Agencies note that 

consistent with safe and sound lending 

practices, lenders should maintain 

information about the value of their 

collateral. Even if the insurance 

provider does not include the 

replacement cost value of the 

condominium building and the total 

number of units on the declaration page, 

lenders typically have other sources of 

valuation information, including costapproach appraisals, automated 

valuation systems, and tax assessments. 

Further, many lenders’ policies and 

procedures include obtaining specific 

documentation related to condominium 

collateral that may provide information 

about the condominium’s insurable 

value, including copies of condominium 

master insurance policies or the 

declaration pages of such policies. The 

Agencies generally will not criticize a 

lender that, in good faith, has used a 

reasonable method to determine the 

insurable value. 

Several commenters agreed that 

RCBAP coverage written at replacement 

cost value, assuming that value is less 

than the outstanding principal amount 

of the loan or the maximum available 

under the Act, is the appropriate 

insurable value for a condominium 

building and that an RCBAP with that 

coverage would meet the mandatory 

purchase requirement for an individual 

unit borrower. The 1997 Interagency 

Questions and Answers stated that 

RCBAP coverage of 80 percent of 

replacement cost value was sufficient to 

meet the mandatory purchase 

requirement. Because of this change in 

policy, commenters urged the Agencies 

to ensure that the new guidance will 

apply only prospectively. Consistent 

with the stated intention in the March 

2008 Proposed Interagency Questions 

and Answers, the Agencies intend that 

this guidance will apply to any loan that 

is made, increased, extended, or 

renewed on or after the effective date of 

these Interagency Questions and 

Answers. 

The Agencies had previously 

indicated in the SUPPLEMENTARY

INFORMATION to the March 2008 

Proposed Interagency Questions and 

Answers that the new guidance would 

apply to a loan made prior to the 

effective date of this guidance, but only 

as of the first flood insurance policy 

renewal following the effective date of 

the guidance. Three commenters asked 

the Agencies to reconsider this position. 

The commenters asserted that lenders 

making loans secured by individual 

condominium units generally do not 

receive RCBAP renewal notifications 

from the insurance providers; therefore, 

the lender may not be in a position to 

make a determination at the first RCBAP 

renewal period following the effective 

date of this guidance. 

Lenders are required to ensure that 

designated loans are covered by flood 

insurance for their term. However, the 

Agencies recognize that lenders made 

loans and required coverage amounts in 

reliance on the previous guidance. 

Therefore, the Agencies have agreed that 

the revised guidance will not apply to 

any loan made prior to the effective date 

of this guidance unless a trigger event 

occurs in connection with the loan (that 

is, the loan is refinanced, extended, 

increased, or renewed). Because the 

Agencies provided supervisory 

guidance that stated that an RCBAP 

with coverage at 80 percent of 

replacement cost value was sufficient, 

any loan for a condominium unit 

relying on an RCBAP with coverage that 

complied with that guidance was in 

compliance at the time it was made. 

Absent a new trigger event, the 

Agencies, therefore, will not require 

lenders to ensure that RCBAP coverage 

is increased to 100 percent on 

previously compliant loans made prior 

to the effective date of this new 

guidance. The Agencies have revised 

the proposed question and answer 

accordingly. The Agencies anticipate 

that the universe of loans affected by 

this policy will be relatively small and 

diminishing due to refinancing and 

other loan prepayments that typically 

occur in the first five years of a home 

mortgage. 

Proposed question and answer 25 

(final question and answer 29) 

addressed what a lender that makes a 

loan on an individual condominium 

unit must do if there is no RCBAP 

coverage. Three commenters addressed 

this question and answer. One 

commenter suggested that, in the 

example, the Agencies should clarify 

that the amount of insurance required is 

the ‘‘minimum amount’’ because that 

value ($175,000) is based on the 

principal amount of the loan, which is 

less than either the insurable value of 

the unit ($200,000) or the maximum 

amount available in a dwelling policy 

($250,000). In response to this comment, 

the Agencies have added the qualifier 

‘‘at least’’ before the amount of $175,000 

to clarify that $175,000 is the minimum 

amount of insurance that must be 

required. As in other situations, a lender 

may require additional coverage. 

Another commenter asked whether a 

unit owner’s dwelling policy will 

respond at all if there is no RCBAP on 

the condominium building. Although 

this is a general insurance question that 

is outside the Agencies’ purview, FEMA 

guidance provides that, when there is 

no RCBAP coverage on the 

condominium building, the unit 

owner’s dwelling policy will respond to 

losses to improvements owned by the 

insured and to assessments charged by 

the condominium association, up to the 

building coverage limits of the dwelling 

policy purchased.7 Finally, one other 

commenter suggested that, when a 

condominium association refuses to 

purchase an RCBAP, the lender should 

refuse to make a loan to a unit owner 

because the unit owner’s dwelling 

policy is not adequate to protect the 

lender. The Agencies agree that there is 

risk to the lender in accepting a 

dwelling policy as protection for the 

collateral. However, this is a risk that 

the lender must weigh. Such policy, 

however, does fulfill the mandatory 

purchase requirement. The Agencies 

have amended the proposed question 

and answer to include additional 

discussion on dwelling policies in 

response to these comments. The 


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Agencies otherwise adopt the question 

and answer as proposed. 

Proposed question and answer 26 

(final question and answer 30) 

discussed what a lender must do if the 

condominium association’s RCBAP 

coverage is insufficient to meet the 

mandatory purchase requirements for a 

loan secured by an individual 

residential condominium unit. Several 

commenters suggested changes to 

FEMA’s flood insurance policies. It is 

beyond the Agencies’ jurisdiction to 

address these suggestions, which are 

within the purview of FEMA. Interested 

parties should appropriately consult 

with FEMA concerning the actual 

operation of flood insurance policies. 

Several other commenters noted that 

the purchase of a unit owner’s dwelling 

policy may not provide adequate 

coverage to the unit owner or the lender 

as a supplement to an RCBAP providing 

insufficient coverage to meet the 

mandatory purchase requirement. As 

noted in the proposed question and 

answer, a dwelling policy may contain 

claim limitations; therefore, it is 

incumbent upon a lender to understand 

these limitations. 

Several commenters also suggested 

that the Agencies should not put forth 

guidance encouraging lenders to apprise 

borrowers that there is risk involved 

when flood coverage is maintained 

under a unit owner dwelling policy 

along with an RCBAP that does not 

provide replacement cost coverage. The 

Agencies believe that although 

insurance professionals are in the best 

position to adequately explain the 

implications of such coverage, lenders 

should still be encouraged to alert their 

borrowers to the risk. FEMA’s brochure, 

National Flood Insurance Program: 

Condominium Coverage, may provide 

some helpful information for borrowers. 

The Agencies adopt the question and 

answer as proposed. 

Proposed question and answer 27 

(final question and answer 31) 

discussed what a lender must do when 

it determines that a loan secured by a 

residential condominium unit is in a 

complex with a lapsed RCBAP. One 

commenter requested that the Agencies 

provide more guidance on the steps a 

lender should take to determine if there 

is a lapse in existing RCBAP coverage. 

As mentioned above, the Agencies are 

aware that, generally, a lender that is the 

mortgagee of a unit owner’s loan would 

not receive notice that the 

condominium association’s RCBAP has 

expired. However, if a trigger event 

occurs (that is, the lender makes, 

increases, extends, or renews a loan to 

the borrower secured by the unit) or if 

the lender otherwise makes a 

determination that the RCBAP has 

expired, then the lender will be required 

to follow the procedure outlined in final 

question and answer 28 and discussed 

above. The Agencies adopt the question 

and answer as proposed. 

Proposed question and answer 28 

(final question and answer 32) provided 

examples of how the co-insurance 

penalty applies when an RCBAP is 

purchased at less than 80 percent of 

replacement cost value, unless the 

amount of coverage meets the maximum 

coverage of $250,000 per unit. Two 

commenters asked about the purpose of 

this question and answer. The Agencies 

intended this question and answer to 

provide information on the topic to 

lenders. The Agencies adopt the 

question and answer as proposed. 

Proposed question and answer 29 

(final question and answer 33) 

addressed the major factors that are 

involved with coverage limitations of 

the individual unit owner’s dwelling 

policy with respect to the condominium 

association’s RCBAP coverage. One 

commenter asked the purpose of this 

question and answer and further 

asserted that lenders should not be 

required to explain to borrowers about 

the limitations in coverage. The 

Agencies intended this question and 

answer to be informative in nature and 

agree that insurance professionals are in 

a better position to explain policy 

limitations to their policyholders. The 

Agencies adopt the question and answer 

as proposed. 

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 Section VII addressed flood 

insurance requirements for home equity 

loans, lines of credit, subordinate liens, 

and other security interests in collateral 

located in an SFHA. The proposed 

questions and answers primarily 

proposed only minor wording changes 

or clarifications to questions and 

answers in the 1997 Interagency 

Questions and Answers without any 

change in the substance or meaning. 

Several commenters addressed 

questions and answers in this section. 

Proposed question and answer 30 

(final question and answer 34), 

addressed when a home equity loan is 

considered a designated loan that 

requires flood insurance. The Agencies 

did not receive any substantive 

comments and adopt the question and 

answer as proposed. 

Proposed question and answer 31 

(final question and answer 35), 

addressed when a draw against an 

approved line of credit secured by 

property located in an SFHA requires 

flood insurance. Nine commenters 

questioned the statement that a 

designated loan requires a flood 

determination when application is made 

for that loan. The commenters noted 

that under the Act and Regulation, a 

lender or its servicer is responsible for 

performing a flood determination upon 

the making, increase, extension, or 

renewal of a loan, and not when a loan 

application is submitted. They further 

noted that applications are often 

withdrawn and that lenders usually 

have a flood determination performed 

when they are reasonably certain that 

one of the previously listed ‘‘trigger’’ 

events (e.g., the making or increasing) 

will occur. The commenters requested 

that this point be clarified. The 

Agencies agree with the commenters 

and are deleting the statement that a 

designated loan requires a flood 

determination when application is made 

for that loan. The Agencies otherwise 

adopt the question and answer as 

proposed. 

Proposed question and answer 32 

(final question and answer 36) 

addressed how much flood insurance is 

required when a lender makes a second 

mortgage secured by property located in 

an SFHA. Six commenters argued that a 

junior lienholder should not have to 

take senior liens into account when 

determining the required amount of 

flood insurance coverage. They asserted 

that the current requirement causes 

substantial cost and delay, resulting in 

an undue burden due to the need for 

either the junior lienholder or its 

servicer to engage in an expensive, timeconsuming search for prior liens. One 

commenter contended that the question 

and answer should state that the amount 

of coverage for a junior lien would be 

100 percent of the insurable value of the 

property. Alternatively, the same 

commenter suggested multiple flood 

insurance policies on buildings with 

multiple liens as a means to address the 

problem. On the other hand, one 

commenter believed that the question 

and answer should remind lenders to 

add secondary loans to any existing 

flood insurance policy’s mortgagee 

clause. Three commenters requested 

more guidance on how and when a 

lienholder should determine the value 

of any other liens on improved 

collateral property. One of these 

mentioned closing or upon renewal of a 

loan as two possible dates for such 

activity. 

The Agencies believe that, given the 

provisions of an NFIP policy, a lender 

cannot comply with Federal flood 

insurance requirements when it makes, 


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increases, extends, or renews a loan by 

requiring the borrower to obtain NFIP 

flood insurance solely in the amount of 

the outstanding principal balance of the 

lender’s junior lien without regard to 

the flood insurance coverage on any 

liens senior to that of the lender. As 

illustrated in the examples in the 

question and answer, a junior 

lienholder’s failure to take such a step 

can leave that lienholder partially or 

even fully unprotected by the 

borrower’s NFIP policy in the event of 

a flood loss. 

The final question and answer 

provides that a junior lienholder should 

work with the borrower, senior 

lienholder, or both these parties, to 

determine how much flood insurance is 

needed to adequately cover the 

improved real estate collateral to the 

lesser of the total of the outstanding 

principal balances on the junior loan 

and any senior loans, the maximum 

available under the Act, or the insurable 

value of the structure. The junior 

lienholder should also ensure that the 

borrower adds the junior lienholder’s 

name as mortgagee/loss payee to an 

existing flood insurance policy. 

The final question and answer also 

provides that a junior lienholder should 

obtain the borrower’s consent in the 

loan agreement or otherwise for the 

junior lienholder to obtain information 

on balance and existing flood insurance 

coverage on senior lien loans from the 

senior lienholder. Commenters also 

contended that privacy concerns make it 

difficult for junior lienholders to obtain 

information from servicers or lenders 

about loan balances and existing flood 

insurance coverage. However, the 

Agencies have determined that the 

privacy provisions of the Gramm-LeachBliley Act, as implemented in the 

Agencies’ regulations, do not prohibit 

sharing of the loan and flood insurance 

information between two lenders with 

liens on the same property, even 

without the borrower’s consent. 

One commenter noted that it is 

sometimes difficult to obtain 

information about the outstanding 

principal balance of other liens once a 

loan has been closed, such as at loan 

renewal, and asked what steps might be 

taken in that regard. The final question 

and answer states that junior 

lienholders have the option of obtaining 

a borrower’s credit report to establish 

the outstanding balances of senior liens 

on property to aid in determining how 

much flood insurance is necessary upon 

increasing, extending or renewing a 

junior lien. 

In the limited situation where a junior 

lienholder or its servicer is unable to 

obtain the necessary information about 

the amount of flood insurance in place 

on the outstanding balance of a senior 

lien (for example, in the context of a 

loan renewal), the final question and 

answer provides that the junior 

lienholder may presume that the 

amount of insurance coverage relating to 

the senior lien in place at the time the 

junior lien was first established 

(provided that the amount of flood 

insurance coverage relating to the senior 

lien was adequate at the time) continues 

to be sufficient. 

The Agencies have revised the 

proposed question and answer to 

respond to these comments. The 

question and answer also provides 

examples illustrating the application of 

these methods of dealing with adequate 

flood insurance coverage for junior and 

senior liens. Specifically, the examples 

illustrate how a junior lienholder 

should handle situations such as: when 

a senior lienholder has obtained an 

inadequate amount of flood insurance 

coverage, when a senior lienholder is 

not subject to the Act’s and Regulation’s 

requirements; and when insurance 

coverage in the amount of the improved 

real estate’s insurable value must be 

obtained by the junior lienholder. 

Commenters also raised other issues 

related to ongoing flood insurance 

coverage on existing second lien loans 

in the context of force placement. The 

final question and answer addresses the 

triggering events of making, increasing, 

extending, and renewing a second lien 

loan. 

Proposed question and answer 33 

(final question and answer 37) 

addressed flood insurance requirements 

in connection with home equity loans 

secured by junior liens. Ten 

commenters requested that the question 

and answer be clarified to address other 

subordinate lien loans, not just junior 

lien home equity loans. The Agencies 

agree with the commenters and, 

therefore, have revised the question and 

answer to clarify that it applies to all 

subordinate lien loans. 

Another commenter recommended 

that the ‘‘same lender’’ exception also 

apply to a lender’s affiliates. The Act 

provides that a person who increases, 

extends, renews, or purchases a loan 

secured by improved real estate or a 

mobile home may rely on a previous 

determination of whether the building 

or mobile home is located in an area 

having special flood hazards, if the 

previous determination was made no 

more than seven years before the date of 

the transaction and there have been no 

subsequent map revisions. 42 U.S.C. 

4104b(e). The Act further defines the 

term ‘‘person’’ to include any individual 

or group of individuals, corporation, 

partnership, association, or any other 

organized group of persons, including 

State and local governments and 

agencies thereof. 42 U.S.C. 4121(a)(5). 

The Agencies do not interpret the 

definition as providing for the inclusion 

of affiliates within a corporate entity as 

constituting a single ‘‘person’’ except for 

treating a regulated lending institution 

and its operating subsidiaries as a single 

entity. The Agencies believe that no 

further revision of the question and 

answer is appropriate on this point. The 

Agencies adopt the question and answer 

as proposed subject to the revisions 

discussed above. 

Proposed question and answer 34 

(final question and answer 38) 

addressed the issue of whether a loan 

secured by inventory stored in a 

building located in an SFHA, when the 

building is not collateral for the loan, 

requires flood insurance. One 

commenter asked what sort of legal 

instrument would have to be filed by a 

lender to result in the need for flood 

insurance coverage for a borrower’s 

contents. The Agencies decline to 

respond to this inquiry because it 

involves a business and legal decision 

beyond the interpretation of the Act and 

Regulation. The Agencies adopt the 

question and answer as proposed. 

Proposed question and answer 35 

(final question and answer 39) 

addressed flood insurance requirements 

when building contents are security for 

a loan. Seven commenters requested 

further guidance and clarification on 

how to calculate flood insurance 

contents coverage in compliance with 

Federal regulation. Five commenters 

specifically requested that the Agencies 

give examples to illustrate how flood 

insurance coverage works for building 

and contents. Two commenters asked 

whether a lender should consider the 

total amount of coverage for both 

contents and building together or 

should consider the two separately. One 

commenter asked whether a lender 

could do the same with contents and 

building coverage as is the practice with 

coverage for multiple buildings, that is, 

the contents and building will be 

considered to have a sufficient amount 

of flood insurance coverage for 

regulatory purposes as long as some 

amount of insurance is allocated to each 

category. 

The Agencies agree that the practice 

for flood insurance coverage for 

multiple buildings would also be 

applicable to coverage for both contents 

and building. That is, both contents and 

building will be considered to have a 

sufficient amount of flood insurance 

coverage for regulatory purposes as long 

as some reasonable amount of insurance 


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is allocated to each category. The 

Agencies have added an example to this 

question and answer to illustrate this 

point. The Agencies otherwise adopt the 

question and answer as proposed. 

Proposed question and answer 36 

(final question and answer 40), 

addressed the flood insurance 

requirements applicable to collateral or 

contents that do not secure a loan. The 

Agencies did not receive any 

substantive comments and adopt it as 

proposed. 

Proposed question and answer 37 

(final question and answer 41) 

addressed the Regulation’s application 

where a lender places a lien on property 

out of an ‘‘abundance of caution.’’ One 

commenter recommended that flood 

insurance coverage should not be 

required when an interest is taken by a 

lender in improved real estate in a flood 

hazard zone out of an ‘‘abundance of 

caution.’’ 

The Agencies decline to accept this 

recommendation. The Act provides that 

a lender may not make, increase, 

extend, or renew any loan secured by 

improved real estate or a mobile home 

in a flood hazard area unless the 

building or mobile home is covered for 

the term of the loan by flood insurance. 

40 U.S.C. 4012a(b)(1). The statute makes 

no exception for property taken as 

collateral by a lender out of an 

abundance of caution. The Agencies 

adopt the question and answer as 

proposed. 

Proposed question and answer 38 

(final question and answer 42) 

addressed loans secured by a note on a 

single-family dwelling, but not the 

dwelling itself. Proposed question and 

answer 39 (final question and answer 

43) pertained to loans personally 

guaranteed by a third party who gave 

the lender a security interest in 

improved real estate owned by the 

guarantor. One commenter stated that 

the two proposed questions and answers 

conflicted. The Agencies do not believe 

there is a conflict between the two 

questions and answers. In the former 

question and answer, the Agencies 

concluded that Federal flood insurance 

requirements did not apply because the 

loan was not secured by improved real 

estate, but was instead secured by a 

note. In the latter question and answer, 

the lender was given a security interest 

in improved real estate by a third party 

in connection with the third party 

providing a personal guarantee on a 

loan. In each situation, the absence or 

presence of a security interest in 

improved real estate determined 

whether Federal flood insurance 

requirements would apply. The 

Agencies believe that no further 

elaboration is necessary and adopt these 

questions and answers as proposed. 

Section VIII. Flood Insurance 

Requirements in the Event of the Sale or 

Transfer of a Designated Loan and/or Its 

Servicing Rights 

Proposed Section IX (final Section 

VIII) addressed flood insurance 

requirements in the event of the sale or 

transfer of a designated loan and/or its 

servicing rights. This section and the 

accompanying questions and answers 

were originally adopted in the 1997 

Interagency Questions and Answers, 

and any changes proposed by the 

Agencies in the March 2008 Proposal 

were designed to provide greater clarity 

with no intended change in substance 

and meaning. The comments received 

by the Agencies regarding the questions 

and answers in this section were 

generally supportive. 

Proposed question and answer 41 

(final question and answer 44) 

addressed the application of the flood 

insurance requirements under the 

Regulation to lenders/loan servicers 

under different scenarios. Upon 

consideration of the various comments, 

the Agencies have clarified the question 

and answer to apply to both regulated 

and nonregulated lenders. One 

commenter was supportive of the 

guidance, but recommended that 

lenders be allowed to assign a certain 

level of responsibility for flood 

insurance compliance through 

contractual arrangements to the servicer. 

The commenter asserted that this 

approach would not absolve lenders of 

liability and ultimate responsibility, but 

would make for a less burdensome and 

logical approach. The Agencies believe 

that the lender’s responsibilities are 

sufficiently clear in the question and 

answer and that further elaboration on 

this point is unnecessary. 

Another commenter asked that the 

Agencies expressly indicate that no 

servicing obligations need be followed 

by a lender who has sold both the loan 

and the servicing rights to a 

nonregulated party. The Agencies have 

elected to clarify in the answer that once 

the regulated lender has sold the loan 

and the servicing rights, the lender has 

no further obligation regarding flood 

insurance on the loan. The Agencies 

have also elected to clarify in the 

answer that, depending upon the 

circumstances, safety and soundness 

considerations may sometimes 

necessitate that the lender undertake 

sufficient due diligence upon purchase 

of a loan as to put the lender on notice 

of lack of adequate flood insurance. 

Moreover, if the purchasing lender 

subsequently extends, increases, or 

renews a designated loan, it must also 

comply with the Act and Regulation. 

The Agencies otherwise adopt the 

question and answer as proposed. 

Proposed question and answer 42 

(final question and answer 45), 

addressed when a lender is required to 

notify FEMA or the Director’s designee. 

Proposed question and answer 43 (final 

question and answer 46), addressed 

whether a RESPA Notice of Transfer 

sent to the Director of FEMA satisfies 

the Act and Regulation. The Agencies 

received one comment that was 

supportive of these proposed questions 

and answers. The Agencies adopt the 

questions and answers as proposed. 

Proposed question and answer 44 

(final question and answer 47), 

indicated that delivery of the notice can 

be made electronically, including by 

batch transmission if acceptable to the 

Director or the Director’s designee. The 

Agencies did not receive any 

substantive comments and adopt this 

question and answer as proposed. 

Proposed question and answer 45 

(final question and answer 48) indicated 

that if a loan and its servicing rights are 

sold by the lender, the lender is 

required to provide notice to the FEMA 

Director or the Director’s designee. The 

Agencies received one comment that 

was supportive of the proposed question 

and answer. The Agencies adopt the 

question and answer as proposed. 

Proposed question and answer 46 

(final question and answer 49), 

indicated that a lender is not required 

to provide notice when the servicer, not 

the lender, sells or transfers the 

servicing rights to another servicer; 

rather the servicer is obligated to 

provide the notice. Proposed question 

and answer 47 (final question and 

answer 50) indicated that in the event 

one institution is acquired by or merges 

with another institution, the duty to 

provide the notice for loans being 

serviced by the acquired institution falls 

to the successor institution if 

notification is not provided by the 

acquired institution prior to the 

effective date of the acquisition or 

merger. The Agencies received one 

comment that was supportive of these 

proposed questions and answers. The 

Agencies adopt the questions and 

answers as proposed. 

Section IX. Escrow Requirements 

Proposed Section X (final Section IX) 

addressed escrow requirements for flood 

insurance premiums. This section and 

the accompanying questions and 

answers were originally adopted in the 

1997 Interagency Questions and 

Answers, and any changes proposed by 

the Agencies were designed to provide 


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greater clarity with no intended change 

in substance and meaning. The 

Agencies received few comments on 

this section. 

Proposed question and answer 48 

(final question and answer 51), 

addressed when multifamily buildings 

and mixed-use properties are 

considered residential real estate. A 

financial institution commenter 

requested two clarifications. First, the 

commenter noted that the proposed 

answer indicated that lenders are 

required to escrow flood insurance 

premiums and fees for any mandatory 

flood insurance for designated loans if 

the lender requires the escrow of taxes, 

hazard insurance premiums, ‘‘or other 

loan charges’’ for loans secured by 

residential improved real estate. The 

commenter questioned whether lenders 

are required to escrow flood insurance 

premiums and fees for any mandatory 

flood insurance for designated loans if 

the lender requires the escrow of 

mortgage insurance premiums. The 

Agencies believe that escrowing flood 

insurance premiums and fees for 

mandatory flood insurance for 

designated loans is required by the Act 

and Regulation where the lender 

requires the escrowing of mortgage 

insurance premiums. The Act and 

Regulation require escrowing if a 

regulated lending institution requires 

the escrowing of ‘‘taxes, insurance 

premiums, fees, or any other charges.’’ 

Mortgage insurance is a form of 

insurance. It is also an ‘‘other charge’’ 

under the Regulation. To provide greater 

consistency with the Act and 

Regulation, the Agencies are inserting 

the word ‘‘any’’ into the answer so that 

it refers to taxes, insurance premiums, 

fees, ‘‘or any other charges.’’ 

The commenter also asked the 

Agencies to expressly state in the 

answer that a lender is not required to 

escrow flood insurance premiums if it 

chooses to make an exception on a loanby-loan basis not to escrow other items 

such as taxes, hazard insurance 

premiums, or other loan charges. In 

response, the Agencies have added a 

sentence to the answer providing that a 

lender is not required to escrow flood 

insurance premiums and fees for a 

particular loan if it does not require 

escrowing of any other charges for that 

loan. 

Finally, because the Agencies are 

adopting questions and answers 

providing examples of residential and 

nonresidential properties, the 

discussion of mixed-use properties has 

been revised to refer the reader to those 

questions and answers. If the primary 

use of a mixed-use property is for 

residential purposes, the Regulation’s 

escrow requirements apply. The 

Agencies otherwise adopt the question 

and answer as proposed. 

Proposed question and answer 49 

(final question and answer 52) 

addressed when escrow accounts must 

be established for flood insurance 

purposes and indicated that escrow 

accounts 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 RESPA’s 

escrow requirements. The Agencies did 

not receive any substantive comments 

on the proposed question and answer; 

however, the Agencies made 

nonsubstantive revisions to the answer 

to more directly respond to the question 

asked and to provide additional clarity. 

The Agencies received no comments 

on proposed questions and answers 50 

and 51 (final questions and answers 53 

and 54 respectively). Proposed question 

and answer 50 (final question and 

answer 53) indicated that voluntary 

escrow accounts established at the 

request of the borrower do not trigger a 

requirement for the lender to escrow 

premiums for required flood insurance. 

Proposed question and answer 51 (final 

question and answer 54) indicated that 

premiums paid for credit life insurance, 

disability insurance, or similar 

insurance programs should not be 

viewed as escrow accounts requiring the 

escrowing of flood insurance premiums. 

The Agencies did not receive any 

substantive comments on these 

questions and answers and adopt them 

as proposed. 

Proposed question and answer 52 

(final question and answer 55) advised 

that only certain escrow-type accounts 

for commercial loans secured by 

multifamily residential buildings trigger 

the escrow requirement for flood 

insurance premiums. The Agencies did 

not receive any substantive comments 

and adopt this question and answer as 

proposed. 

Proposed question and answer 53 

(final question and answer 56) 

addressed escrow requirements for 

condominium units covered by 

RCBAPs. The Agencies received several 

comments on this question and answer. 

Two financial institution commenters 

reiterated their comments pertaining to 

proposed question and answer 24 (final 

question and answer 28) that lenders or 

servicers of a loan to a condominium 

unit owner do not receive a copy of the 

RCBAP renewal information because 

they are not loss payees on the policy. 

This comment was addressed in the 

SUPPLEMENTARY INFORMATION pertaining 

to Section VI above. A financial 

institution requested clarification that 

regardless of whether the lender makes 

a loan for the purchase or refinance of 

a condominium unit, an escrow account 

is not required if dues to the 

condominium association apply to the 

RCBAP premiums. The proposed 

question and answer only addressed 

purchase loans; however, the Agencies 

agree with the commenter that the same 

principle should apply to refinancings. 

The Agencies, therefore, are clarifying 

the question and answer to provide that 

when a lender makes, increases, renews, 

or extends a loan secured by 

condominium unit that is adequately 

covered by an RCBAP, and dues to the 

condominium association apply to the 

RCBAP premiums, an escrow account is 

not required. However, if the RCBAP 

coverage is inadequate and the unit is 

also covered by a dwelling form policy, 

premiums for the dwelling form policy 

would need to be escrowed. The 

Agencies otherwise adopt the question 

and answer as proposed. 

X. Force Placement of Flood Insurance 

Proposed Section XI (final Section X) 

addressed issues concerning the force 

placement of flood insurance. This 

section and the accompanying questions 

and answers were originally adopted in 

the 1997 Interagency Questions and 

Answers and any changes proposed by 

the Agencies in March 2008 were 

designed to provide greater clarity with 

no intended change in substance and 

meaning. 

The Agencies received several 

comments on proposed question and 

answer 54 (final question and answer 

57), which provided general guidance 

on the force placement requirement 

under the Act and Regulation. Six 

commenters requested further guidance 

regarding the exact point at which 

lenders must commence the force 

placement process. Similarly, 

commenters requested clarification as to 

precisely when the 45-day notice period 

begins after which a lender or its 

servicer must force place insurance. One 

of these commenters specifically asked 

the Agencies to clarify whether 

insurance is required 45 days from the 

date the institution received the 

cancellation notice, the date of 

cancellation on that notice, or the date 

that the borrower receives notice from 

the lender or servicer. One commenter 

requested clarification from the 

Agencies whether the 45-day notice 

could be sent prior to the actual date of 

expiration of flood insurance coverage. 

As discussed in the proposed 

question and answer, the Act and 

Regulation require the lender, or its 

servicer, to send notice to the borrower 

upon making a determination that the 


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improved real estate collateral’s 

insurance coverage has expired or is less 

than the amount required for that 

particular property, such as upon 

receipt of the notice of cancellation or 

expiration from the insurance provider. 

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 for the cost of 

premiums and fees to obtain the 

coverage. The Act does not permit a 

lender or its servicer to send the 

required 45-day notice to the borrower 

prior to the institution’s making a 

determination that flood insurance is 

insufficient or lacking (for example, the 

actual expiration date of the flood 

insurance policy). If adequate insurance 

is not obtained by the borrower within 

the 45-day period, then the insurance 

must be obtained by the lender on 

behalf of the borrower. 

Another commenter stated that if a 

lender decides to pay a borrower’s 

current policy premium, this should not 

be considered to be purchasing a force 

placed policy. The Agencies agree that 

it is within a lender’s discretion to 

absorb the costs of a borrower’s flood 

insurance policy anytime during the 

term of the designated loan. This should 

not, however, eliminate the borrower’s 

opportunity to obtain appropriate flood 

insurance coverage, especially during 

the 45-day period after receiving a force 

placement notice from the lender. The 

Agencies revised proposed question and 

answer 54 (final question and answer 

57) to address these commenters’ points. 

The Agencies also received questions 

from commenters regarding coverage 

during the 45-day notice period. Two 

commenters asked how to ensure that 

collateral property is protected against 

flood damage during the 45-day notice 

period prior to actual force placement. 

Another commenter asked for more 

explanation about the coverage that 

continues in effect for 30 days after the 

date that a Standard Flood Insurance 

Policy (SFIP) expires under the NFIP. 

Coverage under FEMA’s SFIP 

continues in effect for 30 days from the 

date that the SFIP lapses. An SFIP 

specifically provides that, if the insurer 

decides to cancel or not renew a policy, 

it will continue in effect for the benefit 

of only the mortgagee for 30 days after 

the insurer notifies the mortgagee of the 

cancellation or nonrenewal. No 

coverage will be provided for a borrower 

under the SFIP during this 30-day 

period. If a lender monitors a mortgage 

loan with respect to the need for flood 

insurance coverage, the lender can time 

the 45-day period to start with the lapse 

of insurance coverage. Assuming 

notification is made immediately upon 

policy cancellation or nonrenewal, 

coverage will continue in place for the 

lender/mortgagee’s benefit for 30 days of 

the 45-day notice period. To cover the 

risk during the remaining 15-day ‘‘gap,’’ 

lenders may purchase private flood 

insurance to cover the collateral 

property, as discussed further in section 

XI below regarding private insurance 

policies. Lenders in these situations, 

often purchase what is known in the 

insurance industry as a ‘‘30-day 

binder,’’ a form of temporary private 

insurance. The insurance provided by 

such a binder will cover the 15-day gap 

and the 15 days subsequent to the end 

of the notice period. Because these 

issues lie outside the scope of the 

Agencies’ purview, however, the 

Agencies decline to include this 

guidance in the question and answer. 

One commenter contended that one of 

the criteria for force placement in 

proposed question and answer 54 (final 

question and answer 57) should be 

changed from ‘‘[t]he community in 

which the property is located 

participates in the NFIP’’ to ‘‘flood 

insurance under the Act is available for 

improved property securing the loan,’’ 

because properties may also be in 

Coastal Barrier Resource Areas, 

Otherwise Protected Areas, or areas 

designated under section 1316 of the 

Flood Act. The Agencies have revised 

final question and answer 57 to reflect 

this requested change. Another 

commenter asked whether the citation 

to ‘‘Appendix A of the FEMA 

publication’’ in proposed question and 

answer 54 was a reference to the 

immediately previously cited FEMA 

procedures that were published in the 

Federal Register. The Agencies have 

revised final question and answer 57 to 

clarify the citation. 

Proposed question and answer 55 

(final question and answer 58), 

addressed whether a servicer can force 

place insurance on behalf of a lender. 

The Agencies did not receive any 

substantive comments and adopt the 

question and answer as proposed. 

Proposed question and answer 56 

(final question and answer 59) 

addressed the amount of insurance 

required when force placement occurs. 

The Agencies received one comment 

suggesting that the proposed answer to 

proposed question 56 not only crossreference Section II of the Interagency 

Questions and Answers, but also refer to 

Section VII, because proposed question 

and answer 36 in that section pertains 

to the required amount of flood 

insurance for home equity loans. The 

Agencies have made minor 

clarifications based upon this comment, 

but otherwise adopt the question and 

answer as proposed. 

The Agencies received comments 

regarding terminology used in this 

section. Specifically, two commenters 

took exception to the use of the term 

‘‘force placement,’’ arguing that the term 

conveys an incorrect impression that the 

borrower is being forced to accept the 

purchase of flood insurance coverage 

when the reverse of the situation 

applies. These commenters suggested 

that the alternative term ‘‘lender 

placed’’ should be used instead. The 

current term ‘‘force placement’’ is used 

in the Regulation. Moreover, the term 

has been widely used since the 

enactment of the National Flood 

Insurance Reform Act of 1994. Changing 

the term may cause confusion. For this 

reason, the Agencies decline to accept 

this suggested change. 

Another commenter recommended 

that ‘‘lender single interest policies’’ 

should not be allowed and should be 

considered in violation of the legal 

requirements of the Act and Regulation 

since they are not purchased on the 

borrower’s behalf and do not offer the 

same or better policy terms to the 

borrower. As discussed in further detail 

in the discussion to section XI below, 

private insurance policies may only be 

considered an adequate substitute for an 

SFIP if the policy meets the criteria set 

forth by FEMA, including the 

requirement that the coverage be as 

broad as an SFIP. The Agencies have 

declined to address this comment 

specifically because it is believed that 

the comment is addressed by the general 

guidance in section XI. 

In response to comments received 

regarding the force placement of flood 

insurance, the Agencies are proposing 

three new questions and answers (60, 

61, and 62), which are discussed in the 

SUPPLEMENTARY INFORMATION

immediately following the 

Redesignation Table, to be added to 

Section VII to address the following 

force-placement issues: when the 45-day 

notice period should begin, how soon a 

lender should take action after learning 

that improved real estate that secures a 

loan is uninsured or underinsured, and 

whether a borrower may be charged for 

the cost of flood insurance coverage 

during the 45-day notice period. 

XI. Private Insurance Policies 

Proposed Section XII (final Section 

XI) addressed the appropriateness of gap 

or blanket insurance policies, often 

purchased by lenders to ensure 

adequate life-of-loan flood insurance 

coverage for designated loans. The 

proposed answer to question 57 (final 


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35928 Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 

8FEMA, Mandatory Purchase of Flood Insurance 

Guidelines, at 57–58. 

question and answer 63) explained, 

generally, that gap or blanket insurance 

is not an adequate substitute for NFIP 

insurance. The proposed answer, 

however, did acknowledge 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. 

The Agencies received several 

comments regarding the proposed 

question and answer. Some industry 

commenters argued that gap or blanket 

insurance is a cost-effective alternative 

to NFIP insurance and should be 

permitted as a substitute for NFIP 

insurance in all cases. Other industry 

commenters argued that gap or blanket 

insurance should be permitted as a 

substitute for NFIP insurance under 

certain circumstances, such as for 

construction loans or underinsured 

properties. Still other industry 

commenters asked the Agencies to 

clarify the use of the terms ‘‘gap’’ and 

‘‘blanket’’ policies, noting that the 

common industry understanding is that 

‘‘gap’’ policies are distinguishable from 

‘‘blanket’’ policies. In particular, these 

commenters requested that the Agencies 

eliminate the prohibition on ‘‘gap’’ 

policies that are meant to cover the 

deficiency between a borrower’s 

coverage and the amount of insurance 

required under the Act and Regulation. 

One industry commenter also noted that 

there are different types of ‘‘gap’’ 

policies and suggested that the Agencies 

clarify its intentions to prohibit only 

certain types of ‘‘gap’’ policies. Lastly, 

commenters also requested general 

guidance on whether non-NFIP private 

insurance policies were permitted. 

Based on these comments, the 

Agencies have decided to modify the 

question and answer to address broader 

issues of the appropriateness of private 

insurance. Instead of focusing on 

whether a policy is called a ‘‘gap’’ 

insurance policy or a ‘‘blanket’’ 

insurance policy, which may depend on 

how the policy is marketed by the 

insurer, the Agencies have decided that 

it is more appropriate to provide 

guidance to lenders on private 

insurance policies in general. 

The Agencies have revised the answer 

to the question to provide that a private 

insurance policy may be an adequate 

substitute for an NFIP policy if it meets 

the criteria set forth by FEMA in its 

Mandatory Purchase of Flood Insurance 

Guidelines.8 As FEMA has stated in its 

Mandatory Purchase of Flood Insurance 

Guidelines, to the extent there are any 

differences between the private 

insurance policy and an NFIP Standard 

Flood Insurance Policy, those 

differences must be evaluated carefully 

by the lender to determine whether the 

policy would provide sufficient 

protection under the Act and 

Regulation. Lenders must consider the 

suitability of a private insurance policy 

only when the mandatory purchase 

requirements apply. Therefore, if the 

Act or Regulation does not require the 

purchase of flood insurance, the lender 

need not evaluate the policy to 

determine whether it meets the criteria 

set forth by FEMA. 

The guidance proposed in March 

2008 on the limited circumstances when 

gap or blanket policies are permissible 

has been revised and is being addressed 

in a new separate question and answer 

64. The answer to final question 64 

provides that in the event that a flood 

insurance policy has expired and the 

borrower has failed to renew coverage, 

a private insurance policy that does not 

meet the criteria set forth by FEMA may 

nevertheless be useful in protecting the 

lender during a gap in coverage in the 

period of time before a force placed 

policy takes effect. However, the answer 

further states that the lender must force 

place NFIP-equivalent coverage in a 

timely manner and may not rely on nonequivalent coverage on an on-going 

basis. This is consistent with guidance 

proposed in March 2008, though the 

language has been modified in response 

to commenters who thought this 

guidance was confusing as worded in 

the proposal. 

Section XII. Required Use of the 

Standard Flood Hazard Determination 

Form (SFHDF) 

Proposed Section XIII (final Section 

XII) addressed the required use of the 

Special Flood Hazard Determination 

Form (SFHDF). This section and the 

accompanying questions and answers 

were originally adopted in the 1997 

Interagency Questions and Answers. 

The changes proposed by the Agencies 

in March 2008 were designed to provide 

greater clarity with no intended change 

in substance and meaning. The agencies 

received a number of comments on this 

section. 

Proposed question and answer 58 

(final question and answer 65), 

addressed whether the SFHDF replaces 

the borrower notification form. One 

commenter suggested the answer clarify 

the SFHDF’s use to the lender and the 

notification form’s use to benefit the 

borrower. The Agencies agree with the 

commenter and have revised the 

proposed answer to be more responsive 

to the question and to more clearly set 

out the respective uses of the SFHDF 

and the borrower notification form. 

Information about the notice of special 

flood hazards may be found in section 

XV. The commenter also suggested that 

the Agencies should amend the 

proposed answer to provide that the 

SFHDF must be used by the lender to 

determine if the ‘‘improved’’ property 

securing the loan is located in an SFHA. 

The Regulation specifically provides 

that a lender must make a flood hazard 

determination and use the SFHDF when 

determining whether the ‘‘building or 

mobile home offered as collateral 

security for a loan is or will be located 

in an SFHA in which flood insurance is 

available under the Act.’’ The Agencies 

agree that it is appropriate to revise the 

proposed question and answer to 

conform to the language of the 

Regulation and have done so. 

Proposed question and answer 59 

(final question and answer 66), 

addressed whether a lender is required 

to provide a copy of the SFHDF to the 

applicant/borrower. The Agencies 

received two comments concerning the 

proposed question and answer. The 

commenters suggested that the answer 

should state that the Act does not 

require that the lender provide the 

borrower with a copy of the SFHDF. The 

Agencies have revised the proposed 

question and answer to note that, while 

not a statutory requirement, a lender 

may provide a copy of the flood 

determination to the borrower so the 

borrower can provide it to the insurance 

agent in order to minimize flood zone 

discrepancies between the lender’s 

determination and the borrower’s 

policy. A lender would also need to 

make the determination available to the 

borrower in case of a special flood 

hazard determination review, which 

must be requested jointly by the lender 

and the borrower. In the event a lender 

provides the SFHDF to the borrower, the 

signature of the borrower is not required 

to acknowledge receipt of the form. 

Proposed question and answer 60 

(final question and answer 67) 

addressed the use of the SFHDF in 

electronic format. The Agencies did not 

receive any substantive comment and 

adopt the question and answer as 

proposed. 

Proposed question and answer 61 

(final question and answer 68) 

addressed the circumstances when a 

lender may rely on a previous special 

flood hazard determination. The 

Agencies received several comments 

concerning this question and answer. 

One commenter suggested that, if a 

lender maintains life-of-loan tracking, 

there is little benefit in obtaining a new 

special flood hazard determination 


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Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 35929 

when renewing, refinancing, or 

extending a loan if the original 

determination is older than seven years. 

The authority to rely on a previous 

determination made within the previous 

seven years if that determination meets 

certain requirements is statutory (42 

U.S.C. 4104b(e)). Accordingly, seven 

years is the maximum period during 

which a lender may rely on a previous 

determination, even if the lender has 

maintained life-of-loan tracking. 

Two commenters suggested that the 

proposed question and answer should 

also address whether a lender may rely 

on one determination if a lender makes 

multiple loans to one borrower, all of 

which are secured by the same 

improved property. For example, it 

should address when a lender may rely 

on a single determination when making 

a home purchase loan and a subsequent 

home equity loan, both secured by the 

same residence. The situation described 

by the commenters is similar to the 

example of a refinancing or assumption 

by a lender, which obtained the original 

flood determination on the same 

security property. In that case, the 

question and answer states that the 

lender may rely on the original 

determination if the original 

determination was made not more than 

seven years before the date of the 

transaction, the basis of 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. The Agencies 

based this interpretation on the premise 

that a refinancing would be the 

functional equivalent of either a loan 

extension or renewal. Subsequent loans 

to the same borrower secured by the 

same improved real estate could be 

deemed to be the functional equivalent 

of increasing the amount of the original 

loan. Therefore, if the original 

determination was made not more than 

seven years before the date of the 

transaction, the basis of 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 lender may 

similarly rely on a previous 

determination if the lender makes 

multiple loans that are secured by the 

same building or mobile home. The 

Agencies have revised the proposed 

question and answer to also address 

subsequent loans by the same lender 

secured by the same improved real 

estate. 

Section XIII. Flood Determination Fees 

Proposed Section XIV (final Section 

XIII) consisted of proposed questions 

and answers 62 and 63 (final questions 

and answers 69 and 70 respectively), 

which addressed fees charged when 

making a flood determination and 

charging fees to cover life-of-loan 

monitoring of a loan, respectively. The 

Agencies received two comments on 

these questions and answers. One 

commenter supported them; the other 

commenter asked whether a lender 

could charge an up-front, 

nonrefundable, composite 

determination and life-of-loan fee 

regardless of whether the loan 

application closes. The Act and 

Regulation allow a lender to charge a 

reasonable fee for determining whether 

a building or mobile home securing a 

loan is located or will be located in a 

special flood hazard area if the 

determination is made in connection 

with the making, increasing, extending, 

or renewing of a loan that is initiated by 

the borrower. In the commenter’s 

situation, the Agencies would agree that 

a fee for an initial determination could 

be charged when the determination is 

procured in connection with an 

application initiated by an applicant, 

even if the application does not close. 

However, a lender cannot charge a lifeof-loan fee if the application does not 

close. Such a fee would be an unearned 

fee and, as such, charging such a fee 

would be prohibited by section 8 of 

RESPA. Therefore, a lender may not 

charge a nonrefundable, composite 

determination and life-of-loan fee when 

a loan application does not close. The 

Agencies have adopted the former 

question and answer as proposed. The 

Agencies have revised the latter 

question and answer in response to the 

comment. 

Section XIV. Flood Zone Discrepancies 

Proposed Section XV (final Section 

XIV) addressed flood zone discrepancies 

between the flood hazard designation 

documented by the lender on the 

SFHDF and the one documented on the 

flood insurance policy and used to rate 

the policy. There were numerous 

negative comments concerning the 

Agencies’ proposed guidance for dealing 

with such discrepancies. 

Proposed question and answer 64 

(final question and answer 71) 

addressed lenders’ recourse when 

confronted with a flood zone 

discrepancy. Nineteen commenters were 

generally opposed to the proposed 

treatment of a discrepancy as set forth 

in the proposed question and answer. 

Several of these commenters argued that 

the Act does not require lenders to 

identify and resolve flood zone 

discrepancies and ensure that a flood 

insurance policy is properly rated. 

Other commenters argued that it is an 

undue burden to expect financial 

institutions to resolve discrepancies 

between the SFHDF and the flood 

insurance policy. Six commenters 

maintained that it is an insurance 

agent’s responsibility to determine the 

correct flood zone and that a lender 

should not be responsible for auditing 

an NFIP-authorized insurance agent. 

These commenters argued that requiring 

lenders to document every flood zone 

discrepancy would be costly and 

burdensome and require extensive loan 

servicing system changes. 

Two commenters stated that the 

Agencies need to clearly define ‘‘zone 

discrepancy.’’ Another commenter 

asked what action would be required to 

correct any ‘‘violation’’ and further 

inquired how much flood insurance 

should be force placed in such a 

situation if a lender wants to correct a 

discrepancy by means of force 

placement. Two other commenters said 

that a borrower will not want to obtain 

a Letter of Determination Review from 

FEMA at a cost of $80 when there is a 

dispute between the lender and 

insurance company over a flood zone 

discrepancy, while three other 

commenters noted that it is 

unreasonable to expect the parties to 

wait 45 days for a FEMA determination 

review. Finally, two commenters noted 

that if a coverage error occurs, the 

borrower or lender may reconcile this 

through payment of the premium 

differential (the amount of premium that 

would have been charged if the policy 

had been correctly rated) or FEMA may 

reduce the amount of claim payment. 

The Agencies disagree with those 

commenters who argued against a 

lender being responsible for resolving 

flood zone designation discrepancies, 

either as a legal matter or because the 

requirement would be burdensome and 

costly. The Agencies agree, and FEMA 

concurs, that Federal law places the 

ultimate responsibility to ensure 

appropriate flood insurance coverage on 

the lender. The Agencies note that, 

although coverage errors can be 

mitigated after a flood loss by paying 

premium differentials or reducing the 

claim payment, these mitigation 

techniques do not relieve a lender of the 

responsibility to ensure that an 

appropriate amount of flood insurance 

coverage is in place when a loan is 

made. 

Commenters, however, raised valid 

points with respect to the proposed 

process for resolving flood zone 


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35930 Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 

discrepancies. To address these points, 

the Agencies have revised final question 

and answer 71 to specify that lenders 

need only address discrepancies 

between high-risk zones (Zones A or V) 

and moderate- or low-risk zones (Zones 

B, C, D, or X). The revised question and 

answer further specifies the actions a 

lender should take if such a zone 

discrepancy is found to exist. Those 

steps continue to include attempting to 

determine whether the discrepancy is a 

result of a legitimate reason, such as 

grandfathering, or is a mistake. In 

certain circumstances, submitting a 

request for a Determination Review to 

FEMA may be an appropriate means of 

resolving discrepancies; however, it is 

not required in all situations. The 

question and answer explains that if the 

discrepancy is not resolved, the lender 

should send a letter to the insurance 

agent and/or the insurance company 

reminding them of FEMA’s April 16, 

2008, instruction that, in cases of 

determination discrepancies, the policy 

should be written to cover the higher 

risk zone. Beyond that, no further action 

by the lender is required. If, for its own 

purposes, the lender believes force 

placement is appropriate, then it should 

consult the guidance on that topic found 

in Sections II and X. 

Proposed question and answer 65 

(final question and answer 72), 

addressed whether lenders can be found 

in violation of the Act and Regulation 

for flood zone discrepancies. Seven 

commenters either registered their 

opposition to the proposed question and 

answer or recommended that it be 

deleted outright. These commenters 

argued, similar to their comments on 

proposed question and answer 64, that 

the lender is the wrong person to 

resolve flood zone discrepancies, that it 

is instead the responsibility of the 

insurance agent and the company 

issuing the flood insurance policy to 

ensure that the flood zone is correct, 

and that imposing this requirement on 

lenders is an unnecessary burden not 

mandated by law. Another commenter 

argued that by sanctioning lenders for 

not successfully identifying and 

resolving flood zone discrepancies, the 

two proposed questions and answers 

would create a duty to ensure that the 

flood policy is rated properly that does 

not presently exist under the Act or the 

Regulation. 

As noted above, the Act and the 

Regulation require lenders to ensure 

that an appropriate amount of flood 

insurance coverage is purchased; 

lenders, therefore, should take steps to 

identify and address flood zone 

discrepancies. If a pattern or practice of 

unresolved discrepancies is found in a 

lender’s loan portfolio, due to a lack of 

effort on the lender’s part to resolve 

such discrepancies using the process 

outlined in final question and answer 

71, the Agencies may cite the lender for 

a violation of the mandatory purchase 

requirements. 

Section XV. Notice of Special Flood 

Hazards and Availability of Federal 

Disaster Relief 

Proposed Section XVI (final Section 

XV) addressed the notice of special 

flood hazards and the availability of 

Federal disaster relief that lenders are 

generally required to provide to 

borrowers. The proposed questions and 

answers primarily proposed only minor 

wording changes or clarifications to 

questions and answers in the 1997 

Interagency Questions and Answers 

without any change in the substance or 

meaning. 

Proposed question and answer 66 

(final question and answer 73), 

addressed whether the notice had to be 

provided to each borrower for each real 

estate related loan. The proposed 

answer explained that in a transaction 

involving multiple borrowers, the 

lender is only required to send notice to 

one borrower, but may provide multiple 

notices if the lender chooses. The 

Agencies received a comment on a 

related issue asking who should receive 

the notice if, at the time of increase, real 

estate collateral has been hypothecated 

by a guarantor as security on the 

borrower’s loan. If a lender takes a 

security interest in improved real estate 

owned by a guarantor (not simply 

pledged by a guarantor) located in an 

SFHA, then flood insurance is required 

and the notice should be sent to both 

the borrower and the guarantor. 

Another commenter asked when 

borrowers have to be notified that their 

secured property is in a flood zone. The 

commenter noted that their examiners 

have previously said ten days prior to 

loan closing. As noted in the Regulation, 

lenders are required to provide notice 

within a reasonable time before 

completion of the transaction (loan 

closing). What constitutes ‘‘reasonable’’ 

notice will necessarily vary according to 

the circumstances of particular 

transactions. Regulated lending 

institutions should bear in mind, 

however, that a borrower should receive 

notice timely enough to ensure that (1) 

the borrower has the opportunity to 

become aware of the borrower’s 

responsibilities under the NFIP; and (2) 

where applicable, the borrower can 

purchase flood insurance before 

completion of the loan transaction. In 

light of these considerations, the final 

question and answer does not establish 

a fixed time period during which a 

lender must provide the notice to the 

borrower. The Agencies generally 

continue to regard ten days as a 

‘‘reasonable’’ time interval. The 

Agencies adopt the question and answer 

as proposed. 

Proposed question and answer 67 

(final question and answer 74) 

addressed how the notice requirement 

applied to loans secured by mobile 

homes where the location of the mobile 

home may not be known until just prior 

to, or sometimes after, the loan closing. 

The Agencies did not receive any 

substantive comments and adopt the 

question and answer as proposed. 

Proposed question and answer 68 

(final question and answer 75), 

addressed when the lender is required 

to provide notice to the loan servicer 

that flood insurance is required. 

Proposed question and answer 69 (final 

question and answer 76) addressed what 

constitutes appropriate notice to the 

loan servicer. Proposed question and 

answer 70 (final question and answer 

77) addressed whether it was necessary 

for the lender to provide notice to a loan 

servicer affiliated with the lender. 

Proposed question and answer 71 (final 

question and answer 78) addressed how 

long a lender has to maintain the record 

of receipt by the borrower of the notice. 

The Agencies received one comment 

that was supportive of these proposed 

questions and answers. The Agencies 

adopt the questions and answers as 

proposed. 

Proposed question and answer 72 

(final question and answer 79), 

addressed whether a lender can rely on 

a previous notice that is less than seven 

years old and was given to the same 

borrower for the same property by the 

same lender. Two commenters stated 

that lenders should be able to waive a 

notice to a borrower when they already 

have adequate flood insurance and one 

commenter said that notice should not 

be required when there has not been a 

change in the flood map. The Act and 

Regulation require lenders to send 

notice when a lender makes, increases, 

extends, or renews a loan secured by a 

building or a mobile home located or to 

be located in a special flood hazard area. 

Therefore, as a statutory requirement, 

the notice may not be waived. The 

Agencies adopt the question and answer 

as proposed. 

Proposed question and answer 73 

(final question and answer 80), 

addressed whether the use of the sample 

form of notice is mandatory. The 

Agencies received one comment that 

was supportive of the proposed question 

and answer; however, another 

commenter asked whether lenders 


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Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 35931 

should use the revised version of the 

Sample Form of the Notice provided by 

FEMA in 2007 or the sample notice that 

accompanies the Regulation. The 

Agencies do not require the use of a 

specific form so long as the form 

contains the required information as 

specified by the Act and Regulation. 

The Agencies revised the answer, to 

reflect that the sample form of the notice 

provided by FEMA in its Mandatory 

Purchase of Flood Insurance Guidelines 

is also not required to be used. 

Section XVI. Mandatory Civil Money 

Penalties 

Proposed Section XVII (final Section 

XVI) addressed the imposition of 

mandatory civil money penalties for 

violations of the flood insurance 

requirements. Proposed question and 

answer 74 (final question and answer 

81) listed the sections of the Act that 

trigger mandatory civil money penalties 

when examiners find a pattern or 

practice of violations of those sections 

and included information about 

statutory limits on the amount of such 

penalties. The Agencies did not receive 

any comments and adopt the question 

and answer as proposed. 

Proposed question and answer 75 

(final question and answer 82) 

addressed the general standards the 

Agencies consider when determining 

whether violations constitute a pattern 

or practice for which civil money 

penalties are mandatory. The Agencies 

received one industry trade group 

comment suggesting that proposed 

question and answer 75 be amended to 

clarify that the assessment of civil 

money penalties be based on an overall 

assessment of the entire loan portfolio 

and not randomly selected 

representations. The Agencies believe 

that the guidance in this question and 

answer properly sets forth the general 

standards the Agencies consider when 

determining whether a pattern or 

practice of violations has occurred. As 

discussed in the March 2008 Proposed 

Interagency Questions and Answers, the 

considerations listed in the proposed 

question and answer are not dispositive 

of individual cases, but serve as a 

reference point for reviewing the 

particular facts and circumstances. The 

Agencies adopt the question and answer 

as proposed. 

Redesignation Table 

The following redesignation table is 

provided as an aid to assist the public 

in reviewing the revisions to the 1997 

Interagency Questions and Answers. 

1997 Interagency 

questions and 

answers 

Current questions 

and answers 

Section I. Definitions

Section I, Question 1 Section IV, Question 

20. 

Section I, Question 2 Section IV, Question 

19. 

Section I, Question 3 Section VII, Question 

34. 

Section I, Question 4 Section VII, Question 

35. 

Section I, Question 5 Section VII, Question 

38. 

Section I, Question 6 Section VII, Question 

39; and Section 

VII, Question 40. 

Section I, Question 7 Section VII, Question 

41. 

Section I, Question 8 Section VII, Question 

42. 

Section I, Question 9 Section I, Question 5. 

Section I, Question 10 Section VII, Question 

43. 

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 6. 

Section II, Question 4 Deleted as obsolete. 

Section II, Question 5 Section II, Question 

15. 

Section II, Question 6 Section VIII, Question 

44. 

Section II, Question 7 Section II, Question 

14; and Section V, 

Question 25. 

Section II, Question 8 Section VI, Question 

28. 

Section II, Question 9 Section VI, Question 

31. 

Section III. Exemptions.Section III. Exemptions from the mandatory flood insurance requirements. 

Section III, Question 1 Section III, Question 

18. 

Section IV. Escrow 

Requirements.

Section IX. Escrow 

requirements. 

Section IV, Question 1 Deleted as obsolete. 

Section IV, Question 2 Section IX, Question 

51. 

Section IV, Question 3 Section IX, Question 

52. 

Section IV, Question 4 Section IX, Question 

53. 

Section IV, Question 5 Section IX, Question 

54. 

Section IV, Question 6 Section IX, Question 

55. 

Section IV, Question 7 Section IX, Question 

56. 

Section V. Required 

Use of Standard 

Flood Hazard Determination Form 

(SFHDF).

Section XII. Required 

use of Standard 

Flood Hazard Determination Form 

(SFHDF). 

Section V, Question 1 Section XII, Question 

65. 

Section V, Question 2 Section XII, Question 

66. 

Section V, Question 3 Section XII, Question 

67. 

1997 Interagency 

questions and 

answers 

Current questions 

and answers 

Section V, Question 4 Section XII, Question 

68. 

Section V, Question 5 Section VII, Question 

36; and Section 

VII, Question 37 

Section VI. Force 

Placement of Flood 

Insurance.

Section X. Force 

placement of flood 

insurance. 

Section VI, Question 1 Section X, Question 

57. 

Section VI, Question 2 Section X, Question 

58. 

Section VI, Question 3 Section X, Question 

59. 

Section VII. Determination Fees.Section XIII. Flood 

determination fees. 

Section VII Question 1 Section XIII, Question 

69. 

Section VII Question 2 Section XIII, Question 

70. 

Section VIII. Notice of 

Special Flood Hazards and Availability 

of Federal Disaster 

Relief.

Section XV. Notice of 

special flood hazards and availability of Federal 

disaster relief. 

Section VIII, Question 

1.

Section XV, Question 

73 

Section VIII, Question 

2.

Section XV, Question 

74. 

Section VIII, Question 

3.

Section XV, Question 

75. 

Section VIII, Question 

4.

Section XV, Question 

76. 

Section VIII, Question 

5.

Section XV, Question 

77. 

Section VIII, Question 

6.

Section XV, Question 

78. 

Section IX. Notice of 

Servicer’s Identity.

Section VIII. Flood insurance requirements in the event 

of the sale or 

transfer of a designated loan and/or 

its servicing rights. 

Section IX, Question 1 Section VIII, Question 

45. 

Section IX, Question 2 Section VIII, Question 

46. 

Section IX, Question 3 Section VIII, Question 

47. 

Section IX, Question 4 Section VIII, Question 

48. 

Section IX, Question 5 Section VIII, Question 

49. 

Section IX, Question 6 Section VIII, Question 

50. 

Section X Appendix A 

to the Regulation— 

Sample Form of 

Notice of Special 

Flood Hazards and 

Availability of Federal Disaster Relief 

Assistance.

Section XV. Notice of 

special flood hazards and availability of Federal 

disaster relief. 

Section X, Question 1 Section XV, Question 

80. 

Proposed Questions and Answers and 

Request for Comment 

The Agencies are proposing five new 

questions and answers for public 


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35932 Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 

9FEMA, Mandatory Purchase of Flood Insurance 

Guidelines, at 27. 

10FEMA, Mandatory Purchase of Flood Insurance 

Guidelines, at GLS10. 

comment upon consideration of various 

comments received on the March 2008 

Proposed Interagency Questions and 

Answers. The new proposed questions 

and answers concern the determination 

of insurable value in calculating the 

maximum limit of coverage available for 

the particular type of property under the 

Act and force placement of required 

flood insurance. In anticipation of the 

possible adoption of these proposed 

questions and answers, the applicable 

question and answer numbers have been 

reserved and the remaining questions 

and answers have been renumbered 

accordingly. 

Insurable value. The Agencies 

received numerous comments to 

proposed question and answer 7 stating 

that implementing insurable value was 

confusing and that the term needed 

clear and objective standards. 

Commenters asked for guidance on the 

terms ‘‘overall value’’ and ‘‘repair or 

replacement cost’’ as they relate to a 

lender’s determination of the required 

amount of flood insurance for a 

designated loan. Commenters similarly 

asked the Agencies to define the term 

‘‘actual cash value.’’ In response to these 

comments, the Agencies are proposing 

new questions and answers 9 and 10 for 

public comment to address how to 

calculate insurable value. Calculating 

insurable value is important because in 

addition to the maximum caps under 

the Act, the Regulation 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.’’ The Agencies 

use the term ‘‘insurable value’’ in the 

proposed question and answer to mean 

the overall value minus the value of the 

land. 

FEMA guidelines state that the full 

insurable value of a building is the same 

as 100 percent replacement cost value 

(RCV) of the insured building.9

Replacement cost value, according to 

FEMA’s Mandatory Purchase of Flood 

Insurance Guidelines, is the cost to 

replace property with the same kind of 

material and construction without 

deduction for depreciation.10 As such, it 

is important to make clear that the RCV 

of a building is not its contributory 

value to the overall appraised value of 

the collateral and does not include any 

value for any land that is also part of 

collateral. When determining the RCV of 

a building, lenders (either by themselves 

or in consultation with the flood 

insurance provider or other 

professionals) should consider the 

replacement cost value under a hazard 

insurance policy, an appraisal based on 

a cost-value before depreciation 

deductions (not a market-value) 

approach, and/or a construction cost 

calculation. 

The statutory and regulatory 

requirement that flood insurance be 

obtained in the amount of the lesser of 

the principal balance of the designated 

loan or the maximum limit of coverage 

available for the particular type of 

building under the Act is separate from 

the amount of a recovery if the 

improved property is destroyed by 

flood. Insurable value is replacement 

cost value and would be the amount 

required for adequate insurance 

coverage assuming that amount does not 

exceed the principal balance of the 

designated loan or the maximum limit 

of coverage under the Act. Actual cash 

value, which would be determined by a 

claims adjuster at the time of loss, is the 

amount that will be paid by the NFIP for 

nonresidential properties and certain 

residential properties. To lessen the 

effect of a potential difference between 

the two values with certain 

nonresidential buildings, the Agencies, 

with FEMA’s concurrence, are 

proposing new questions and answers 9 

and 10. 

It is important for lenders to recognize 

that insurable value is only relevant to 

the extent that it is lower than either the 

outstanding principal balance of the 

loan or the maximum amount of 

insurance available under the NFIP. 

Therefore, if the insurable value of a 

building is the lesser of the outstanding 

principal balance of the loan or the 

maximum amount of insurance 

allowable under the NFIP, then the 

building must be insured at its insurable 

value, which for single family, 2–4 

family, other residential or 

nonresidential buildings, is equivalent 

to its RCV. The Agencies are proposing 

new question and answer 9 to provide 

more concrete guidance on insurable 

value. 

fl9. What is the insurable value of a 

building? 

Answer: Per FEMA guidelines, the 

insurable value of a building is the same 

as 100 percent replacement cost value of 

the insured building. FEMA’s 

Mandatory Purchase of Flood Insurance 

Guidelines defines replacement cost as 

‘‘The cost to replace property with the 

same kind of material and construction 

without deduction for depreciation.’’ 

When determining replacement cost 

value of a building, lenders (either by 

themselves or in consultation with the 

flood insurance provider or other 

professionals) should consider the 

replacement cost value used in a hazard 

insurance policy (recognizing that 

replacement cost for flood insurance 

will include the foundation), an 

appraisal based on a cost-value 

approach before depreciation 

deductions (not a market-value), and/or 

a construction cost calculation.fi 

In considering the comments 

submitted on the subject of insurable 

value, the Agencies recognized that 

there are situations when insuring some 

nonresidential buildings at RCV would 

result in the building being overinsured. The Agencies, in consultation 

with FEMA, are proposing two 

alternatives to determine replacement 

cost value for nonresidential buildings 

used for ranching, farming, or industrial 

purposes, which the borrower either 

would not replace if damaged or 

destroyed by a flood or would replace 

with a structure more closely aligned to 

the function the building is providing at 

the time of the flood. Industrial use, as 

opposed to the broader commercial use, 

is defined as those buildings not 

directly engaged in the retail and/or 

wholesale sale of the business’s goods, 

such as warehouses or storage, 

manufacturing, or maintenance 

facilities. 

The first alternative is the ‘‘functional 

building cost value,’’ which is the cost 

to repair or replace a building with 

commonly used, less costly construction 

materials and methods that are 

functionally equivalent to obsolete, 

antique, or custom construction 

materials and methods used in the 

original construction of the building. 

Borrowers and/or lenders can choose 

this alternative when the building being 

insured is important to the business 

operation and would be replaced if 

damaged or destroyed by a flood, but 

not to its original condition. The 

‘‘functional building cost value’’ 

recognizes that insurance to the 

replacement cost is not needed as the 

borrower would not repair or replace 

the building back to its original form but 

to a condition that represents the 

function the building is providing to the 

business operation. 

The second alternative is the 

‘‘demolition/removal cost value,’’ which 

is the cost to demolish the remaining 

structure and remove the debris after a 

flood. Borrowers and/or lenders can 

choose this alternative when the 

building being insured is not important 

to the business operation and would not 

be repaired or replaced if damaged or 

destroyed by a flood. The ‘‘demolition/ 

removal cost value’’ recognizes that the 

building has limited-to-no-value and 


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that it does not provide an important 

enough function to necessitate that the 

business repair or replace it. 

When a borrower or lender chooses 

one of these two replacement cost value 

alternatives they have determined that 

the building to be insured will not be 

insured to its full replacement cost 

value. Both the borrower and the lender 

should ensure that they consider the 

impact this may have on the ongoing 

nature of the business and the value of 

the collateral securing the loan. Full 

replacement cost is always the preferred 

insurance amount. These alternatives 

are available only for those situations 

where full replacement cost would 

result in a building used for farming, 

ranching, or industrial purposes being 

over-insured. The Agencies are 

proposing new question and answer 10 

to address this issue. 

fl10. Are there alternative approaches 

to determining the insurable value of a 

building? 

Answer: Yes, in the case of buildings 

used for ranching, farming, and 

industrial purposes, insurable value 

may also be determined by the 

functional building cost value or the 

demolition/removal cost value. The 

Agencies recognize that there are 

situations where insuring some 

nonresidential buildings to the 

replacement cost value will result in the 

building being over-insured. Therefore, 

borrowers and/or lenders have two 

alternative approaches to determine the 

insurable value for buildings used in 

ranching, farming, and for industrial 

purposes when the borrower would 

either not replace the building if 

damaged or destroyed by a flood or 

would replace the building with a 

structure more closely aligned with the 

function the building is presently 

providing. Industrial use, as opposed to 

the broader commercial use, means 

those buildings not directly engaged in 

the retail and/or wholesale sale of the 

business’s goods, such as warehouses, 

storage, manufacturing, or maintenance 

facilities. 

• The lender may calculate the 

insurable value as the ‘‘functional 

building cost value,’’ that is, the cost to 

replace a building with a lower-cost 

functional equivalent. The ‘‘functional 

building cost value’’ is the cost to repair 

or replace a building with commonly 

used, less costly construction materials 

and methods that are functionally 

equivalent to obsolete, antique, or 

custom construction materials and 

methods used in the original 

construction of the building. The 

determination of the appropriate 

‘‘functional building cost value’’ amount 

of insurance should be made by the 

lender and/or borrower. This alternative 

may be chosen when the building is 

important to the ongoing nature of the 

business and would be replaced if 

damaged or destroyed in a flood, but not 

to its original form. For example, a 

farming operation would replace an old 

dairy barn currently used for storage 

with a storage building of pole, or some 

other type of less costly construction 

found currently in storage buildings. 

• The lender may calculate the 

insurable value as the ‘‘demolition/ 

removal cost value,’’ that is the cost to 

demolish the remaining structure and 

remove the debris. The ‘‘demolition/ 

removal cost value’’ may be used when 

a building is not important to the 

ongoing nature of the business and as 

such would not be replaced if damaged 

or destroyed by a flood. The amount of 

flood insurance should be calculated by 

the lender and/or borrower to be at least 

the cost of demolition and removal of 

the insured debris. 

Regardless of what method the lender 

and/or borrower selects to determine 

insurable value (replacement cost value 

or one of the two alternatives), all terms 

and conditions of the Standard Flood 

Insurance Policy apply including its 

Loss Settlement provision.fi 

Force placement. In response to 

comments received regarding the force 

placement of flood insurance, the 

Agencies are proposing new questions 

and answers 60, 61, and 62, which 

would be added to Section X to address 

the following force-placement issues: 

whether a borrower may be charged for 

the cost of flood insurance coverage 

during the 45-day notice period, when 

the 45-day notice period should begin, 

and how soon a lender should take 

action after learning that improved real 

estate that secures a loan is uninsured 

or under-insured. 

Several commenters requested 

clarification regarding timing issues 

related to the 45-day notice. One 

commenter requested clarification on 

whether the 45-day notice could be sent 

prior to the actual date of expiration of 

flood insurance coverage. The Act and 

Regulation require the lender, or its 

servicer, to send notice to the borrower 

upon making a determination that the 

improved real estate collateral’s 

insurance coverage has expired or is less 

than the amount required for that 

particular property, such as upon 

receipt of the notice of cancellation or 

expiration from the insurance provider 

or as a result of an internal flood policy 

monitoring system. The borrower must 

obtain flood insurance within 45 days 

after notification by the lender; 

however, the 45-day period cannot 

begin until the lender or servicer has 

sent notice to the borrower. 

Furthermore, the Act does not permit a 

lender or its servicer to send the 45-day 

notice to the borrower prior to the actual 

expiration date of the flood insurance 

policy. 

Another commenter suggested that 

flood insurance be force placed through 

private insurers since this would allow 

flood insurance coverage to be 

immediately available instead of having 

to wait 45 days. Whether the lender 

plans to force place coverage through 

FEMA or private insurers, lenders must 

allow the borrower 45 days in which to 

obtain flood insurance. The Agencies 

are proposing new question and answer 

60 to address these commenters’ issues. 

fl60. Can the 45-day notice period be 

accelerated by sending notice to the 

borrower prior to the actual date of 

expiration of flood insurance coverage? 

Answer: No. Although a lender or 

servicer may send a notice warning a 

borrower that flood insurance on the 

collateral is about to expire, the Act and 

Regulation do not allow a lender or its 

servicer to shorten the 45-day forceplacement notice period by sending 

notice to the borrower prior to the actual 

expiration date of the flood insurance 

policy. The Act provides that a lender 

or its servicer must notify a borrower if 

it determines that the improved real 

estate collateral’s insurance coverage 

has expired or is less than the amount 

required for that particular property. 42 

U.S.C. 4012a(e). A lender must send the 

notice upon making a determination 

that the flood insurance coverage is 

inadequate or has expired, such as upon 

receipt of the notice of cancellation or 

expiration from the insurance provider 

or as a result of an internal flood policy 

monitoring system. This notice must 

allow the borrower 45 days in which to 

obtain flood insurance.fi 

Three commenters asserted that it 

would be appropriate for the Agencies 

to allow a reasonable period to 

implement force placement after the end 

of the 45-day notice period. The 

Regulation provides that the lender or 

its servicer shall purchase insurance on 

the borrower’s behalf if the borrower 

fails to obtain flood insurance within 45 

days after notification. Given that the 

lender is already aware during the 45- 

day notice period that it may be 

required to force place insurance if there 

is no response from the borrower, any 

delay should be brief. Where there is a 

brief delay in force placing required 

insurance, the Agencies will expect the 

lender to provide a reasonable 

explanation for the delay. The Agencies 


hsrobinson on PROD1PC76 with NOTICES
35934 Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 

11The 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). 

are proposing new question and answer 

61 to address these commenters’ 

concern. 

One commenter suggested that a 

lender’s procurement of the flood 

insurance binder should be acceptable 

under the Act and Regulation to satisfy 

the force placement requirement. The 

Agencies believe that the insurance 

binder may provide a reasonable 

explanation for a delay in force placing 

the formal flood insurance policy. 

However, an insurance binder is proof 

only of temporary coverage for a limited 

period of time until the formal 

insurance policy is either accepted or 

denied. Lenders should have sufficient 

internal controls in place to ensure that 

if a formal policy is not issued, it should 

force place required insurance 

immediately. 

fl61. When must the lender have flood 

insurance in place if the borrower has 

not obtained adequate insurance within 

the 45-day notice period? 

Answer: The Regulation provides that 

the lender or its servicer shall purchase 

insurance on the borrower’s behalf if the 

borrower fails to obtain flood insurance 

within 45 days after notification. 

However, where there is a brief delay in 

force placing required insurance, the 

Agencies will expect the lender to 

provide a reasonable explanation for the 

delay.fi 

Two commenters asked whether it is 

permissible to charge a borrower for the 

cost of insurance during all or a portion 

of the 45-day notice period. Regardless 

of whether the flood insurance coverage 

is obtained through FEMA or by private 

means, under the Act and Regulation, 

lenders may not impose the cost of 

coverage for that 45-day period at any 

time. The Agencies are proposing new 

question and answer 62 to address this 

comment. 

fl62. Does a lender or its servicer have 

the authority to charge a borrower for 

the cost of insurance coverage during 

the 45-day notice period? 

Answer: No. There is no authority 

under the Act and Regulation to charge 

a borrower for a force-placed flood 

insurance policy until the 45-day notice 

period has expired. The ability to 

impose the costs of force placed flood 

insurance on a borrower commences 45 

days after notification to the borrower of 

a lack of insurance or of inadequate 

insurance coverage. Therefore, lenders 

may not charge borrowers for coverage 

during the 45-day notice period. This 

holds true regardless of whether the 

force placed flood insurance is obtained 

through the NFIP or a private 

provider.fi 

Public Comments 

The Agencies specifically invite 

public comment on the proposed new 

questions and answers. If financial 

institutions, bank examiners, 

community groups, or other interested 

parties have unanswered questions or 

comments about the Agencies’ flood 

insurance regulation, they should 

submit them to the Agencies. The 

Agencies will consider including these 

questions and answers in future 

guidance. 

Solicitation of Comments Regarding the 

Use of ‘‘Plain Language’’ 

Section 722 of the Gramm-LeachBliley 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 document is not 

a proposed rule, comments are 

nevertheless invited on whether the 

proposed questions and answers are 

stated clearly and how they might be 

revised to be easier to read. 

The text of the 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 Act 

and Regulation. 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.11 The OCC, Board, FDIC, OTS, 

NCUA, and FCA (collectively, ‘‘the 

Agencies’’) are providing answers to 

questions pertaining to the following 

topics: 

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 

Nonresidential Buildings 

VI. Flood Insurance Requirements for 

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 in the 

Event of the Sale or Transfer of a 

Designated Loan and/or Its Servicing 

Rights 

IX. Escrow Requirements 

X. Force Placement of Flood Insurance 

XI. Private Insurance Policies 

XII. Required Use of Standard Flood Hazard 

Determination Form (SFHDF) 

XIII. Flood Determination Fees 

XIV. Flood Zone Discrepancies 

XV. Notice of Special Flood Hazards and 

Availability of Federal Disaster Relief 

XVI. 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 a Small 

Business Administration, Veterans 

Administration, or Federal Housing 

Administration 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 


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Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 35935 

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. How do the Agencies enforce the 

mandatory purchase requirements 

under the Act and Regulation when a 

lender participates in a loan syndication 

or participation? 

Answer: As with purchased loans, the 

acquisition by a lender of an interest in 

a loan either by participation or 

syndication after that loan has been 

made does not trigger the requirements 

of Act or Regulation, such as making a 

new flood determination or requiring a 

borrower to purchase flood insurance. 

Nonetheless, as with purchased loans, 

depending upon the circumstances, 

safety and soundness considerations 

may sometimes necessitate that the 

lender undertake due diligence to 

protect itself against the risk of flood or 

other types of loss. 

Lenders who pool or contribute funds 

that will be simultaneously advanced to 

a borrower or borrowers as a loan 

secured by improved real estate would 

all be subject to the requirements of Act 

or Regulation. Federal flood insurance 

requirements would also apply to those 

situations where such a group of lenders 

decides to extend, renew or increase a 

loan. Although the agreement among the 

lenders may assign compliance duties to 

a lead lender or agent, and include 

clauses in which the lead lender or 

agent indemnifies participating lenders 

against flood losses, each participating 

lender remains individually responsible 

for 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 

ongoing basis for compliance with the 

flood insurance requirements. Further, 

the Agencies expect the participating 

lender to have adequate controls to 

monitor the activities of the lead lender 

or agent to ensure compliance with 

flood insurance requirements over the 

term of the loan. 

5. Does the Regulation apply to loans 

that are being restructured or modified? 

Answer: It depends. If the loan 

otherwise meets the definition of a 

designated loan and if the lender 

increases the amount of the loan, or 

extends or renews the terms of the 

original loan, then the Regulation 

applies. 

6. 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. 

7. Is a lender required to perform a 

review of its, or of its servicer’s, existing 

loan portfolio for compliance with the 

flood insurance requirements under the 

Act and Regulation? 

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 

8. 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 

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 


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estate for flood insurance purposes also 

includes the repair or replacement cost 

of the foundation and supporting 

structures. It is very important to 

calculate the correct insurable value of 

the property; otherwise, the lender 

might inadvertently require the 

borrower to purchase too much or too 

little flood insurance coverage. For 

example, if the lender fails to exclude 

the value of the land when determining 

the insurable value of the improved real 

estate, the borrower will be asked to 

purchase coverage that exceeds the 

amount the NFIP will pay in the event 

of a loss. (Please note, however, when 

taking a security interest in improved 

real estate where the value of the land, 

excluding the value of the 

improvements, is sufficient collateral for 

the debt, the lender must nonetheless 

require flood insurance to cover the 

value of the structure if it is located in 

a participating community’s SFHA). 

9. What is insurable value? 

Answer: [Reserved] 

10. Are there any alternatives to the 

definition of insurable value? 

Answer: [Reserved] 

11. 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 nonresidential 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, or 50 

percent for single-family dwellings. 

12. What are examples of nonresidential 

buildings? 

Answer: Nonresidential buildings 

include those used for small businesses, 

churches, schools, farm activities 

(including grain bins and silos), pool 

houses, clubhouses, recreation, 

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. 

13. 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: 

Æ The maximum limit available for 

the type of structure; or 

Æ The ‘‘insurable value’’ of the 

structure. 

Example: (Calculating insurance required 

on a nonresidential 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: 

Æ Maximum limit available for type of 

structure is $500,000 per building 

(nonresidential building). 

Æ 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. 

14. Is flood insurance required for each 

building when the real estate security 

contains more than one building located 

in an SFHA in a participating 

community? If so, how much coverage is 

required? 

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: 

Æ The maximum limit available for 

the type of structures; or 

Æ The ‘‘insurable value’’ of the 

structures. 

The amount of total required flood 

insurance can be allocated among the 

secured buildings in varying amounts, 

but all buildings in an SFHA must 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. 

Æ Maximum limit available for the type of 

structure is $500,000 per building 

(nonresidential buildings); or 

Æ Insurable value (for each nonresidential 

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. 

15. 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. 

16. 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. However, lenders should 

avoid creating situations where a 

building is ‘‘over-insured.’’ 

17. 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 

insurable value of the property to avoid 


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12FEMA, Mandatory Purchase of Flood Insurance 

Guidelines, at 30. 

the mandatory purchase requirement for 

flood insurance. 

III. Exemptions From the Mandatory 

Flood Insurance Requirements 

18. What are the exemptions from 

coverage? 

Answer: There are only two 

exemptions from the purchase 

requirements. The first applies to Stateowned 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 

19. Is a loan secured only by 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 only by land that is 

located in an SFHA in which flood 

insurance is available is not a 

designated loan since it is not secured 

by a building or mobile home. 

20. 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. 

21. 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. 

FEMA, Flood Insurance Manual at p. 

GR 4 (FEMA’s Flood Insurance Manual 

is updated every six months). 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.’’ FEMA, 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. 

22. 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 either a foundation slab 

has been poured and/or an elevation 

certificate has been issued or, if the 

building to be constructed will have its 

lowest floor below the Base Flood 

Elevation, when the building is walled 

and roofed.12 However, the lender must 

require the borrower to have flood 

insurance in place before the lender 

disburses funds to pay for building 

construction (except as necessary to 

pour the slab or perform preliminary 

site work, such as laying utilities, 

clearing brush, or the purchase and/or 

delivery of building materials) 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. 

23. 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 

Nonresidential Buildings 

24. Some borrowers have buildings with 

limited utility or value and, in many 

cases, the borrower would not replace 

them 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 and in a participating 

community. 

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. 


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25. What are a lender’s requirements 

under the Regulation for a loan secured 

by multiple 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 

improved real property securing the 

loan is in an SFHA. If secured improved 

real estate is located in an SFHA, but 

not in a participating 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 secured improved 

real estate 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. 

VI. Flood Insurance Requirements for 

Residential Condominiums 

26. 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. 

27. What is an NFIP Residential 

Condominium Building Association 

Policy (RCBAP)? 

Answer: The RCBAP is a master 

policy for residential condominiums 

issued by FEMA. A residential 

condominium building is defined as 

having 75 percent or more of the 

building’s floor area in residential use. 

It may be purchased only by 

condominium owners associations. The 

RCBAP covers both the common and 

individually owned building elements 

within the units, improvements within 

the units, and contents owned in 

common (if contents coverage is 

purchased). The maximum amount of 

building coverage that can be purchased 

under an RCBAP is either 100 percent 

of the replacement cost value of the 

building, including amounts to repair or 

replace the foundation and its 

supporting structures, or the total 

number of units in the condominium 

building times $250,000, whichever is 

less. RCBAP coverage is available only 

for residential condominium buildings 

in Regular Program communities. 

28. 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: 

Æ The maximum limit available for 

the residential condominium unit; or 

Æ 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. 

Effective October 1, 2007, FEMA 

required agents to provide on the 

declaration page of the RCBAP the 

replacement cost value of the 

condominium building and the number 

of units. Lenders may rely on the 

replacement cost value and number of 

units on the RCBAP declaration page in 

determining insurable value unless they 

have reason to believe that such 

amounts clearly conflict with other 

available information. If there is a 

conflict, the lender should notify the 

borrower of the facts that cause the 

lender to believe there is a conflict. If 

the lender believes that the borrower is 

underinsured, it should require the 

purchase of a Dwelling Policy for 

supplemental coverage. 

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 and 

answer 29, 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 and 

answer 30. 

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: 

Æ Maximum limit available for the 

residential condominium unit is $250,000; or 

Æ 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 this question and answer 

will apply to any loan that is made, 

increased, extended, or renewed after the 

effective date of this revised guidance. This 

revised guidance will not apply to any loans 

made prior to the effective date of this 

guidance until a trigger event occurs (that is, 

the loan is refinanced, extended, increased, 

or renewed) in connection with the loan. 

Absent a new trigger event, loans made prior 

to the effective date of this new guidance will 

be considered compliant if they complied 

with the Agencies’ previous guidance, which 

stated that an RCBAP that provided 80 

percent RCV coverage was sufficient. 

29. 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 28. 

A dwelling policy is available for 

condominium unit owners’ purchase 

when there is no or inadequate RCBAP 


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Federal Register / Vol. 74, No. 138 / Tuesday, July 21, 2009 / Notices 35939 

coverage. When coverage by an RCBAP 

is inadequate, the dwelling policy may 

provide individual unit owners with 

supplemental building coverage to the 

RCBAP. The RCBAP and the dwelling 

policy are coordinated such that the 

dwelling policy purchased by the unit 

owner responds to shortfalls on building 

coverage pertaining either to 

improvements owned by the insured 

unit owner or to assessments. However, 

the dwelling policy does not extend the 

RCBAP limits, nor does it enable the 

condominium association to fill in gaps 

in coverage. 

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: 

Æ Maximum limit available for the 

residential condominium unit is $250,000; or 

Æ 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 

at least $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 ($175,000), 

the maximum coverage available under the 

NFIP ($250,000), or the insurable value 

($200,000).) 

30. 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 that the individual unit owner/ 

borrower ask the condominium 

association to obtain additional 

coverage that would be sufficient to 

meet the Regulation’s requirements (see 

question and answer 28). 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 

and answer 29). 

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: 

Æ Maximum limit available for the 

residential condominium unit is $250,000; or 

Æ 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 

coverage pertaining either to 

improvements owned by the insured 

unit owner or to assessments. However, 

the dwelling policy does not extend the 

RCBAP limits, nor does it enable the 

condominium association to fill in gaps 

in coverage. 

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 coinsurance 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, and 

elevators. It is incumbent on the lender 

to understand these limitations. 

31. 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 and answer 28). 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 and answers 

29 and 30). 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. 

32. 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 coinsurance 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 


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available for the building under the 

NFIP, whichever is less. 

B. Multiply the amount of loss, before 

application of the deductible, by the 

figure determined in A above. 

C. Subtract the deductible from the 

figure determined in B above. 

The policy will pay the amount 

determined in C above, or the amount 

of insurance carried, whichever is less. 

Example 1: (Inadequate insurance amount 

to avoid penalty). 

Replacement value of the building: 

$250,000. 

80% of replacement value of the building: 

$200,000. 

Actual amount of insurance carried: 

$180,000. 

Amount of the loss: $150,000. 

Deductible: $ 500. 

Step A: 180,000 ÷ 200,000 = .90 

(90% of what should be carried to avoid coinsurance penalty) 

Step B: 150,000 × .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 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 coinsurance penalty) 

Step B: 150,000 × 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. 

33. 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 

34. 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. 

35. 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 before 

the loan is made, 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 

response to question 68 in Section XIII. 

Required use of Standard Flood Hazard 

Determination Form.) 

36. When a lender makes, increases, 

extends or renews a second mortgage 

secured by a building or mobile home 

located in an SFHA, how much flood 

insurance must the lender require? 

Answer: The lender must ensure that 

adequate flood insurance is in place or 

require that additional flood insurance 

coverage be added to the flood 

insurance policy in the amount of the 

lesser of either the combined total 

outstanding principal balance of the 

first and second loan, the maximum 

amount available under the Act 

(currently $250,000 for a residential 

building and $500,000 for a 

nonresidential building), or the 

insurable value of the building or 

mobile home. The junior lienholder 

should also ensure that the borrower 

adds the junior lienholder’s name as 

mortgagee/loss payee to the existing 

flood insurance policy. Given the 

provisions of NFIP policies, a lender 

cannot comply with the Act and 

Regulation by requiring the purchase of 

an NFIP flood insurance policy only in 

the amount of the outstanding principal 

balance of the second mortgage without 

regard to the amount of flood insurance 

coverage on a first mortgage. 

A junior lienholder should work with 

the senior lienholder, the borrower, or 

with both of these parties, to determine 

how much flood insurance is needed to 

cover improved real estate collateral. A 

junior lienholder should obtain the 

borrower’s consent in the loan 

agreement or otherwise for the junior 

lienholder to obtain information on 

balance and existing flood insurance 

coverage on senior lien loans from the 

senior lienholder. 

Junior lienholders also have the 

option of pulling a borrower’s credit 

report and using the information from 

that document to establish how much 

flood insurance is necessary upon 

increasing, extending or renewing a 

junior lien, thus protecting the interests 

of the junior lienholder, the senior 

lienholders, and the borrower. In the 

limited situation where a junior 

lienholder or its servicer is unable to 


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obtain the necessary information about 

the amount of flood insurance in place 

on the outstanding balance of a senior 

lien (for example, in the context of a 

loan renewal), the lender may presume 

that the amount of insurance coverage 

relating to the senior lien in place at the 

time the junior lien was first established 

(provided that the amount of flood 

insurance relating to the senior lien was 

adequate at the time) continues to be 

sufficient. 

Example 1: Lender A makes a first 

mortgage with a principal balance of 

$100,000, but improperly requires only 

$75,000 of flood insurance coverage, which 

the borrower satisfied by obtaining an NFIP 

policy. Lender B issues a second mortgage 

with a principal balance of $50,000. The 

insurable value of the residential building 

securing the loans is $200,000. Lender B 

must ensure that flood insurance in the 

amount of $150,000 is purchased and 

maintained. If Lender B were to require 

additional flood insurance only in an amount 

equal to the principal balance of the second 

mortgage ($50,000), its interest in the secured 

property would not be fully protected in the 

event of a flood loss because Lender A would 

have prior claim on $100,000 of the loss 

payment towards its principal balance of 

$100,000, while Lender B would receive only 

$25,000 of the loss payment toward its 

principal balance of $50,000. 

Example 2: Lender A, who is not directly 

covered by the Act or Regulation, makes a 

first mortgage with a principal balance of 

$100,000 and does not require flood 

insurance. Lender B, who is directly covered 

by the Act and Regulation, issues a second 

mortgage with a principal balance of $50,000. 

The insurable value of the residential 

building securing the loans is $200,000. 

Lender B must ensure that flood insurance in 

the amount of $150,000 is purchased and 

maintained. If Lender B were to require flood 

insurance only in an amount equal to the 

principal balance of the second mortgage 

($50,000) through an NFIP policy, then its 

interest in the secured property would not be 

protected in the event of a flood loss because 

Lender A would have prior claim on the 

entire $50,000 loss payment towards its 

principal balance of $100,000. 

Example 3: Lender A made a first mortgage 

with a principal balance of $100,000 on 

improved real estate with a fair market value 

of $150,000. The insurable value of the 

residential building on the improved real 

estate is $90,000; however, Lender A 

improperly required only $70,000 of flood 

insurance coverage, which the borrower 

satisfied by purchasing an NFIP policy. 

Lender B later takes a second mortgage on the 

property with a principal balance of $10,000. 

Lender B must ensure that flood insurance in 

the amount of $90,000 (the insurable value) 

is purchased and maintained on the secured 

property to comply with the Act and 

Regulation. If Lender B were to require flood 

insurance only in an amount equal to the 

principal balance of the second mortgage 

($10,000), its interest in the secured property 

would not be protected in the event of a flood 

loss because Lender A would have prior 

claim on the entire $70,000 loss payment 

towards the insurable value of $90,000. 

37. If a borrower requesting a loan 

secured by a junior lien provides 

evidence that flood insurance coverage 

is in place, does the lender have to 

make a new determination? Does the 

lender have to adjust the insurance 

coverage? 

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 junior 

lien 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 junior lien loan), the insurable 

value, or the maximum amount of 

coverage available on the improved real 

estate. This will hold true whether the 

subordinate lien loan is a home equity 

loan or some other type of junior lien 

loan. 

38. 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. 

39. 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. 

Example: Lender A makes a loan for 

$200,000 that is secured by a warehouse with 

an insurable value of $150,000 and inventory 

in the warehouse worth $100,000. The Act 

and Regulation require that flood insurance 

coverage be obtained for the lesser of the 

outstanding principal balance of the loan or 

the maximum amount of flood insurance that 

is available under the NFIP. The maximum 

amount of insurance that is available for both 

building and contents is $500,000 for each 

category. In this situation, Federal flood 

insurance requirements could be satisfied by 

placing $150,000 worth of flood insurance 

coverage on the warehouse, thus insuring it 

to its insurable value, and $50,000 worth of 

contents flood insurance coverage on the 

inventory, thus providing total coverage in 

the amount of the outstanding principal 

balance of the loan. Note that this holds true 

even though the inventory is worth $200,000. 

40. 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. 

41. 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. 

42. 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. 

43. 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 


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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 in 

the Event of the Sale or Transfer of a 

Designated Loan and/or Its Servicing 

Rights 

44. How do the flood insurance 

requirements under the Regulation 

apply to regulated lenders under the 

following scenarios involving loan 

servicing? 

Scenario 1: A regulated lender 

originates a designated loan secured by 

a building or mobile home located in an 

SFHA in which flood insurance is 

available under the Act. The regulated 

lender makes the initial flood 

determination, provides the borrower 

with appropriate notice, and flood 

insurance is obtained. The regulated 

lender initially services the loan; 

however, the regulated lender 

subsequently sells both the loan and the 

servicing rights to a nonregulated party. 

What are the regulated lender’s 

requirements under the Regulation? 

What are the regulated lender’s 

requirements under the Regulation if it 

only transfers or sells the servicing 

rights, but retains ownership of the 

loan? 

Answer: The regulated lender must 

comply with all requirements of the 

Regulation, including making the initial 

flood determination, providing 

appropriate notice to the borrower, and 

ensuring that the proper amount of 

insurance is obtained. In the event the 

regulated lender sells or transfers the 

loan and servicing rights, the regulated 

lender must provide notice of the 

identity of the new servicer to FEMA or 

its designee. Once the regulated lender 

has sold the loan and the servicing 

rights, the lender has no further 

obligation regarding flood insurance on 

the loan. 

If the regulated lender retains 

ownership of the loan and only transfers 

or sells the servicing rights to a 

nonregulated party, the regulated 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 

regulated lender as owner of the loan, 

including escrow of insurance 

premiums and force 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, 

force placement, and flood hazard 

determination fee provisions of the Act 

and Regulation primarily so that they 

may perform the administrative tasks for 

the regulated lender, without fear of 

liability to the borrower for the 

imposition of unauthorized charges. It is 

the Agencies’ longstanding position, as 

described in the preamble to the 

Regulation that the obligation of a loan 

servicer to fulfill administrative duties 

with respect to the flood insurance 

requirements arises from the contractual 

relationship between the loan servicer 

and the regulated lender or from other 

commonly accepted standards for 

performance of servicing obligations. 

The regulated lender remains ultimately 

liable for fulfillment of those 

responsibilities, and must take adequate 

steps to ensure that the loan servicer 

will maintain compliance with the flood 

insurance requirements. 

Scenario 2: A nonregulated 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 

nonregulated lender does not make an 

initial flood determination or notify the 

borrower of the need to obtain 

insurance. The nonregulated lender 

sells the loan and servicing rights to a 

regulated lender. What are the regulated 

lender’s requirements under the 

Regulation? What are the regulated 

lender’s requirements if it only 

purchases the servicing rights? 

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 regulated lender makes, 

increases, extends, or renews a 

designated loan. A regulated lender’s 

purchase of a loan does not fall within 

any of those categories. However, if a 

regulated lender becomes aware at any 

point during the life of a designated 

loan that flood insurance is required, 

then the regulated lender must comply 

with the Regulation, including force 

placing insurance, if necessary. 

Depending upon the circumstances, 

safety and soundness considerations 

may sometimes necessitate that the 

lender undertake sufficient 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 Act and Regulation. 

Where a regulated lender purchases 

only the servicing rights to a loan 

originated by a nonregulated 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 regulated 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. 

45. When a regulated 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 regulated 

lender’s force placement of a policy) 

will constitute notice to FEMA when 

the regulated lender is servicing that 

loan. 

In the event the servicing is 

subsequently transferred to a new 

servicer, the regulated 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. 

46. 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. 

47. 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. 


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48. If the loan and its servicing rights 

are sold by the regulated lender, is the 

regulated 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. 

49. Is a regulated lender required to 

provide notice when the servicer, not the 

regulated 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 regulated 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. 

50. In the event of a merger or 

acquisition 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. 

IX. Escrow Requirements 

51. Are multi-family buildings or mixeduse 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 

designated loan. Lenders are required to 

escrow flood insurance premiums and 

fees for mandatory flood insurance for 

such loans if the lender requires the 

escrow of taxes, hazard insurance 

premiums or any other charges for loans 

secured by residential improved real 

estate. A lender is not required to 

escrow flood insurance premiums and 

fees for a particular loan if it does not 

require escrowing of any other charges 

for that loan. 

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. Singlefamily 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 any other 

charges 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.’’ (See questions and answers 

11 and 12 for guidance on residential 

and nonresidential buildings.) If the 

primary use of a mixed-use property is 

for residential purposes, the 

Regulation’s escrow requirements apply. 

52. When must escrow accounts be 

established for flood insurance 

purposes? 

Answer: If a lender requires the 

escrow of taxes, insurance premiums, 

fees, or any other charges for a loan 

secured by residential improved real 

estate or a mobile home, the lender must 

also require the escrow of all flood 

insurance premiums and fees. When 

administering loans secured by one-tofour family dwellings, 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 the escrow 

requirements in Section 10 of RESPA. 

(This includes individual units of 

condominiums. Individual units of 

cooperatives, although covered by 

Section 10 of RESPA, are not insurable 

under the NFIP and are not covered by 

the Regulation.) 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. 

53. 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. 

54. 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. 

55. Will escrow-type accounts for 

commercial loans, secured by multifamily 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 


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requirement to escrow flood insurance 

premiums. 

56. Which requirements for escrow 

accounts apply to properties adequately 

covered by RCBAPs? 

Answer: RCBAPs (Residential 

Condominium Building Association 

Policies) 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, increases, renews, or extends a 

loan secured by a condominium unit 

that is adequately covered by an RCBAP 

and dues to the condominium 

association apply to the RCBAP 

premiums, an escrow account is not 

required. However, if the RCBAP 

coverage is inadequate and the unit is 

also covered by a dwelling form policy, 

premiums for the dwelling form policy 

would need to be escrowed if the lender 

requires escrow for other purposes, such 

as hazard insurance or taxes. Lenders 

should exercise due diligence with 

respect to continuing compliance with 

the insurance requirements on the part 

of the condominium association. 

X. Force Placement of Flood Insurance 

57. What is the requirement for the force 

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; 

• Flood insurance under the Act is 

available for improved property 

securing the loan; 

• 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. 

The Act and Regulation require the 

lender, or its servicer, to send notice to 

the borrower upon making a 

determination that the improved real 

estate collateral’s insurance coverage 

has expired or is less than the amount 

required for that particular property, 

such as upon receipt of the notice of 

cancellation or expiration from the 

insurance provider. 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 for the cost of premiums and 

fees to obtain the coverage. The Act 

does not permit a lender or its servicer 

to send the required 45-day notice to the 

borrower prior to making a 

determination that flood insurance 

coverage is inadequate. If adequate 

insurance is not obtained by the 

borrower within the 45-day notice 

period, then the lender must purchase 

insurance on the borrower’s behalf. 

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 force 

placement procedures. FEMA published 

these procedures in the Federal Register 

on August 29, 1995 (60 FR 44881). 

Appendix A of FEMA’s September 2007 

Mandatory Purchase of Flood Insurance 

Guidelines sets out the MPPP 

Guidelines and Requirements, including 

force placement procedures and 

examples of notification letters to be 

used in connection with the MPPP. 

58. Can a servicer force place on behalf 

of a lender? 

Answer: Yes. Assuming the statutory 

prerequisites for force 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. 

59. When force 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 

and also Section VII. Flood Insurance 

Requirements for Home Equity Loans, 

Lines of Credit, Subordinate Liens, and 

Other Security Interests in Collateral 

Located in an SFHA.) 

60. Can the 45-day notice period be 

accelerated by sending notice to the 

borrower prior to the actual date of 

expiration of flood insurance coverage? 

Answer: [Reserved] 

61. Is a reasonable period of time 

allowed after the end of the 45-day 

notice period for a lender or its servicer 

to implement force placement? 

Answer: [Reserved] 

62. Does a lender or its servicer have the 

authority to charge a borrower for the 

cost of insurance coverage during the 

45-day notice period? 

Answer: [Reserved] 

XI. Private Insurance Policies 

63. May a lender rely on a private 

insurance policy to meet its obligation 

to ensure that its designated loans are 

covered by an adequate amount of flood 

insurance? 

Answer: It depends. A private 

insurance policy may be an adequate 

substitute for NFIP insurance if it meets 

the criteria set forth by FEMA in its 

Mandatory Purchase of Flood Insurance 

Guidelines. Similarly, a private 

insurance policy may be used to 

supplement NFIP insurance for 

designated loans where the property is 

underinsured if it meets the criteria set 

forth by FEMA in its Mandatory 

Purchase of Flood Insurance Guidelines. 

FEMA states that, to the extent that a 

private policy differs from the NFIP 

Standard Flood Insurance Policy, the 

differences should be carefully 

examined before the policy is accepted 

as sufficient protection under the law. 

FEMA also states that the suitability of 

private policies need only be considered 

when the mandatory purchase 

requirement applies. 

64. When may a lender rely on a private 

insurance policy that does not meet the 

criteria set forth by FEMA? 

Answer: A lender may rely on a 

private insurance policy that does not 

meet the criteria set forth by FEMA only 

in limited circumstances. For example, 

when a flood insurance policy has 

expired and the borrower has failed to 

renew coverage, private insurance 

policies that do not meet the criteria set 

forth by FEMA, such as private 

insurance policies providing portfoliowide blanket coverage, may be useful 

protection for the lender for a gap in 

coverage in the period of time before a 

force placed policy takes effect. 

However, the lender must still force 

place adequate coverage in a timely 

manner, as required, and may not rely 

on a private insurance policy that does 

not meet the criteria set forth by FEMA 

on an ongoing basis. 

XII. Required Use of Standard Flood 

Hazard Determination Form (SFHDF) 

65. Does the SFHDF replace the 

borrower notification form? 

Answer: No. The SFHDF is used by 

the lender to determine whether the 

building or mobile home offered as 

collateral security for a loan is or will 

be located in an SFHA in which flood 


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insurance is available under the Act. 

The notification form, on the other 

hand, is used to notify the borrower(s) 

that the building or mobile home is or 

will be located in an SFHA and to 

inform them about flood insurance 

requirements and the availability of 

Federal disaster relief assistance. 

66. May a lender provide the SFHDF to 

the borrower? 

Answer: Yes. While not a statutory 

requirement, a lender may provide a 

copy of the flood determination to the 

borrower so the borrower can provide it 

to the insurance agent in order to 

minimize flood zone discrepancies 

between the lender’s determination and 

the borrower’s policy. A lender would 

also need to make the determination 

available to the borrower in case of a 

special flood hazard determination 

review, which must be requested jointly 

by the lender and the borrower. In the 

event a lender provides the SFHDF to 

the borrower, the signature of the 

borrower is not required to acknowledge 

receipt of the form. 

67. May the SFHDF be used in electronic 

format? 

Answer: Yes. In the final rule 

adopting the SFHDF, FEMA stated: ‘‘If 

an electronic format is used, the format 

and exact layout of the Standard Flood 

Hazard Determination Form is not 

required, but the fields and elements 

listed on the form are required. Any 

electronic format used by lenders must 

contain all mandatory fields indicated 

on the form.’’ It should be noted, 

however, that the lender must be able to 

reproduce the form upon receiving a 

document request by its Federal 

supervisory agency. 

68. May a lender rely on a previous 

determination for a refinancing or 

assumption of a loan or multiple loans 

to the same borrower secured by the 

same property? 

Answer: It depends. 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. 

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. Further, 

if the same lender makes multiple loans 

to the same borrower secured by the 

same improved real estate, the lender 

may rely on its previous determination 

if the original determination was made 

not more than seven years before the 

date of the transaction, the basis for the 

determination was set forth on the 

SFHDF, and there were no map 

revisions or updates affecting the 

security property since the original 

determination was made. 

XIII. Flood Determination Fees 

69. 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 

force placement of insurance. 

Loan or other contractual documents 

between the parties may also permit the 

imposition of fees. 

70. 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 69 occur. Further, a lender 

may not charge a composite 

determination and life-of-loan fee if the 

loan does not close, because the life-ofloan fee would be an unearned fee in 

violation of the Real Estate Settlement 

Procedures Act. 

XIV. Flood Zone Discrepancies 

71. What should a lender do when there 

is a discrepancy between the flood 

hazard zone designation on the flood 

determination form and the flood 

insurance policy? 

A lender should only be concerned 

about a discrepancy on the Standard 

Flood Hazard Determination Form (the 

SFHDF) and the one on the flood 

insurance policy if the discrepancy is 

between a high-risk zone (A or V) and 

a low- or moderate-risk zone (B, C, D, 

or X). In other words, a lender need not 

be concerned about subcategory 

differences between flood zones on 

these two documents. Once in 

possession of a copy of the flood 

insurance policy, a lender should 

systematically compare the flood zone 

designation on the policy with the zone 

shown on the SFHDF. If the flood 

insurance policy shows a lower risk 

zone than the SFHDF, then lender 

should investigate. As noted in FEMA’s 

Mandatory Purchase of Flood Insurance 

Guidelines, Federal law sets the 

ultimate responsibility to place flood 

insurance on the lender, with limited 

reliance permitted on third parties to 

the extent that the information that 

those third parties provide is 

guaranteed. 

A lender should first determine 

whether the difference results from the 

application of the NFIP’s ‘‘Grandfather 

Rule.’’ This rule 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 


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rating for particular pieces of improved 

property. A discrepancy resulting from 

application of the NFIP’s Grandfather 

Rule is reasonable and acceptable, but 

the lender should substantiate these 

findings. 

A lender should also determine 

whether a difference in flood zone 

designations is the result of a mistake. 

To do so, a lender should facilitate 

communication between itself or the 

third-party service provider that 

performed the flood hazard 

determination for the lender. If it 

appears that the discrepancy is the 

result of a mistake, a lender should 

recheck its determination. If there still 

appears to be a discrepancy after this 

step has been taken, a lender and 

borrower may jointly request that FEMA 

review the determination to confirm or 

review the accuracy of the original 

determination performed by a lender or 

on the lender’s behalf. However, FEMA 

will only conduct this review if the 

request is submitted within 45 days of 

the date the lender notified the borrower 

that a building or manufactured home is 

in an SFHA and flood insurance is 

required. 

If, despite these efforts, the 

discrepancy is not resolved, or in the 

course of attempting to resolve a 

discrepancy, a borrower or an insurance 

company or its agent is uncooperative in 

assisting a lender in this attempt, the 

lender should notify the insurance agent 

about the insurer’s duty pursuant to 

FEMA’s letter of April 16, 2008 (W– 

08021), to write a flood insurance policy 

that covers the most hazardous flood 

zone. When providing this notification, 

the lender should include its zone 

information and it should also notify the 

insurance company itself. The lender 

should substantiate these 

communications in its loan file. 

72. Can a lender be found in violation 

of the requirements of the Regulation 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: As noted in question and 

answer 71 above, lenders should have a 

process in place to identify and resolve 

flood zone discrepancies. A lender is in 

the best position to coordinate between 

the various parties involved in a 

mortgage loan transaction to resolve any 

flood zone discrepancy. If a lender is 

able to substantiate in its loan file a 

bona fide effort to resolve a discrepancy, 

either by finding a legitimate reason for 

such discrepancy or by attempting to 

resolve the discrepancy, for example, by 

contacting FEMA to review the 

determination, no violation will be 

cited. If a pattern or practice of 

unresolved discrepancies is found in a 

lender’s loan portfolio due to a lack of 

effort on the lender’s part to resolve 

such discrepancies, the Agencies may 

cite the lender for a violation of the 

mandatory purchase requirements. 

XV. Notice of Special Flood Hazards 

and Availability of Federal Disaster 

Relief 

73. 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. 

74. 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. 

75. 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. 

76. 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. 

77. 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. 

78. 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. 

79. 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 

provide the notice to the borrower. 


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13Please refer to 12 CFR 19.240(a) (OCC); 12 CFR 

263.65(b)(10) (Board); 12 CFR 308.132(c)(xvi) 

(FDIC); 12 CFR 509.103(c) (OTS); 12 CFR 622.61(b) 

(FCA); and 12 CFR 747.1001(a) (NCUA) for the 

Agencies’ current civil penalty limits. 

Therefore, the lender must provide a 

new notice to the borrower, even if a 

new determination is not required. 

80. 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 of the 

Regulation or in Appendix 4 of FEMA’s 

Mandatory Purchase of Flood Insurance 

Guidelines 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. 

XVI. Mandatory Civil Money Penalties 

81. Which 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 Regulation triggers a 

mandatory civil money penalty: 

• Purchase of flood insurance where 

available (42 U.S.C. 4012a(b)); 

• Escrow of flood insurance 

premiums (42 U.S.C. 4012a(d)); 

• Force placement of flood insurance 

(42 U.S.C. 4012a(e)); 

• Notice of special flood hazards and 

the availability of Federal disaster relief 

assistance (42 U.S.C. 4104a(a)); and 

• Notice of servicer and any change of 

servicer (42 U.S.C. 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)). 

Each Agency adjusts these limits 

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.13 Lenders pay the penalties 

into the National Flood Mitigation Fund 

held by the Department of the Treasury 

for the benefit of FEMA. 

82. 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 a 

pattern or practice exists by weighing 

the individual facts and circumstances 

of each case. In making the 

determination, the Agencies look both 

to guidance and experience with 

determinations of pattern or practice 

under other regulations (such as 

Regulation B (Equal Credit Opportunity) 

and Regulation Z (Truth in Lending)), as 

well as Agencies’ precedents in 

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: May 15, 2009. 

John C. Dugan, 

Comptroller of the Currency. 

By order of the Board of Governors of the 

Federal Reserve System, July 14, 2009. 

Jennifer J. Johnson, 

Secretary of the Board. 

Dated at Washington, DC, this 8th day of 

July, 2009. 

Robert E. Feldman, 

Executive Secretary, Federal Deposit 

Insurance Corporation. 

Dated: April 2, 2009. 

By the Office of Thrift Supervision. 

John E. Bowman, 

Acting Director. 

Date: July 8, 2009 

Roland E. Smith, 

Secretary, Farm Credit Administration Board. 

By the National Credit Union 

Administration Board, on June 5, 2009. 

Mary F. Rupp, 

Secretary of the Board. 

[FR Doc. E9–17129 Filed 7–20–09; 8:45 am] 

BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P; 

6720–01–P; 6705–01–P; 7535–01–P 


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