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Rule2022-10414

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

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Published

May 31, 2022

Issuing agencies

Treasury DepartmentComptroller of the CurrencyFederal Reserve SystemFederal Deposit Insurance CorporationFarm Credit AdministrationNational Credit Union Administration

Abstract

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

Full Text

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<title>Federal Register, Volume 87 Issue 104 (Tuesday, May 31, 2022)</title>
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[Federal Register Volume 87, Number 104 (Tuesday, May 31, 2022)]
[Rules and Regulations]
[Pages 32826-32895]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-10414]

[[Page 32825]]

Vol. 87

Tuesday,

No. 104

May 31, 2022

Part IV

Department of the Treasury

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Office of the Comptroller of the Currency

Federal Reserve System

Federal Deposit Insurance Corporation

Farm Credit Administration

National Credit Union Administration

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

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

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

[[Page 32826]]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 22

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

FEDERAL RESERVE SYSTEM

12 CFR Part 208

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

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 339

RIN 3064-ZA16

FARM CREDIT ADMINISTRATION

12 CFR Part 614

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 760

RIN 3133-AF31, 3133-AF14

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

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

ACTION: Guidance.

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

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

FOR FURTHER INFORMATION CONTACT:
OCC: Rhonda L. Daniels, Compliance Specialist, Compliance Risk
Policy Division, (202) 649-5405; Amber Dapshi, Compliance Specialist,
Compliance Risk Policy Division, (240) 646-4348; Heidi M. Thomas,
Special Counsel, Sadia Chaudhary, Counsel, Rima Kundnani, Counsel, or
Cyndy MacMahon, Attorney, Chief Counsel's Office, (202) 649-5490. If
you are deaf, hard of hearing, or have a speech disability, please dial
7-1-1 to access telecommunications relay services.
Board: Vivian W. Wong, Senior Counsel, (202) 452-3667, Matthew
Dukes, Counsel, (202) 973-5096, or Keshia King, Lead Supervisory Policy
Analyst, (202) 452-2496, Division of Consumer and Community Affairs; or
Daniel Ericson, Senior Counsel, (202) 452-3359, Legal Division; for
users of Telecommunications Relay Service (TRS),Telecommunications
Device for the Deaf (TDD) only, contact 711 or (202) 263-4869.
FDIC: Navid Choudhury, Counsel, Policy Unit, Legal Division, (202)
898-6526; or Simin Ho, Senior Policy Analyst, Division of Depositor and
Consumer Protection, (202) 898-6907.
FCA: Ira D. Marshall, Senior Policy Analyst, Office of Regulatory
Policy, (703) 883-4379, TTY (703) 883-4056 or Jennifer Cohn, Assistant
General Counsel, Office of General Counsel, (720) 213-0440.
NCUA: Thomas Zells, Senior Staff Attorney, Office of General
Counsel, (703) 518-6540, or Simon Hermann, Senior Credit Specialist,
Office of Examination and Insurance, (703) 518-6360.

SUPPLEMENTARY INFORMATION:

Background

The National Flood Insurance Act of 1968 created the National Flood
Insurance Program (NFIP), which is administered by the Federal
Emergency Management Agency (FEMA).\1\ The NFIP enables property owners
in participating communities to purchase flood insurance if the
community has adopted floodplain management ordinances and minimum
standards for new and substantially damaged or improved construction.
Thus, in participating communities, federally-backed flood insurance is
available for property owners in flood risk areas.
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\1\ Public Law 90-448, 82 Stat. 572 (1968).
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Congress expanded the NFIP by enacting the Flood Disaster
Protection Act of 1973 (FDPA).\2\ The FDPA made the purchase of flood
insurance mandatory in connection with loans made by federally-
regulated lending institutions when the loans are secured by improved
real estate or mobile homes located in a special flood hazard area
(SFHA). The National Flood Insurance Reform Act of 1994 (the Reform
Act) (Title V of the Riegle Community Development and Regulatory
Improvement Act of 1994) comprehensively revised the Federal flood
insurance statutes.\3\ The Reform Act required the OCC, Board, FDIC,
Office of Thrift Supervision (OTS), and NCUA to revise their flood
insurance regulations, and required the FCA to promulgate a flood
insurance regulation for the first time. The OCC, Board, FDIC, OTS,
FCA, and NCUA \4\ fulfilled these requirements by issuing a joint final
rule in the summer of 1996.\5\
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\2\ Public Law 93-234, 87 Stat. 975 (1973).
\3\ Public Law 103-325, 108 Stat. 2255 (1994).
\4\ Throughout this document ``the Agencies'' includes the OTS
with respect to events that occurred prior to July 21, 2011, but
does not include OTS with respect to events thereafter. Sections 311
and 312 of the Dodd-Frank Wall Street Reform and Consumer Protection
Act transferred OTS's functions to other agencies on July 21, 2011.
The OTS's supervisory functions relating to Federal savings
associations were transferred to the OCC, while those relating to
State savings associations were transferred to the FDIC. See also 76
FR 39246 (July 6, 2011).
\5\ 61 FR 45684 (Aug. 29, 1996).
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In October 2013, the Agencies jointly issued proposed rules \6\ to
implement the escrow, force placement, and private flood insurance
provisions of the Biggert-Waters Flood Insurance Reform Act of 2012
(the Biggert-Waters Act).\7\ In March 2014, Congress enacted the
Homeowner Flood Insurance Affordability Act (HFIAA), which, among other
things, amended the Biggert-Waters Act's requirements regarding the
escrow of flood insurance premiums and fees and created a new exemption
from the mandatory flood insurance purchase requirement for certain
detached structures.\8\ The Agencies finalized the regulations to
implement provisions in the Biggert-Waters Act and HFIAA under the
Agencies' jurisdiction, except for the provisions in the Biggert-Waters
Act related to private flood insurance, with a final rule issued in
July 2015 (2015 Final Rule).\9\ In February 2019, the

[[Page 32827]]

Agencies finalized regulations to implement the private flood insurance
related provisions of the Biggert-Waters Act (2019 Final Rule).\10\
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\6\ 78 FR 65107 (Oct. 30, 2013).
\7\ Public Law 112-141, 126 Stat. 916 (2012).
\8\ Public Law 113-89, 128 Stat. 1020 (2014).
\9\ 80 FR 43215 (July 21, 2015). Subsequently, on November 7,
2016, the Agencies re-proposed the private flood insurance
provisions through a joint notice of proposed rulemaking (81 FR
78063).
\10\ 84 FR 4953 (Feb. 20, 2019).
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Interagency Questions and Answers Regarding Flood Insurance

Since 1997, the Interagency Questions and Answers \11\ have
provided the lending industry and other interested parties with
guidance addressing a wide spectrum of technical flood insurance-
related compliance issues. In 2009, the Agencies comprehensively
revised and reorganized the initial 1997 Interagency Questions and
Answers (2009 Interagency Questions and Answers). In 2011, the Agencies
further finalized two additional Q&As that were proposed in 2009, and
re-proposed three Q&As that were never finalized.\12\
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\11\ Throughout this document, ``Interagency Questions and
Answers'' refers to the Interagency Questions and Answers Regarding
Flood Insurance in its entirety; ``Q&A'' refers to an individual
question and answer within the Questions and Answers.
\12\ For additional information on the history of the
Interagency Questions and Answers, please see the preamble to the
July 2020 Proposed Interagency Questions and Answers at 85 FR 40442
(July 6, 2020).
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In light of the significant changes to flood insurance requirements
pursuant to the Biggert-Waters Act and HFIAA, as well as the Agencies'
regulations issued to implement these laws, the Agencies proposed new
and revised Interagency Questions and Answers in July 2020 (July 2020
Proposed Questions and Answers) that covered a broad range of topics
related to technical flood insurance-related issues, including the
escrow of flood insurance premiums, the detached structure exemption to
the mandatory purchase of flood insurance requirement, and force
placement procedures.\13\ This proposal also reorganized the
Interagency Questions and Answers to provide a more logical flow of
questions through the flood insurance process. The Agencies also
committed in the July 2020 Proposed Questions and Answers to separately
issuing for notice and comment additional proposed questions and
answers relating to the 2019 Final Rule implementing the private flood
insurance provisions of the Biggert-Waters Act. The Agencies published
these proposed questions and answers in March 2021 (March 2021 Proposed
Questions and Answers).\14\
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\13\ See 85 FR 40442 (July 6, 2020). The comment period for the
July 2020 Proposed Questions and Answers was extended from Sept. 4,
2020 to Nov. 3, 2020. See 85 FR 54946 (Sept. 3, 2020).
\14\ See 86 FR 14696 (Mar. 18, 2021).
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With this Federal Register document, the Agencies are consolidating
the July 2020 Proposed Questions and Answers and the March 2021
Proposed Questions and Answers into one set of Interagency Questions
and Answers Regarding Flood Insurance (2022 Interagency Questions and
Answers), consisting of 144 Questions and Answers (including 24 private
flood insurance questions and answers), revised as appropriate based on
comments received. Specifically, the Q&As in the March 2021 Proposed
Questions and Answers are now set forth as sections III, IV, and V in
the 2020 Interagency Questions and Answers, and the remaining sections,
with the exception of proposed Section III discussed below, are
renumbered accordingly. The Agencies also are making non-substantive
revisions to certain questions and answers to more directly respond to
the question asked, provide additional clarity, or make technical
corrections.
These 2022 Interagency Questions and Answers supersede the 2009
Interagency Questions and Answers (and the 2011 amendments to the 2009
Interagency Questions and Answers) and supplement other guidance or
interpretations issued by the Agencies related to loans in areas having
special flood hazards. In addition to guidance and interpretations
issued by the Agencies, lenders should be aware of information related
to the NFIP provided by FEMA that may address questions pertaining to
NFIP requirements.
The issuance of these 2022 Interagency Questions and Answers
responds to requests over the years from the lending industry,
including at conferences and through interagency webinars, to provide
additional guidance on flood insurance compliance issues. In addition,
the 2022 Interagency Questions and Answers are responsive to requests
made pursuant to the most recent review under the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (EGRPRA), which directs some
of the Agencies to conduct a joint review of their regulations every 10
years and consider whether any of those regulations are outdated,
unnecessary, or unduly burdensome.\15\ As part of the most recent joint
review, the Board, FDIC, OCC, and NCUA received comments on the
Agencies' flood insurance rules. Several commenters asked for more
guidance to the industry on flood insurance requirements, particularly
with respect to renewal notices for force-placed insurance policies,
the required amount of flood insurance, and flood insurance
requirements for tenant-owned buildings and detached structures. One
commenter specifically requested that the Agencies update the
Interagency Questions and Answers. In the 2017 EGRPRA Joint Report to
Congress issued by the Federal Financial Institutions Examination
Council (FFIEC), the Board, FDIC, and OCC indicated that they agreed
with commenters that the Interagency Questions and Answers should be
updated and planned to address many of the flood insurance issues
raised by EGRPRA commenters.\16\ Accordingly, in issuing these 2022
Interagency Questions and Answers, the Agencies are addressing the
commitment made in the 2017 EGRPRA Joint Report to Congress.
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\15\ Public Law 104-208, 110 Stat. 3001 (1996) (codified at 12
U.S.C. 3311). The most recent report to Congress required by EGRPRA
was published by the Board, FDIC, OCC, and NCUA under the FFIEC in
March 2017 and is available at <a href="https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf">https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf</a>. The NCUA, although
an FFIEC member, is not a ``Federal banking agency'' within the
meaning of EGRPRA and so is not required to participate in the
review process. Nevertheless, the NCUA elected to participate in the
EGRPRA review and conducted its own parallel review of its
regulations. The FCA is not subject to EGRPRA; however, as required
by the Farm Credit System Reform Act of 1996 (see 12 U.S.C. 2252
note), FCA engages in periodic regulatory review. The Consumer
Financial Protection Bureau (CFPB), although an FFIEC member, is not
a ``Federal banking agency'' within the meaning of EGRPRA and so is
not required to participate in the review process.
\16\ Specifically, the OCC, Board, and FDIC stated in the EGRPRA
report that they ``agree with these EGRPRA commenters that
additional agency guidance on flood insurance requirements would be
helpful to the banking industry and that the Interagency Flood Q&As
should be updated to address recent amendments to the flood
insurance statutes. In fact, the agencies have begun work on
revising the Interagency Flood Q&As to reflect the agencies'
recently issued final rules implementing the Biggert-Waters Act and
HFIAA requirements and to address other issues that have arisen
since the last update in 2011. As part of this revision, the
agencies also plan to address many of the flood insurance issues
raised by EGRPRA commenters.'' FFIEC Joint EGRPRA Report to
Congress, March 2017 at 56; available at <a href="https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf">https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf</a>.
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Reorganization of Interagency Questions and Answers

For ease of reference and in light of the increased number of
subjects covered that address complex issues, the Agencies proposed to
reorganize the Interagency Questions and Answers to provide a more
logical flow of questions through the flood insurance process for
lenders, servicers, regulators, and policyholders. Moreover, the
Agencies also proposed a new system of designation for the Q&As. Rather
than numbering the Q&As successively

[[Page 32828]]

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

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

For ease of reference, the following terms are used throughout this
document: ``Act'' refers to the National Flood Insurance Act of 1968
and the Flood Disaster Protection Act of 1973, as revised by the
National Flood Insurance Reform Act of 1994, Biggert-Waters Flood
Insurance Reform Act of 2012, and Homeowner Flood Insurance
Affordability Act of 2014 (codified at 42 U.S.C. 4001 et seq).
``Regulation'' refers to each Agency's current final rule.\17\
References to the NFIP Flood Insurance Manual refer to the version
published in April 2021.
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\17\ 12 CFR part 22 (OCC); 12 CFR 208.25 (Board); 12 CFR part
339 (FDIC); 12 CFR part 614, subpart S (FCA); and 12 CFR part 760
(NCUA).
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Public Comments

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

[[Page 32829]]

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

Section-by-Section Analysis

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

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

[[Page 32830]]

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

\20\ See <a href="https://www.fema.gov/flood-insurance/risk-rating">https://www.fema.gov/flood-insurance/risk-rating</a>.
---------------------------------------------------------------------------

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

[[Page 32831]]

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

[[Page 32832]]

clarified that the Agencies expect a lender participating in a multi-
tranche credit facility to perform upfront due diligence to determine
whether the lead lender has adequate controls to monitor the loan on an
ongoing basis for compliance with flood insurance requirements. One
commenter requested the same changes it suggested for proposed Q&A
Applicability 9 regarding further clarification on what constitutes
sufficient upfront due diligence and adequate controls and removal of
flood compliance requirements if the lead lender is not federally-
regulated. For the reasons stated in the discussion of Q&A
Applicability 9, the Agencies decline to accept these changes and are
adopting Q&A Applicability 10 as proposed with the addition of a
similar statement added to Q&A Applicability 9 regarding due diligence
and non-Federal lead lenders.
Applicability 11. The Agencies proposed new Q&A Applicability 11 to
clarify that an automatic extension of a credit facility agreed upon by
the borrower and lender in the original loan agreement would not
constitute a triggering event for purposes of the Federal flood
insurance requirements. The Agencies received no specific comment on
this Q&A and are adopting it as proposed.
Applicability 12. The Agencies proposed new Q&A Applicability 12,
based on guidance previously issued by the Agencies,\21\ to address the
applicability of the mandatory purchase requirement during a period of
time when coverage under the NFIP is unavailable, such as due to a
lapse in authorization or in appropriations. The proposed answer
clarified that during a period when NFIP coverage is not available,
lenders may continue to make loans subject to the Regulation without
flood insurance coverage but must continue to make flood
determinations, provide timely, complete and accurate notices to
borrowers, and comply with other aspects of the Regulation. The
proposed answer also indicated that lenders should evaluate the safety
and soundness and legal risks, and prudently manage those risks, during
such periods when the NFIP is unavailable. One commenter specifically
commented on this proposed Q&A, stating that it provides helpful and
appreciated clarity on how credit unions should proceed in the event of
a lapse in authorization or appropriations. The Agencies are adopting
this Q&A as proposed.
---------------------------------------------------------------------------

\21\ See Guidance Regarding Lapse and Extension of FEMA's
Authority to Issue Flood Insurance Contracts, OCC Bulletin 2010-20
(OCC); Informal Guidance on the Lapse of FEMA's Authority to Issue
Flood Insurance Contracts, CA Letter 10-3 (Board); Lapse of FEMA
Authority to Issue Flood Insurance Policies, FIL-23-2010 (FDIC);
Lapse and Extension of FEMA's Authority to Issue Flood Insurance
Contracts, Informational Memorandum June 3, 2010 (FCA), and Guidance
on the Lapse of FEMA's Authority to Issue Flood Insurance Contracts,
Letter No. 10-CU-08 (NCUA).
---------------------------------------------------------------------------

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

[[Page 32833]]

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

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

Existing section III includes one Q&A related to the exemptions
from the mandatory flood insurance purchase requirements. The Agencies
proposed to redesignate existing section III as section II and proposed
a streamlined heading for this section to provide greater clarity with
no intended change in substance or meaning. As proposed, section II
includes existing Q&A 18 and six new Q&As, Exemptions 2 through 7,
pertaining to the exemption from the mandatory flood insurance purchase
requirements for certain detached structures created by HFIAA. The
Agencies proposed changes to the Q&As in this section in the July 2020
Proposed Questions and Answers. As noted in the proposal, this set of
Q&As on the detached structure exemption responds to a request for more
guidance related to this exemption, as documented in the EGRPRA
report.\22\
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\22\ <a href="https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf">https://www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf</a>.
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Exemptions 1. The Agencies proposed to redesignate existing Q&A 18
as Q&A Exemptions 1. This Q&A discusses the exemptions from the
mandatory flood insurance purchase requirement. The Agencies proposed
to revise the Q&A to include the detached structure exemption in
addition to the existing exemptions for State-owned property and loans
with an original principal balance of $5,000 or less and an original
repayment term of one year or less. The proposed Q&A also noted that
although an exemption may apply, a borrower may still elect to purchase
flood insurance or a lender may still require flood insurance as a
condition of making the loan for purposes of safety and soundness,
depending on its risk analysis. One commenter requested further clarity
and examples on what constitutes a detached structure. Another
commenter requested clarification on ``mixed use'' property where
detached buildings that may have been used for commercial purposes but
no longer have a commercial use could fall under the residential
exemption if the residence is using the structure for storage. The
Agencies note that what constitutes a detached structure is a fact-
based determination and that the lender, who is in the best position to
consider all the facts and circumstances and with input from the
borrower, has the responsibility to determine what constitutes a
detached structure and its purpose or the primary use of a mixed use
structure. The Agencies are not in a position to provide examples for
all possible scenarios. The Agencies also are including a cross
reference to Q&A Exemptions 2 to provide further guidance and therefore
are adopting the Q&A with this addition.
Exemptions 2. The Agencies proposed new Q&A Exemptions 2 to address
whether a lender must take a security interest in the primary
residential structure for a detached structure to be eligible for the
detached structure exemption. The proposed answer provided that
although a lender does not have to take a security interest in the
primary residential structure, it would need to evaluate the uses of
the detached structures to confirm each is eligible for the exemption.
One commenter suggested that the Agencies provide more examples of a
primary residential structure. The Agencies decline to provide examples
as the Agencies have indicated in the preamble to the 2015 Final Rule
that whether a structure is defined as a primary residential structure
is fact specific and that lenders would need to conduct good faith due
diligence to make this determination. Another commenter suggested the
Agencies separate this Q&A into two discrete questions to highlight
different aspects of the answer. The Agencies decline to adopt this
suggestion because the example is intertwined with the principles being
discussed in the answer. Accordingly, the Agencies are adopting the Q&A
as proposed.
Exemptions 3. The Agencies proposed new Q&A Exemptions 3 to clarify
that a flood hazard determination is required for a detached structure
even though flood insurance coverage is not required on such a
structure because the determination is used to identify the number and
type of structures present on the property. One commenter noted that in
practice, lenders first obtain a flood hazard determination as to the
entire parcel of property to determine if any structures are located in
an SFHA and then determine whether any detached structures on the
property may be exempt under the Regulation, and therefore the proposed
Q&A may imply that the presence or absence of exempt structures may
affect whether a flood hazard determination is required. The Agencies
agree that this Q&A may be confusing as proposed. As a result, the
Agencies are revising the Q&A to clarify that a flood hazard
determination is required even where detached structures are present.
The revised answer provides that a flood hazard determination is needed
to determine whether a building or mobile home securing a loan is or
will be located in an SFHA where flood insurance is available under the
Act. The answer further provides that in order to determine whether the
exemption for non-residential detached structures on residential
property may apply, a flood hazard determination must be conducted
first, without regard to whether there may be any detached structures
that could be exempt. With these amendments, the Agencies are adopting
Q&A Exemptions 3.
Exemptions 4. The Agencies proposed new Q&A Exemptions 4 to provide
that a lender or its servicer may cancel its flood insurance
requirement on an eligible detached structure that is

[[Page 32834]]

currently insured, but that a lender alternatively may want to continue
to require flood insurance coverage for detached structures of
relatively high value if such coverage would be beneficial to the
borrower and the lender. The Agencies received no specific comments on
this Q&A and are adopting the Q&A as proposed.
Exemptions 5. The Agencies proposed new Q&A Exemptions 5 to address
whether a property being remapped into an SFHA triggers a review of the
intended use of each detached structure. Specifically, the proposed
answer stated that a lender must examine the status of a detached
structure upon a qualifying triggering event and that a remapping is
not a triggering event. The proposed answer also stated that although
there is no duty to monitor the status of a detached structure
following the lender's initial determination, sound risk management
practices may lead a lender to conduct scheduled periodic reviews that
track the need for flood insurance on properties securing loans in its
portfolio. Further, the proposed answer notes that, consistent with
existing obligations under the Regulation, if a lender determines at
any time that a property, including a detached structure, has become
subject to the mandatory flood insurance purchase requirement and, as a
result, the collateral is uninsured or underinsured, the lender has a
duty to inform the borrower of the obligation to obtain or increase
insurance coverage and to purchase flood insurance on the borrower's
behalf, as necessary.
One commenter asked whether notification of a map change
constitutes notice that the property may be subject to the mandatory
flood insurance purchase requirement. Another commenter inquired
whether this Q&A allows a lender to rely on the initial appraisal as to
what the detached structure is being used for or whether the lender is
responsible for determining the current use. One commenter noted that
the answer reiterates the requirements for force placement which do not
seem relevant to the answer. Based on the comments received, the
Agencies are revising the question to focus instead on whether a
triggering event requires a lender to review the intended use of the
detached structure. The answer remains unchanged, except for removing
the language regarding remapping and force placement and non-
substantive wording changes for clarification. In addition, the
Agencies are including a reference to new Q&A Applicability 13, which
explains what constitutes a triggering event. With these changes, the
Agencies are adopting Q&A Exemptions 5.
Exemptions 6. The Agencies proposed new Q&A Exemptions 6 to discuss
whether a lender, following a review of its loan portfolio, may
determine to no longer require flood insurance on a detached structure
in an SFHA if the structure does not provide contributory value. The
Agencies proposed to clarify that, while a lender or servicer could
initiate such a review, the Regulation does not permit the exemption of
structures from the mandatory flood insurance purchase requirement
based solely on their contributory value. Instead, a specific exemption
must apply. The Agencies received no specific comments on this Q&A and
are adopting the Q&A as proposed.
Exemptions 7. The Agencies proposed new Q&A Exemptions 7 to address
whether a building would qualify as a detached structure if it is
joined to another building by a stairway or covered walkway. The
proposed answer provided that for purposes of the detached structure
exemption, a structure is ``detached'' from the primary residential
structure if it is not joined by any structural connection to that
structure, and ``stands alone.'' One commenter suggested that the
Agencies allow lenders to defer to an insurer's definition for a
structural connection as this term is not defined in the Regulation or
statute, or that the Agencies define this term. As indicated in the
proposed Q&A, the Agencies have interpreted this term to mean a
structure is ``detached'' if it stands alone and that this
interpretation is consistent with the coverage provision of the NFIP's
Standard Flood Insurance Policy (SFIP) for additions and extensions to
a dwelling unit. The proposed answer also included a reference to the
NFIP Flood Insurance Manual for additional information. However, the
Agencies are amending the Q&A to track the language of the Regulation
and are removing the FEMA example as it is unnecessary. Therefore, the
Agencies are adopting the Q&A with these changes.

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

The Agencies proposed in the July 2020 Questions and Answers to
move existing section XI to section III. This section included two new
Q&As (Coverage 1 and 3), and existing Q&A 64 redesignated as Coverage
2. Because the Agencies are consolidating the July 2020 Proposed
Questions and Answers and the March 2021 Proposed Questions and
Answers, for organizational purposes, in the 2022 Interagency Questions
and Answers the Agencies are moving the three Q&As under Section III
Coverage to other sections as noted below and reassigning section III.
The Agencies proposed new Q&A Coverage 1 in the July 2020 Proposed
Questions and Answers to assist lenders in complying with the
discretionary acceptance provision and mutual aid societies provision
in the Agencies' 2019 Final Rule. The Agencies are redesignating this
Q&A as Q&A Discretionary 4. Please refer to Section IV, Q&A
Discretionary 4 for the Agencies response to comments.
The Agencies proposed to redesignate existing Q&A 64 as Coverage 2.
This Q&A addresses when a lender may rely on an insurance policy
providing portfolio-wide coverage, removes the reference to criteria
set forth by FEMA, and includes language addressing a lender's reliance
on a policy that provides portfolio-wide coverage. The Agencies are re-
designating this Q&A as Q&A Applicability 14. Please refer to Section
I, Q&A Applicability 14 for the Agencies response to comments.
The Agencies proposed new Q&A Coverage 3 in the July 2020 Proposed
Questions and Answers to address when mandatory flood insurance on a
designated loan is required to be in place during the closing process.
The Agencies redesignated Q&A Coverage 3 as Q&A Applicability 15.
Please refer to Section I, Q&A Applicability 15 for the Agencies
response to comments.
Additionally, the Agencies proposed in the July 2020 Proposed
Questions and Answers to delete existing Q&A 63 because it was
inconsistent with the Agencies' final rule implementing the private
flood insurance provision of the Biggert-Waters Act.\23\ The Agencies
received no specific comment on this proposed change and are deleting
this Q&A as proposed.
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\23\ 84 FR 4953 (Feb. 20, 2019).
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Section III. Private Flood Insurance--Mandatory Acceptance (Mandatory)

The 2019 Final Rule requires lenders to accept ``private flood
insurance,'' as defined in the Biggert-Waters Act (mandatory
acceptance). In order to assist lenders in evaluating whether a flood
insurance policy meets the definition of ``private flood insurance,''
the 2019 Final Rule also includes a compliance aid provision. Under the
compliance aid provision, a lender may conclude that a policy meets the
definition of ``private flood insurance'' without further review if the
policy, or an endorsement to the policy, contains the compliance aid
statement set forth in the rule.

[[Page 32835]]

The Agencies proposed a number of Q&As regarding mandatory
acceptance and the compliance aid provision in the March 2021 Proposed
Questions and Answers. As discussed in further detail below, the
Agencies are combining proposed Q&A Mandatory 2 with proposed Q&A
Discretionary 4 and renumbering the Q&A as Q&A Private Flood Compliance
11. The Agencies also are renumbering the other Q&As in this section
accordingly.
General Comments. The Agencies received some general comments
regarding the Q&As related to the mandatory acceptance of private flood
insurance policies. One commenter was supportive of the proposed Q&As,
stating that the Agencies' implementation of the mandatory acceptance
provisions and widespread use of a compliance aid assurance clause have
allowed the private flood insurance market to thrive. This commenter
believed the mandatory acceptance provisions facilitate private policy
placements, ensure that consumers have access to affordable flood
coverage, and provide security to lenders seeking to fulfill their
compliance obligation.
Another commenter suggested the Q&As could incorporate language
that clarifies digital transmission of relevant flood coverage
documents, as well as physical transmission or use of paper documents,
is permissible. As explained under Q&A Discretionary 2, the Regulation
does not address the acceptability of electronic records, but lenders
may accept electronic and digital records for recordkeeping purposes.
One commenter noted that a number of the mandatory acceptance Q&As
refer to ``reviews'' of private flood insurance policies. This
commenter stated that it would be helpful to clarify that a flood
insurance policy issued by a private insurer is subject to two
different reviews. According to the commenter, as with any flood
insurance policy, including NFIP policies, the lender or servicer must
conduct the mandatory purchase requirement review in connection with a
triggering event. The commenter stated that this review would include,
among other things, determining whether the policy contains the
appropriate coverage limits, deductible, term of coverage, and
mortgagee clause. In addition, the commenter stated that, the lender or
servicer must determine whether a private flood insurance policy
satisfies the definition of ``private flood insurance'' or could
otherwise be accepted by a lender under the discretionary acceptance
criteria. The commenter requested this clarification throughout the
Interagency Questions and Answers.
The Agencies understand the commenter's confusion regarding the
term ``review'' as used in some of the Q&As in the mandatory acceptance
section. The Agencies have generally clarified the type of review
involved for relevant mandatory acceptance Q&As, either in the text of
the Q&A or the preamble.
Mandatory 1. Proposed new Q&A Mandatory 1 addressed whether a
lender may decide to only accept private flood insurance policies under
the mandatory acceptance provision of the Regulation. The proposed
answer confirmed that a lender may decide to only accept private flood
insurance policies that the lender is required to accept under the
mandatory acceptance provision because the policies meet the definition
of ``private flood insurance'' under the Regulation. The proposed
answer also clarified that a lender is not required to accept flood
insurance policies that only meet the criteria set forth in the
discretionary acceptance or mutual aid provision in the Regulation. The
Agencies received no specific comments on this Q&A and are adopting it
as proposed with minor non-substantive edits.
Mandatory 2 (Proposed as Q&A Mandatory 3). Proposed new Q&A
Mandatory 3 addressed whether the private flood insurance requirements
under the Regulation require a lender to change its policy of not
originating a mortgage in non-participating communities or coastal
barrier regions where the NFIP is not available. The proposed answer
explained that the Regulation does not require a lender to originate a
loan that does not meet the lender's underwriting criteria. Further,
the proposed answer noted that the flood insurance purchase requirement
only applies to loans secured by structures located or to be located in
an SFHA in which flood insurance is available under the Act. As stated
in Q&A Applicability 1, as proposed and as adopted by the Agencies, the
mandatory flood insurance purchase requirement does not apply within
non-participating communities where NFIP insurance is not available
under the Act. Therefore, the proposed answer states that the lender
does not need to change its policy of not originating mortgages in
areas where NFIP insurance is unavailable solely because of the private
flood insurance requirements under the Regulation. The Agencies
received no specific comments on this Q&A and are adopting it as
proposed, with minor changes for clarity, and renumbered as Q&A
Mandatory 2.
Mandatory 3 (Proposed as Q&A Mandatory 4). Proposed new Q&A
Mandatory 4 addressed whether the compliance aid assurance clause could
act as a conformity clause that would make a flood insurance policy
issued by a private insurer conform to the definition of ``private
flood insurance'' under the Regulation. The proposed answer clarified
that the compliance aid assurance clause is not intended to act as a
conformity clause but rather to facilitate the ability of lenders and
borrowers to recognize policies that meet the definition of ``private
flood insurance'' and promote the consistent acceptance of policies
that meet this definition.
The Agencies received a few comments on this proposed Q&A. One
commenter agreed in principle that the compliance aid language should
not, and cannot, act as a conformity clause, due mainly to the unique
legal status that the term ``conformity clause'' has in State insurance
regulation and contract law. Another commenter noted that whether the
compliance aid assurance clause acts as a conformity clause is best
interpreted by State insurance regulation and contract law. The third
commenter explained that interpretation of insurance contracts,
including whether the compliance aid assurance clause acts as a
conformity clause, should be a matter of State law. This commenter
further stated that this Q&A is outside the scope of the Federal flood
insurance statutes and regulations, and is outside the Agencies'
authority to interpret and apply those Federal statutes and
regulations. The commenter recommended instead that the Agencies
address this question by providing guidance that this is a matter of
State insurance contract law. The Agencies disagree with this
commenter's statement regarding the scope of the Act and Regulation and
the Agencies' authority to interpret or apply the Act and Regulation.
The Agencies adopted the compliance aid provision in the Regulation
pursuant to the authority granted to the Agencies in the Act to issue
the Regulation.\24\ Therefore, the Agencies have the authority to
interpret this provision in a Q&A.
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\24\ 42 U.S.C. 4012a(b)(1).
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Additionally, a few of the commenters recommended that the Agencies
delete references to ``assurance clause'' in this Q&A and revert to
prior language that simply refers to this clause as the compliance aid
language or statement. The commenters noted that the addition of
``assurance clause'' in the current

[[Page 32836]]

Q&A could infer a meaning beyond that intended by the Agencies because
the term ``assurance clause'' has broad meaning under State insurance
regulations and insurance laws. The Agencies agree with these comments.
The Agencies are removing references to ``assurance clause'' in the
final Q&A, as well as in the other Q&As, and will refer to this as the
``compliance aid statement'' per the Regulation. With this change, and
a minor change for clarity, the Agencies are adopting this Q&A as
proposed and renumbered as Q&A Mandatory 3.
Mandatory 4 (Proposed as Q&A Mandatory 5). Proposed new Q&A
Mandatory 5 stated that a lender is not required to accept a flood
insurance policy issued by a private insurer solely because the policy
contains the compliance aid assurance clause if the lender chooses to
conduct its own review and determines the flood insurance policy
actually does not meet the mandatory acceptance requirements. The
proposed answer noted that if a flood insurance policy issued by a
private insurer does not include the compliance aid assurance clause,
the lender must still review the policy to determine if it meets the
requirements for private flood insurance as set forth in the Regulation
before the lender may choose to reject the policy.
One commenter believed that a flood insurance policy issued by a
private insurer that includes the compliance aid statement must be
accepted and did not support Q&A Mandatory 5. The Agencies have been
clear that a lender is not required to accept a flood insurance policy
issued by a private insurer solely because it contains the compliance
aid statement. Lenders may still, at their discretion, review a flood
insurance policy issued by a private insurer that contains the
compliance aid statement and reject the policy if they do not believe
it meets the definition of ``private flood insurance'' or if it does
not meet other requirements of the Regulation, such as providing the
required amount of insurance.
Other commenters emphasized that Q&A Mandatory 5 is confusing and
unclear. For example, commenters pointed out that a lender does not
have to accept a flood insurance policy issued by a private insurer
that does not meet the coverage requirements and a review is not
required if a policy does not meet the coverage requirements.
Commenters were unsure if the ``required to accept'' phrase in the
question applies only to an assessment of whether the policy meets the
definition of ``private flood insurance'' or if a lender could be
required to accept the policy even if the policy is otherwise
insufficient (such as the required dollar amount of coverage).
Some commenters believed the Agencies make an assumption about a
given lender's processes by concluding that the lender would review a
policy under mandatory acceptance criteria before the lender would
review under discretionary acceptance criteria even though the Agencies
make clear under proposed Q&A Mandatory 8 that a lender ``may first
review the policy to determine whether it meets the criteria under the
discretionary acceptance provision.'' One commenter emphasized that the
Agencies go further than necessary in the proposed response and seem to
dictate certain processes for the lender.
In addition, commenters suggested the Agencies consider alternative
language for Q&A Mandatory 5. One commenter was confused by the
Agencies' choice of language that did not align with the Regulation or
the preamble discussion on the proposed Q&A. One commenter recommended
the Agencies modify the answer to use plain language from the 2019
Final Rule and use consistent language to avoid confusion regarding key
compliance concepts.
As explained in the preamble to the 2019 Final Rule, the Regulation
does not permit lenders to reject a flood insurance policy issued by a
private insurer solely because the policy is not accompanied by the
compliance aid statement.\25\ The Agencies stress that the compliance
aid statement is meant to be an aid for lenders and it is not required
for lenders to accept a flood insurance policy issued by a private
insurer. In addition, lenders should remember that other aspects of the
Regulation must be met for a lender to accept a flood insurance policy
issued by a private insurer, even if the policy meets the definition of
``private flood insurance.''
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\25\ 84 FR 4953, 4959 (Feb. 20, 2019).
---------------------------------------------------------------------------

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

[[Page 32837]]

supportive. The commenter agreed that if a policy or an endorsement to
the policy contains the compliance aid statement, further review is not
necessary in order for the lender to determine that a policy meets the
definition of ``private flood insurance.'' Therefore, the Agencies are
adopting this Q&A as proposed, other than amending the term
``compliance aid assurance clause'' throughout the Q&A to ``compliance
aid statement'' to be consistent with the Regulation. The Agencies are
also renumbering Q&A Mandatory 6 as proposed to Q&A Mandatory 5 and
updating the included cross-reference.
Mandatory 6 (Proposed as Q&A Mandatory 7). Proposed new Q&A
Mandatory 7 described additional reviews a lender must conduct when a
flood insurance policy issued by a private insurer includes the
compliance aid assurance clause, as the clause only assists a lender in
making the determination that a flood insurance policy meets the
definition of ``private flood insurance'' in the Regulation, and not
other requirements specified in the Regulation. Specifically, under the
proposed answer, the lender also must ensure that the amount of
insurance is at least equal to the lesser of the outstanding principal
balance of the designated loan or the maximum limit of coverage
available for the particular type of property under the Act. The answer
also included a cross-reference to proposed new Q&A Mandatory 6.
One commenter recommended that the Agencies revise Q&A Mandatory 7
and include a new Q&A under the Private Flood Compliance section. This
commenter understood that the Agencies are attempting to reassure
lenders who may be reluctant to accept a flood insurance policy issued
by a private insurer merely because the policy includes the compliance
aid statement. At the same time, the commenter believed that the
Agencies do not want lenders to overlook the fundamental ``requirements
for coverage'' review. Thus, the commenter suggested the Agencies
simplify Q&A Mandatory 7 and move the language regarding coverage and
other applicable requirements to a new Q&A under the Private Flood
Compliance section. In addition, this commenter further recommended the
Agencies include appropriate cross-references between Q&A Mandatory 7
and their suggested new Q&A, as well as to applicable questions under
other sections. The Agencies disagree with this comment. Under the
Regulation, lenders must determine whether a policy issued by a private
flood insurance company meets both the definition of ``private flood
insurance'' and the required amount of insurance under the Regulation.
The intent of proposed Q&A Mandatory 7 is to remind lenders that they
must review the policy to ensure that it meets the amount of insurance
required under the Regulation even if the policy includes the
compliance aid statement.
Many commenters had concerns with the sentence in the answer
recommending that lenders ensure the accuracy of other key aspects of
the policy, such as the borrower's name and address. These commenters
specifically found the phrase ``key aspects of the policy'' to be
ambiguous, open-ended, extraneous, and potentially problematic and
recommended either its deletion or amendment. Specifically, one
commenter noted that because there are no statutory or regulatory
requirements or references regarding this phrase or the included
examples, this sentence could confuse lenders. Another commenter stated
that the Agencies should clearly define the exact elements that lenders
must review beyond the compliance aid statement. One commenter
suggested that the Agencies instead instruct lenders to review the
policy as they would review other insurance policies for safety and
soundness. Further, one commenter explained that there are many valid
reasons for differences between the named parties on a mortgage and a
property insurance policy as well as for differences in the physical
address of the property, especially if the mortgage system reflects the
legal description for the property as opposed to a mailing address.
The Agencies agree with the commenters that the phrase ``other key
aspects of the policy'' is unclear. Because this sentence is not
necessary to answer the question, the Agencies are deleting it in the
final answer. Using alternative language regarding safety and
soundness, as suggested by one commenter, would not eliminate
ambiguity. However, the Agencies note that this deletion does not
eliminate the need for lenders to conduct other reviews of a policy
pursuant to their internal processes.
One commenter requested that the Agencies use the term ``limit''
instead of the term ``coverage'' the first time it appears in the
answer. The Agencies have considered this request and are changing this
use of ``coverage'' to ``amount of insurance,'' which is the phrase
used in the Regulation.
Additionally, the Agencies are adding a reference to the Regulation
in the question in this Q&A to avoid further confusion. The Agencies
also are amending the term ``compliance aid assurance clause''
throughout the Q&A to ``compliance aid statement'' to be consistent
with the Regulation.
With these changes, the Agencies are adopting this Q&A, renumbering
it as Q&A Mandatory 6, and making a corresponding update to the
included cross-reference.
Mandatory 7 (Proposed as Q&A Mandatory 8). Proposed new Q&A
Mandatory 8 addressed whether a lender may use the criteria under the
discretionary acceptance provision to decide whether to accept a policy
that does not contain the compliance aid assurance clause without first
reviewing the policy to determine if it meets the mandatory acceptance
provision. The proposed answer clarified that a lender may first review
the policy to determine whether it meets the criteria under the
discretionary acceptance provision. However, if the policy is not
accepted under the discretionary acceptance provision, the lender still
needs to determine whether it must accept the policy under the
mandatory acceptance criteria. The proposed answer also reminded
lenders to document that a policy provides sufficient protection of the
loan if the lender accepts the policy under the discretionary
acceptance provision of the Regulation.
The Agencies did not receive any specific comment on Q&A Mandatory
8. However, the Agencies are adding a cross reference to Q&A
Discretionary 2 regarding the documentation of the sufficient
protection of the loan, which provides that the lender may document
this information electronically. The Agencies also are amending the
term ``compliance aid assurance clause'' in the question to
``compliance aid statement'' to be consistent with the Regulation. The
Agencies are adopting Q&A Mandatory 8 with minor clarifying edits and
renumbering as Q&A Mandatory 7.
Mandatory 8 (Proposed as Q&A Mandatory 9). Proposed new Q&A
Mandatory 9 noted that if the compliance aid assurance clause is
included on the declarations page, a lender may accept the policy
without further review to determine whether the policy meets the
definition of ``private flood insurance.'' However, a lender also must
ensure that the policy provides the amount of insurance as required
under the Regulation. One commenter pointed out that many private flood
insurance policies do not include this representation on the
declarations page, but they do include it in the policy, and requested
that the Agencies edit this Q&A to reflect this fact. The Agencies note
that the

[[Page 32838]]

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

\26\ The National Association of Insurance Commissioners (NAIC)
notes, ``[t]he surplus lines market (inclusive of U.S. and non-U.S.
domiciled insurers) is a distinct segment of the industry consisting
of non-admitted specialized insurers covering risks not available
within the admitted market . . . Surplus lines insurers are subject
to regulatory requirements and are overseen for solvency by their
domiciliary [S]tate or country.'' <a href="https://content.naic.org/cipr_topics/topic_surplus_lines.htm">https://content.naic.org/cipr_topics/topic_surplus_lines.htm</a>. For specific definitions
related to surplus lines insurers, lenders should review the State
law in which the property is located.
---------------------------------------------------------------------------

Some commenters suggested revising the answer to be more direct and
to remove language that is addressed in Q&A Private Flood Compliance
10. The Agencies agree with the commenters that the answer can be
worded more effectively and are adopting language similar to that
recommended by one of the commenters. As revised, the answer provides
that if the policy includes a statement indicating that the insurer is
not licensed in the State or jurisdiction in which the property is
located, suggesting that the policy is issued by a surplus lines
insurer, but contains a compliance aid statement, lenders may accept
the policy as long as the policy complies with the Regulation and
applicable State laws. However, the Agencies note that the language
removed from the proposed answer that provided specific circumstances
under which lenders may accept a policy issued by a surplus lines
insurer is still relevant. Specifically, a lender may accept a policy
issued by a surplus lines insurer recognized or not disapproved by the
relevant State insurance regulator as protection for loan collateral
that is a commercial property. Also, a lender may accept a policy
issued by a surplus lines insurer as protection for loan collateral
that is a noncommercial property as a policy issued by an insurance
company that is ``otherwise approved to engage in the business of
insurance by the insurance regulator of the State or jurisdiction in
which the property to be insured is located.''
The Agencies also are making one technical change to this question,
amending the term ``compliance aid assurance clause'' to ``compliance
aid statement'' to be consistent with the Regulation.
With the changes described above, the Agencies are adopting Q&A
Mandatory 9.

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

The 2019 Final Rule permits a lender, at its discretion, to accept
a flood insurance policy issued by a private insurer even if the policy
does not meet the statutory and regulatory definition of ``private
flood insurance,'' provided the policy meets certain requirements in
the rule (discretionary acceptance). The 2019 Final Rule also permits a
lender, at its discretion, to accept certain mutual aid plans that meet
the conditions stated in the rule.
The Agencies proposed the Q&As in this section, except for Q&A
Discretionary 4, in the March 2021 Proposed Questions and Answers. The
Agencies originally proposed Q&A Discretionary 4, as adopted in these
2022 Interagency Questions and Answers, as Q&A Coverage 1 in the July
2020 Proposed Questions and Answers. The Agencies are combining
proposed Q&A Discretionary 4 with proposed Q&A Mandatory 2 and
renumbering this Q&A as Q&A Private Flood Compliance 11, as discussed
in more detail below.
Discretionary 1. Proposed Q&A Discretionary 1 addressed whether
lenders are required to accept flood insurance policies that meet the
discretionary acceptance criteria. The proposed answer notes that the
discretionary acceptance criteria in the Regulation set forth the
minimum acceptable criteria that a flood insurance policy must have for
the lender to accept the policy under the discretionary acceptance
provision. The proposed answer clarified that it is at the lender's
discretion to accept a policy that meets the discretionary acceptance
criteria so long as the policy does not meet the mandatory acceptance
criteria. The Agencies received no specific comments on this Q&A and
are adopting Q&A Discretionary 1 as proposed.
Discretionary 2. Proposed Q&A Discretionary 2 addressed the
requirements for documentation to demonstrate that a policy provides
sufficient protection of a loan when a lender accepts that policy under
the discretionary acceptance criteria. The proposed answer explained
that the Regulation requires the lender to document its conclusion in
writing that the policy provides sufficient protection of the loan,
consistent with safety and soundness principles. In addition, the
proposed answer included a cross-reference to Q&A Discretionary 4 which
discusses some factors to consider when determining whether a flood
insurance policy issued by a private insurer provides sufficient
protection of the

[[Page 32839]]

loan, consistent with safety and soundness principles.\27\ Furthermore,
the proposed answer noted that while the Regulation does not require
any specific documentation to demonstrate that the policy provides
sufficient protection of the loan, lenders may include any information
that reasonably supports the lender's conclusion following review of
the policy.
---------------------------------------------------------------------------

\27\ These factors include whether: (1) A policy's deductibles
are reasonable based on a borrower's financial condition; (2) the
insurer provides adequate notice of cancellation to the mortgagor
and the mortgagee; (3) the terms and conditions of the policy with
respect to payment per occurrence or per loss and aggregate limits
are adequate to protect the lending institution's interest in the
collateral; (4) the flood insurance policy complies with applicable
State insurance laws; and (5) the private insurance company has the
financial strength, solvency and ability to satisfy claims. See 85
FR 40442, 40458 (July 6, 2020).
---------------------------------------------------------------------------

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

[[Page 32840]]

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

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

The Agencies proposed eleven new Q&As in this section in the March
2021 Proposed Questions and Answers. As discussed in more detail above,
the Agencies are renumbering proposed Q&A Private Flood Compliance 11
from the March 2021 Proposed Questions and Answers as Q&A Mandatory 9.
Q&A Private Flood Compliance 11, as adopted in these 2022 Interagency
Questions and Answers, is a combination of proposed Q&A Mandatory 2 and
proposed Q&A Discretionary 4 from the March 2021 Proposed Questions and
Answers.
Private Flood Compliance 1. Proposed new Q&A Private Flood
Compliance 1 addressed the maximum deductible permissible for a flood
insurance policy issued by a private insurer on properties located in
an SFHA. The proposed answer clarified that the analysis depends on
whether the lender is accepting the flood insurance policy under the
mandatory acceptance provision or the discretionary acceptance
provision.
For a private flood insurance policy that the lender is accepting
under the mandatory acceptance provision, the proposed answer stated
that the Regulation provides that the policy must contain a deductible
that is ``at least as broad as'' the maximum deductible in the SFIP
under the NFIP, which means that the deductible is no higher than the
specified maximum under an SFIP for any total coverage amount up to the
maximum available under the NFIP at the time the policy is provided to
the lender. Further, the proposed answer provided that a policy with a
coverage amount exceeding that available under the NFIP may have a
deductible exceeding the specific maximum deductible under an SFIP.
However, the proposed answer also advised that for safety and soundness
purposes, the lender should consider whether the deductible is
reasonable based on the borrower's financial condition, consistent with
guidance the Agencies proposed in Q&A Amount 9 \28\ and with how
deductibles may be evaluated under the discretionary acceptance
provision. The proposed answer also set forth examples to aid in
compliance.
---------------------------------------------------------------------------

\28\ Proposed Q&A Amount 9 provided that a lender should
determine the reasonableness of the deductible on a case-by-case
basis, taking into account the risk that such a deductible would
pose to the borrower and the lender.
---------------------------------------------------------------------------

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

[[Page 32841]]

insurance policy contain a deductible no higher than the specified
maximum deductible for an SFIP. Therefore, the proposed answer
clarified that a lender may require a borrower's private flood
insurance policy deductible to be lower than the maximum deductible for
an NFIP policy in connection with a policy that the lender accepts
under the mandatory acceptance provision consistent with general safety
and soundness principles and based on a borrower's financial condition,
among other factors. With respect to the discretionary acceptance
provision, the proposed answer noted that the lender need only consider
whether the policy, including the stated deductible, provides
sufficient protection of the loan, consistent with general safety and
soundness principles. The proposed answer also included a reference to
proposed Q&A Private Flood Compliance 1, which also addresses
deductibles.
A commenter requested that the Agencies include in the answer an
example of when a lender is not required to accept a policy for safety
and soundness reasons related to the deductible, such as when a
deductible is too high based on the borrower's financial condition. The
Agencies decline to include an example in the answer because the answer
already makes clear that a lender can require, as a condition of
accepting the policy, a lower deductible for safety and soundness
reasons. The Agencies note that the issues of deductibles as they
relate to flood insurance policies issued by private insurers are
already discussed in Q&A Private Flood Compliance 1. Therefore, the
Agencies are adopting this Q&A as proposed with some minor non-
substantive edits.
Private Flood Compliance 3. Proposed Q&A Private Flood Compliance 3
provided guidance regarding whether a lender may charge fees to the
borrower for the lender's use of a third party to review flood
insurance policies. The proposed answer provided that the Act and the
Regulation do not prohibit lenders from charging fees to borrowers for
contracting with a third party to review flood insurance policies,
including a policy issued by a private insurer, and, as provided in Q&A
Fees 1 and Q&A Fees 2, lenders may charge limited, reasonable fees for
flood determinations and life-of-loan monitoring.\29\ The proposed
answer reminded lenders that they should be aware of any other
applicable requirements regarding fees and disclosures of fees.
---------------------------------------------------------------------------

\29\ New Q&A Fees 1, which is adapted from current Q&A 69, lists
the four instances in the Act and Regulation when a lender or
servicer can charge the borrower a fee for making a flood
determination. New Q&A Fees 2, adapted from current Q&A 70, provides
that charges made for life-of-loan reviews by determination firms
may be passed to the borrower under certain conditions.
---------------------------------------------------------------------------

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

[[Page 32842]]

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

[[Page 32843]]

on behalf of other entities not supervised by the Agencies, the
proposed answer stated that the servicer should comply with the terms
of its contract with such an entity. The proposed answer suggested that
when servicing loans on behalf of Fannie Mae or Freddie Mac, where
there are insurer rating requirements specified within those entities'
servicing guidance or other relevant authorities that are not included
in the Regulation, the servicer should adhere to those servicing
requirements. The Agencies did not receive any specific comment on
proposed Q&A Private Flood Compliance 8. Therefore, the Agencies are
adopting Q&A Private Flood Compliance 8 as proposed.
Private Flood Compliance 9. Proposed new Q&A Private Flood
Compliance 9 provided guidance regarding optional methods lenders can
use to address questions on whether an insurer is licensed, admitted,
or otherwise approved to do business in a particular State, which is
one of the factors lenders must evaluate under both the mandatory
acceptance and discretionary acceptance provisions. Specifically,
proposed new Q&A Private Flood Compliance 9 explained that a lender
could determine whether an insurer is licensed, admitted, or otherwise
approved in a particular State, or whether a surplus lines or
nonadmitted alien insurer \30\ is permitted to issue an insurance
policy in a particular State, by reviewing the website of the State
insurance regulator where the collateral property is located or by
contacting the State insurance regulator directly. Further, the
proposed answer noted that the information with respect to surplus
lines insurer eligibility may be available in the Consumer Insurance
Search (CIS) tool available on the National Association of Insurance
Commissioners (NAIC) website.\31\ The proposed answer stated that
lenders also may consult commercial service providers regarding the
eligibility of surplus lines insurers in particular States as long as
the lenders have a reasonable basis to believe that these service
providers have reliable information. With regard to nonadmitted alien
insurers in particular, the proposed answer suggested that lenders
could review the NAIC's Quarterly Listing of Alien Insurers.\32\
---------------------------------------------------------------------------

\30\ The NAIC notes that ``[w]hereas [S]tates monitor the
eligibility of U.S. domiciled surplus lines insurers, alien insurers
eligible to write surplus lines premium are listed on the NAIC
Quarterly Listing of Alien Insurers [<a href="https://www.naic.org/prod_serv_alpha_listing.htm#quarterly_alien">https://www.naic.org/prod_serv_alpha_listing.htm#quarterly_alien</a>] . . . [Alien insurers]
are prohibited from establishing a U.S. branch office.'' <a href="https://content.naic.org/cipr_topics/topic_surplus_lines.htm">https://content.naic.org/cipr_topics/topic_surplus_lines.htm</a>.
\31\ See <a href="https://content.naic.org/cis_consumer_information.htm">https://content.naic.org/cis_consumer_information.htm</a>.
\32\ See <a href="https://www.naic.org/prod_serv_alpha_listing.htm#quarterly_alien">https://www.naic.org/prod_serv_alpha_listing.htm#quarterly_alien</a>.
---------------------------------------------------------------------------

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

\33\ During discussion of the Biggert-Waters Act on the Senate
floor, Sen. Crapo noted that surplus lines insurers can provide
flood insurance coverage for residential properties and asked for
clarification regarding the inclusion of surplus lines coverage in
the definition of ``private flood insurance.'' In his response, Sen.
Johnson stated, ``[T]he definition of `private flood insurance'
includes private flood insurance provided by a surplus lines insurer
and is not intended to limit surplus lines eligibility to
nonresidential properties. While the Senator is correct that surplus
lines insurance is specifically mentioned in that context, overall
the definition accommodates private flood insurance from insurers
who are `licensed, admitted, or otherwise approved' in the State
where the property is located.'' 158 Cong. Rec. S6051 (daily ed.
Sept. 10, 2012).
---------------------------------------------------------------------------

As the Agencies discussed in the preamble to the March 2021
Proposed Questions and Answers, if the surplus lines insurer is
eligible or not disapproved to place insurance in the State or
jurisdiction in which a property to be insured is located, the surplus
lines insurer is deemed to be ``otherwise approved to engage in the
business of insurance by the insurance regulator of the State or
jurisdiction in which the property to be insured is located'' for
purposes of the Act and Regulation. Therefore, the proposed answer
noted that even if the surplus lines insurer is not considered to be
engaged in the business of insurance under applicable State law, the
surplus lines insurer nevertheless would meet the criteria only for
purposes of this provision of the Regulation if the insurer is eligible
or not disapproved to place insurance in the State or jurisdiction in
which a property to be insured is located.
In the preamble to the March 2021 Proposed Questions and Answers,
the Agencies provided an example to illustrate this concept, noting
that under section 1776 of the California Insurance Code, the
permission granted to allow an insurance policy issued by a nonadmitted
insurer to be placed in California, ``shall not be deemed or construed
to authorize any insurer to do business in [California].'' \34\ In
addition,

[[Page 32844]]

section 1776 of the California Insurance Code states that ``[p]lacement
activities of a licensed surplus line broker in accordance with
[California law], including, but not limited to, policy issuance, shall
not be deemed or construed to be business done by the insurer in
[California].'' \35\ However, as discussed in the March 2021 Proposed
Questions and Answers, it is the Agencies' understanding that these
provisions of California law do not make ineligible or disapprove any
individual surplus lines insurer from placing insurance in California
if they meet all other applicable requirements in California law.
Consequently, a surplus lines insurer that is eligible or not
disapproved to place insurance in California is ``otherwise approved''
for purposes of the Regulation even though the surplus lines insurer is
not authorized to do business in California for purposes of Section
1776 of the California Insurance Code.
---------------------------------------------------------------------------

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

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

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

Proposed Q&A Mandatory 2 and proposed Q&A Discretionary 4 addressed
lender requirements for reviewing flood insurance policies issued by
private insurers. Because both proposed Q&As discussed similar issues,
the Agencies are combining these two Q&As and renumbering them as Q&A
Private Flood Compliance 11.
Proposed new Q&A Mandatory 2 addressed when a lender must review a
flood insurance policy issued by a private insurer to make sure the
policy meets the mandatory acceptance criteria, other than at loan
origination. The proposed answer provided that other than at loan
origination, a lender must review a flood insurance policy issued by a
private insurer to determine whether it meets the mandatory acceptance
criteria when the policy comes up for renewal, or any time the borrower
presents the lender with any new flood insurance policy issued by a
private insurer. The proposed answer clarified that a lender must
review the policy in these instances regardless of whether a triggering
event occurred (making, increasing, extending or renewing a loan).
The proposed answer further explained that a lender may determine
that the policy meets the mandatory acceptance criteria without further
review if the policy or an endorsement to the policy includes the
compliance aid assurance clause and clarified that if the policy does
not meet the mandatory acceptance criteria, the lender may still accept
the policy if it meets the discretionary acceptance criteria, or, if
applicable, the mutual aid plan criteria. The proposed answer indicated
that if the policy does not meet the mandatory acceptance,
discretionary acceptance, or mutual aid plan criteria, the lender must
notify the borrower in accordance with the force placement provisions
of the Regulation and further indicated that if the borrower does not
purchase flood insurance that complies with the Regulation, the lender
must purchase insurance on the borrower's behalf.
The proposed answer also clarified that if a lender previously
reviewed the flood insurance policy under the discretionary acceptance
provision to ensure that the policy meets the private flood insurance
requirements of the Regulation, the lender may rely on its previous
review, provided there are no changes to the terms of the policy.
However, as required by the Regulation, the proposed answer indicated
that the lender must document its conclusion regarding sufficiency of
protection of the loan in writing.
Proposed Q&A Discretionary 4 addressed whether a lender is required
to review a flood insurance policy upon renewal if that policy was
issued by a private insurer and was originally accepted in accordance
with the discretionary acceptance provision. The proposed answer
provided that if a lender had accepted a flood insurance policy issued
by a private insurer in accordance with the discretionary acceptance
requirements and the policy is renewed, the lender must review the
policy upon renewal to ensure that it continues to meet the
discretionary acceptance requirements. The proposed answer also stated
that a lender would need to document its conclusion regarding
sufficiency of the protection of the loan in writing upon each renewal
to indicate that the policy continues to provide sufficient protection
of the loan.
One commenter to proposed Q&A Mandatory 2 stated its belief that a
private policy should be reviewed either at every policy renewal or
when making, increasing, extending or renewing a loan but believes it
would be best if the policy is reviewed when making, increasing,
extending or renewing a loan. This commenter also stated that in
connection with a renewal of a policy, a lender should be able to rely
on its prior review in connection with mandatory acceptance to be
consistent with the proposed answer to Q&A Mandatory 2 that allows a
lender to rely on its prior review in connection with discretionary
acceptance. Some commenters indicated that proposed Q&As Mandatory 2
and Discretionary 4 suggest that there is a distinction between the
level of review required in connection with making, increasing,
extending or renewing a loan (triggering event) and the level of review
required to accept a new policy during the loan term or renewal of the
policy that had initially been accepted, and recommended that the
Agencies revise the answers to clarify the level of review required in
connection with a triggering event and the renewal of coverage. Some
commenters noted that in connection with private flood insurance, a
private flood insurance policy must be reviewed for both the
acceptability of the policy (i.e., whether the policy meets the
definition of ``private flood insurance'') and sufficiency (i.e., the
amount and term of coverage), and they requested guidance on whether
there is a distinction between the review required in connection with a
triggering event and upon renewal of the policy. One commenter
appreciated the statement in proposed Q&A Mandatory 2 that ``the lender
may rely on its previous review, provided there are no changes to the
terms of the policy'' and recommended that the Agencies provide
additional detail as to what elements of the prior review may be relied
on during review of the same policy at renewal. Other commenters stated
that proposed Q&A Mandatory 2 conflicts with proposed Q&A Applicability
8, which stated that ``[a]part from the requirements mandated when a
loan is made, increased, extended or renewed, a lender need only review
and take action

[[Page 32845]]

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

Section VI. Standard Flood Hazard Determination Form (SFHDF)

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

[[Page 32846]]

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

Section VII. Flood Insurance Determination Fees (Fees)

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

Section VIII. Flood Zone Discrepancies (Zone)

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

\36\ See <a href="https://www.fema.gov/flood-insurance/risk-rating">https://www.fema.gov/flood-insurance/risk-rating</a>.
---------------------------------------------------------------------------

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

[[Page 32847]]

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

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

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

\38\ See <a href="https://www.fema.gov/flood-insurance/risk-rating">https://www.fema.gov/flood-insurance/risk-rating</a>.
---------------------------------------------------------------------------

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

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

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

[[Page 32848]]

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

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

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

[[Page 32849]]

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

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

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

[[Page 32850]]

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

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

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

[[Page 32851]]

respectively, and added a new construction-related Q&A, as Q&A
Construction 6. The Agencies proposed changes to the Q&As in this
section in the July 2020 Proposed Questions and Answers. Because the
Agencies are combining the July 2020 Proposed Questions and Answers and
the March 2021 Proposed Questions and Answers into one document, the
Agencies are renumbering this Construction section as Section XI in the
2022 Interagency Questions and Answers.
Construction 1. The Agencies proposed to redesignate existing Q&A
19 as Q&A Construction 1 and to make minor non-substantive wording
changes for clarity. This Q&A addresses the applicability of the flood
insurance requirements to a loan secured only by land that will be
developed into buildable lot(s). The Agencies did not receive any
specific comment on Q&A Construction 1 and are adopting it as proposed.
Construction 2. The Agencies proposed to redesignate existing Q&A
20 as Q&A Construction 2 and to make minor wording changes for clarity.
This Q&A addresses whether a loan secured or to be secured by a
building in the course of construction that is located or to be located
in an SFHA in which flood insurance is available under the Act is a
designated loan. The Agencies did not receive any specific comment on
Q&A Construction 2 and are adopting it as proposed.
Construction 3. The Agencies

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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.