Q1. Does the regulation apply to a loan where the building or mobile home securing such loan is located in a community that does not participate in the National Flood Insurance Program (NFIP)?

A1. Yes, the regulation does apply; however, a lender need not require borrowers to obtain flood insurance for a building or mobile home located in a community that does not participate in the NFIP, even if the building or mobile home securing the loan is located in an SFHA. Nonetheless, a lender, using the Standard Flood Hazard Determination Form, must still determine whether the building or mobile home is located in an SFHA.³ If the building or mobile home is determined to be located in an SFHA, a lender is required to mail or deliver a written notice to the borrower.⁴ In this case, a lender, generally, may make a conventional loan without requiring flood insurance. However, because federal agencies such as the Small Business Administration, Veterans Administration, or Federal Housing Administration are prohibited from guaranteeing or insuring a loan secured by a building or mobile home located in an SFHA in a community that does not participate in the NFIP, a lender would not be able to make a federally guaranteed or insured loan. See 42 U.S.C. 4106(a). Also, a lender is responsible for exercising sound risk management practices to avoid making a loan secured by a building or mobile home located in an SFHA where no flood insurance is available, if doing so would pose an unacceptable risk to the lender.

Q2. Some borrowers have buildings with limited utility or value and, in many cases, the borrower would not replace them if lost in a flood. Must a lender require flood insurance for such buildings?

A2. Lenders must require flood insurance on a building or mobile home when those structures are part of the property securing the loan and are located in an SFHA in a participating community.⁵ However, flood insurance is not required on a structure that is part of a residential property but is detached from the primary residential structure of such property and does not serve as a residence.⁶ If the limited utility or value structure does not qualify for the detached structure exemption, a lender may consider “carving out” the building from the security it takes on the loan to avoid having to require flood insurance on the structure. However, the lender should fully analyze the risks of this option. In particular, a lender should consider whether and how it would be able to market and sell the property securing its loan in the event of foreclosure. See also Q&A Exemptions Q1.

Q3. What are a lender’s requirements under the regulation for a loan secured by multiple buildings when some of the buildings are located in an SFHA in which flood insurance is available and other buildings are not? What if the buildings are located in different communities and some of the communities participate in the NFIP and others do not?

A3. A lender must determine whether a building securing the loan is in an SFHA.⁷ In cases in which the loan is secured by multiple buildings and some of the buildings are located in an SFHA in which flood insurance is available under the act, but other buildings are not located in an SFHA (or are located in an SFHA, but not in a participating community), a lender is required to obtain flood insurance only on the buildings securing the loan that are located in an SFHA in which flood insurance is available under the act.⁸ For example, assume a loan is secured by five buildings as follows:

Q4. What is a lender’s responsibility if a particular building or mobile home that secures a loan is not located within an SFHA, or is no longer located within an SFHA due to a map change?

A4. Although a lender is not obligated to require mandatory flood insurance on a building or mobile home securing a loan that is not located within an SFHA or is no longer located within an SFHA, a lender may, at its discretion and taking into consideration state law, as appropriate, require flood insurance for property outside of SFHAs for safety and soundness purposes as a condition of a loan being made. Each lender should tailor its own flood insurance policies and procedures to suit its business needs and protect its ongoing interest in the collateral.

Q5. Does a lender’s purchase from another lender of a loan secured by a building or mobile home located in an SFHA in which flood insurance is available under the act trigger any requirements under the regulation?

A5. No. A lender’s purchase of a loan, secured by a building or mobile home located in an SFHA in which flood insurance is available under the act, alone, is not an event that triggers the regulation’s requirements, such as making a new flood determination or requiring a borrower to purchase flood insurance. Requirements under the regulation are triggered when a lender makes, increases, extends, or renews a designated loan.¹⁰ A lender’s purchase of a loan does not fall within any of those categories.

Q6. If a loan is being restructured or modified, does that constitute a triggering event under the regulation?

A6. It depends. If a loan modification or restructuring involves recapitalizing into the loan’s outstanding principal balance: (1) delinquent payments and other amounts due under the loan and the maturity date of the loan otherwise stays the same, or (2) amounts that were otherwise originally contemplated to be part of the loan pursuant to the contract with the borrower and the maturity date of the loan otherwise stays the same, the regulation would not apply because the modification or restructuring would not increase, extend, or renew the terms of the loan.

Q7. Are table funded loans treated as new loan originations?

A7. Yes. Table funding, as defined in the regulation, means a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds.¹⁴ A loan made through a table funding process is treated as though the party advancing the funds has originated the loan.¹⁵ The funding party is required to comply with the regulation. The table funding lender can meet the administrative requirements of the regulation by requiring the party processing and underwriting the application to perform those functions on its behalf.

Q8. Is a lender required by the act or the regulation to perform a review of its, or of its servicer’s, existing loan portfolio for compliance with the flood insurance requirements under the act and regulation?

A8. No. Apart from the requirements mandated when a loan is made, increased, extended, or renewed,¹⁶ a lender need only review and take action on any part of its existing portfolio for safety and soundness purposes, or if it knows or has reason to know of the need for NFIP coverage.¹⁷ Regardless of the lack of such requirement in the act and regulation, however, sound risk management practices may lead a lender to conduct scheduled periodic reviews that track the need for flood insurance on a loan portfolio.

Q9. Do the mandatory purchase requirements under the act and regulation apply when a lender participates in a loan syndication or participation?

A9. 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, such as making a new flood determination or requiring a borrower to purchase flood insurance.

Q10. Is a lender expected to consider any triggering event or any cashless roll of which it becomes aware in any tranche of a multi-tranche credit facility, regardless of whether the lender participates in the affected tranche?

A10. No. Consistent with Q&A Applicability Q9, the agencies expect that a lender participating in a multi-tranche credit facility will perform upfront due diligence to determine whether the lead lender has adequate controls to monitor the loan on an ongoing basis for compliance with the flood insurance requirements. This due diligence is especially important when the lead lender itself is not subject to federal flood insurance requirements. Even though each lender participating in a tranche in a multi-tranche credit facility remains individually responsible for compliance with the flood insurance requirements relating to structures securing the tranche in which it participates, this obligation can be achieved through the upfront due diligence process when determining the lead lender/administrative agent’s ongoing monitoring for compliance with flood insurance requirements. A multi-tranche credit facility is analogous in many respects to a loan syndication or participation. Q&A Applicability Q9 addresses applicability of the mandatory purchase requirements when a lender participates in a loan syndication or participation. Similar to a loan syndication or participation, a multi-tranche credit facility involves one credit agreement that describes and governs all the tranches. In addition, similar to a loan syndication or participation, a multi-tranche credit facility typically has one lead lender that acts as the administrative agent for the credit facility and its tranches. Thus, the agencies do not expect a lender participating in one tranche in a multi-tranche credit facility to be responsible for taking direct steps to comply with flood insurance requirements in connection with a triggering event (i.e., making, increasing, extending or renewing) or cashless roll that occurs in a tranche in which the lender does not participate.

Q11. Does an automatic extension of a credit facility, that was agreed upon by the borrower and the lender at loan origination and memorialized in the loan agreement, constitute a triggering event (i.e., making, increasing, extending or renewing) that would trigger the federal flood insurance requirements?

A11. No. An automatic extension of a credit facility that was agreed upon by the lender and the borrower at loan origination and memorialized in the loan agreement does not constitute a triggering event (i.e., making, increasing, extending or renewing) that would trigger the federal flood insurance requirements, because the automatic extension was agreed to in the original loan contract.

Q12. What is the applicability of the mandatory purchase requirement during a period of time when coverage under the NFIP is not available?

A12. During a period when coverage under the NFIP is not available, such as due to a lapse in authorization or in appropriations, lenders may continue to make loans subject to the regulation without requiring flood insurance coverage. However, lenders must continue to make flood determinations,²⁰ provide timely, complete, and accurate notices to borrowers,²¹ and comply with other applicable parts of the regulation.

Q13. What is a “triggering event” under the regulation? If there is a triggering event, what is required under the regulation?

A13. Under the regulation, a triggering event occurs when a designated loan is made, increased, extended, or renewed (also known as a “MIER” or “MIRE” event).²³ If a triggering event occurs with respect to a designated loan, the lender must comply with the regulation as applicable, 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 the Federal Emergency Management Agency (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.²⁴

Q14. May a lender rely on an insurance policy providing portfolio-wide coverage to meet the flood insurance purchase requirement or the force placement requirement under the regulation?

A14. It depends. 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”). When a flood insurance policy has expired and the borrower has failed to renew coverage, insurance 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, even if a lender has portfolio-wide coverage to address gaps, the lender must still ensure the flood insurance purchase requirement is satisfied at the time a loan is made, increased, renewed or extended, and the lender must still force place coverage on the borrower’s behalf in a timely manner, as required,²⁵ and may not rely on an insurance policy that provides portfolio-wide coverage as a substitute for a force-placed policy.

Q15. When does mandatory flood insurance on a designated loan need to be in place during the closing process?

A15. The regulation states that a lender cannot “make” a loan secured by a property in an SFHA without adequate flood insurance coverage being in place.²⁶ A lender should use the loan “closing date” to determine the date by which flood insurance must be in place for a designated loan. FEMA deems the “closing date” as the day the ownership of the property transfers to the new owner based on state law.

Q1. What are the exemptions from the mandatory purchase requirement?

A1. There are only three exemptions from the mandatory requirement to purchase flood insurance on a designated loan. The first applies to state-owned property covered under a policy of self-insurance satisfactory to the Administrator of FEMA.²⁷ The second applies if both the original principal balance of the loan is $5,000 or less, and the original repayment term is one year or less.²⁸ The third applies to any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence. For purposes of the detached structure exemption, a “structure that is a part of residential property” is a structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes. In addition, a structure is “detached” from the primary residential structure if it is not joined by any structural connection to that structure. Furthermore, whether a structure “does not serve as a residence” is based upon the good faith determination of the lender that the structure is not intended for use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities.²⁹ See also Q&A Exemptions Q2. If one of these exemptions applies, a borrower may still elect to purchase flood insurance. Also, a lender may require flood insurance as a condition of making the loan, as a matter of safety and soundness.

Q2. Does a lender have to take a security interest in the primary residential structure for detached structures to be eligible for the detached structure exemption? For example, suppose the house on a farm is not collateral, but all of the outbuildings including the barn, the equipment storage shed, and the silo (which are used for farm production), and a detached garage where the homeowner keeps his car, are taken as collateral. May the lender apply the detached structure exemption to the outbuildings?

A2. The lender does not have to take a security interest in the primary residential structure for detached structures to be eligible for the exemption, but the lender needs to evaluate the uses of detached structures to determine if they are eligible.³⁰ The term “a structure that is part of a residential property” in the detached structure exemption applies only to structures for which there is a residential use and not to structures for which there is a commercial, agricultural, or other business use.³¹ In this example, only the garage is serving a residential use, so it could qualify for the exemption. The barn, equipment storage shed, and silo, which are used for farm production, would not qualify for the exemption.

Q3. Is a flood hazard determination required even where the secured property may contain detached structures for which coverage is not required under the regulation?

A3. Yes, as required under the regulation, 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.

Q4. If a borrower currently has a flood insurance policy on a detached structure that is part of residential property and the detached structure does not serve as a residence, may the lender or its servicer cancel its requirement to carry flood insurance on that structure?

A4. Yes. If a borrower has a flood insurance policy on a detached structure that is part of a residential property and does not serve as a residence, the lender is no longer mandated by the act to require flood insurance on that structure.³³ The lender may allow the borrower to cancel the policy. If warranted as a matter of safety and soundness, the lender may continue to require flood insurance coverage on the detached structure.

Q5. In the event that a triggering event has occurred, is the lender required to review the intended use of each detached structure?

A5. Yes, a lender must examine the status of a detached structure upon a qualifying triggering event to determine whether the detached structure exemption still applies.³⁴ See Q&A Applicability Q13. There is no duty to monitor the status of a detached structure following the lender’s initial determination unless a triggering event occurs. However, regardless of the absence of a duty to monitor the status of a detached structure in the regulation, sound risk-management practices may lead a lender to conduct scheduled periodic reviews that track the need for flood insurance on a loan portfolio.

Q6. May a lender review current loans in its portfolio as the flood insurance policies renew and determine that it will no longer require flood insurance on a detached structure in an SFHA if the structure does not contribute to the value of the property securing the loan?

A6. A lender or servicer could initiate such a review; however, the regulation does not permit the exemption of structures from the mandatory flood insurance purchase requirement based solely on whether the detached structure contributes value to the overall residential property securing the loan.³⁵ In the case of any residential property, flood insurance is not required on any structure that is part of such property as long as it is detached from the primary residential structure and does not serve as a residence.³⁶ In addition, there are other exemptions that could apply: the exemption for state-owned property covered under a policy of self-insurance satisfactory to the Administrator of FEMA or the exemption for property securing any loan with an original principal balance of $5,000 or less and a repayment term of one year or less.³⁷

Q7. If a loan is secured by a residential property and the primary residential structure is joined to another building by a stairway or covered walkway, for purposes of federal flood insurance requirements, would the other building qualify as a detached structure?

A7. 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.³⁸ That is, a structure is “detached” if it stands alone. This definition is consistent with the coverage provision of the NFIP’s Standard Flood Insurance Policy (SFIP) for additions and extensions to the dwelling unit. See the NFIP Flood Insurance Manual. In this case, the other building would not qualify as a detached structure because it is attached to the primary residential structure by a stairway or covered walkway and does not stand alone.

Q1. May a lender decide to only accept private flood insurance policies under the mandatory acceptance provision of the regulation?

A1. Yes. A lender is only required to accept flood insurance policies issued by a private insurer that meet the definition of “private flood insurance” under the regulation, as long as the policy meets the amount of insurance required under the regulation. 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 of the regulation.

Q2. If a lender has a policy not to originate a mortgage in non-participating communities or coastal barrier regions where the NFIP is not available, do the private flood insurance requirements under the regulation require a lender to change its policy?

A2. The regulation does not require that a lender originate a loan that does not meet the lender’s underwriting criteria. 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.³⁹ The flood insurance purchase requirement does not apply within non-participating communities, where NFIP insurance is not available under the act. See Q&A Applicability Q1. Therefore, 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.

Q3. Did the agencies intend the compliance aid statement to act as a conformity clause that would make a private policy conform to the definition of “private flood insurance”?

A3. No. The agencies did not intend the compliance aid statement to act as a conformity clause. Rather, the compliance aid statement is intended to facilitate the ability of lenders, as well as consumers, to recognize policies that meet the definition of “private flood insurance” and promote the consistent acceptance of policies that meet this definition. The compliance aid statement is intended to leverage the expertise of insurers to assist lenders in satisfying the “private flood insurance” definition of the regulation.

Q4. Is a lender required to accept a flood insurance policy issued by a private insurer that includes the compliance aid statement? Conversely, may a lender reject a flood insurance policy issued by a private insurer solely because it does not contain the compliance aid statement?

A4. 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.”

Q5. If a flood insurance policy issued by a private insurer includes the compliance aid statement, does a lender need to conduct an additional review of the policy for compliance with the mandatory acceptance provision of the regulation?

A5. No, under the mandatory acceptance provision of the regulation, 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.”⁴² It is important to note that, in order for the lender to rely on the compliance aid statement without further review of the policy, the language of the compliance aid statement must be stated in the policy, or as an endorsement to the policy, as set forth in the regulation.⁴³ If the language is different from the compliance aid statement set forth in the regulation, the lender cannot rely on the protections of the compliance aid statement in the regulation and should review the policy to determine if it meets the definition of “private flood insurance.” However, a policy containing the compliance aid statement need not be rejected if there are stylistic differences, such as formatting, font, and punctuation that do not change the substantive meaning of the clause, from the compliance aid statement included in the regulation. See also Q&A Mandatory Q6.

Q6. Under the regulation, what additional reviews does a lender need to conduct if the flood insurance policy issued by a private insurer includes the compliance aid statement?

A6. Although a lender may rely on the compliance aid statement to determine that a flood insurance policy meets the definition of “private flood insurance” in the regulation, the lender must also 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.⁴⁴ See also Q&A Mandatory Q5.

Q7. If a flood insurance policy issued by a private issuer does not include a compliance aid statement, can a lender use the criteria under the discretionary acceptance provision to decide whether to accept the policy without first checking to see if the policy meets the criteria under the mandatory acceptance provision?

A7. Yes, the lender may first review the policy to determine whether it meets the criteria under the discretionary acceptance provision.⁴⁵ However, if the policy does not meet the discretionary acceptance criteria, the lender will still need to determine whether it must accept the policy under the mandatory acceptance criteria.⁴⁶

Q8. If a lender only receives a declarations page without receiving a copy of the policy, and the declarations page includes the compliance aid statement, may the lender accept the policy?

A8. If the compliance aid statement is included on the declarations page, a lender may determine the policy meets the definition of “private flood insurance” without further review. However, a lender also must ensure that the policy meets the amount of insurance required under the regulation. See Q&A Mandatory Q6.

Q9. May a lender accept a private flood insurance policy that includes a compliance aid statement, but also includes a disclaimer explaining that the “insurer is not licensed in the state or jurisdiction in which the property is located,” which suggests that the policy is issued by a surplus lines insurer?

A9. Even 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. See Q&A Private Flood Compliance Q10.

Q1. Are lenders required to accept flood insurance policies that meet the discretionary acceptance criteria?

A1. No, the discretionary acceptance criteria in the regulation sets forth the minimum acceptable criteria that a flood insurance policy must have for the lender to accept the policy under the discretionary acceptance provision. 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.

Q2. If the lender determines that a flood insurance policy meets the discretionary acceptance criteria and accepts that policy, what documentation will demonstrate that the policy provides sufficient protection of the loan, consistent with general safety and soundness principles?

A2. The regulation requires the lender to document its conclusion in writing that the policy provides sufficient protection of the loan, consistent with general safety and soundness principles. See also Q&A Discretionary Q4. This review may be performed and recorded electronically. 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.

Q3. How can a lender evaluate the sufficiency of an insurer’s solvency, strength, and ability to satisfy claims when determining whether a flood insurance policy provides sufficient protection of the loan, consistent with general safety and soundness principles?

A3. 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. A lender can rely on the licensing or other processes used by the state insurance regulator for such an evaluation. See Q&A Discretionary Q4.

Q4. What are some factors to consider when determining whether a flood insurance policy issued by a private insurer under the discretionary acceptance provision or a mutual aid plan provides sufficient protection of a loan secured by improved real property located in an SFHA, consistent with general safety and soundness principles?

A4. Some factors, among others, that a lender could consider in determining whether a policy provides sufficient protection of a loan include whether: (1) a policy’s deductible is reasonable based on the borrower’s financial condition; (2) the insurer provides adequate notice of cancellation to the mortgagor and mortgagee to allow for timely force placement of flood insurance, if necessary; (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 regulated 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 solvency, strength, and ability to satisfy claims.

Q1. What is the maximum deductible a flood insurance policy issued by a private insurer can have for residential or commercial properties located in an SFHA?

A1. The maximum deductible for a flood insurance policy issued by a private insurer varies depending on whether the lender accepts the policy under the mandatory acceptance or the discretionary acceptance provision. For purposes of compliance with the mandatory acceptance provision, the regulation provides that a policy must provide coverage at least as broad as the coverage provided under an SFIP for the same type of property, including a deductible that 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.⁴⁸ For a private policy with a coverage amount exceeding that available under the NFIP, the deductible may exceed the specific maximum deductible under an SFIP. However, for safety and soundness purposes, the lender should consider whether the deductible is reasonable based on the borrower’s financial condition, among other factors. See Q&A Amount Q9.

For purposes of compliance with the discretionary acceptance provision, the regulation requires that the policy provide sufficient protection of the loan, consistent with safety and soundness principles.⁴⁹ Among the factors a lender could consider in determining whether a policy provides sufficient protection of a loan is whether the policy’s deductible is reasonable based on the borrower’s financial condition. 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 safety and soundness principles.

Q2. May a lender require that the deductible of any flood insurance policy issued by a private insurer be lower than the maximum deductible for an SFIP?

A2. Yes. If the lender is accepting the private flood insurance policy under the mandatory acceptance provision, the regulation requires that the private flood insurance policy be at least as broad as an SFIP, which includes a requirement that the private flood insurance policy contain a deductible no higher than the specified maximum deductible for an SFIP.⁵¹ The lender may require a borrower’s private flood insurance policy deductible to be lower than the maximum deductible for an SFIP 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.

Q3. If a lender utilizes a third party to review flood insurance policies, would it be permissible for a lender to charge the borrower a fee for this review?

A3. The act and the regulation do not prohibit lenders from charging fees to borrowers for contracting with third parties to review flood insurance policies issued by private insurers. As explained in Q&A Fees Q1 and Q2, lenders may charge limited, reasonable fees for flood determinations and life-of-loan monitoring. Similarly, the act and the regulation do not prohibit lenders from charging a fee to a borrower when a third party reviews a flood insurance policy issued by a private insurer. However, lenders should be aware of any other applicable requirements regarding fees and disclosures of fees.

Q4. If the policy is not available prior to closing, what can the lender rely on to make sure the policy meets the private flood insurance requirements of the regulation?

A4. 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. Lenders should determine whether they have sufficient evidence to show the policy meets the private flood insurance requirements under the regulation.

Q5. Under existing force placement requirements, a declarations page is sufficient to evidence a borrower’s purchase of a flood insurance policy. Does the declarations page have sufficient information for a lender to determine whether the policy complies with the private flood insurance requirements of the regulation?

A5. It depends. If the declarations page provides enough information for the lender to determine whether the policy meets the mandatory acceptance provision or discretionary acceptance provision of the regulation or if the declarations pages contains the compliance aid statement, then the lender may rely on the declarations pages. However, if the declarations page does not provide enough information for the lender to determine whether the policy satisfies the mandatory acceptance provision or discretionary acceptance provision of the regulation, the lender should request additional information about the policy to aid in making its determination.

Q6. May a lender accept a multiple-peril policy issued by a private insurer to satisfy the mandatory purchase of flood insurance requirement?

A6. Yes. A lender can accept a multiple-peril policy that covers the hazard of flood, either in the policy or as an endorsement, under the private flood insurance provisions of the regulation.

Q7. How do the private flood insurance requirements of the regulation, especially the compliance aid statement, work in conjunction with the requirements from secondary market investors (for example, the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac))?

A7. Lenders must comply with federal flood insurance requirements. The requirements for the secondary market are separate from the regulation. A lender should carefully review these separate requirements for secondary market investors regarding acceptable private flood insurance if the lender plans to sell loans to such investors and should direct questions regarding these requirements to the appropriate entities.

Q8. When servicing a loan covered by flood insurance pursuant to the act and the regulation, which requirements must a servicer follow in evaluating the acceptance of a flood insurance policy issued by a private insurer?

A8. 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 provision or mutual aid provision. For loans serviced on behalf of other entities not supervised by the agencies, the servicer should comply with the terms of its contract with that entity. For example, 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 required in the regulation, the servicer should adhere to those servicing requirements.

Q9. How can a lender determine: (i) whether an insurer is licensed or admitted in a particular state, (ii) or whether a surplus lines or nonadmitted alien insurer is permitted to issue an insurance policy in a particular state?

A9. A lender may refer to the website of the state insurance regulator where the collateral property is located to determine whether a particular insurer is licensed, admitted, or otherwise permitted to issue an insurance policy in a particular state. If the lender cannot determine this information from the website, the lender could contact the state insurance regulator directly.

Q10. May lenders accept policies issued by private insurers that are surplus lines insurers for noncommercial properties?

A10. Yes, 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.

Q11. When must a lender review a flood insurance policy issued by a private insurer under the private flood insurance requirements of the regulation?

A11. Any time the borrower presents the lender with a new flood insurance policy issued by a private insurer, regardless of whether a triggering event occurred, the lender must review the policy to determine whether it meets the private flood insurance requirements of the regulation.⁵⁶ 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 statement.⁵⁷ If there is no compliance aid statement, or the lender chooses not to rely on the compliance aid statement, the lender must conduct its own review to determine if the policy meets the mandatory acceptance criteria. See Q&A Mandatory Q4. 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. See also Q&A Mandatory Q7. If the policy does not meet the mandatory acceptance, discretionary acceptance, or mutual aid plan criteria, the lender may not accept the policy.⁵⁸

Q1. Does the SFHDF replace the borrower notification form?

A1. No. The SFHDF is used by the lender to determine whether the building or mobile home offered as collateral security for a loan is or will be located in an SFHA in which flood insurance is available under the act.⁵⁹ The notification form, on the other hand, is used to notify the borrower(s) that the building or mobile home is or will be located in an SFHA and to inform the borrower(s) about flood insurance requirements and the availability of federal disaster relief assistance.⁶⁰

Q2. May a lender provide the SFHDF to the borrower?

A2. Yes. Although not a statutory requirement, a lender may provide a copy of the flood determination to the borrower. In the event a lender provides the SFHDF to the borrower, the signature of the borrower is not required to acknowledge receipt of the form. The agencies note that under the FEMA process for a Letter of Determination Review (LODR), a lender would need to make the determination available to the borrower.

Q3. May the SFHDF be used in electronic format?

A3. Yes.⁶¹ In the final rule adopting the SFHDF, FEMA stated: “If an electronic format is used, the format and exact layout of the Standard Flood Hazard Determination Form is not required, but the fields and elements listed on the form are required. Any electronic format used by lenders must contain all mandatory fields indicated on the form.” It should be noted that the lender must be able to reproduce the form upon receiving a document request by its federal supervisory agency.

Q4. May a lender rely on a previous determination for a refinancing or assumption of a loan or multiple loans to the same borrower secured by the same property?

A4. It depends. The act (42 U.S.C. 4104b(e)) permits a lender to rely on a previous flood determination using the SFHDF when it increases, extends, renews, or purchases a loan secured by a building or a mobile home. Under the act, the “making” of a loan is not listed as a permissible event that permits a lender to rely on a previous determination. When the loan involves a refinancing or assumption by the same lender who obtained the original flood determination on the same property, the lender may rely on the previous determination only if the original determination was made not more than seven years before the date of the transaction, the basis for the determination was set forth on the SFHDF, and there were no map revisions or updates affecting the security property since the original determination was made. Further, if the same lender makes multiple loans to the same borrower secured by the same improved real estate, the lender may rely on its previous determination if the original determination was made not more than seven years before the date of the transaction, the basis for the determination was set forth on the SFHDF, and there were no map revisions or updates affecting the security property since the original determination was made. These loans are extended by the same lender, to the same borrower, and are secured by the same improved real estate, and, therefore, these types of transactions are the functional equivalent of an increase of a loan.

Q1. When can lenders or servicers charge the borrower a fee for making a determination?

A1. There are four instances under the act and regulation when the borrower can be charged a fee for a flood determination:

Q2. May charges made for life-of-loan reviews by flood determination firms be passed along to the borrower?

A2. Yes, with limitations noted below. In addition to the initial determination at the time a loan is made, increased, renewed, or extended, many flood determination firms provide a service to the lender to review and report changes in the flood status of a dwelling for the entire term of the loan (i.e., life-of-loan monitoring). The fee charged for the service at loan closing is a composite fee for conducting both the original and subsequent reviews. Charging a fee for the original determination is clearly authorized by the act. The agencies agree that a determination fee may include, among other things, reasonable fees for a lender, servicer, or third party to monitor the flood hazard status of property securing a loan in order to make determinations on an ongoing basis.

Q1. Does a lender need to reconcile a discrepancy between the flood zone designation on the flood determination form and the flood zone associated with a flood insurance policy?

A1. No, a lender need not reconcile or otherwise be concerned with a flood zone discrepancy. For NFIP policies issued under FEMA’s Risk Rating 2.0—Equity in Action (Risk Rating 2.0),⁶⁵ premium rates are no longer determined by the flood zone in which the property is located. Moreover, the flood zone is no longer included on the declarations page for NFIP policies issued under Risk Rating 2.0.

Q2. Is a lender in violation of the regulation if there is a discrepancy between the flood zone on the SFHDF and the flood zone associated with a flood insurance policy?

A2. No, a lender is not in violation of the regulation if there is a discrepancy between the flood zone on the SFHDF and the flood zone associated with the policy. See Q&A Zone Q1.

Q3. What should a lender do when the lender’s flood zone determination specifies that a building securing the loan is located in an SFHA requiring mandatory flood insurance coverage, but the borrower disputes that determination?

A3. If a borrower disputes a lender’s determination that the building securing the loan is located in an SFHA requiring mandatory flood insurance coverage, the parties involved in making the determination are encouraged to resolve the flood zone discrepancy before contacting FEMA for a final determination. If the flood zone discrepancy cannot be resolved, an appeal may be filed with FEMA. Depending on the nature of the dispute, FEMA has different options for review, including:

Q1. Does the Notice of Special Flood Hazards have to be provided to each borrower for a real estate related loan?

A1. No. The Notice of Special Flood Hazards must be provided to one borrower when the lender determines that the property securing the loan is or will be located in an SFHA.⁶⁹ In a transaction involving multiple borrowers, the lender need only provide the Notice of Special Flood Hazards to any one of the borrowers in the transaction. Lenders may provide multiple notices if they choose. The lender and borrower(s) typically designate the borrower to whom the Notice of Special Flood Hazards will be provided.

Q2. When should a lender provide the Notice of Special Flood Hazards to the borrower? How does this requirement apply 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?

A2. As required by the regulation, a lender must provide the Notice of Special Flood Hazards to the borrower within a reasonable time before the completion of the transaction.⁷⁰ 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 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. The agencies generally regard 10 calendar days as a “reasonable” time interval.

Q3. When is the lender required to provide notice to the servicer of a loan that flood insurance is required?

A3. Because the servicer of a loan is often not identified prior to the closing of a loan, the regulation requires that notice be provided no later than the time the lender transmits other loan data, such as information concerning hazard insurance and taxes, to the servicer.⁷³

Q4. What will constitute appropriate form of notice to the servicer?

A4. Delivery to the servicer of a copy of the notice given to the borrower is appropriate notice. The regulation also provides that the notice can be made either electronically or by a written copy.⁷⁴

Q5. How long must the lender maintain the record of receipt by the borrower of the Notice of Special Flood Hazards?

A5. The record of receipt provided by the borrower must be maintained for the period of time that the lender owns the loan.⁷⁶ Examples of a record of receipt include: the borrower’s signed acknowledgment of receipt of the Notice of Special Flood Hazards; the borrower’s initials on a form that acknowledges receipt; the borrower’s electronic signature that acknowledges receipt, or a certified return receipt if the Notice of Special Flood Hazards was mailed to the borrower. Lenders may keep the record in the form that best suits the lender’s business practices. Lenders may retain the record electronically, but they must be able to retrieve the record within a reasonable time pursuant to a document request from their federal supervisory agency.

Q6. Can a lender rely on a previous Notice of Special Flood Hazards if it is less than seven years old, and it is the same property, same borrower, and same lender?

A6. The regulation does not waive the requirement to provide the Notice of Special Flood Hazards to the borrower. Although subsequent transactions by the same lender with respect to the same property are the functional equivalent of a renewal and do not require a new determination, the lender must still provide a new Notice of Special Flood Hazards to the borrower.⁷⁷

Q7. Is use of the sample form of Notice of Special Flood Hazards mandatory?

A7. Although lenders are required to provide a Notice of Special Flood Hazards to a borrower when they make, increase, extend, or renew a loan secured by an improved structure located in an SFHA,⁷⁸ use of the sample form of Notice of Special Flood Hazards provided in appendix A of the regulation is not mandatory. It should be noted that the sample form includes other information in addition to what is required by the act and the regulation. Lenders may personalize, change the format of, and add information to the sample form of notice, if they choose. However, a lender-revised Notice of Special Flood Hazards must provide the borrower with at least the minimum information required by the act and regulation.⁷⁹ Therefore, lenders should consult the act and regulation to determine the information needed.

Q1. The regulation states that the amount of flood insurance required “must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the act.” What is meant by the “maximum limit of coverage available for the particular type of property under the act”?

A1. The maximum limit of coverage available for the particular type of property under the act depends on the value of the secured collateral. First, under the NFIP, there are maximum caps on the amount of insurance available for buildings located in a participating community under the Regular Program. For single-family and two-to-four family dwellings and individually owned condominium units insured under the Dwelling Form policy, the maximum limit is $250,000. For a residential condominium building insured under the Residential Condominium Building Association Policy (RCBAP) form, the maximum amount of insurance available is $250,000 multiplied by the number of units. For all other buildings insured under the General Property Form, the maximum limit of building coverage available is $500,000. This includes all non-residential buildings, mixed-use condominium buildings not eligible for coverage under the RCBAP, and other residential buildings of five or more families, such as cooperatives or apartment buildings in the non-condominium form of ownership. (In participating communities that are under the emergency program phase, the maximum limits of insurance are different.) The maximum limit for contents insured under the Dwelling Form and RCBAP is $100,000 ($100,000 total, not per unit) and $500,000 for contents insured under the General Property Form. See NFIP Flood Insurance Manual.

Q2. What is the “insurable value” of a building and how is it used to determine the required amount of flood insurance?

A2. The insurable value of the building may generally be the same as 100 percent replacement cost value (RCV), which is the cost to replace the building with the same kind of material and construction without deduction for depreciation. In calculating the amount of insurance to require, the lender and borrower (either by themselves or in consultation with the flood insurance provider or other appropriate professional) may choose from a variety of approaches or methods to establish the insurable value. They may use an appraisal based on a cost-value (not market-value) approach, a construction-cost calculation, the insurable value used on a hazard insurance policy (recognizing that the insurable value for flood insurance purposes may differ from the coverage provided by the hazard insurance and that adjustments may be necessary), the replacement cost value listed on the flood insurance policy declarations page, or any other reasonable approach, so long as it can be supported.

Q3. What are examples of residential buildings?

A3. A residential building is a non-commercial building designed for habitation by one or more families or a mixed-use building that qualifies as a single-family, 2-4 family, or other residential building.

For more complete information, refer to the NFIP Flood Insurance Manual.

Q4. What are examples of non-residential buildings?

A4. Pursuant to the NFIP Flood Insurance Manual, a non-residential building includes:

For more complete information, refer to the NFIP Flood Insurance Manual.

Q5. How much insurance is required on a building located in an SFHA in a participating community?

A5. The amount of insurance required by the act and regulation is the lesser of:

Example: (Calculating insurance required on a non-residential building): Loan security includes one equipment shed located in an SFHA in a participating community under the Regular Program.

The minimum amount of insurance required by the regulation for the equipment shed is $30,000.

Q6. Is flood insurance required for each building when the real estate security contains more than one building located in an SFHA in a participating community? If so, how much coverage is required?

A6. Yes. The lender must determine the amount of insurance required on each building and add these individual amounts together.⁸⁴ The total amount of required flood insurance is the lesser of:

Example: Lender makes a loan in the principal amount of $150,000 secured by five non-residential buildings, only three of which are located in SFHAs within participating communities.

Amount of insurance required for the three buildings is $150,000. This amount of required flood insurance could be allocated among the three buildings in varying amounts, so long as each is covered in accordance with the statutory requirement.

Q7. If the insurable value of a building or mobile home securing a designated loan is less than the outstanding principal balance of the loan, must a lender require the borrower to obtain flood insurance up to the balance of the loan?

A7. No. The regulation provides that the amount of flood insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for a particular type of property under the act.⁸⁶ The regulation also provides that flood insurance coverage under the act is limited to the building or mobile home and any personal property that secures a loan and not the land itself.⁸⁷ Since the NFIP policy does not cover land value, lenders determine the amount of insurance necessary based on the insurable value of the building.

Q8. Can a lender require more flood insurance than the minimum required by the regulation?

A8. Yes. Lenders are permitted to require more than the minimum amount of flood insurance required by the regulation, taking into consideration applicable state and federal law and safe and sound banking practices, as appropriate. However, the borrower or lender may have to seek such coverage outside the NFIP. Although a lender has the responsibility to tailor its own flood insurance policies and procedures to suit its business needs and protect its ongoing interest in the collateral, it should consider the extent of recovery allowed under the NFIP or a private policy for the type of property being insured to assist the borrower in avoiding paying for coverage that exceeds the amount the insured would recover in the event of a loss.

Q9. Can a lender allow the borrower to use the maximum deductible to reduce the cost of flood insurance?

A9. Yes. However, it may not be a sound business practice for a lender, as a matter of policy, to always allow the borrower to use the maximum deductible. A lender should determine the reasonableness of the deductible on a case-by-case basis, taking into account the risk that such a deductible would pose to the borrower and lender. A lender may not allow the borrower to use a deductible amount equal to the insurable value of the property to avoid the mandatory purchase requirement for flood insurance.⁸⁸

Q10. Can a lender accept a blanket flood insurance policy or blanket multi-peril policy covering multiple buildings that includes a per-occurrence deductible, regardless of whether any single building covered by the policy has an insurable value lower than the amount of the deductible?

A10. Yes, a lender may accept a blanket flood insurance policy or blanket multi-peril policy covering multiple buildings that includes a per-occurrence deductible, regardless of whether any single building covered by the policy has an insurable value lower than the amount of the deductible. A blanket flood insurance policy or blanket multi-peril policy that includes a per-occurrence deductible provides coverage for each building covered by such a policy, regardless of whether any individual building covered under the policy has an insurable value that may be lower than the amount of the deductible. However, 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. 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 lender. See Q&A Amount Q9.

Q1. Is a loan secured only by land, which is located in an SFHA in which flood insurance is available under the act and that will be developed into buildable lot(s), a designated loan that requires flood insurance?

A1. No. A designated loan is a loan secured by a building or mobile home that is located or to be located in an SFHA in which flood insurance is available under the act.⁸⁹ Any loan secured only by land that is located in an SFHA in which flood insurance is available is not a designated loan since it is not secured by a building or mobile home.

Q2. Is a loan secured or to be secured by a building in the course of construction that is located or to be located in an SFHA in which flood insurance is available under the act a designated loan?

A2. Yes. A lender must always make a flood determination prior to loan origination to determine whether a building to be constructed that is security for the loan is located or will be located in an SFHA in which flood insurance is available under the act.⁹⁰ If the building or mobile home is located or will be located in an SFHA, then the loan is a designated loan and the lender must provide the requisite notice to the borrower prior to loan origination.⁹¹ The lender must then comply with the mandatory purchase requirement under the act and regulation.⁹²

Q3. Is a building in the course of construction that is located in an SFHA in which flood insurance is available under the act eligible for coverage under an NFIP policy?

A3. Yes. The NFIP will insure a building in the course of construction before it is walled and roofed using the NFIP-issued rates based on the construction designs and the intended use of the building. However, buildings in the course of construction that are not walled and roofed are not eligible for coverage when construction stops for more than 90 days and/or if the lowest floor for rating purposes is below the Base Flood Elevation. The NFIP will not insure materials or supplies intended for use in such construction, alteration, or repair unless they are contained within an enclosed building on the premises or adjacent to the premises. (See NFIP Flood Insurance Manual; the NFIP Dwelling Form for an SFIP).

Q4. When must a lender require the purchase of flood insurance for a loan secured by a building in the course of construction that is located in an SFHA in which flood insurance is available?

A4. Under the act, as implemented by the regulation, a lender may not make, increase, extend, or renew any loan secured by a building or a mobile home, located or to be located in an SFHA in which flood insurance is available, unless the property is covered by adequate flood insurance for the term of the loan.⁹³ The NFIP provides that lenders may comply with the mandatory purchase requirement for a loan secured by a building in the course of construction that is located in an SFHA by requiring borrowers to have a flood insurance policy in place at the time of loan origination. Such a policy is issued based upon the construction designs and intended use of the building. A borrower should obtain a provisional rating (available only if certain criteria are met) to enable the placement of coverage prior to receipt of the Elevation Certificate (EC). In accordance with the NFIP requirement, it is expected that an EC will be secured and a full-risk rating completed within 60 days of the policy effective date. Failure to obtain the EC could result in reduced coverage limits at the time of a loss. (See NFIP Flood Insurance Manual).

Q5. Does the NFIP 30-day waiting period apply when the purchase of the flood insurance policy is deferred in connection with a construction loan?

A5. Yes. A 30-day waiting period will apply if a lender allows a borrower to delay the purchase of flood insurance in connection with a construction loan after making, increasing, renewing, or extending the loan. A borrower must apply for flood insurance on or before the closing date of a loan transaction for the NFIP 30-day waiting period to be waived. See NFIP Flood Insurance Manual. See also Q&A Construction Q4.

Q6. If a lender allows a borrower to defer the purchase of flood insurance until either a foundation slab has been poured and/or an Elevation Certificate has been issued, or if the building to be constructed will have its lowest floor below Base Flood Elevation when the building is walled and roofed, when must the lender begin escrowing flood insurance premiums and fees?

A6. If the lender allows a borrower to defer the purchase of flood insurance until either the foundation slab has been poured and/or an Elevation Certificate has been issued, or if the building to be constructed will have its lowest floor below Base Flood Elevation when the building is walled and roofed, a lender must escrow flood insurance premiums and fees at the time of purchase of the flood insurance, unless one of the escrow exceptions applies.⁹⁵

Q1. Are residential condominiums, including multi-story condominium complexes, subject to the statutory and regulatory requirements for flood insurance?

A1. Yes. The mandatory flood insurance purchase requirements under the act and regulation apply to loans secured by individual residential condominium units, including those located in multi-story condominium complexes, located in an SFHA in which flood insurance is available under the act.⁹⁶ The mandatory purchase requirements also apply to loans secured by other residential condominium property, such as loans to a developer for construction of the condominium or loans to a condominium association.

Q2. What is an NFIP Residential Condominium Building Association Policy (RCBAP)?

A2. The RCBAP is a master policy for residential condominiums issued by FEMA. A residential condominium building is defined as having 75 percent or more of the building’s floor area in residential use. It may be purchased only by condominium owners associations. The RCBAP covers both the common and individually owned building elements within the units, improvements within the units, and contents owned in common (if contents coverage is purchased). The maximum amount of building coverage that can be purchased under an RCBAP is either 100 percent of the replacement cost value of the building, including amounts to repair or replace the foundation and its supporting structures, or the total number of units in the condominium building times $250,000, whichever is less. RCBAP coverage is available only for residential condominium buildings in Regular Program communities.

Q3. What is the amount of flood insurance coverage that a lender must require with respect to residential condominium units, including those located in multi-story residential condominium complexes, to comply with the mandatory purchase requirements under the act and the regulation?

A3. To comply with the regulation, the lender must ensure that the minimum amount of flood insurance covering the condominium unit is the lesser of:

Example: Lender makes a loan in the principal amount of $300,000 secured by a condominium unit in a 50-unit condominium building, which is located in an SFHA within a participating community, with a replacement cost of $15 million and insured by an RCBAP with $12.5 million of coverage.

The lender does not need to require additional flood insurance since the RCBAP’s $250,000 per unit coverage ($12.5 million ÷ 50 = $250,000) satisfies the regulation’s mandatory flood insurance purchase requirement. (This is the lesser of the outstanding principal balance ($300,000), the maximum coverage available under the NFIP ($250,000), or the insurable value ($300,000)). See NFIP Flood Insurance Manual.

Q4. For residential condominiums with no RCBAP coverage, what action must a lender take for an individual unit owner?

A4. If there is no RCBAP on the residential condominium building, then the lender must require the individual unit owner to obtain coverage in an amount sufficient to meet the requirements outlined in Q&A Condo and Co-op Q3.⁹⁹

Example: The lender makes a loan in the principal amount of $175,000 secured by a residential condominium unit in a 50-unit residential condominium building, which is located in an SFHA within a participating community, with a replacement cost value of $10 million; however, there is no RCBAP.

The lender must require the individual unit owner to purchase flood insurance coverage in the amount of at least $175,000, since there is no RCBAP, to satisfy the regulation’s mandatory flood insurance purchase requirement. (This is the lesser of the outstanding principal balance ($175,000), the maximum coverage available under the NFIP ($250,000), or the insurable value ($200,000).)

Q5. What action must a lender take if the RCBAP coverage is insufficient to meet the regulation’s mandatory purchase requirements for a loan secured by an individual residential condominium unit?

A5. If the lender determines that flood insurance coverage purchased under the RCBAP is insufficient to meet the regulation’s mandatory purchase requirements, then the lender should request that the individual unit owner ask the condominium association to obtain additional coverage that would be sufficient to meet the regulation’s requirements. See Q&A Condo and Co-op Q3. If the condominium association does not obtain sufficient coverage, then the lender must require the individual unit owner to purchase supplemental coverage in an amount sufficient to meet the regulation’s flood insurance requirements.¹⁰⁰ The amount of supplemental coverage required to be purchased by the individual unit owner would be the difference between the RCBAP’s coverage allocated to that unit and the regulation’s mandatory flood insurance purchase requirements. See Q&A Condo and Co-op Q4.

Example: Lender makes a loan in the principal amount of $300,000 secured by a condominium unit in a 50-unit condominium building, which is located in an SFHA within a participating community, with a replacement cost value of $10 million; however, the RCBAP is at 80 percent of replacement cost value ($8 million or $160,000 per unit).

Q6. What must a lender do when a loan secured by a residential condominium unit is in a complex whose condominium association allows its existing RCBAP to lapse?

A6. If a lender determines at any time during the term of a designated loan that the loan is not covered by flood insurance or is covered by such insurance in an amount less than that required under the act and the regulation, the lender must notify the individual unit owner of the requirement to maintain flood insurance coverage sufficient to meet the regulation’s mandatory requirements.¹⁰¹ The lender should encourage the individual unit owner to work with the condominium association to acquire a new RCBAP in an amount sufficient to meet the regulation’s mandatory flood insurance purchase requirement. See Q&A Condo and Co-op Q3. Failing that, the lender must require the individual unit owner to obtain a flood insurance policy in an amount sufficient to meet the regulation’s mandatory flood insurance purchase requirement. See Q&A Condo and Co-op Q4 and Q5. If the borrower/unit owner or the condominium association fails to purchase flood insurance sufficient to meet the regulation’s mandatory requirements within 45 days of the lender’s notification to the individual unit owner of inadequate insurance coverage, the lender must force place the necessary flood insurance on the borrower’s behalf.¹⁰²

Q7. How does the RCBAP’s co-insurance penalty apply in the case of residential condominiums, including those located in multi-story condominium complexes?

A7. In the event the RCBAP’s coverage on a condominium building at the time of loss is less than 80 percent of either the building’s replacement cost or the maximum amount of insurance available for that building under the NFIP (whichever is less), then the loss payment, which is subject to a coinsurance penalty, is determined as follows (subject to all other relevant conditions in the policy, including those pertaining to valuation, adjustment, settlement, and payment of loss):

Example 1: (Inadequate insurance amount to avoid penalty).

Replacement value of the building: $250,000.

80 percent of replacement value of the building: $200,000.

Actual amount of insurance carried: $180,000.

Amount of the loss: $150,000.

Deductible: $ 500.

Step A: 180,000 ÷ 200,000 = .90

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

Step B: 150,000 × .90 = 135,000

Step C: 135,000 - 500 = 134,500

The policy will pay no more than $134,500. The remaining $15,500 is not covered due to the co-insurance penalty ($15,000) and application of the deductible ($500).

Example 2: (Adequate insurance amount to avoid penalty).

Replacement value of the building: $250,000.

80 percent of replacement value of the building: $200,000.

Actual amount of insurance carried: $200,000.

Amount of the loss: $150,000.

Deductible: $ 500.

Step A: 200,000 ÷ 200,000 = 1.00

(100 percent of what should be carried to avoid coinsurance penalty)

Step B: 150,000 × 1.00 = 150,000

Step C: 150,000 - 500 = 149,500

In this example there is no co-insurance penalty, because the actual amount of insurance carried meets the 80 percent requirement to avoid the co-insurance penalty. The policy will pay no more than $149,500 ($150,000 amount of loss minus the $500 deductible). This example also assumes a $150,000 outstanding principal loan balance.

Q8. What are the major factors involved with the individual unit owner’s NFIP Dwelling Policy’s coverage limitations with respect to the condominium association’s RCBAP coverage?

A8. The following examples demonstrate how the unit owner’s NFIP Dwelling Policy may cover in certain loss situations:

Example 1: RCBAP

Example 2: No RCBAP

Q9. What are the flood insurance requirements for a residential condominium unit or a non-residential condominium unit located in a non-residential condominium building? What are the flood insurance requirements for a non-residential condominium unit located in a residential condominium building?

A9. Coverage is not available under the NFIP for an individual residential condominium unit or a non-residential condominium unit located in a non-residential condominium building. NFIP coverage is also not available for a non-residential condominium unit located in a residential condominium building. Therefore, a loan secured by one of these types of units is not a designated loan under the regulation, and the mandatory flood insurance requirement does not apply. The agencies note, however, that contents coverage is available through the NFIP for these types of units. See NFIP Flood Insurance Manual.

Q10. What flood insurance requirements apply to a loan secured by a share in a cooperative building that is located in an SFHA?

A10. It is important to recognize the difference between ownership of a condominium and a cooperative. Although an owner of a condominium owns title to real property, a cooperative unit holder holds stock in a corporation with the right to occupy a particular unit but owns no title to the building. As a result, a loan to a cooperative unit owner, secured by the owner’s share in the cooperative, is not a designated loan that is subject to the act or the regulation.

Q1. Is a home equity loan considered a designated loan that requires flood insurance?

A1. Yes. A home equity loan is a designated loan, regardless of the lien priority, if the loan is secured by a building or a mobile home located in an SFHA in which flood insurance is available under the act.¹⁰³

Q2. Does a draw against an approved line of credit secured by a building or mobile home, which is located in an SFHA in which flood insurance is available under the act, require a flood determination under the regulation?

A2. No. While a line of credit secured by a building or mobile home located in an SFHA in which flood insurance is available under the act is a designated loan and, therefore, requires a flood determination before the loan is made, draws against an approved line do not require further determinations.¹⁰⁴ However, a request made for an increase in an approved line of credit may require a new determination, depending upon whether a previous determination was done. See Q&A SFHDF Q4.

Q3. What is the amount of flood insurance coverage required on a line of credit secured by a residential improved real estate?

A3. A lender may take the following alternative approaches:

Q4. When a lender makes, increases, extends or renews a second mortgage secured by a building or mobile home located in an SFHA, how much flood insurance must the lender require?

A4. The lender must ensure that adequate flood insurance is in place or require that additional flood insurance coverage be added to the flood insurance policy in the amount of the lesser of either the combined total outstanding principal balance of the first and second loan, the maximum amount available under the act (currently $250,000 for most residential buildings and $500,000 for other buildings), or the insurable value of the building or mobile home.¹⁰⁷ The junior lienholder should also have the borrower add the junior lienholder’s name as mortgagee/loss payee to the existing flood insurance policy. Given the provisions of NFIP policies, a lender cannot comply with the act and regulation by requiring the purchase of an NFIP flood insurance policy only in the amount of the outstanding principal balance of the second mortgage without regard to the amount of flood insurance coverage on a first mortgage.

Example 1: Lender A makes a first mortgage with a principal balance of $100,000, but improperly requires only $75,000 of flood insurance coverage, which the borrower satisfied by obtaining an NFIP policy. Lender B issues a second mortgage with a principal balance of $50,000. The insurable value of the residential building securing the loans is $200,000. Lender B must ensure that flood insurance in the amount of $150,000 is purchased and maintained. If Lender B were to require additional flood insurance only in an amount equal to the principal balance of the second mortgage ($50,000), its interest in the secured property would not be fully protected in the event of a flood loss because Lender A would have prior claim on $100,000 of the loss payment towards its principal balance of $100,000, while Lender B would receive only $25,000 of the loss payment toward its principal balance of $50,000.

Example 2: Lender A, who is not directly covered by the act or regulation, makes a first mortgage with a principal balance of $100,000 and does not require flood insurance. Lender B, who is directly covered by the act and regulation, issues a second mortgage with a principal balance of $50,000. The insurable value of the residential building securing the loans is $200,000. Lender B must ensure that flood insurance in the amount of $150,000 is purchased and maintained. If Lender B were to require flood insurance only in an amount equal to the principal balance of the second mortgage ($50,000) through an NFIP policy, then its interest in the secured property would not be protected in the event of a flood loss because Lender A would have prior claim on the entire $50,000 loss payment towards its principal balance of $100,000.

Example 3: Lender A made a first mortgage with a principal balance of $100,000 on improved real estate with a fair market value of $150,000. The insurable value of the residential building on the improved real estate is $90,000; however, Lender A improperly required only $70,000 of flood insurance coverage, which the borrower satisfied by purchasing an NFIP policy. Lender B later takes a second mortgage on the property with a principal balance of $10,000. Lender B must ensure that flood insurance in the amount of $90,000 (the insurable value) is purchased and maintained on the secured property to comply with the act and regulation. If Lender B were to require flood insurance only in an amount equal to the principal balance of the second mortgage ($10,000), its interest in the secured property would not be protected in the event of a flood loss because Lender A would have prior claim on the entire $80,000 loss payment towards the insurable value of $90,000.

Q5. If a borrower requesting a loan secured by a junior lien provides evidence that flood insurance coverage is in place, does the lender have to make a new determination? Does the lender have to adjust the insurance coverage?

A5. It depends. Assuming the requirements in section 528 of the act (42 U.S.C. 4104b) are met and the same lender made the first mortgage, then a new determination may not be necessary when the existing determination is not more than seven years old, there have been no map changes, and the determination was recorded on an SFHDF. If, however, a lender other than the one that made the first mortgage loan is making the junior lien loan, a new determination would be required because this lender would be deemed to be “making” a new loan.¹⁰⁸ In either situation, the lender will need to determine whether the amount of insurance in effect is sufficient to cover the lesser of the combined outstanding principal balance of all loans (including the junior lien loan), the insurable value, or the maximum amount of coverage available on the improved real estate. This will hold true whether the subordinate lien loan is a home equity loan or some other type of junior lien loan.

Q6. If the loan request is to finance inventory stored in a building located within an SFHA, but the building is not security for the loan, is flood insurance required?

A6. No. The act and the regulation provide that a lender shall not make, increase, extend, or renew a designated loan, that is, a loan secured by a building or mobile home located or to be located in an SFHA, “unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan.”¹⁰⁹ In this example, the loan is not a designated loan because it is not secured by a building or mobile home; rather, the collateral is the inventory alone.

Q7. Is flood insurance required if a building and its contents both secure a loan, and the building is located in an SFHA in which flood insurance is available?

A7. Yes. Flood insurance is required for the building located in the SFHA and any personal property securing the loan.¹¹⁰ The method for allocating flood insurance coverage among multiple buildings, as described in Q&A Amount Q6, would be the same method for allocating flood insurance coverage among contents and buildings. That is, both contents and building will be considered to have a sufficient amount of flood insurance coverage for regulatory purposes so long as some reasonable amount of insurance is allocated to each category.

Example: Lender A makes a loan for $200,000 that is secured by a warehouse with an insurable value of $150,000 and inventory in the warehouse worth $100,000. The act and regulation require that flood insurance coverage be obtained for the lesser of the outstanding principal balance of the loan or the maximum amount of flood insurance that is available under the NFIP. The maximum amount of insurance that is available for both building and contents is $500,000 for each category. In this situation, federal flood insurance requirements could be satisfied by placing $150,000 worth of flood insurance coverage on the warehouse, thus insuring it to its insurable value, and $50,000 worth of contents flood insurance coverage on the inventory, thus providing total coverage in the amount of the outstanding principal balance of the loan. Note that this holds true even though the inventory is worth $100,000.

Q8. If a loan is secured by Building A, which is located in an SFHA, and contents located in Building B where building B does not secure the loan, is flood insurance required on the contents securing the loan?

A8. No. If collateral securing the loan is stored in Building B, where Building B does not secure the loan, then flood insurance is not required on those contents whether or not Building B is located in an SFHA.

Q9. Does the regulation apply when the lender takes a security interest in improved real estate and contents located in an SFHA only as an “abundance of caution”?

A9. Yes. The act and regulation look to the collateral securing the loan. If the lender takes a security interest in improved real estate and contents located in an SFHA, then flood insurance is required.¹¹¹

Q10. Is flood insurance required if the lender takes a security interest in contents located in a building in an SFHA securing the loan but does not perfect the security interest?

A10. Yes, flood insurance is required. The language in the loan agreement or security instrument determines whether the contents are taken as security for the loan. If the lender takes a security interest in contents located in a building in an SFHA securing the loan, flood insurance is required for the contents, regardless of whether that security interest is perfected.¹¹²

Q11. If a borrower offers a note on a single-family dwelling as collateral for a loan but the lender does not take a security interest in the dwelling itself, is this a designated loan that requires flood insurance?

A11. No. A designated loan is a loan secured by a building or mobile home that is located or to be located in an SFHA in which flood insurance is available under the act.¹¹³ In this example, the lender did not take a security interest in the building; therefore, the loan is not a designated loan.

Q12. If a lender makes a loan that is not secured by real estate, but is made on the condition of a personal guarantee by a third party who gives the lender a security interest in improved real estate owned by the third party that is located in an SFHA in which flood insurance is available, is it a designated loan that requires flood insurance?

A12. Yes. In this scenario, a loan is made on condition of a personal guarantee by a third party and further secured by improved real estate, which is located in an SFHA and owned by that third party. Under these circumstances, the security of improved real estate in an SFHA is so closely tied to the making of the loan that it is considered a designated loan that requires flood insurance.¹¹⁴

Q1. When must escrow accounts be established for flood insurance purposes?

A1. A lender, or a servicer acting on its behalf, must escrow all premiums and fees for any flood insurance required under the mandatory purchase of flood insurance requirement for any designated loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after January 1, 2016. The escrow must be payable with the same frequency as payments on the designated loan are required to be made for the duration of the loan, unless the loan or lender is subject to one of the exceptions.¹¹⁵

Q2. If a lender does not escrow for taxes or homeowner’s insurance, is it required to escrow for flood insurance under the regulation? If yes, is the lender obligated to escrow for taxes and other insurance because it escrows for flood insurance pursuant to the rule?

A2. If a lender or its servicer is required to escrow for flood insurance under the regulation, it must do so even if it does not escrow for taxes or other insurance.¹²⁰ A lender or servicer is not, however, obligated to escrow for taxes and other insurance solely because it must escrow for flood insurance pursuant to the regulation, though there may be other laws or regulations that require that additional escrow.

Q3. Are lenders required to escrow force-placed insurance?

A3. Yes, the regulation requires lenders or their servicers to escrow flood insurance premiums for any residential designated loan made, increased, extended, or renewed on or after January 1, 2016, unless the lender or the loan qualifies for an exception from the escrow requirement.¹²¹ The act and regulation do not include an exception to the escrow requirement for force-placed insurance.

Q4. Does the requirement to escrow flood insurance premiums and fees apply when a loan does not experience a triggering event?

A4. No, subject to certain exceptions. The regulation provides that a lender or its servicer is required to escrow flood insurance premiums and fees when a designated loan is made, increased, extended, or renewed (a triggering event), unless either the lender or the loan is excepted from the escrow requirement.¹²² Until the loan experiences a triggering event, the lender is not required to escrow flood insurance premiums and fees, unless: (i) a borrower requests the escrow in connection with the requirement that the lender provide an option to escrow for outstanding loans;¹²³ or (ii) the lender determines that a loan exception to the escrow requirement no longer applies.¹²⁴

Q5. Are multi-family buildings or mixed-use properties included in the definition of “residential improved real estate” under the regulation for which escrows are required (unless an exception applies)?

A5. Yes. For the purposes of the act and the regulation, the definition of residential improved real estate does not make a distinction between whether a building is single- or multi-family, or whether a building is owner- or renter-occupied.¹²⁵ Single-family dwellings (including mobile homes), two-to-four family dwellings, and multi-family properties containing five or more residential units are considered residential improved real estate.

Q6. If a borrower obtains a second mortgage loan for a property located in an SFHA, and it is determined that the first lienholder does not have sufficient flood insurance coverage for both liens and is not currently escrowing for flood insurance, does the junior lienholder have to escrow for the additional amount of flood insurance coverage?

A6. Under the regulation, for a closed-end second mortgage loan, junior lienholders are not required to escrow for flood insurance as long as the borrower has obtained flood insurance coverage that meets the mandatory purchase requirement. Thus, the junior lender or its servicer must ensure that adequate flood insurance is in place. See Q&A Other Security Interests Q4 for junior lienholder requirements.¹²⁷ Q&A Other Security Interests Q4 explains the requirements for junior lienholders. If adequate flood insurance has not been obtained by the first lienholder and insurance must be purchased in connection with the second mortgage loan to meet the mandatory purchase requirement, the junior lender or its servicer would need to escrow the insurance obtained in connection with the second mortgage loan.¹²⁸ However, the escrow requirements do not apply to a junior lien that is a home equity line of credit (HELOC) since HELOCs have a separate escrow exception under the act and regulation.¹²⁹

Q7. Does a lender or servicer have to escrow for loans when the security property is not located in an SFHA, but the borrower chooses to buy flood insurance?

A7. Under the regulation, lenders and servicers are only required to escrow for loans that are secured by residential improved real estate or a mobile home located or to be located in SFHAs where flood insurance is available under the NFIP and that experience triggering event (made, increased, extended, or renewed) on or after January 1, 2016, unless either the lender or the loan qualifies for an exception.¹³⁰ If the property securing the loan is not located in an SFHA, it is not a designated loan, and the lender or its servicer is not required to escrow, although the lender or servicer may offer escrow service to the borrower.

Q1. Is the $1 billion small lender exception for the mandatory escrow of flood insurance premiums at the lending institution level or bank holding company level?

A1. By its own terms, the small lender exception to the flood insurance escrow requirement applies to lenders rather than holding companies.¹³¹ Therefore, the $1 billion requirement is calculated based on the assets held at the lending institution level, rather than at the holding company level.

Q2. If a lender was required to escrow for taxes and hazard insurance solely under the (a) Higher-Priced Mortgage Loan (HPML) rules or (b) U.S. Department of Agriculture (USDA) or Federal Housing Administration (FHA) programs on or before July 6, 2012, is such a lender, who otherwise qualifies for the small lender exception, required to escrow the premiums and fees for flood insurance?

A2. The act and regulation provide that a small lender is eligible for the exception only if, on or before July 6, 2012, the lender: (1) was not required under federal or state law to deposit taxes, insurance premiums, fees, or any other charges in an escrow account for the entire term of any loan secured by residential improved real estate or a mobile home; and (2) did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or other charges in an escrow account for any loans secured by residential improved real estate or a mobile home.¹³²

Q3. Is a lender disqualified from the small lender escrow exception if it is required to collect escrowed funds on a mortgage loan on behalf of a third party?

A3. To qualify for the small lender exception, one requirement is the lender must not have had a policy on or before July 6, 2012, of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or any other charges in an escrow account for any loans secured by residential improved real estate or a mobile home.¹³³

Q4. Is a lender eligible for the small lender exception if, on or before July 6, 2012, it offered escrow accounts only upon a borrower’s request?

A4. Yes. If, on or before July 6, 2012, a lender offered escrow accounts only upon the request of borrowers, this practice did not constitute a consistent or uniform policy of requiring escrow and the lender is eligible for the exception, provided all other conditions for the exception are met. The small lender exception does not apply if, on or before July 6, 2012, the lender had a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or any other charges in an escrow account for a loan secured by residential improved real estate or a mobile home.¹³⁴

Q5. Is the option to escrow notice required for all outstanding loans secured by residential real estate that are not excepted from the escrow requirement? What about outstanding loans that are not secured by buildings located in SFHAs?

A5. Under the regulation, lenders or their servicers are required to offer and make available the option to escrow flood insurance premiums and fees for all outstanding designated loans secured by residential improved real estate or a mobile home located in an SFHA as of January 1, 2016, or July 1 of the first calendar year in which the lender no longer qualifies for the small lender exception to the escrow requirement.¹³⁵ With the expiration of the June 30, 2016, deadline to comply with the option to escrow notice requirement for outstanding loans as of January 1, 2016, that requirement currently applies only to lenders who have a change in status and no longer qualify for the small lender exception.¹³⁶ Such lenders will be required to provide the option to escrow notice by September 30 of the first calendar year in which the lender has had a change in status pursuant to the regulation.¹³⁷ The requirement to provide the option to escrow notice does not apply to outstanding loans or to lenders that are excepted from the general escrow requirement under the regulation. The option to escrow notice requirement also does not apply to loans that are not subject to the mandatory flood insurance purchase requirement.

Q6. If the borrower has waived escrow of flood insurance premiums and fees, does the lender or its servicer still need to send a notice to offer the ability to escrow for the flood insurance?

A6. Yes, if the small lender exception no longer applies. See Q&A Escrow Small Lender Exception Q5. The regulation does not exclude loans for which borrowers have previously waived escrow from the requirement to offer and make available the option to escrow flood insurance premiums and fees. Consequently, lenders or their servicers must send a notice of the option to escrow flood insurance premiums and fees to borrowers who have previously waived escrow or for whom lenders previously offered an option to escrow.¹³⁸ Although a borrower may have previously decided to waive escrow or been offered an option to escrow, it is possible that the borrower’s circumstances have changed, and if offered another chance to escrow, the borrower may desire to do so.

Q7. Is it correct that lenders that qualify for the small lender exception are not required to provide borrowers the escrow notice or the option to escrow notice?

A7. Yes. Lenders that qualify for the small lender exception are not required to provide borrowers either the escrow notice or the option to escrow notice unless the lender ceases to qualify for the small lender exception.¹³⁹

Q1. Are escrow accounts for flood insurance premiums and fees required for commercial loans that are secured by residential property?

A1. No. Extensions of credit primarily for business, commercial or agricultural purposes are not subject to the escrow requirement for flood insurance premiums and fees, even if such loans are secured by residential improved real estate or a mobile home.¹⁴⁰ See Q&A Exemptions Q1 for further information on the definition of residential property.

Q2. Are escrow accounts for flood insurance premiums and fees required for loans secured by particular units located in multi-family buildings?

A2. The escrow requirements in the regulation would not apply to a loan secured by a particular unit in a multi-family residential building if a condominium association, cooperative, homeowners association, or other applicable group provides an adequate policy and pays for the insurance as a common expense.¹⁴¹ See Q&A Exemptions Q1. Otherwise, the escrow requirements generally would apply to loans for particular units in multi-family residential buildings.

Q3. Which requirements for an escrow account apply to a property covered by an RCBAP?

A3. An RCBAP (residential condominium building association policy) is a policy purchased by the condominium association on behalf of itself and the individual unit owners in the condominium. Typically, a portion of the periodic dues paid to the association by the condominium owners applies to the premiums on the policy. When a lender makes, increases, renews, or extends a loan secured by a condominium unit that is adequately covered by an RCBAP and RCBAP premiums are paid by the condominium association as a common expense, an escrow account is not required.¹⁴² However, if the RCBAP coverage is inadequate and the unit is also covered by a flood insurance policy for supplemental coverage, premiums for the supplemental policy would need to be escrowed, provided the lender or the loan did not qualify for any other exception from the regulation’s escrow requirement.¹⁴³ Lenders should exercise due diligence with respect to continuing compliance with the insurance requirements on the part of the condominium association.

Q4. Do construction-permanent loans qualify for the 12-month exception if one phase of the loan is for 12 months or less?

A4. Generally, no. Construction-permanent loans (or C-P loans) are loans that have a construction phase of approximately one year before the loan converts into permanent financing. During the construction phase, the loan is typically interest-only, so the borrower does not start paying principal until the permanent phase. After the construction phase, the borrower generally comes in to sign papers to start the permanent phase, but this is not a true closing. Given that C-P loans are generally 20- to 30-year term loans, a C-P loan would not qualify for the 12 month-exception from escrow, even if one phase of the loan is for 12 months or less.

Q5. Although a lender is not required to monitor whether a subordinate lien moves into first lien position for the purpose of the mandatory escrow requirement, if the lender becomes aware that the subordinate lien exception no longer applies, when must the lender begin to escrow?

A5. If at any time during the term of the loan a lender determines that a subordinate lien exception no longer applies, the lender must begin escrowing flood insurance premiums and fees as soon as reasonably practicable (unless another exception applies).¹⁴⁴ Lenders should ensure that the loan documents for the subordinate lien permit the lender to require an escrow if the loan takes a first lien position.

Q1. What is the requirement for the force placement of flood insurance under the act and the regulation?

A1. When a lender makes a determination that the collateral securing the loan is uninsured or underinsured, it must begin the force placement process. Specifically, the act and the regulation provide that if a lender, or a servicer acting on its behalf, determines at any time during the term of a designated loan that a building or mobile home and any personal property securing the loan is not covered by flood insurance or is covered by flood insurance in an amount less than the amount required under the regulation, the lender or its servicer must notify the borrower that the borrower must obtain flood insurance, at the borrower’s expense, in an amount at least equal to the minimum amount required under the regulation. If the borrower fails to obtain flood insurance within 45 days of the lender’s notification to the borrower, the lender must purchase flood insurance on the borrower’s behalf at that time. The lender must force place flood insurance for the full amount required under the regulation, or if the borrower has purchased flood insurance that otherwise satisfies the flood insurance requirements but in an insufficient amount, the lender would be required to force place only for the “insufficient amount,” that is, the difference between the amount the borrower insured and the required amount of flood insurance. The act and the regulation also provide that the lender or its servicer may purchase insurance on the borrower’s behalf and may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount. See also Q&A Force Placement Q8.¹⁴⁵

Q2. When must a lender provide the force placement notice to the borrower?

A2. The regulation requires the lender, or its servicer, to send notice to the borrower upon making a determination that the building or mobile home and any personal property securing the designated loan is not covered by flood insurance or is covered by flood insurance in an amount less than the amount required under the regulation. The agencies expect that such notice will be provided to the borrower at the time of determination of no or insufficient coverage. If there is a brief delay in providing the notice, the agencies will expect the lender or servicer to provide a reasonable explanation for the delay. For example, there may be brief delays due to various lender processes, including but not limited to, batch processing and manual exception processing.

Q3. May a servicer force place on behalf of a lender?

A3. Yes. Assuming the statutory prerequisites for force placement are met, and subject to the servicing contract between the lender and its servicer, the act authorizes servicers to force place flood insurance on behalf of the lender, following the procedures set forth in the regulation.¹⁴⁶

Q4. May a lender satisfy its notice requirement by sending the force placement notice to the borrower prior to the expiration of the flood insurance policy?

A4. No. The act specifically provides that the lender or servicer for a loan must send a notice upon its determination that the collateral property securing the loan is either not covered by flood insurance or is covered by flood insurance in an amount less than the amount required.¹⁴⁷ Although a lender may send notice prior to the expiration date of the flood insurance policy as a courtesy, the lender or servicer is still required to send notice upon determining that the flood insurance policy actually has lapsed or is insufficient in meeting the statutory requirement. The lender may purchase insurance on the borrower’s behalf beginning on the date of the lapse.¹⁴⁸

Q5. When must the lender have flood insurance in place if the borrower has not obtained adequate insurance within 45 days after notification?

A5. The regulation provides that the lender or its servicer shall purchase insurance on the borrower’s behalf if the borrower fails to obtain flood insurance within 45 days after notification.¹⁴⁹ If the borrower fails to obtain flood insurance and the lender does not force place flood insurance by the end of the force placement notification period, the agencies will expect the lender to provide a reasonable explanation for the brief delay, for example, that a lender uses batch processing to purchase force-placed flood insurance policies.

Q6. Once a lender makes a determination that a designated loan has no or insufficient flood insurance coverage and sends the borrower a force placement notice, may a lender make a subsequent determination in connection with the initial notification period that the designated loan has no or insufficient coverage and send another force placement notice, effectively providing more than 45 days for the borrower to obtain sufficient coverage?

A6. No. The act and regulation state that once a lender makes a determination that a designated loan has no or insufficient flood insurance coverage, the lender must notify the borrower and, if the borrower fails to obtain sufficient flood insurance coverage within 45 days after that notice, the lender must purchase coverage on the borrower’s behalf.¹⁵⁰ For example, if in response to a force placement notice, the borrower obtains flood insurance that is insufficient in amount, there is no extension of the time period by which the lender must force place flood insurance.

Q7. May a lender commence a force-placed insurance policy on the day the previous policy expires, or must the new policy begin on the day after?

A7. The regulation provides that the lender or its servicer may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance, including premiums or fees incurred for coverage, beginning on the date on which flood insurance lapsed or did not provide a sufficient coverage amount.¹⁵¹

Q8. When force placement occurs, what is the amount of insurance required to be placed?

A8. The regulation states that the minimum amount of flood insurance required “must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the act.”¹⁵³ Therefore, if the outstanding principal balance is the basis for the minimum amount of required flood insurance, the lender must ensure that the force-placed policy amount covers the outstanding principal balance plus any additional force-placed premium and fees capitalized into the outstanding principal balance.¹⁵⁴

Q9. When may a lender or its servicer charge the borrower for the cost of force-placed insurance?

A9. A lender, or a servicer acting on its behalf, may force place flood insurance and charge the borrower for the cost of premiums and fees incurred by the lender or servicer in purchasing the flood insurance on the borrower’s behalf at any time starting from the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount. The lender or servicer would not have to wait 45 days after providing notification to force place insurance.¹⁵⁶ Lenders that monitor loans secured by property located in an SFHA for continuous flood insurance coverage can minimize any gaps in coverage and any charge to the borrower for coverage for a timeframe prior to the lender’s or its servicer’s date of discovery and force placement. If a lender or its servicer, despite its monitoring efforts, discovers a loan with no or insufficient coverage, for example, due to a remapping, it may charge the borrower for premiums and fees incurred by the lender or servicer for a force-placed flood insurance policy purchased on the borrower’s behalf, including premiums and fees for coverage, beginning on the date of no or insufficient coverage, provided that the policy was effective as of the date of the insufficient coverage. When a lender or its servicer purchases a policy on the borrower’s behalf, the lender or its servicer may not charge for premiums and fees for coverage beginning on the date of lapse or insufficient coverage if that policy purchased on the borrower’s behalf did not provide coverage for the borrower prior to purchase. A lender’s or servicer’s frequent need to purchase policies on a borrower’s behalf having coverage that precedes the date of purchase may, depending upon the facts and circumstances, indicate that there are weaknesses within the lender’s or servicer’s compliance management system.

Q10. Does capitalizing the flood insurance premium into the outstanding principal balance constitute a triggering event—an “increase” that would trigger the applicability of flood insurance regulatory requirements?

A10. The act and the regulation require a lender to notify the borrower that the borrower should obtain adequate flood insurance when the lender determines that a building or a mobile home located or to be located in an SFHA is not covered by any or adequate flood insurance.¹⁵⁷ If the borrower fails to obtain adequate flood insurance within 45 days, then the lender must purchase insurance on the borrower’s behalf. The lender may charge the borrower for the premiums and fees incurred by the lender in purchasing the force-placed flood insurance.¹⁵⁸

Premium and fees capitalized into outstanding principal balance: If the lender’s loan contract with the borrower includes a provision permitting the lender or servicer to advance funds to pay for flood insurance premiums and fees as additional debt to be secured by the building or mobile home, such an advancement would be considered part of the loan. As such, the capitalization of the flood insurance premiums and fees into the outstanding principal balance is not considered an “increase” in the loan amount, and thus would not be considered a triggering event. If, however, there is no explicit provision permitting this type of advancement of funds in the loan contract, the capitalization of flood insurance premiums and fees into the borrower’s outstanding principal balance would be considered an “increase” in the loan amount, and, therefore is considered a triggering event because no advancement of funds was contemplated as part of the loan. See also Q&A Force Placement Q8.

Premium and fees added to an account: If the lender accounts for and tracks the amount owed on the force-placed flood insurance premium and fees in a separate account, this approach does not result in an increase in the loan balance and, therefore, is not considered a triggering event.

Premium and fees advanced from the borrower’s escrow account: If the lender’s loan contract with the borrower permits the lender to advance the premiums and fees for the force-placed flood insurance from the borrower’s escrow account, this approach does not increase the outstanding principal balance and is not considered a triggering event.

Premium and fees billed directly to borrower: If the lender bills the borrower directly for the cost of the force-placed flood insurance, this approach does not increase the outstanding principal balance and is not considered a triggering event.

Q11. What documentation is sufficient to demonstrate evidence of flood insurance in connection with a lender’s refund of premiums paid by a borrower for force-placed insurance during any period of overlap with borrower-purchased insurance?

A11. With respect to when a lender is required to refund premiums paid by a borrower for force-placed insurance during any period of overlap with borrower-purchased insurance, the regulation specifically addresses the documentation requirements. The regulation provides that, for purposes of confirming a borrower’s existing flood insurance coverage, a lender must accept from the borrower an insurance policy declarations page that includes the existing flood insurance policy number and the identity of, and contact information for, the insurance company or its agent.¹⁵⁹ The regulation does not require that the declarations page contain any additional information in order to ascertain whether the policy meets the mandatory flood insurance purchase requirement to determine whether a refund is required. See Q&A Private Flood Compliance Q5 for further guidance regarding evaluation under the private flood insurance requirements of the regulation.

Q12. If a lender receives a confirmation, consistent with the regulation, of a borrower’s existing flood insurance coverage evidencing an overlap with a force-placed flood insurance policy, but the lender does not receive a refund from the insurance provider of the force-placed flood insurance policy in a timely manner, is the lender still required to refund any premiums for overlapping coverage to the borrower within 30 days?

A12. Yes. The regulation specifically requires the refund of force-placed insurance premiums and any related fees charged to the borrower for any overlap period within 30 days of receipt of a confirmation of a borrower’s existing flood insurance coverage without exception.¹⁶⁰

Q13. Is a lender permitted to increase, renew, or extend a designated loan that is currently insured by force-placed insurance? More specifically, if the borrower is undergoing a refinance or a loan modification, can the lender rely on the existing force-placed insurance to meet the mandatory purchase requirement?

A13. A lender can rely on existing force-placed insurance to satisfy the mandatory flood insurance purchase requirement if the borrower does not purchase his or her own policy. The regulation states that a lender “shall not make, increase, extend or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan.”¹⁶¹ Assuming the force-placed policy is in effect and otherwise satisfies the regulatory coverage standards, then that policy may satisfy the mandatory purchase requirement.

Q14. If a borrower’s force-placed flood insurance expires, is the lender required to send a force placement notification to the borrower prior to renewing the force-placed flood insurance coverage?

A14. No. The regulation does not require the lender to send a notice to the borrower prior to renewing a force-placed policy. However, the lender or its servicer, at its discretion, may notify the borrower that the lender is planning to renew or has renewed the force-placed policy. Such a notification may encourage the borrower to purchase his or her own policy, which may be available for a lower premium amount.

Q15. Are lenders required to have in place “Life-of-Loan” monitoring for continuous coverage of designated loans?

A15. Although there is no explicit duty to monitor flood insurance coverage over the life of the loan in the act or regulation, for purposes of safety and soundness, many lenders monitor the continuous coverage of flood insurance for the building or mobile home and any personal property securing the loan. Such a practice helps to ensure that lenders complete the force placement of flood insurance in a timely manner upon lapse of a policy, that there is continuous coverage to protect both the borrower and the lender, and that lenders are promptly made aware of flood map changes.

Q16. If a lender or its servicer receives a notice of remapping that states that a property has been or will be remapped into an SFHA, what do the act and regulation require the lender or its servicer to do?

A16. The act and regulation provide that if a lender, or its servicer, determines at any time during the term of a designated loan, that a building or mobile home and any personal property securing a loan is uninsured or underinsured, the lender or its servicer must begin the notice and force placement process, as detailed in Q&A Force Placement Q1.¹⁶³ A loan that is secured by property that was not located in an SFHA does not become a designated loan until the effective date of the map change that remaps the property into an SFHA. Therefore, when a lender or its servicer receives advance notice that a property will be remapped into an SFHA, the effective date of the remapping becomes the date on which the lender or its servicer must determine whether the property is covered by sufficient flood insurance. If the borrower does not purchase a flood insurance policy that begins on the effective date of the map change, the lender or its servicer must send the force placement notice to the borrower to purchase adequate flood insurance.¹⁶⁴ Similar to the guidance set forth in Q&A Force Placement Q4, a lender also may send notice prior to the effective date of the map change as a courtesy.

Q1. How do the flood insurance requirements under the regulation apply to lenders under the following scenarios involving loan servicing?

A1.

Q2. When a lender makes a designated loan and will be servicing that loan, what are the requirements for notifying the Administrator of FEMA or the Administrator’s designee, i.e., the insurance provider?

A2. Under the regulation, the Administrator’s designee is the insurance company issuing the flood insurance policy.¹⁷⁶ The borrower’s purchase of an NFIP policy (or the lender’s force placement of an NFIP policy) will constitute notice to the Administrator of FEMA when the lender is servicing that loan.

Q3. Would a Real Estate Settlement Procedures Act (RESPA) Notice of Transfer sent to the Administrator of FEMA (or the Administrator’s designee, i.e., the insurance provider) satisfy the requirements of the act?

A3. Yes. The delivery of a copy of the Notice of Transfer or any other form of notice is sufficient if the sender includes, on or with the notice, the following information that FEMA has indicated is needed by its designee:

Q4. Can delivery of the notice be made electronically, including batch transmission?

A4. Yes. The regulation specifically permits transmission by electronic means.¹⁷⁸ A timely batch transmission of the notice would also be permissible, if it is acceptable to the Administrator’s designee, i.e., the insurance provider.

Q5. If the loan and its servicing rights are sold by the lender, is the lender required to provide notice to the Administrator or the Administrator’s designee (i.e., the insurance provider)?

A5. Yes, in the case of an NFIP policy.¹⁷⁹ Failure to provide such notice would defeat the purpose of the notice requirement because FEMA would have no record of the identity of either the owner or servicer of the loan.

Q6. Is a lender required to provide notice when the servicer, not the lender, sells or transfers the servicing rights to another servicer?

A6. No. After servicing rights are sold or transferred, the subsequent notification obligations applicable in connection with NFIP policies are the responsibility of the new servicer.¹⁸⁰ The obligation of the lender to notify the Administrator or the Administrator’s designee (i.e., the insurance provider) of the identity of the servicer transfers to the new servicer. The duty to notify the insurance provider of any subsequent sale or transfer of the servicing rights and responsibilities belongs to that servicer.¹⁸¹ For example, if a lender makes and services a loan and then sells the loan in the secondary market and also sells the servicing rights to a mortgage company, then the lender must notify the insurance provider of the identity of the new servicer and the other information requested by FEMA so that flood insurance transactions can be properly administered by the insurance provider. If the mortgage company later sells the servicing rights to another firm, the mortgage company, not the lender, is responsible for notifying the insurance provider of the identity of the new servicer.

Q7. In the event of a merger or acquisition of one lender with another, what are the responsibilities of the parties for notifying the Administrator’s designee (i.e., the insurance provider)?

A7. If a lender is acquired by or merges with another lender, the duty in connection with NFIP policies to provide notice for the loans being serviced by the acquired lender will fall to the successor lender in the event that notification is not provided by the acquired lender prior to the effective date of the acquisition or merger.

Q1. Which violations of the act can result in a mandatory civil money penalty?

A1. A pattern or practice of violations of any of the following requirements of the act and its implementing regulation triggers a mandatory civil money penalty:

Q2. What constitutes a “pattern or practice” of violations for which civil money penalties must be imposed under the act?

A2. The act does not define “pattern or practice.” The agencies make a determination of whether a pattern or practice exists by weighing the individual facts and circumstances of each case. In making the determination, the agencies look both to guidance and experience with determinations of pattern or practice under other regulations (such as Regulation B (Equal Credit Opportunity) and Regulation Z (Truth in Lending)), as well as agencies’ precedents in considering the assessment of civil money penalties for flood insurance violations. The Policy Statement on Discrimination in Lending (Policy Statement) provided the following guidance on what constitutes a pattern or practice: Isolated, unrelated, or accidental occurrences will not constitute a pattern or practice. However, repeated, intentional, regular, usual, deliberate, or institutionalized practices will almost always constitute a pattern or practice. The totality of the circumstances must be considered when assessing whether a pattern or practice is present.