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FIL-77-97 Attachment

[Federal Register: July 23, 1997 (Volume 62, Number 141)]

[Notices]

[Page 39523-39530]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr23jy97-104]


 

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FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL



 

Loans in Areas Having Special Flood Hazards; Interagency

Questions and Answers Regarding Flood Insurance


 

AGENCY: Federal Financial Institutions Examination Council.


 

ACTION: Notice and request for comment.


 

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SUMMARY: The Consumer Compliance Task Force of the Federal Financial

Institutions Examination Council (FFIEC) is issuing Interagency

Questions and Answers Regarding Flood Insurance (Interagency Questions

and Answers). To help financial institutions meet their

responsibilities under federal flood insurance legislation and to

increase public understanding of their flood insurance regulations, the

staffs of the Office of the Comptroller of the Currency (OCC), the

Federal Reserve Board (Board), the Federal Deposit Insurance

Corporation (FDIC), the Office of Thrift Supervision (OTS), the Farm

Credit Administration (FCA), and the National Credit Union

Administration (NCUA) (collectively, the agencies) have prepared

answers to the most frequently asked questions about flood insurance.

The Interagency Questions and Answers contain informal staff guidance

for agency personnel, financial institutions, and the public.


 

DATES: Public comment is invited on a continuing basis.


 

ADDRESSES: Questions and comments may be sent to Joe M. Cleaver,

Executive Secretary, Federal Financial Institutions Examination

Council, 2100 Pennsylvania Avenue NW., Suite 200, Washington, DC 20037,

or by facsimile transmission to (202) 634-6556.


 

FOR FURTHER INFORMATION CONTACT:


 

OCC: Carol Workman, Compliance Specialist, Compliance Management,

(202) 874-4858; or Margaret Hesse, Senior Attorney, Community and


 

[[Page 39524]]


 

Consumer Law Division, (202) 874-5750, Office of the Comptroller of the

Currency, 250 E Street, SW., Washington, DC 20219.

Board: Thomas Grundy, Review Examiner, Division of Consumer and

Community Affairs, (202) 452-3946; or Lawranne Stewart, Senior

Attorney, Legal Division, (202) 452-3513, Board of Governors of the

Federal Reserve System, 20th Street and Constitution Avenue, NW.,

Washington, DC 20551. For the hearing impaired only, Telecommunication

Device for the Deaf (TDD), Earnestine Hill or Dorothea Thompson, (202)

452-3544.

FDIC: Ken Baebel, Senior Review Examiner, Division of Compliance

and Consumer Affairs, (202) 942-3086; or Mark Mellon, Counsel, Legal

Division, (202) 898-3854; Federal Deposit Insurance Corporation, 550

17th Street, NW., Washington, DC 20429.

OTS: Larry Clark, Senior Manager, Compliance and Trust Programs,

(202) 906-5628; Ronald Dice, Program Analyst, Compliance Policy, (202)

906-5633; or Catherine Shepard, Senior Attorney, Regulations and

Legislation Division, (202) 906-7275, Office of Chief Counsel, Office

of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

FCA: Robert G. Magnuson, Policy Analyst, Regulation Development

Division, Office of Policy Development and Risk Control, (703) 883-

4498; or William L. Larsen, Senior Attorney, Legal Counsel Division,

Office of General Counsel, (703) 883-4020, Farm Credit Administration,

1501 Farm Credit Drive, McLean, VA 22102-5090. For the hearing impaired

only, TDD, (703) 883-4444.

NCUA: Kimberly Iverson, Program Officer, Office of Examination and

Insurance, (703) 518-6375, National Credit Union Administration, 1775

Duke Street, Alexandria, VA 22314-3428.


 

SUPPLEMENTARY INFORMATION:


 

Background


 

The National Flood Insurance Reform Act of 1994 (the Reform Act)

(Title V of the Riegle Community Development and Regulatory Improvement

Act of 1994) comprehensively revised the two federal flood insurance

statutes, the National Flood Insurance Act of 1968 and the Flood

Disaster Protection Act of 1973. The Reform Act required the OCC,

Board, FDIC, OTS, and NCUA to revise their current flood insurance

regulations and required the FCA to promulgate flood insurance

regulations for the first time. The agencies fulfilled these

requirements by issuing a joint final rule in the summer of 1996. See

61 FR 45684 (August 29, 1996).

The agencies received a number of requests in the rulemaking

process to clarify specific issues covering a wide spectrum of the

proposed rule's provisions. Many of these requests were addressed in

the preamble to the joint final rule. The agencies concluded, however,

given the number, level of detail, and diversity of subject matter of

the requests for additional information, that informal staff guidance

addressing the more technical compliance issues would be helpful and

appropriate. Consequently, the agencies decided to issue informal

guidance to address these technical issues subsequent to the

promulgation of the final rule. 61 FR at 45685-45686. This objective is

fulfilled by the release of the Interagency Questions and Answers.

The purpose of these Interagency Questions and Answers is to

consolidate, to the extent possible, useful flood insurance information

into a comprehensive document. These Interagency Questions and Answers

supplement other documents that the agencies are not superseding,

including, for example, interagency staff flood insurance interpretive

letters.


 

Comments


 

The agencies invite public comment on a continuing basis. The

agencies intend to update the Interagency Questions and Answers on a

regular basis. If, after reading the Interagency Questions and Answers,

financial institutions, examiners, community groups, or other

interested parties have unanswered questions or comments about the

agencies' flood insurance regulations, they should submit them to the

agencies. The agencies will consider including these questions in

future guidance.


 

Interagency Questions and Answers Format


 

The Interagency Questions and Answers are organized by topic. Each

topic addresses a major area of the revised flood insurance law and

regulations such as the requirement to purchase flood insurance where

available, escrow requirements, forced placement, et cetera. The text

of the Interagency Questions and Answers follows:


 

Text of the Interagency Questions and Answers Regarding Flood Insurance


 

Interagency Questions and Answers Regarding Flood Insurance


 

Table of Contents


 

The agencies are providing answers to questions pertaining to

the following topics of the flood insurance laws and regulations:


 

I. Definitions.

II. Requirement to purchase flood insurance where available.

III. Exemptions.

IV. Escrow requirements.

V. Required use of Standard Flood Hazard Determination Form (SFHDF).

VI. Forced placement of flood insurance.

VII. Determination fees.

VIII. Notice of special flood hazards and availability of Federal

disaster relief.

IX. Notice of servicer's identity.

X. Appendix A to the Regulation--Sample Form of Notice of Special

Flood Hazards and Availability of Federal Disaster Relief

Assistance.


 

The body of the Interagency Questions and Answers Regarding Flood

Insurance follows:

This document answers commonly asked questions about the revised

flood insurance laws and regulations that have been raised by financial

institutions and other interested parties. It was prepared by staff

from the Farm Credit Administration, the Federal Deposit Insurance

Corporation, the Federal Reserve Board, the National Credit Union

Administration, the Office of the Comptroller of the Currency, and the

Office of Thrift Supervision under the auspices of the Federal

Financial Institutions Examination Council.

The document does not anticipate all circumstances or contingencies

that may affect particular financial institutions. As experience with

the application of the revised regulation is gained, the agencies will

issue further staff guidance.

For ease of reference the following terms are used throughout the

document: Act refers to the National Flood Insurance Reform Act of 1994

(Title V of the Riegle Community Development and Regulatory Improvement

Act of 1994 [Pub. L. 103-325, title V, 108 Stat. 2160, 2255-2287

(September 23, 1994)]). Regulation refers to the joint final rule

adopted by the agencies (61 FR 45684 (August 29, 1996)).


 

I. Definitions


 

Designated Loan--A loan secured by a building or mobile home that

is located or to be located in a special flood hazard area (SFHA) in

which flood insurance is available under the Act. . .


 

[[Page 39525]]


 

1. Is an interim loan to construct a commercial building included

in this definition?

Answer: Yes. If the purpose of the loan is to construct a building

(assuming the loan is secured by that building), the Regulation

applies. If the community in which the property is located participates

in the National Flood Insurance Program (NFIP), then NFIP policies,

subject to certain conditions and restrictions, can be purchased to

provide coverage during the construction period for a building that

will be located in an SFHA.

2. Are loans secured by raw land that will be developed into

buildable lots subject to the Regulation?

Answer: No. Acquisition and development loans would not be subject

to the Regulation because they do not meet the definition of a

``designated loan.'' However, when the final construction phase of an

ADC (acquisition, development, construction) project is commenced, the

Regulation becomes effective. This will require lenders to determine

whether the property is located in an SFHA. If the building securing

the loan is located or to be located in an SFHA, the other requirements

of the Regulation will also apply. As noted above, the NFIP permits

policies (subject to certain conditions and restrictions) to be

purchased prior to the actual construction of a building.

3. Is a home equity loan considered a ``designated loan''?

Answer: Yes, a home equity (or other) loan can be a designated

loan, regardless of the lien priority if: the loan is secured by a

building or a mobile home; the collateral is located in an SFHA; and,

the community where the property is located participates in the NFIP.

4. Are draws against approved lines of credit a ``triggering

event'' requiring a flood determination under the Regulation or is it

only the original application for the line of credit that triggers a

determination?

Answer: Assuming that the line of credit is secured by a building

and is thereby a ``designated loan,'' a determination is required when

application is made for the loan. Draws against an approved line would

not require further determinations. However, a request for an increase

in the line of approved credit is a triggering event and might require

a new determination, depending upon whether a previous determination

was done. (See the response to Question 4 in Section V, Required use of

Standard Flood Hazard Determination Form)

5. If the loan request is to finance inventory stored in a building

located within an SFHA but the building is not security for the loan,

is flood insurance required?

Answer: No. The Act looks to the collateral securing the loan. In

this example, the collateral does not meet the definition of a

``designated loan'' because it is not a building or mobile home.

6. If the building and contents both secure the loan, and the

building is located in an SFHA, in a community that participates in the

NFIP, what are the requirements for flood insurance? What if the

contents securing the loan are located in buildings other than the

building securing the loan?

Answer: Flood insurance is required for the building located in the

SFHA and any contents stored in that building. If collateral securing

the loan is stored in buildings that do not secure the loan and these

buildings are not located in an SFHA, then flood insurance is not

required on those contents.

7. Does the Regulation apply where the lender is taking a security

interest only as an ``abundance of caution''?

Answer: Yes. The Act looks to the collateral securing the loan, not

to the purpose of the loan. If the lender takes a security interest in

improved real estate, the Regulation applies without regard to the

purpose of the loan.

8. If a borrower offers a note on a single family dwelling as

collateral for a personal loan but the lender does not take a security

interest in the dwelling itself, is this a ``designated loan''?

Answer: No. A designated loan is a loan secured by a building or

mobile home. In this example, the lender did not take a security

interest in the building, therefore, the loan is not a ``designated

loan.''

9. Does the Regulation apply to loans that are being restructured

because of the borrower's default on the original loan?

Answer: Yes, assuming that the loan otherwise meets the definition

of a ``designated loan'' and if the lender increases the amount of the

loan, or extends or renews the terms of the original loan.

10. A lender makes a loan (not secured by real estate) on the

condition that a third party personally guarantees the loan and permits

the lender to take a security interest in improved real estate owned by

the third party. Is this a ``designated loan'' to which the Regulation

applies if the guarantor's property is located in an SFHA in a

community that participates in the NFIP?

Answer: Yes. The making of a loan on condition of a personal

guarantee by a third party and further secured by improved real estate

owned by that third party is so closely tied to the making of the loan

that it is considered a ``designated loan'' under the Regulation.


 

II. Requirement to Purchase Flood Insurance Where Available


 

1. If flood insurance is not available because the community in

which the property securing the loan is located is a non-participating

community in the NFIP, does the Regulation apply?

Answer: Yes. The Regulation still applies, although it does not

require the borrower to obtain flood insurance. The lender must make a

determination on the Special Flood Hazard Determination Form (SFHDF) to

determine if the property is located in an SFHA and notify the

borrower. The lender may make a conventional loan in an SFHA in a non-

participating community if it chooses to do so. Government-guaranteed

or insured loans (e.g., SBA, VA, FHA), however, are not permitted to be

made in non-participating communities (see 42 USC Sec. 4106(a)).

Nevertheless, institutions should exercise good risk management

practices to ensure that making loans on properties that are in an SFHA

where no flood insurance is available does not create unacceptable

risks in an institution's loan portfolio.

2. Does the Regulation apply to loans purchased from others?

Answer: No. The Regulation lists certain events that trigger its

requirements: making, increasing, extending or renewing a designated

loan. The purchase of a loan is not an event that requires the

purchaser to make a new determination at the time of purchase. However,

if the lender becomes aware at some point during the life of the loan

that flood insurance is required, then the lender must comply with the

Regulation. Similarly, if the lender extends, increases or renews the

loan, the Regulation applies.

3. What about table funding programs? Are they treated as

originations or as loans purchased from others?

Answer: Loans made through a table funding process will be treated

as though the party providing the funds has originated the loan. The

funding party must 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.

4. How are loans that are now under-insured because of previous

insurance limitations to be handled?


 

[[Page 39526]]


 

Answer: In accordance with the Act, the Federal Insurance

Administration has increased the amount of insurance available under

the NFIP. Consequently, loans that previously had principal balances in

excess of the program limits may now be underinsured. The new insurance

limitations went into effect on March 1, 1995. Lenders and servicers

must adjust coverage limits at the first renewal date or the first

anniversary date following March 1, 1995, if the policy is a multi-year

policy. Loans made after March 1, 1995, are subject to the new limits.

5. If the insurable value of the building securing the loan is less

than the outstanding balance of the loan, can a lender require the

borrower to obtain flood insurance up to the balance of the loan?

Answer: No. The insurable value of the improvements to the real

estate that secures the loan governs the amount of insurance that is

required. The amount of required insurance coverage is the lesser of

the principal balance of the loan(s) or the maximum coverage available

under the NFIP. An NFIP policy will not provide insurance coverage for

losses in excess of the value of the improvements. Since the NFIP

policy does not cover land value, lenders should determine the amount

of insurance necessary based on the value of the improvements.

6. How do the flood insurance requirements apply in situations

involving loan servicing?

Scenario 1--Loan is originated by a regulated lender and secured by

a building on property located in an SFHA in a community in which flood

insurance is available under the Act. Borrower is provided appropriate

notice and insurance is obtained. Lender services the loan. Loan is

subsequently sold to a non-regulated party and servicing is transferred

to that party. What responsibilities are imposed on the regulated

lender? What if the regulated lender only transfers or sells the

servicing rights?

Answer: The lender must comply with all requirements of the

Regulation, including making the initial determination, providing

appropriate notice to the borrower, and ensuring that the proper amount

of insurance is obtained. When the loan is sold and servicing is

transferred to the new servicer, the lender must provide notice of the

identity of the new servicer to FEMA or its designee.

If the lender retains ownership of the loan and only transfers or

sells servicing rights to a non-regulated party, the lender must notify

FEMA or its designee of the identity of the new servicer. The servicing

contract should require the servicer to comply with all the

requirements that are imposed on the lender as owner of the loan,

including escrow of insurance premiums and forced placement (if

necessary).

More generally, the Regulation does not impose obligations on a

loan servicer independent from the obligations it imposes on the owner

of a loan. Loan servicers are covered by the escrow, forced placement

and flood hazard determination fee provisions of the Act and Regulation

primarily to ensure that they may perform the administrative tasks for

the lender, without fear of liability to the borrower for the

imposition of unauthorized charges. In addition, the preamble to the

Regulation emphasizes that the obligation of a loan servicer to fulfill

administrative duties with respect to the flood insurance requirements

arises from the contractual relationship between the loan servicer and

the lender or from other commonly accepted standards for performance of

servicing obligations. The lender remains ultimately liable for

fulfillment of those responsibilities, and must take adequate steps to

ensure that the loan servicer will maintain compliance with the flood

insurance requirements.

Scenario 2--Loan is originated by a non-regulated lender. Property

is located in an SFHA but the lender did not make an initial

determination or notify borrower of the need to obtain insurance. Loan

is purchased by regulated lender who also services the loan. What are

the responsibilities of the regulated lender? What if the regulated

lender only purchases the servicing rights?

Answer: If the loan is purchased by the regulated lender, no

determination is necessary at that point nor is any notice to FEMA

required. If, at some time in the future, the lender becomes aware that

the property is located in an SFHA in a community in which flood

insurance is available under the Act, it must notify the borrower of

that fact and require the borrower to purchase flood insurance. If the

borrower does not voluntarily comply, the lender must force place the

insurance. If servicing is subsequently sold or transferred, the lender

must also notify FEMA or its designee of the identity of the new

servicer.

If the regulated lender purchases only the servicing rights to the

loan, the lender is only obligated to follow the terms of its servicing

contract with the owner of the loan.

7. A loan is secured by multiple agricultural buildings located

throughout a large geographic area. Some of the properties are located

in an SFHA and others are not. In addition, the buildings are located

in several jurisdictions or counties where some of the communities

participate in the NFIP, and others do not. What are the flood

insurance requirements for security properties in this scenario?

Answer: Flood insurance would be required only on those buildings

located in an SFHA in which the community participates in the NFIP. A

notice of special flood hazards is required for those buildings located

in an SFHA whether or not the community participates in the NFIP. The

amount of insurance required will depend upon the principal amount of

the loan, the value of the buildings located in participating

communities and the amount of insurance available under the NFIP.

For example, a loan in the principal amount of $150,000 is secured

by 5 buildings, 3 of which are located in SFHAs within participating

communities. The properties are non-residential in nature, therefore

the maximum amount of insurance available under the NFIP is $500,000

per building. Each of the three buildings located in an SFHA must be

covered by flood insurance. The total required amount of insurance for

the three buildings would be the lesser of $150,000 or the value of the

three buildings with each building insured separately from the other.

The amount of required flood insurance could be allocated among the

three buildings in varying amounts, so long as each is covered by flood

insurance.

8. What is the appropriate amount of coverage under federal flood

insurance legislation with respect to condominiums, in particular,

multi-story condominium complexes?

Answer: Effective October 1, 1994, the Federal Insurance

Administration issued a new form of Master Policy for condominiums--the

Residential Condominium Building Association Policy (RCBAP) . To meet

federal flood insurance requirements, an RCBAP should be purchased in

the amount of at least 80% of the replacement value of the building or

the maximum amount available under the NFIP (currently $250,000

multiplied by the number of units), whichever is less. For instance,

the maximum amount of coverage on a 50 unit condominium building could

be up to $12,500,000 ($250,000 x 50). However, if the replacement value

of the building was only $10,000,000, the condominium association could

purchase a policy of $8,000,000 and not be required to have a co-

insurance payment in the event of a flood. The


 

[[Page 39527]]


 

$8,000,000 of coverage would meet the requirements of the Regulation

for all the units within the condominium. A lender should make a

similar analysis to determine the amount of coverage for other

condominium complexes where flood insurance is required.

When making a loan on a condominium unit located in an SFHA,

lenders should determine whether a master policy or similar product,

provides adequate flood insurance coverage and is in place at the time

the loan is made. Lenders should further ensure that a mechanism is in

place (possibly a covenant on the part of the condominium association)

that provides for adequate flood insurance coverage for the term of the

loan.

9. A lender has a loan secured by a condominium unit in a multi-

unit complex whose condominium association allows its existing flood

insurance policy to lapse. As a result, there is no flood insurance

coverage for the condominium unit. What recourse does the lender have?

Answer: The NFIP does make an individual condominium unit policy

available (the Dwelling Form), in addition to association master

policies. In this instance, the lender after receiving notice that the

association policy has lapsed, must notify the unit owner according to

the forced placement procedures to obtain a policy (within 45 days) for

the amount of the loan or the maximum amount of coverage available,

whichever is less.


 

III. Exemptions


 

1. What are the exemptions from coverage?

Answer: There are only two exemptions from the purchase

requirements: The first applies to State-owned property covered under a

policy of self-insurance satisfactory to the Director of FEMA. The

second applies if the original principal balance of the loan is $5,000

or less, and the original repayment term is one year or less. Both of

these conditions must be present for the second exemption to apply.


 

IV. Escrow Requirements


 

1. The effective date of the escrow requirement was October 1,

1996. Does the escrow requirement apply to applications received before

October 1, 1996?

Answer: No. The escrow requirement applies only to loans closed on

or after October 1, 1996.

2. Are multi-family buildings or mixed-use properties included in

the definition of ``residential improved real estate''? Are escrows

required?

Answer: The Regulation states that if the collateral securing the

loan meets the definition of ``residential improved real estate'' and

the lender requires escrows for other items (e.g., hazard insurance or

taxes), then the lender is required to also escrow flood insurance

premiums.

Multi-family buildings. Neither the Act nor the Regulation

distinguishes whether residential improved real estate is single or

multi-family, or whether it is owner or renter-occupied. The preamble

to the Regulation indicates that single family dwellings (including

mobile homes), two to four family dwellings, and multi-family

properties containing five or more residential units are covered under

the Act's escrow provisions. If the building securing the loan meets

the Regulation's definition of residential improved real estate, and

the lender requires the escrow of other items, such as taxes or hazard

insurance premiums, the lender is required to also escrow premiums and

fees for flood insurance.

Mixed-use properties. The lender should look to the primary use of

a building to determine if it meets the definition of ``residential

improved real estate.'' For example, a building having a retail store

on the ground level with a small upstairs apartment used by the store's

owner is generally considered a commercial enterprise and consequently

would not constitute a residential building under the definition. Even

though the Regulation does not require escrows for flood insurance, the

lender may impose such a requirement through contract.

On the other hand, if the primary use of a mixed-use property is

for residential purposes, the Regulation's escrow requirements apply.

3. When must escrow accounts established for flood insurance

purposes be administered in accordance with the escrow rules under

Section 10 of RESPA?

Answer: Lenders should look to the definition of ``federally

related mortgage loan'' contained in RESPA to see if a particular loan

is subject to Section 10. Generally, only loans on one to four family

dwellings will be subject to the escrow requirements of RESPA.

Consequently, only those escrow accounts established for loans subject

to RESPA are required to conform with Section 10 of RESPA. Loans on

multi-family dwellings with five or more units are not covered by RESPA

requirements.

Pursuant to the Regulation, however, lenders must escrow premiums

and fees for any required flood insurance if the lender requires

escrows for other purposes such as hazard insurance or taxes. This

requirement pertains to any loan, including those subject to RESPA. The

preceding paragraph addresses the requirement for administering loans

covered by RESPA. The preamble to the Regulation contains a more

detailed discussion of the escrow requirements.

4. Do voluntary escrow accounts established at the request of the

borrower, trigger a requirement for the lender to escrow premiums for

required flood insurance?

Answer: No. If escrow accounts for other purposes are established

at the voluntary request of the borrower, the lender is not required to

establish escrow accounts for flood insurance premiums. Examiners

should review the loan policies of the lender and the underlying legal

obligation between the parties to the loan to determine whether the

accounts are in fact voluntary. For example, If the loan policies of

the lending institution require borrowers to establish escrow accounts

for other purposes and the contractual obligation permits the lender to

establish escrow accounts for those other purposes, the lender will

have the burden of demonstrating that an existing escrow was not made

pursuant to a voluntary request.

5. Will premiums paid for credit life insurance, disability

insurance, or similar insurance programs be viewed as escrow accounts

requiring the escrow of flood insurance premiums?

Answer: No. Premiums paid for these types of insurance policies

will not trigger the escrow requirement for flood insurance premiums.

6. Will escrow-type accounts for multi-family building commercial

loans trigger the escrow requirement for flood insurance premiums?

Answer: Various types of accounts are established in connection

with commercial purpose real estate loans. These loans typically

involve multi-family properties and are substantially different in

purpose and type from escrows accounts on single family residences.

These involve accounts such as ``interest reserve accounts,''

``compensating balance accounts,'' ``marketing accounts,'' and similar

accounts that may be established by contract between the purchaser and

seller of the building (although administered by the lender in some

cases). Accounts established in connection with the underlying

agreement between the buyer and seller, or that relate to the

commercial venture itself are not the type of accounts that constitute

escrow accounts for the purpose of the Regulation. Escrow accounts for

the protection of the property, such as escrows for hazard


 

[[Page 39528]]


 

insurance premiums or local real estate taxes, are the types of escrows

that trigger the requirement to escrow flood insurance premiums.

7. What requirements for escrow accounts apply to properties

covered by Residential Condominium Building Association Policies?

Answer: RCBAPs are policies purchased by the condominium

association on behalf of the individual unit owners in the condominium.

The premiums on the policy are paid by a portion of the periodic dues

paid to the association by the condominium owners. When a lender makes

a loan on the purchase of a condominium over which a RCBAP is in place

and the premiums are paid by dues to the condominium association, the

escrow requirement is satisfied. Lenders should exercise due diligence

with respect to continuing compliance with the insurance requirements

on the part of the condominium association.


 

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


 

1. Does the SFHDF replace the borrower notification form?

Answer: No. The notification form is used to notify the borrower(s)

that they are purchasing improved property located in an SFHA. The

financial regulatory agencies, in consultation with FEMA, included a

revised version of the sample borrower notification form in Appendix A

to the Regulation. The SFHDF is used by the lender to determine whether

the property securing the loan is located in an SFHA.

2. Must the SFHDF be provided to the borrower? If so, must the

borrower sign the form acknowledging receipt?

Answer: While it may be a common practice in some areas for lenders

to provide a copy of the SFHDF to the borrower to give to the insurance

agent, lenders are neither required nor prohibited from providing the

borrower with a copy of the form. Signature of the borrower is not

required on the SFHDF.

3. May the SFHDF be used in electronic format?

Answer: Yes. FEMA, in the final rule adopting the SFHDF stated:

``If an electronic format is used, the format and exact layout of the

Standard Flood Hazard Determination Form is not required, but the

fields and elements listed on the form are required. Any electronic

format used by lenders must contain all mandatory fields indicated on

the form.'' It should be noted, however, that the lender must be able

to reproduce the form upon receiving a document request by its Federal

supervisory agency.

4. Section 528 of the Act permits a lender to rely on a previous

determination using the SFHDF when it is increasing, extending,

renewing or purchasing a loan secured by a building or a mobile home.

The Act omits the ``making'' of a loan as a permissible event to rely

on a previous determination. May a lender rely on a previous

determination for a refinancing or assumption of a loan?

Answer: It depends. If a subsequent loan involving a refinancing or

assumption is made on the same property by the same lender who obtained

the original determination, and the other requirements contained in

Section 528 are met, the lender may rely on the previous determination.

Section 528 of the Act requires that a lender may rely on a previous

determination only if the original determination was recorded on the

SFHDF within the previous seven years and there were no map revisions

or updates affecting the security property since the original

determination was made. However, a loan refinancing or assumption made

by a lender other than the lender who obtained the original

determination would constitute ``making'' a new loan, thereby requiring

a new determination.

5. If a borrower requesting a home equity loan secured by a junior

lien provides evidence that flood insurance coverage is in place, does

the lender have to make a new determination? Does the lender have to

adjust the insurance coverage?

Answer: It depends. Assuming the requirements in Section 528 are

met and the lender made the first mortgage, then a new determination

would not be necessary. If, however, a lender other than the one that

made the first mortgage loan is making the home equity loan, a new

determination would be required because this lender would be deemed to

be ``making'' a new loan. In any event, the institution will need to

determine if the amount of insurance in force is sufficient to cover

either the principal balance of all loans (including the home equity

loan) or the maximum amount of coverage available on the improved real

estate, whichever is less.


 

VI. Forced Placement of Flood Insurance


 

1. Is forced placement allowed? What are the procedures?

Answer: The Act and Regulation require a lender to force place

flood insurance if all of the following circumstances occur:

The lender determines at any time during the life of the

loan that the property securing the loan is located in an SFHA;

The community in which the property is located

participates in the NFIP;

Flood insurance coverage is inadequate or does not exist;

and

The borrower fails to purchase the appropriate amount of

coverage.

In order to force place, a lender must notify the borrower of the

required amount of flood insurance that must be obtained within 45 days

after notification. The notice must also state that if the borrower

does not obtain the insurance within the 45 day period, the lender will

purchase the insurance on behalf of the borrower and may charge the

borrower the cost of premiums and fees to obtain the coverage. Standard

FNMA/FHLMC documents permit the servicer or lender to add those charges

to the principal amount of the loan.

FEMA developed the Mortgage Portfolio Protection Program (MPPP) to

assist lenders in connection with forced placement procedures. FEMA

published these procedures in the Federal Register on August 29, 1995

(60 FR 44881). Appendix A of the FEMA publication contains examples of

notification letters to be used in connection with the MPPP.

2. Can a servicer force place on behalf of a lender?

Answer: Yes. Assuming the statutory prerequisites for forced

placement are met, and subject to the servicing contract between the

lender and the servicer, the Act clearly authorizes servicers to force

place flood insurance on behalf of the lender, following the procedures

set forth in the Regulation.

3. When forced placement occurs, what is the amount of insurance

required to be placed?

Answer: The amount of flood insurance coverage required is the same

regardless of how the insurance is placed. (See Section II. Requirement

to purchase flood insurance where available.)


 

VII. Determination Fees


 

1. When can lenders or servicers charge the borrower a fee for

making a determination?

Answer: There are four instances under the Act and Regulation when

the borrower can be charged a specific fee for a flood determination:

When the determination is made in connection with the

making, increasing, extending, or renewing of a loan that is initiated

by the borrower;

When the determination is prompted by a revision or

updating by FEMA of floodplain areas or flood-risk zones;

When the determination is prompted by FEMA's publication

of a


 

[[Page 39529]]


 

notice or compendia that affects the area in which the security

property is located; or

When the determination results in forced placement of

insurance.

Loan or other contractual documents between the parties may also

permit the imposition of fees.

2. May charges made for life of loan reviews by flood determination

firms be passed along to the borrower?

Answer: Yes. Many flood determination firms provide a service to

the lender for conducting a periodic review of the loan during the time

it is outstanding to ascertain whether the original determination

remains valid. This service is sometimes coupled with the making of the

original determination and the fee charged is a composite one for

conducting both the original and subsequent reviews. Charging a fee for

the original determination is clearly within the permissible purpose

envisioned by the Act. The agencies agree that a determination fee may

include, among other things, reasonable fees for a lender, servicer, or

third party to monitor the flood hazard status of property securing a

loan in order to make determinations on an ongoing basis.

Consequently, the agencies also believe that a fee for a life of

loan service may be passed along to the borrower. However, because the

life of loan fee is based on the ability to charge a determination fee,

the monitoring fee may be charged only if the events specified in the

answer to question VII.1 occur.


 

VIII. Notice of Special Flood Hazards and Availability of Federal

Disaster Relief


 

1. Does the notice have to be provided to each borrower for a real

estate related loan?

Answer: The notice must be provided to a borrower only when the

lender determines that the property securing the loan is or will be

located in an SFHA. In a transaction involving multiple borrowers, the

agencies believe it is only necessary to provide the notice to any one

of the borrowers in the transaction. Lenders may provide multiple

notices if they choose. The lender and borrower(s) typically designate

the borrower to whom the notice will be provided.

2. Lenders making loans on mobile homes may not always know where

the home is to be located until just prior to, or sometimes after, the

time of loan closing. How is the notice requirement applied in these

situations?

Answer: The notice requirement can be met by lenders in mobile home

loan transactions if notice is provided to the borrower as soon as

practicable after determination that the mobile home will be located in

an SFHA and, if possible, before completion of the loan transaction. In

circumstances where time constraints can be anticipated, regulated

lenders should use their best efforts to provide adequate notice of

flood hazards to borrowers at the earliest possible time.

In the case of loan transactions secured by mobile homes not

located on a permanent foundation, the agencies note that such ``home

only'' transactions are excluded from the definition of mobile home and

the notice requirements would not apply to these transactions. However,

as indicated in the preamble to the Regulation, the agencies encourage

a lender to advise the borrower that if the mobile home is later

located on a permanent foundation in an SFHA, flood insurance will be

required. If the lender, when notified of the location of the mobile

home subsequent to the loan closing, determines that it has been placed

on a permanent foundation and is located in an SFHA in which flood

insurance is available under the Act, flood insurance coverage becomes

mandatory and appropriate notice must be given to the borrower under

those provisions. If the borrower fails to purchase flood insurance

coverage within 45 days after notification, the lender must force place

the insurance.

3. When is the lender required to provide notice to the servicer of

a loan that flood insurance is required?

Answer: Because the servicer of a loan is often not identified

prior to the closing of a loan, the Regulation requires that notice be

provided no later than the time the lender transmits other loan data,

such as information concerning hazard insurance and taxes, to the

servicer.

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

Answer: Delivery to the servicer of a copy of the notice given to

the borrower is appropriate notice. The Regulation also provides that

the notice can be made either electronically or by a written copy.

5. In the case of a servicer affiliated with the lender, is it

necessary to provide the notice?

Answer: Yes. The Act requires the lender to notify the servicer of

special flood hazards and the Regulation reflects this requirement.

Neither contains an exception for affiliates.

6. How long does the lender have to maintain the record of receipt

by the borrower of the notice?

Answer: The record of receipt provided by the borrower must be

maintained for the time that the lender owns the loan. Lenders may keep

the record in the form that best suits the lender's business practices.

Lenders may retain the record electronically, but they must be able to

retrieve the record within a reasonable time pursuant to a document

request from their Federal supervisory agency.


 

IX. Notice of Servicer's Identity


 

1. When a lender makes a designated loan and it will be servicing

that loan, what are the requirements for notifying the Director of FEMA

or the Director's designee?

Answer: FEMA stated in a June 4, 1996 letter, that the Director's

designee is the insurance company issuing the flood insurance policy.

The borrower's purchase of a policy (or the lender's forced placement

of a policy), will constitute notice to FEMA when the lender is

servicing that loan. In the event the servicing is subsequently

transferred to a new servicer, the lender must provide notice to the

insurance company of the identity of the new servicer.

2. Would a RESPA Notice of Transfer sent to the Director of FEMA

(or the Director's designee) satisfy the regulatory provisions of the

Act?

Answer: The delivery of a copy of the Notice of Transfer or any

other form of notice is sufficient if the sender includes, on or with

the notice, the following information that FEMA has indicated is needed

by its designee:

Borrower's Full Name;

Flood Insurance Policy Number;

Property Address (including city and state);

Name of bank or servicer making notification;

Name and address of new servicer;

Name and telephone number of contact person at new

servicer.

3. Can delivery of the notice be made electronically, including

batch transmissions?

Answer: Yes. The Regulation specifically permits transmission by

electronic means and a timely batch transmission of the notice would

also be permissible, if it is acceptable to the Director's designee.

4. If the loan and its servicing rights are sold by the lender, is

the lender required to provide notice to the Director or the Director's

designee?

Answer: Yes. Failure to provide such notice would defeat the

purpose of the notice requirement because FEMA would have no record of

the identity of either the owner or servicer of the loan.

5. Is the lender required to provide notice when a servicer other

than the


 

[[Page 39530]]


 

lender sells or transfers the servicing rights to another servicer?

Answer: No. The obligation of the lender to notify the Director or

the Director's designee of the identity of the servicer transfers to

the new servicer. The duty to notify the Director or the Director's

designee of any subsequent sale or transfer of the servicing rights and

responsibilities belongs to that servicer. For example, First Financial

Institution makes and services the loan. It then sells the loan in the

secondary market and also sells the servicing rights to First Financial

Mortgage Company. First Financial Institution notifies the Director's

designee of the identity of the new servicer and the other information

requested by FEMA so that FEMA can track the loan. If First Financial

Mortgage Company later sells the servicing rights to another firm,

First Financial Mortgage Company is responsible for notifying the

Director's designee of the identity of the new servicer, not First

Financial Institution.

6. In the event of a merger of one lending institution with

another, what are the responsibilities of the parties for notifying the

Director's designee?

Answer: If an institution is acquired by or merges with another

institution, the duty to provide notice for the loans being serviced by

the acquired institution will fall to the successor institution in the

event that notification is not provided by the acquired institution

prior to the effective date of the acquisition or merger.


 

X. Appendix A to the Regulation--Sample Form of Notice of Special

Flood Hazards and Availability of Federal Disaster Relief

Assistance


 

1. Is use of the sample form of notice mandatory? Can it be revised

to accommodate a lender's needs?

Answer: Although lenders are required to provide a notice to a

borrower who is purchasing property secured by an improved structure

located in an SFHA, use of the sample form of notice provided in

Appendix A is not mandatory. It should be noted that the sample form

includes other information in addition to what is required by the Act

and the Regulation. Lenders may personalize, change the format of, and

add information to the sample form if they choose. However, a lender-

revised form must provide the borrower with at least the minimum

information required by the Regulation. Therefore, lenders should

consult the Regulation to determine the information needed.


 

Federal Financial Institutions Examination Council.

Dated at Washington, DC this 16th day of July 1997.


 

Joe M. Cleaver,

Executive Secretary.

[FR Doc. 97-19133 Filed 7-22-97; 8:45 am]

BILLING CODE 6210-01-P, 6720-01-P, 6714-01-P, 4810-01-P, 7535-01-P

Last Updated: March 24, 2024