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Federal Reserve Bank
of
Dallas
R O B ERT D. M cTEER, JR.
DALLAS, TE XAS
PRESIDENT
AND CHIEF EXECUTIVE OFFICER
75265-5906
August 25, 1997
Notice 97-73
TO:
The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District
SUBJECT
Interagency Questions and Answers
Regarding Flood Insurance
DETAILS
The Federal Financial Institutions Examination Council (FFIEC) has published a reference
document on the federal flood insurance legislation titled Interagency Questions and Answers Regarding
Flood Insurance. The publication, which answers the most frequently asked questions about flood
insurance, was published by the FFIEC on behalf of its member banking regulatory agencies.
To the extent possible, the publication consolidates useful information about the revised
flood insurance regulations issued by the agencies in August 1996. In addition, the publication contains
informal staff guidance for agency personnel, financial institutions and the public. The agencies plan to
update the publication regularly and invite public comment and new questions on flood insurance.
ATTACHMENTS
The FFIEC’s notice and the reference document as they appear on pages 39523-30, Vol. 62,
No. 141, of the Federal Register dated July 23, 1997, are attached.
MORE INFORMATION
For more information, please contact Peggy Atcher at (214) 922-6202. For additional
copies of this Bank’s notice, please contact the Public Affairs Department at (214) 922-5254.
Sincerely yours,
J9 ■
•
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162. Interstate (8001 221-0363: San Antonio Branch Intrastate ('80(11 292-5810.
Federal Register / Vol. 62, No. 141 / Wednesday, July 23, 1997 / Notices
39523
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.
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 m eet 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 A dm inistration (FCA), and the
National Credit Union A dm inistration
(NCUA) (collectively, the agencies) have
prepared answers to the m ost 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,
W ashington, DC 20037, or by facsimile
transm ission to (202) 634-6556.
SUMMARY:
FOR FURTHER INFORMATION CONTACT:
OCC: Carol Workman, Compliance
Specialist, Compliance Management,
(202) 874-4858; or Margaret Hesse,
Senior Attorney, Com munity and
39524
Federal Register / Vol. 62, No. 141 / Wednesday, July 23, 1997 / Notices
in the sum m er of 1996. See 61 FR 45684
Consumer Law Division, (202) 8745750, Office of the Comptroller of the
(August 29, 1996).
Currency, 250 E Street, SW.,
The agencies received a num ber of
W ashington, DC 20219.
requests in the rulemaking process to
Board: Thomas Grundy, Review
clarify specific issues covering a wide
Examiner, Division of Consumer and
spectrum of the proposed rule’s
Community Affairs, (202) 452-3946; or
provisions. M any of these requests were
Lawranne Stewart, Senior Attorney,
Legal Division, (202) 452-3513, Board of addressed in the preamble to the joint
final rule. The agencies concluded,
Governors of the Federal Reserve
however, given the number, level of
System, 20th Street and Constitution
detail, and diversity of subject matter of
Avenue, NW., W ashington, DC 20551.
the requests for additional information,
For the hearing im paired only,
Telecom m unication Device for the Deaf that informal staff guidance addressing
the more technical com pliance issues
(TDD), Earnestine Hill or Dorothea
w ould be helpful and appropriate.
Thompson, (202) 452-3544.
Consequently, the agencies decided to
FDIC: Ken Baebel, Senior Review
issue informal guidance to address these
Examiner, Division of Compliance and
Consumer Affairs, (202) 942-3086; or
technical issues subsequent to the
Mark Mellon, Counsel, Legal Division,
promulgation of the final rule. 61 FR at
(202) 898-3854; Federal Deposit
45685-45686. This objective is fulfilled
Insurance Corporation, 550 17th Street,
by the release of the Interagency
NW., W ashington, DC 20429.
Questions and Answers.
OTS: Larry Clark, Senior Manager,
The purpose of these Interagency
Compliance and Trust Programs, (202)
Questions and Answers is to
906-5628; Ronald Dice, Program
consolidate, to the extent possible,
Analyst, Compliance Policy, (202) 906useful
flood insurance information into
5633; or Catherine Shepard, Senior
a comprehensive document. These
Attorney, Regulations and Legislation
Interagency Questions and Answers
Division, (202) 906-7275, Office of
supplem ent other docum ents that the
Chief Counsel, Office of Thrift
agencies are not superseding, including,
Supervision, 1700 G Street, NW.,
for example, interagency staff flood
W ashington, DC 20552.
insurance interpretive letters.
FCA: Robert G. Magnuson, Policy
Analyst, Regulation Development
Comments
Division, Office of Policy Development
and Risk Control, (703) 883-4498; or
The agencies invite public comment
W illiam L. Larsen, Senior Attorney,
on a continuing basis. The agencies
Legal Counsel Division, Office of
intend to update the Interagency
General Counsel, (703) 883-4020, Farm
Questions and Answers on a regular
Credit A dm inistration, 1501 Farm
basis. If, after reading the Interagency
Credit Drive, McLean, VA 22102-5090.
Questions and Answers, financial
For the hearing im paired only, TDD,
institutions, examiners, community
(703) 883-4444.
groups, or other interested parties have
NCUA: Kimberly Iverson, Program
unansw ered questions or comments
Officer, Office of Exam ination and
about the agencies’ flood insurance
Insurance, (703) 518-6375, National
regulations, they should subm it them to
Credit Union A dm inistration, 1775
the agencies. The agencies w ill consider
Duke Street, Alexandria, VA 22314including these questions in future
3428.
guidance.
SUPPLEMENTARY INFORMATION:
Background
The National Flood Insurance Reform
Act of 1994 (the Reform Act) (Title V of
the Riegle Comm unity Development and
Regulatory Improvement Act of 1994)
com prehensively 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
requirem ents by issuing a joint final rule
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 requirem ent to
purchase flood insurance where
available, escrow requirements, forced
placem ent, 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 answ ers to
questions pertaining to the following topics
of the flood insurance laws and regulations:
I. Definitions.
II. Requirement to purchase flood insurance
w here available.
III. Exemptions.
IV. Escrow requirem ents.
V. Required use of Standard Flood Hazard
D eterm ination Form (SFHDF).
VI. Forced placem ent of flood insurance.
VII. D eterm ination fees.
VIII. Notice of special flood hazards and
availability of Federal disaster relief.
IX. Notice of servicer’s identity.
X. A ppendix 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 docum ent 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 A dm inistration, the Federal
Deposit Insurance Corporation, the
Federal Reserve Board, the National
Credit U nion Adm inistration, 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 docum ent does not anticipate all
circumstances or contingencies that may
affect particular financial institutions.
As experience w ith 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. 103325, 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 hom e that is
located or to be located in a special
flood hazard area (SFHA) in w hich
flood insurance is available under the
Act. . .
Federal Register / Vol. 62, No. 141 / Wednesday, July 23, 1997 / Notices
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 com m unity in
w hich 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
w ill be located in an SFHA.
2. Are loans secured by raw land that
w ill be developed into buildable lots
subject to the Regulation?
Answer: No. A cquisition and
developm ent loans w ould not be subject
to the Regulation because they do not
m eet the definition of a “ designated
loan.” However, w hen the final
construction phase of an ADC
(acquisition, development, construction)
project is commenced, the Regulation
becomes effective. This w ill require
lenders to determ ine w hether the
property is located in an SFHA. If the
building securing the loan is located or
to be located in an SFHA, the other
requirem ents of the Regulation w ill 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 com m unity w here the property is
located participates in the NFIP.
4. Are draws against approved lines of
credit a “triggering event” requiring a
flood determ ination 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
determ ination is required w hen
application is m ade for the loan. Draws
against an approved line w ould 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
determ ination, depending up on w hether
a previous determ ination was done. (See
the response to Q uestion 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
w ithin 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 com m unity
that participates in the NFIP, what are
the requirem ents for flood insurance?
W hat 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 im proved real
estate, the Regulation applies w ithout
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 borrow er’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 am ount of the loan, or
extends or renew s 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 im proved real
estate owned by the th ird party. Is this
a “ designated loan” to w hich the
Regulation applies if the guarantor’s
property is located in an SFHA in a
com m unity 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
im proved real estate owned by that
39525
third party is so closely tied to the
making of the loan that it is considered
a “designated loan” u nder the
Regulation.
II. Requirement to Purchase Flood
Insurance Where Available
1. If flood insurance is not available
because the com m unity in w hich the
property securing the loan is located is
a non-participating com m unity 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 m ust make a determ ination 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 com m unity if it
chooses to do so. Governmentguaranteed or insured loans (e.g., SBA,
VA, FHA), however, are not perm itted
to be m ade in non-participating
com m unities (see 42 USC § 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 determ ination 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 m ust comply
w ith 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 m ade through a table
funding process w ill be treated as
though the party providing the funds
has originated the loan. The funding
party m ust comply w ith the Regulation.
The table funding lender can m eet the
adm inistrative requirem ents of the
Regulation by requiring the party
processing and underw riting the
application to perform those functions
on its behalf.
4. How are loans that are now u n d er
insured because of previous insurance
limitations to be handled?
39526
Federal Register / Vol. 62, No. 141 / Wednesday, July 23, 1997 / Notices
servicing contract should require the
Answer: In accordance w ith the Act,
servicer to comply w ith all the
the Federal Insurance Adm inistration
requirem ents that are im posed on the
has increased the am ount of insurance
available under the NFIP. Consequently, lender as owner of the loan, including
escrow of insurance prem ium s and
loans that previously had principal
forced placem ent (if necessary).
balances in excess of the program limits
More generally, the Regulation does
may now be underinsured. The new
insurance lim itations w ent into effect on not impose obligations on a loan
servicer independent from the
M arch 1, 1995. Lenders and servicers
obligations it imposes on the owner of
m ust adjust coverage limits at the first
a loan. Loan servicers are covered by the
renew al date or the first anniversary
escrow, forced placem ent and flood
date following M arch 1,1995, if the
hazard determ ination fee provisions of
policy is a multi-year policy. Loans
the Act and Regulation prim arily to
m ade after M arch 1, 1995, are subject to
ensure that they may perform the
the new limits.
adm inistrative tasks for the lender,
5. If the insurable value of the
w ithout fear of liability to the borrower
building securing the loan is less than
for the im position of unauthorized
the outstanding balance of the loan, can
charges. In addition, the preamble to the
a lender require the borrower to obtain
Regulation emphasizes that the
flood insurance up to the balance of the
obligation of a loan servicer to fulfill
loan?
Answer: No. The insurable value of
adm inistrative duties w ith respect to the
the improvements to the real estate that
flood insurance requirem ents arises
secures the loan governs the am ount of
from the contractual relationship
insurance that is required. The am ount
betw een the loan servicer and the lender
of required insurance coverage is the
or from other commonly accepted
lesser of the principal balance of the
standards for performance of servicing
loan(s) or the m axim um coverage
obligations. The lender remains
available under the NFIP. An NFIP
ultim ately liable for fulfillment of those
policy w ill not provide insurance
responsibilities, and m ust take adequate
coverage for losses in excess of the value steps to ensure that the loan servicer
of the improvements. Since the NFIP
w ill m aintain com pliance w ith the flood
policy does not cover land value,
insurance requirements.
Scenario 2—Loan is originated by a
lenders should determ ine the am ount of
non-regulated lender. Property is
insurance necessary based on the value
located in an SFHA b ut the lender did
of the improvements.
6. How do the flood insurance
not make an initial determ ination or
requirem ents apply in situations
notify borrower of the need to obtain
involving loan servicing?
insurance. Loan is purchased by
Scenario 1—Loan is originated by a
regulated lender w ho also services the
regulated lender and secured by a
loan. W hat are the responsibilities of the
building on property located in an
regulated lender? W hat if the regulated
SFHA in a com m unity in w hich flood
lender only purchases the servicing
insurance is available u nder the Act.
rights?
Answer: If the loan is purchased by
Borrower is provided appropriate notice
the regulated lender, no determ ination
and insurance is obtained. Lender
is necessary at that point nor is any
services the loan. Loan is subsequently
notice to FEMA required. If, at some
sold to a non-regulated party and
servicing is transferred to that party.
tim e in the future, the lender becomes
aware that the property is located in an
W hat responsibilities are im posed on
SFHA in a com m unity in w hich flood
the regulated lender? W hat if the
regulated lender only transfers or sells
insurance is available under the Act, it
m ust notify the borrower of that fact and
the servicing rights?
Answer: The le n d e r m ust comply w ith require the borrower to purchase flood
all requirem ents of the Regulation,
insurance. If the borrower does not
including making the initial
voluntarily comply, the lender m ust
determ ination, providing appropriate
force place the insurance. If servicing is
notice to the borrower, and ensuring
subsequently sold or transferred, the
that the proper am ount of insurance is
lender m ust also notify FEMA or its
obtained. W hen the loan is sold and
designee of the identity of the new
servicing is transferred to the new
servicer.
servicer, the lender m ust provide notice
If the regulated lender purchases only
the servicing rights to the loan, the
of the identity of the new servicer to
FEMA or its designee.
lender is only obligated to follow the
If the lender retains ow nership of the
terms of its servicing contract w ith the
loan and only transfers or sells servicing owner of the loan.
7. A loan is secured by m ultiple
rights to a non-regulated party, the
lender m ust notify FEMA or its designee agricultural buildings located
of the identity of the new servicer. The
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. W hat are the
flood insurance requirem ents for
security properties in this scenario?
Answer: Flood insurance w ould be
required only on those buildings located
in an SFHA in w hich the com m unity
participates in the NFIP. A notice of
special flood hazards is required for
those buildings located in an SFHA
w hether or not the com m unity
participates in the NFIP. The am ount of
insurance required w ill depend upon
the principal am ount of the loan, the
value of the buildings located in
participating com m unities and the
am ount of insurance available u n der the
NFIP.
For example, a loan in the principal
am ount of $150,000 is secured by 5
buildings, 3 of w hich are located in
SFHAs w ithin participating
communities. The properties are nonresidential in nature, therefore the
m axim um am ount of insurance
available under the NFIP is $500,000
per building. Each of the three buildings
located in an SFHA m ust be covered by
flood insurance. The total required
am ount of insurance for the three
buildings w ould be the lesser of
$150,000 or the value of the three
buildings w ith each building insured
separately from the other. The am ount
of required flood insurance could be
allocated among the three buildings in
varying am ounts, so long as each is
covered by flood insurance.
8. W hat is the appropriate am ount of
coverage under federal flood insurance
legislation w ith respect to
condom inium s, in particular, m ulti
story condom inium complexes?
Answer: Effective October 1,1994, the
Federal Insurance A dm inistration
issued a new form of Master Policy for
condom inium s—the Residential
Condom inium Building Association
Policy (RCBAP). To m eet federal flood
insurance requirements, an RCBAP
should be purchased in the am ount of
at least 80% of the replacem ent value of
the building or the m axim um am ount
available under the NFIP (currently
$250,000 m ultiplied by the num ber of
units), w hichever is less. For instance,
the m axim um am ount of coverage on a
50 unit condom inium building could be
up to $12,500,000 ($250,000 x 50).
However, if the replacem ent value of the
building was only $10,000,000, the
condom inium association could
purchase a policy of $8,000,000 and not
be required to have a co-insurance
paym ent in the event of a flood. The
Federal Register / Vol. 62, No. 141 / Wednesday, July 23, 1997 / Notices
$8,000,000 of coverage w ould m eet the
requirements of the Regulation for all
the units w ithin the condom inium . A
lender should make a sim ilar analysis to
determ ine the am ount of coverage for
other condom inium complexes where
flood insurance is required.
W hen making a loan on a
condom inium unit located in an SFHA,
lenders should determ ine w hether 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 th at a m echanism is in place
(possibly a covenant on the part of the
condom inium association) that provides
for adequate flood insurance coverage
for the term of the loan.
9. A lender has a loan secured by a
condom inium unit in a m ulti-unit
complex w hose condom inium
association allows its existing flood
insurance policy to lapse. As a result,
there is no flood insurance coverage for
the condom inium unit. W hat recourse
does the lender have?
Answer: The NFIP does make an
individual condom inium un it 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, m ust notify the unit
owner according to the forced
placem ent procedures to obtain a policy
(within 45 days) for the am ount of the
loan or the m axim um am ount of
coverage available, w hichever 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 Stateow ned property covered u n der 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
repaym ent term is one year or less. Both
of these conditions m ust be present for
the second exem ption to apply.
IV. Escrow Requirements
1. The effective date of the escrow
requirem ent was October 1,1996. Does
the escrow requirem ent apply to
applications received before October 1,
1996?
Answer: No. The escrow requirem ent
applies only to loans closed on or after
October 1, 1996.
2. Are multi-fam ily buildings or
mixed-use properties included in the
definition of “residential im proved real
estate”? Are escrows required?
Answer: The Regulation states that if
the collateral securing the loan meets
the definition of “residential im proved
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.
M ulti-fam ily buildings. Neither the
Act nor the Regulation distinguishes
w hether residential im proved real estate
is single or multi-family, or w hether 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 A ct’s escrow
provisions. If the building securing the
loan meets the Regulation’s definition of
residential im proved real estate, and the
lender requires the escrow of other
items, such as taxes or hazard insurance
prem ium s, the lender is required to also
escrow prem ium s and fees for flood
insurance.
M ixed-use properties. The lender
should look to the prim ary use of a
building to determ ine if it meets the
definition of “residential im proved real
estate.” For example, a building having
a retail store on the ground level w ith
a small upstairs apartm ent used by the
store’s owner is generally considered a
commercial enterprise and consequently
w ould 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 requirem ent through
contract.
On the other hand, if the prim ary use
of a mixed-use property is for
residential purposes, the Regulation’s
escrow requirem ents apply.
3. W hen m ust escrow accounts
established for flood insurance purposes
be adm inistered in accordance w ith the
escrow rules u nder 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 w ill be subject to the
escrow requirem ents of RESPA.
Consequently, only those escrow
accounts established for loans subject to
RESPA are required to conform w ith
Section 10 of RESPA. Loans on m ulti
family dwellings w ith five or more units
are not covered by RESPA requirements.
Pursuant to the Regulation, however,
lenders m ust escrow prem ium s and fees
for any required flood insurance if the
lender requires escrows for other
purposes such as hazard insurance or
39527
taxes. This requirem ent pertains to any
loan, including those subject to RESPA.
The preceding paragraph addresses the
requirem ent for adm inistering 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 requirem ent for the
lender to escrow prem ium s 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 betw een the
parties to the loan to determ ine w hether
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 w ill have the burden of
demonstrating that an existing escrow
was not made pursuant to a voluntary
request.
5. Will prem ium s 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 w ill not
trigger the escrow requirem ent for flood
insurance premiums.
6. W ill escrow-type accounts for
m ulti-family building commercial loans
trigger the escrow requirem ent for flood
insurance prem iums?
Answer: Various types of accounts are
established in connection w ith
commercial purpose real estate loans.
These loans typically involve m ulti
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,”
“m arketing accounts,” and similar
accounts th at may be established by
contract betw een the purchaser and
seller of the building (although
adm inistered by the lender in some
cases). Accounts established in
connection w ith the underlying
agreement betw een 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
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Federal Register / Vol. 62, No. 141 / Wednesday, July 23, 1997 / Notices
insurance prem ium s or local real estate
taxes, are the types of escrows that
trigger the requirem ent to escrow flood
insurance premiums.
7. W hat requirem ents for escrow
accounts apply to properties covered by
Residential Condom inium Building
Association Policies?
Answer: RCBAPs are policies
purchased by the condom inium
association on behalf of the individual
unit owners in the condom inium . The
prem ium s on the policy are paid by a
portion of the periodic dues paid to the
association by the condom inium
owners. W hen a lender makes a loan on
the purchase of a condom inium over
w hich a RCBAP is in place and the
prem ium s are paid by dues to the
condom inium association, the escrow
requirem ent is satisfied. Lenders should
exercise due diligence w ith respect to
continuing com pliance w ith the
insurance requirem ents on the part of
the condom inium association.
V. Required Use of Standard Flood
Hazard Determination Form (SFHDF)
1. Does the SFHDF replace the
borrow er notification form?
Answer: No. The notification form is
used to notify the borrower(s) that they
are purchasing im proved property
located in an SFHA. The financial
regulatory agencies, in consultation
w ith FEMA, included a revised version
of the sample borrower notification form
in A ppendix A to the Regulation. The
SFHDF is used by the lender to
determ ine w hether the property
securing the loan is located in an SFHA.
2. Must the SFHDF be provided to the
borrower? If so, m ust the borrower sign
the form acknowledging receipt?
Answer: W hile 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
w ith 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 m ust
contain all m andatory fields indicated
on the form.” It should be noted,
however, that the lender m ust be able to
reproduce the form upon receiving a
docum ent request by its Federal
supervisory agency.
4. Section 528 of the Act perm its a
lender to rely on a previous
determ ination using the SFHDF w hen it
is increasing, extending, renewing or
purchasing a loan secured by a building
or a mobile home. The Act omits the
“m aking” of a loan as a permissible
event to rely on a previous
determination. May a lender rely on a
previous determ ination for a refinancing
or assum ption of a loan?
Answer: It depends. If a subsequent
loan involving a refinancing or
assum ption is made on the same
property by the same lender who
obtained the original determ ination, and
the other requirem ents contained in
Section 528 are met, the lender may rely
on the previous determination. Section
528 of the Act requires that a lender
m ay rely on a previous determ ination
only if the original determ ination was
recorded on the SFHDF w ithin the
previous seven years and there were no
map revisions or updates affecting the
security property since the original
determ ination was made. However, a
loan refinancing or assum ption m ade by
a lender other than the lender who
obtained the original determ ination
w ould constitute “m aking” 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
requirem ents in Section 528 are met and
the lender m ade the first mortgage, then
a new determ ination w ould not be
necessary. If, however, a lender other
than the one that m ade the first
mortgage loan is making the hom e
equity loan, a new determ ination w ould
be required because this lender w ould
be deemed to be “m aking” a new loan.
In any event, the institution w ill need
to determ ine if the am ount of insurance
in force is sufficient to cover either the
principal balance of all loans (including
the hom e equity loan) or the m axim um
am ount of coverage available on the
im proved real estate, w hichever is less.
• The com m unity in w hich 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 am ount of coverage.
In order to force place, a lender m ust
notify the borrower of the required
am ount of flood insurance that m ust be
obtained w ithin 45 days after
notification. The notice m ust also state
that if the borrower does not obtain the
insurance w ithin the 45 day period, the
lender will purchase the insurance on
behalf of the borrower and may charge
the borrower the cost of prem ium s and
fees to obtain the coverage. Standard
FNMA/FHLMC docum ents perm it the
servicer or lender to add those charges
to the principal am ount of the loan.
FEMA developed the Mortgage
Portfolio Protection Program (MPPP) to
assist lenders in connection w ith forced
placem ent procedures. FEMA published
these procedures in the Federal Register
on August 29, 1995 (60 FR 44881).
A ppendix A of the FEMA publication
contains examples of notification letters
to be used in connection w ith the
MPPP.
2. Can a servicer force place on behalf
of a lender?
Answer: Yes. Assuming the statutory
prerequisites for forced placem ent are
met, and subject to the servicing
contract betw een 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. W hen forced placem ent occurs,
w hat is the am ount of insurance
required to be placed?
Answer: The am ount 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. W hen can lenders or servicers
charge the borrow er a fee for making a
determination?
Answer: There are four instances
under the Act and Regulation w hen the
VI. Forced Placement of Flood
borrower can be charged a specific fee
Insurance
for a flood determination:
• W hen the determ ination is made in
1. Is forced placem ent allowed? W hat
connection w ith the making, increasing,
are the procedures?
extending, or renewing of a loan that is
Answer: The Act and Regulation
initiated by the borrower;
require a lender to force place flood
• W hen the determ ination is
insurance if all of the following
prom pted by a revision or updating by
circumstances occur:
•
The lender determines at any time FEMA of floodplain areas or flood-risk
during the life of the loan that the
zones;
• W hen the determ ination is
property securing the loan is located in
prom pted by FEMA’s publication of a
an SFHA;
Federal Register / Vol. 62, No. 141 / Wednesday, July 23, 1997 / Notices
notice or com pendia that affects the area
in w hich the security property is
located; or
•
W hen the determ ination results in
forced placem ent of insurance.
Loan or other contractual documents
betw een the parties may also perm it the
im position of fees.
2. May charges m ade for life of loan
reviews by flood determ ination firms be
passed along to the borrower?
Answer: Yes. Many flood
determ ination firms provide a service to
the lender for conducting a periodic
review of the loan during the time it is
outstanding to ascertain w hether the
original determ ination rem ains valid.
This service is sometimes coupled w ith
the making of the original determ ination
and the fee charged is a composite one
for conducting both the original and
subsequent reviews. Charging a fee for
the original determ ination is clearly
w ithin the permissible purpose
envisioned by the Act. The agencies
agree that a determ ination 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 determ inations 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 determ ination fee, the monitoring fee
m ay 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 m ust be provided
to a borrower only w hen the lender
determines that the property securing
the loan is or w ill be located in an
SFHA. In a transaction involving
m ultiple borrowers, the agencies believe
it is only necessary to provide the notice
to any one of the borrowers in the
transaction. Lenders may provide
m ultiple notices if they choose. The
lender and borrower(s) typically
designate the borrower to w hom 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 tim e of loan
closing. How is the notice requirem ent
applied in these situations?
Answer: The notice requirem ent can
be met by lenders in m obile home loan
transactions if notice is provided to the
borrower as soon as practicable after
determ ination 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 perm anent foundation, the agencies
note that such “home only” transactions
are excluded from the definition of
mobile home and the notice
requirem ents w ould 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 perm anent foundation
in an SFHA, flood insurance w ill be
required. If the lender, w hen notified of
the location of the mobile home
subsequent to the loan closing,
determines that it has been placed on a
perm anent foundation and is located in
an SFHA in w hich flood insurance is
available under the Act, flood insurance
coverage becomes m andatory and
appropriate notice m ust be given to the
borrower under those provisions. If the
borrower fails to purchase flood
insurance coverage w ithin 45 days after
notification, the lender m ust force place
the insurance.
3. W hen 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 tim e the lender transm its other
loan data, such as information
concerning hazard insurance and taxes,
to the servicer.
4. W hat w ill 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
m ade either electronically or by a
w ritten copy.
5. In the case of a servicer affiliated
w ith 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
m aintain the record of receipt by the
borrower of the notice?
39529
Answer: The record of receipt
provided by the borrower m ust be
m aintained 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 m ust be able to retrieve the record
w ithin a reasonable time pursuant to a
docum ent request from their Federal
supervisory agency.
IX. Notice of Servicer’s Identity
1. W hen a lender makes a designated
loan and it will be servicing that loan,
w hat 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 placem ent of a policy), will
constitute notice to FEMA w hen 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
com pany of the identity of the new
servicer.
2. W ould 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 w ith 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 num ber of
contact person at new servicer.
3. Can delivery of the notice be made
electronically, including batch
transmissions?
Answer: Yes. The Regulation
specifically permits transm ission by
electronic means and a timely batch
transm ission of the notice w ould 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 w ould defeat the purpose of the
notice requirem ent because FEMA
w ould have no record of the identity of
either the owner or servicer of the loan.
5. Is the lender required to provide
notice w hen a servicer other than the
39530
Federal Register / Vol. 62, No. 141 / Wednesday, July 23, 1997 / Notices
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
m arket 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 w ith another, w hat
are the responsibilities of the parties for
notifying the Director’s designee?
Answer: If an institution is acquired
by or merges w ith another institution,
the duty to provide notice for the loans
being serviced by the acquired
institution w ill 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: A lthough lenders are
required to provide a notice to a
borrower w ho is purchasing property
secured by an im proved structure
located in an SFHA, use of the sample
form of notice provided in A ppendix A
is not mandatory. It should be noted
that the sample form includes other
inform ation in addition to w hat 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 m ust provide the
borrower w ith at least the m inim um
information required by the Regulation.
Therefore, lenders should consult the
Regulation to determ ine the inform ation
needed.
Federal Financial Institutions Exam ination
Council.
D ated a t W ash in g to n, DC th is 1 6th d ay of
July 1997.
Joe M. Cleaver,
Executive Secretary.
[FR Doc. 9 7 -1 9 1 3 3 F ile d 7 -2 2 -9 7 ; 8:45 am]
BILLING CODE 6 210 -01 -P , 6 720 -01 -P , 6714 -01 -P ,
4810-01-P , 7535-01-P
@FedFRASER