Loans in Areas Having Special Flood Hazards; Interagency Questions and Answers Regarding Private Flood Insurance
Notice and request for comment.
CFR Part: "12 CFR Part 22"; "12 CFR Part 208"; "12 CFR Part 339"; "12 CFR Part 614"; "12 CFR Part 760"
RIN Number: "RIN 7100-AG12"; "RIN 3064-ZA16"; "RIN 3133-AF31"
Citation: "86 FR 14696"
Document Number: "Docket ID OCC-2020-0033"; "Docket No. R-1742"
Page Number: "14696"
"Proposed Rules"
Agency: "
SUMMARY: The OCC, Board,
DATES:
Comments on the proposed questions and answers must be submitted on or before
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SUPPLEMENTARY INFORMATION:
Background The National Flood Insurance Act of 1968 created the National Flood Insurance Program (NFIP), which is administered by the
FOOTNOTE 1 Public Law 90-448, 82 Stat. 572 (1968). END FOOTNOTE
FOOTNOTE 2 Public Law 93-234, 87 Stat. 975 (1973). END FOOTNOTE
FOOTNOTE 3 Title V of PublicLaw 103-325, 108 Stat. 2255 (1994). END FOOTNOTE
FOOTNOTE 4 Throughout this document "the Agencies" includes the
FOOTNOTE 5 61 FR 45684 (
Since 1997, the Interagency Questions and Answers /6/ have provided the lending industry with guidance addressing a wide spectrum of technical flood insurance-related compliance issues. In 2009, the Agencies comprehensively revised and reorganized the initial 1997 Interagency Questions and Answers. In 2011, the Agencies further finalized two additional Q&As that were proposed in 2009. /7/ In
FOOTNOTE 6 Throughout this document, "Questions and Answers" refers to the
FOOTNOTE 7 For additional information on the history of Interagency Questions and Answers, please see the preamble to the
FOOTNOTE 8 78 FR 65108 (
FOOTNOTE 9 Public Law 112-141, 126 Stat. 916 (2012). END FOOTNOTE
FOOTNOTE 10 Public Law 113-89, 128 Stat. 1020 (2014). END FOOTNOTE
FOOTNOTE 11 80 FR 43216 (
FOOTNOTE 12 84 FR 4953 (
On
FOOTNOTE 13 For more information about the
On
FOOTNOTE 14 See 85 FR 40442 (
As noted in the
I. Private Flood Insurance--Mandatory Acceptance
II. Private Flood Insurance--Discretionary Acceptance
III. Private Flood Insurance--General Compliance
To assist the reader, the Agencies have included references to specific Q&As from the
FOOTNOTE 15 The Agencies' rules are codified at 12 CFR part 22 (OCC), 12 CFR part 208 (Board), 12 CFR part 339 (FDIC), 12 CFR part 614 (FCA), and 12 CFR part 760 (NCUA). END FOOTNOTE
The Agencies plan to publish a final document in the
Public Comments
The Agencies solicit comment on all aspects of the proposed questions and answers regarding the private flood insurance rule. If lenders, community groups, or other parties have unanswered questions or comments about the private flood insurance provision of the Regulation, they are invited to submit them to the Agencies in their comments.
Section-by-Section Analysis
I. Private Flood Insurance--Mandatory Acceptance
The Agencies propose nine new Q&As to address issues regarding the mandatory acceptance and the application of the compliance aid assurance clause with respect to the private flood insurance provision of the Regulation. The new proposed Q&As would be designated as Mandatory 1-9. Proposed new Q&A Mandatory 1 would address whether a lender may decide to only accept private flood insurance policies under the mandatory acceptance provision of the Regulation. The proposed answer would confirm that a lender may decide to only accept flood insurance policies issued by a private insurer that the lender is required to accept because the policies meet the definition of "private flood insurance" under the Regulation. The proposed answer also would clarify that a lender is not required to accept flood insurance policies that only meet the criteria set forth in the discretionary acceptance or mutual aid provisions in the Regulation.
Proposed new Q&A Mandatory 2 would address when a lender must review a flood policy issued by a private flood insurer to make sure the policy meets the mandatory acceptance criteria, other than at loan origination. The proposed response would explain that, other than at origination, a lender must review a flood insurance policy issued by a private insurer when the policy is up for renewal, or any time the borrower presents the lender with any new flood insurance policy issued by a private insurer. The Agencies would clarify that a lender must review the policy in these instances in addition to when a triggering event occurs (making, increasing, extending or renewing a loan).
During this review, a lender may determine that the policy meets the mandatory acceptance criteria without further review if the policy or an endorsement to the policy includes the compliance aid assurance clause. However, if the policy does not meet the mandatory acceptance criteria, the lender may still accept it if it meets the discretionary acceptance criteria or, if applicable, the mutual aid plan criteria. The proposed answer would also explain that if the policy does not meet any such criteria, the lender must notify the borrower in accordance with the force placement provisions of the Regulation. If the borrower does not purchase flood insurance that complies with the Regulation, the lender must purchase insurance on the borrower's behalf. In addition, the Agencies would clarify that a lender may rely on a previous review of a flood insurance policy under the discretionary acceptance provision, provided there are no changes to the terms of the policy. However, as required by the Regulation and discussed below in proposed new Q&A Discretionary 4, the lender must document its conclusion regarding sufficient protection of the loan in writing. The Agencies are also including a reference to proposed new Q&A Discretionary 4.
Proposed new Q&A Mandatory 3 would address whether the private flood insurance requirements under the Regulation require a lender to change its policy of not originating a mortgage in non-participating communities or coastal barrier regions where the NFIP is not available. The proposed answer would explain that the Regulation does not require a lender to originate a loan that does not meet the lender's underwriting criteria. The Agencies would note that the flood insurance purchase requirement only applies to loans secured by structures located or to be located in an SFHA in which flood insurance is available under the Act. As stated in proposed Q&A Applicability 1 in the
Proposed new Q&A Mandatory 4 would address whether the compliance aid assurance clause could act as a conformity clause that would make a private policy conform to the definition of private flood insurance under the Regulation. The Agencies propose to clarify that the compliance aid assurance clause is not intended to act as a conformity clause but rather to facilitate the ability of lenders and consumers to recognize policies that meet the definition of "private flood insurance" and to promote the consistent acceptance of policies that meet this definition.
Proposed new Q&A Mandatory 5 would provide that a lender is not required to accept a flood insurance policy issued by a private insurer solely because the policy contains the compliance aid assurance clause if the lender chooses to conduct its own review and determines the flood insurance policy actually does not meet the mandatory acceptance requirements. The proposed answer also would note that if a flood insurance policy issued by a private insurer does not include the compliance aid assurance clause, the lender must still review the policy to determine if it meets the requirements for private flood insurance as set forth in the Regulation before the lender may choose to reject the policy.
Proposed new Q&A Mandatory 6 would discuss whether a lender is required to conduct an additional review of a flood insurance policy under the mandatory acceptance provision if the policy includes the compliance aid assurance clause. The proposed answer would state that under the mandatory acceptance provision of the Regulation, if a policy or an endorsement to the policy contains the compliance aid assurance clause, a lender is not required to conduct any further review of the policy in order to determine that the policy meets the definition of "private flood insurance." The Agencies also propose to clarify that the language of the compliance aid assurance clause must be stated as set forth in the Regulation in order for the lender to rely on the protections of the compliance aid assurance clause. However, the proposed answer would provide that a lender need not reject a policy containing the compliance aid assurance clause if the formatting, font, punctuation, and similar stylistic effects that do not change the substantive meaning of the clause are different from the compliance aid assurance clause set forth in the Regulation. The proposed answer would also include a reference to proposed new Q&A Mandatory 7.
Proposed new Q&A Mandatory 7 would describe additional reviews a lender must conduct when a flood insurance policy issued by a private insurer includes the compliance aid assurance clause, as the clause only assists a lender in making the determination that a flood insurance policy meets the definition of private flood insurance in the Regulation, and not other requirements specified in the Regulation. Specifically, the lender also must ensure that the coverage is at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act, and also should ensure that other key aspects of the policy are accurate, such as the borrower's name and property address. The proposed answer would also include a reference to proposed new Q&A Mandatory 6.
Proposed new Q&A Mandatory 8 would address whether a lender may use the criteria under the discretionary acceptance provision to decide whether to accept a policy that does not contain the compliance aid assurance clause without first reviewing the policy to determine if it meets the mandatory acceptance provision. The proposed answer would clarify that a lender may first review the policy to determine whether it meets the criteria under the discretionary acceptance provision. However, if the policy is not accepted under the discretionary acceptance provision, the lender would still need to determine whether it must accept the policy under the mandatory acceptance criteria. The proposed answer would also remind lenders to document that a policy provides sufficient protection of the loan if the lender accepts the policy under the discretionary acceptance provision of the Regulation.
Lastly, new proposed Q&A Mandatory 9 would note that if the compliance aid assurance clause is included on the declarations page, a lender may accept the policy without further review to determine whether the policy meets the definition of private flood insurance. However, a lender must also ensure compliance with the mandatory purchase requirement.
II. Private Flood Insurance--Discretionary Acceptance
The Agencies propose to add four new Q&As to provide additional clarity on the discretionary acceptance provision of the Regulation. These new Q&As would be designated as Discretionary 1-4. Proposed new Q&A Discretionary 1 would address whether lenders are required to accept flood insurance policies that meet the discretionary acceptance criteria. The proposed answer would note that the discretionary acceptance criteria in the Regulation set forth the minimum acceptable criteria that a flood insurance policy must have for the lender to accept the policy under the discretionary acceptance provision. The proposed answer would clarify that it is at the lender's discretion to accept a policy that meets the discretionary acceptance criteria so long as the policy does not meet the mandatory acceptance criteria.
Proposed new Q&A Discretionary 2 would address the requirements for documentation to demonstrate that a policy provides sufficient protection of a loan when a lender accepts that policy under the discretionary acceptance criteria. The proposed answer would explain that the Regulation requires the lender to document its conclusion in writing that the policy provides sufficient protection of the loan, consistent with safety and soundness principles. In addition, the proposed answer would include a reference to proposed Q&A Coverage 1 from the
FOOTNOTE 16 These factors include whether: (1) A policy's deductibles are reasonable based on a borrower's financial condition; (2) the insurer provides adequate notice of cancellation to the mortgagor and the mortgagee; (3) the terms and conditions of the policy with respect to payment per occurrence or per loss and aggregate limits are adequate to protect the lending institution's interest in the collateral; (4) the flood insurance policy complies with applicable State insurance laws; and (5) the private insurance company has the financial strength, solvency and ability to satisfy claims. See 85 FR 40442, 40458 (
Proposed new Q&A Discretionary 3 would address how a lender could evaluate concerns related to an insurer's solvency, strength, and ability to pay claims in order to determine whether an insurance policy provides sufficient protection of a loan, consistent with general safety and soundness principles. The proposed answer would provide that a lender may evaluate an insurer's solvency, strength, and ability to satisfy claims by obtaining information from the State insurance regulator's office of the State in which the property securing the loan is located, among other options. The proposed answer would further indicate that a lender could rely on the licensing or other processes used by the State insurance regulator for such an evaluation. The proposed answer would also include a reference to proposed Q&A Coverage 1 from the
Proposed new Q&A Discretionary 4 would address whether a lender is required to review a flood insurance policy upon renewal if that policy was issued by a private insurer and was originally accepted in accordance with the discretionary acceptance requirements. The proposed answer would provide that if a lender had accepted a flood insurance policy issued by a private insurer in accordance with the discretionary acceptance requirements and the policy is renewed, the lender would be required to review the policy upon renewal to ensure that it continues to meet the discretionary acceptance requirements. The proposed answer would also state that a lender would need to document its conclusion regarding sufficiency of the protection of the loan in writing upon each renewal to indicate that the policy continues to provide sufficient protection of the loan.
III. Private Flood Insurance--General Compliance
The Agencies propose to add 11 new Q&As on topics related to the private flood insurance provisions of the Regulation that are not covered in sections I and II above. The new proposed Q&As would be designated as Private
New proposed Q&A Private
Specifically, for a private flood insurance policy that the lender is accepting under the mandatory acceptance provision, the proposed answer would state that the Regulation provides that the policy must contain a deductible that is "at least as broad as" the maximum deductible in the Standard Flood Insurance Policy (SFIP) under the NFIP, which means that the deductible is no higher than the specified maximum under an SFIP for any total coverage amount up to the maximum available under the NFIP at the time the policy is provided to the lender. The proposed answer would provide that a policy with a coverage amount exceeding that available under the NFIP may have a deductible exceeding the specific maximum deductible under an SFIP. However, the proposed answer would also advise that for safety and soundness purposes, the lender should consider whether the deductible is reasonable based on the borrower's financial condition, consistent with guidance the Agencies proposed in Q&A Amount 9 /17/ in the
FOOTNOTE 17 Proposed Q&A Amount 9, adapted from current Q&A 17, provides that a lender should determine the reasonableness of the deductible on a case-by-case basis, taking into account the risk that such a deductible would pose to the borrower and the lender. Proposed Q&A Amount 9 also states that a lender may not allow the borrower to use a deductible amount equal to the insurable value of the property to avoid the mandatory purchase requirement for flood insurance. See 85 FR 40442 at 40463 (
The Agencies note that this proposed guidance regarding the deductible for a private flood insurance policy with a coverage amount exceeding that available under the NFIP is different from the informal advice the Agencies previously provided in supplementary information to the private flood insurance rule. /18/ In the supplementary information to the private flood insurance rule, the Agencies advised that even for private flood insurance policies with amounts exceeding the maximum coverage under the NFIP, the lender should still match the SFIP deductible for the amount up to the maximum coverage amount under the NFIP but could exceed the maximum deductible for an SFIP for the coverage over the maximum coverage amount available under the NFIP. However, based on additional investigation, the Agencies understand that these types of tiered deductibles are not common and the guidance provided in the supplementary information may not be practicable. Therefore, the Agencies believe the guidance they are proposing in Q&A Private
FOOTNOTE 18 See 84 FR 4953 at 4957 (
Proposed Q&A Private
Proposed Q&A Private
The Agencies also received questions on whether a lender may require that the deductible of any flood insurance policy issued by a private insurer be lower than the maximum deductible for an NFIP policy. New proposed Q&A Private
Proposed new Q&A Private
FOOTNOTE 19 Proposed Q&A Fees 1, adapted from current Q&A 69, lists the four instances in the Act and Regulation when a lender or servicer can charge the borrower a fee for making a flood determination. Proposed Q&A Fees 2, adapted from current Q&A 70, provides that charges made for life-of-loan reviews by determination firms may be passed to the borrower under certain conditions. See 85 FR 40442 at 40459-60 (
Proposed new Q&A Private
The Agencies received many questions requesting guidance on whether a declarations page provides sufficient information for a lender to determine whether the policy complies with the Regulation. Proposed new Q&A Private
Proposed new Q&A Private
Proposed new Q&A Private
The Agencies are proposing new Q&A Private
The Agencies also propose to add three new Q&As to provide guidance regarding optional methods lenders can use to address questions on whether an insurer is licensed, admitted, or otherwise approved to do business in a particular State, which is one of the factors lenders must evaluate under both the mandatory acceptance and discretionary acceptance provisions. Proposed new Q&A Private
FOOTNOTE 20 The
FOOTNOTE 21 The NAIC notes that "[w]hereas [S]tates monitor the eligibility of
FOOTNOTE 22 See https://content.naic.org/cis_consumer_information.htm. END FOOTNOTE
FOOTNOTE 23 See https://www.naic.org/prod_serv_alpha_listing.htm#quarterly_alien. END FOOTNOTE
Proposed new Q&A Private
FOOTNOTE 24 During discussion of the Biggert-Waters Act on the
As noted above, if the surplus lines insurer is eligible or not disapproved to place insurance in the State or jurisdiction in which a property to be insured is located, the surplus lines insurer is deemed to be "otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located" for purposes of the Act and Regulation. Therefore, the proposed answer would note that even if the surplus lines insurer is not considered to be engaged in the business of insurance under applicable State law, the surplus lines insurer nevertheless would meet the criteria only for purposes of this provision of the Regulation if the insurer is eligible or not disapproved to place insurance in the State or jurisdiction in which a property to be insured is located.
For example, under section 1776 of the California Insurance Code, the permission granted to allow an insurance policy issued by a nonadmitted insurer to be placed in
FOOTNOTE 25 Cal. Ins. Code
FOOTNOTE 26 Id. END FOOTNOTE
Proposed new Q&A Private
I. Private Flood Insurance--Mandatory Acceptance
Mandatory 1. May a lender decide to only accept private flood insurance policies under the mandatory acceptance provision of the Regulation?
Yes. A lender is only required to accept flood insurance policies issued by a private insurer that meet the definition of "private flood insurance" under the Regulation. A lender is not required to accept flood insurance policies that only meet the criteria set forth in the discretionary acceptance or mutual aid provision of the Regulation.
Mandatory 2. Apart from loan origination, when must a lender review a flood policy issued by a private flood insurer?
Once a flood insurance policy issued by a private insurer comes up for renewal or any time the borrower presents the lender with any new flood insurance policy issued by a private insurer, regardless of whether a triggering event occurred (making, increasing, extending or renewing a loan), the lender must review the policy to determine whether it meets the mandatory acceptance criteria. /27/ A lender may determine that the policy meets the mandatory acceptance criteria without further review if the policy or an endorsement to the policy includes the compliance aid assurance clause. /28/ If the policy does not meet the mandatory acceptance criteria, the lender may still accept the policy if it meets the discretionary acceptance criteria or, if applicable, the mutual aid plan criteria. If the policy does not meet the mandatory acceptance, discretionary acceptance, or mutual aid plan criteria, the lender must notify the borrower in accordance with the force placement provisions of the Regulation. /29/ If the borrower does not purchase flood insurance that complies with the Regulation, the lender must purchase insurance on the borrower's behalf. /30/
FOOTNOTE 27 See 12 CFR 22.3(c)(1) (OCC); 12 CFR 208.25(c)(3)(i) (Board); 12 CFR 339.3(c)(1) (FDIC); 12 CFR 614.4930(c)(1) (FCA); and 12 CFR 760.3(c)(1) (NCUA). END FOOTNOTE
FOOTNOTE 28 12 CFR 22.3(c)(2) (OCC); 12 CFR 208.25(c)(3)(ii) (Board); 12 CFR 339.3(c)(2) (FDIC); 12 CFR 614.4930(c)(2) (FCA); and 12 CFR 760.3(c)(2) (NCUA). END FOOTNOTE
FOOTNOTE 29 12 CFR 22.7 (OCC); 12 CFR 208.25(g) (Board); 12 CFR 339.7 (FDIC); 12 CFR 614.4945 (FCA); and 12 CFR 760.7 (NCUA). END FOOTNOTE
FOOTNOTE 30 12 CFR 22.7(a) (OCC); 12 CFR 208.25(g)(1) (Board); 12 CFR 339.7(a) (FDIC); 12 CFR 614.4945(a) (FCA); and 12 CFR 760.7(a) (NCUA). END FOOTNOTE
If the lender has previously reviewed the flood insurance policy under the discretionary acceptance provision to ensure that the policy meets the private flood insurance requirements of the Regulation, the lender may rely on its previous review, provided there are no changes to the terms of the policy. However, as required by the Regulation, the lender must document its conclusion regarding sufficiency of protection of the loan in writing. /31/ See Q&A Discretionary 4.
FOOTNOTE 31 12 CFR 22.3(c)(3) (OCC); 12 CFR 208.25(c)(3)(iii) (Board); 12 CFR 339.3(c)(3) (FDIC); 12 CFR 614.4930(c)(3) (FCA); and 12 CFR 760.3(c)(3) (NCUA). END FOOTNOTE
Mandatory 3. If a lender has a policy not to originate a mortgage in non-participating communities or coastal barrier regions where the NFIP is not available, do the private flood insurance requirements under the Regulation require a lender to change its policy?
The Regulation does not require that a lender originate a loan that does not meet the lender's underwriting criteria. The Agencies note that the flood insurance purchase requirement only applies to loans secured by structures located or to be located in an SFHA in which flood insurance is available under the Act. /32/ As noted in Q&A Applicability 1, the flood insurance purchase requirement does not apply within non-participating communities, where NFIP insurance is not available under the Act. Therefore, the lender does not need to change its policy of not originating mortgages in areas where NFIP insurance is unavailable solely because of the private flood insurance requirements under the Regulation.
FOOTNOTE 32 Public Law 93-234, 87 Stat. 975 (1973). END FOOTNOTE
Mandatory 4. Did the Agencies intend the compliance aid assurance clause to act as a conformity clause that would make a private policy conform to the definition of private flood insurance?
No. The Agencies did not intend the compliance aid assurance clause to act as a conformity clause. Rather, the compliance aid assurance clause is intended to facilitate the ability of lenders, as well as consumers, to recognize policies that meet the definition of "private flood insurance" and promote the consistent acceptance of policies that meet this definition. The compliance aid provision is intended to leverage the expertise of insurers to assist lenders in satisfying the requirements of the Regulation.
Mandatory 5. Is a lender required to accept a flood insurance policy issued by a private insurer that includes the compliance aid assurance clause? Conversely, may a lender reject a flood insurance policy issued by a private insurer solely because it does not contain the compliance aid assurance clause?
A lender is not required to accept a flood insurance policy issued by a private insurer solely because the policy contains the compliance aid assurance clause if the lender chooses to conduct its own review and determines the flood insurance policy actually does not meet the mandatory acceptance requirements.
If a flood insurance policy issued by a private insurer does not include the compliance aid assurance clause, the lender must still review the policy to determine if it meets the requirements for private flood insurance as set forth in the Regulation before the lender may choose to reject the policy. /33/
FOOTNOTE 33 12 CFR 22.3(c) (OCC); 12 CFR 208.25(c)(3) (Board); 12 CFR 339.3(c) (FDIC); 12 CFR 614.4930(c) (FCA); and 12 CFR 760.3(c) (NCUA). END FOOTNOTE
Mandatory 6. If a flood insurance policy issued by a private insurer includes the compliance aid assurance clause, does a lender need to conduct an additional review of the policy for compliance with the mandatory acceptance provision of the Regulation?
No, under the mandatory acceptance provision of the Regulation, if a policy or an endorsement to the policy contains the compliance aid assurance clause, further review is not necessary in order for the lender to determine that a policy meets the definition of "private flood insurance." /34/
FOOTNOTE 34 12 CFR 22.3(c)(2) (OCC); 12 CFR 208.25(c)(3)(ii) (Board); 12 CFR 339.3(c)(2) (FDIC); 12 CFR 614.4930(c)(2) (FCA); and 12 CFR 760.3(c)(2) (NCUA). END FOOTNOTE
It is important to note that, in order for the lender to rely on the compliance aid assurance clause without further review of the policy, the language of the compliance aid assurance clause must be stated in the policy, or as an endorsement to the policy, as set forth in the Regulation. If the language is different from the compliance aid assurance clause set forth in the Regulation, the lender cannot rely on the protections of the compliance aid assurance clause in the Regulation and should review the policy to determine if it meets the definition of private flood insurance. However, a policy containing the compliance aid assurance clause need not be rejected if there are stylistic differences, such as formatting, font, and punctuation that do not change the substantive meaning of the clause, from the compliance aid assurance clause included in the Regulation. See also Q&A Mandatory 7.
Mandatory 7. What additional reviews does a lender need to conduct if the flood insurance policy issued by a private insurer includes the compliance aid assurance clause?
Although a lender may rely on the compliance aid assurance clause to determine that a flood insurance policy meets the definition of private flood insurance in the Regulation, the lender must also ensure that the coverage is at least equal to the lesser of the outstanding principal balance of the designated loan, or the maximum limit of coverage available for the particular type of property under the Act. /35/ The lender should also ensure that other key aspects of the policy are accurate, such as the borrower's name and property address. See also Q&A Mandatory 6.
FOOTNOTE 35 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA). END FOOTNOTE
Mandatory 8. If a flood insurance policy issued by a private issuer does not include a compliance aid assurance clause, can a lender use the criteria under the discretionary acceptance provision to decide whether to accept the policy without first checking to see if the policy meets the criteria under the mandatory acceptance provision?
Yes, the lender may first review the policy to determine whether it meets the criteria under the discretionary acceptance provision. /36/ However, even if the policy does not meet the discretionary acceptance criteria, the lender will still need to determine whether it must accept the policy under the mandatory acceptance criteria. /37/
FOOTNOTE 36 12 CFR 22.3(c)(3) (OCC); 12 CFR 208.25(c)(3)(iii) (Board); 12 CFR 339.3(c)(3) (FDIC); 12 CFR 614.4930(c)(3) (FCA); and 12 CFR 760.3(c)(3) (NCUA). END FOOTNOTE
FOOTNOTE 37 12 CFR 22.3(c) (OCC); 12 CFR 208.25(c)(3) (Board); 12 CFR 339.3(c) (FDIC); 12 CFR 614.4930(c) (FCA); and 12 CFR 760.3(c) (NCUA). END FOOTNOTE
Note that if the lender accepts a policy under the discretionary acceptance provision, the Regulation requires the lender to document that the policy provides sufficient protection of the loan. /38/
FOOTNOTE 38 12 CFR 22.3(c)(3) (OCC); 12 CFR 208.25(c)(3)(iii) (Board); 12 CFR 339.3(c)(3) (FDIC); 12 CFR 614.4930(c)(3) (FCA); and 12 CFR 760.3(c)(3) (NCUA). END FOOTNOTE
Mandatory 9. If the compliance aid assurance clause is on the declarations page, may a lender accept the policy without further review?
If the compliance aid assurance clause is included on the declarations page, a lender may accept the policy without further review to determine whether the policy meets the definition of private flood insurance. However, a lender must also ensure compliance with the mandatory purchase requirement. See Q&A Mandatory 7.
II. Private Flood Insurance--Discretionary Acceptance
Discretionary 1. Are lenders required to accept flood insurance policies that meet the discretionary acceptance criteria?
No, the discretionary acceptance criteria in the Regulation sets forth the minimum acceptable criteria that a flood insurance policy must have for the lender to accept the policy under the discretionary acceptance provision. It is at the lender's discretion to accept a policy that meets the discretionary acceptance criteria so long as the policy does not meet the mandatory acceptance criteria.
Discretionary 2. If the lender determines that a flood insurance policy meets the discretionary acceptance criteria and accepts that policy, what documentation will demonstrate that the policy provides sufficient protection of the loan, consistent with general safety and soundness principles?
The Regulation requires the lender to document its conclusion in writing that the policy provides sufficient protection of the loan, consistent with general safety and soundness principles (see also Q&A Coverage 1). While the Regulation does not require any specific documentation to demonstrate that the policy provides sufficient protection of the loan, lenders may include any information that reasonably supports the lender's conclusion following review of the policy.
Discretionary 3. How can a lender evaluate the sufficiency of an insurer's solvency, strength, and ability to satisfy claims when determining whether a flood insurance policy provides sufficient protection of the loan, consistent with general safety and soundness principles?
A lender may evaluate an insurer's solvency, strength, and ability to satisfy claims by obtaining information from the State insurance regulator's office of the State in which the property securing the loan is located, among other options. A lender can rely on the licensing or other processes used by the State insurance regulator for such an evaluation. See Q&A Coverage 1.
Discretionary 4. If a flood insurance policy issued by a private insurer that was originally accepted in accordance with the discretionary acceptance requirements is renewed annually, is the lender required to review the policy upon renewal?
If a lender had accepted a flood insurance policy issued by a private insurer in accordance with the discretionary acceptance requirements and the policy is renewed, the lender must review the policy upon renewal to ensure that it continues to meet the discretionary acceptance requirements. /39/ The lender must also document its conclusion regarding sufficiency of the protection of the loan in writing upon each renewal to indicate that the policy continues to provide sufficient protection of the loan. /40/
FOOTNOTE 39 12 CFR 22.3(c) (OCC); 12 CFR 208.25(c)(3) (Board); 12 CFR 339.3(c) (FDIC); 12 CFR 614.4930(c) (FCA); and 12 CFR 760.3(c) (NCUA). END FOOTNOTE
FOOTNOTE 40 12 CFR 22.3(c)(3) (OCC); 12 CFR 208.25(c)(3)(iii) (Board); 12 CFR 339.3(c)(3) (FDIC); 12 CFR 614.4930(c)(3) (FCA); and 12 CFR 760.3(c)(3) (NCUA). END FOOTNOTE
III. Private Flood Insurance--Private
Private
The maximum deductible for a flood insurance policy issued by a private insurer varies depending on whether the lender accepts the policy under the mandatory acceptance or the discretionary acceptance provision. For purposes of compliance with the mandatory acceptance provision, the Regulation provides that a policy must contain a deductible that is "at least as broad as" in a Standard Flood Insurance Policy (SFIP)--i.e., no higher than the specified maximum under an SFIP--for any total coverage amount up to the maximum available under the NFIP at the time the policy is provided to the lender. /41/ For a private policy with a coverage amount exceeding that available under the NFIP, the deductible may exceed the specific maximum deductible under an SFIP. However, for safety and soundness purposes, the lender should consider whether the deductible is reasonable based on the borrower's financial condition, among other factors. See Q&A Amount 9.
FOOTNOTE 41 12 CFR 22.2(k) (OCC); 12 CFR 208.25(b)(9) (Board); 12 CFR 339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA). END FOOTNOTE
* For example, if a private policy for a commercial building provided
* Similarly, if a private policy for a residential building provided
For purposes of compliance with the discretionary acceptance provision, the Regulation requires that the policy provide sufficient protection of the loan, consistent with general safety and soundness principles. /42/ Among the factors a lender could consider in determining whether a policy provides sufficient protection of a loan is whether the policy's deductible is reasonable based on the borrower's financial condition. Unlike the limitation on deductibles for policies accepted under the mandatory acceptance provision for any total coverage amount up to the maximum available under the NFIP, a lender can accept a flood insurance policy issued by a private insurer under the discretionary acceptance provision with a deductible higher than that for an SFIP for a similar type of property, provided the lender has determined the policy provides sufficient protection of the loan, consistent with general safety and soundness principles.
FOOTNOTE 42 12 CFR 22.3(c)(3)(iv) (OCC); 12 CFR 208.25(c)(3)(iii)(D) (Board); 12 CFR 339.3(c)(3)(iv) (FDIC); 12 CFR 614.4930(c)(3)(iv) (FCA); and 12 CFR 760.3(c)(3)(iv) (NCUA). END FOOTNOTE
Whether the lender is evaluating the policy under the mandatory acceptance provision or the discretionary acceptance provision, a lender may not allow the borrower to use a deductible amount equal to the insurable value of the property to avoid the mandatory purchase requirement for flood insurance. /43/ See Q&A Amount 9.
FOOTNOTE 43 12 CFR 22.3(a) (OCC); 12 CFR 208.25(c)(1) (Board); 12 CFR 339.3(a) (FDIC); 12 CFR 614.4930(a) (FCA); and 12 CFR 760.3(a) (NCUA). END FOOTNOTE
Private
Yes. If the lender is accepting the private flood insurance policy under the mandatory acceptance provision, the Regulation requires that the private flood insurance policy be at least as broad as an NFIP policy, which includes a requirement that the private flood insurance policy contain a deductible no higher than the specified maximum deductible for a Standard Flood Insurance Policy (SFIP). /44/ The lender may require a borrower's private flood insurance policy deductible be lower than the maximum deductible for an NFIP policy in connection with a policy that the lender accepts under the mandatory acceptance provision, consistent with general safety and soundness principles and based on a borrower's financial condition, among other factors.
FOOTNOTE 44 12 CFR 22.2(k)(2)(iii) (OCC); 12 CFR 208.25(b)(9)(ii)(B) (Board); 12 CFR 339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA). END FOOTNOTE
If the lender is accepting a flood insurance policy issued by a private insurer under the discretionary acceptance provision, the lender need only consider whether the policy, including the stated deductible, provides sufficient protection of the loan, consistent with general safety and soundness principles. /45/ See also Q&A Private
FOOTNOTE 45 12 CFR 22.3(c)(3)(iv)(D) (OCC); 12 CFR 208.25(c)(3)(iii)(D) (Board); 12 CFR 339.3(c)(3)(iv) (FDIC); 12 CFR 614.4930(c)(3)(iv) (FCA); and 12 CFR 760.3(c)(3)(iv) (NCUA). END FOOTNOTE
Private
The Act and the Regulation do not prohibit lenders from charging fees to borrowers for contracting with third parties to review flood insurance policies. As explained in Q&A Fees 1 and Q&A Fees 2, lenders may charge limited, reasonable fees for flood determinations and life-of-loan monitoring. Similarly, the Act and the Regulation do not prohibit lenders from charging a fee to a borrower when a third party reviews a flood insurance policy issued by a private insurer. However, lenders should be aware of any other applicable requirements regarding fees and disclosures of fees.
Private
The Act and Regulation do not specify the acceptable types of documentation for a lender to rely on when reviewing a flood insurance policy issued by a private insurer. Lenders should determine whether they have sufficient evidence to show the policy meets the requirements under the Regulation.
Lenders can take steps to help mitigate against closing delays such as designating employees responsible for reviewing flood policies, training employees, and requesting additional information from insurers early in the process. If the lender does not have enough information to determine if the policy meets the private flood insurance requirements under the Regulation, then the lender should timely request additional information as necessary to complete its review.
Private
It depends. If the declarations page provides enough information for the lender to determine whether the policy meets the mandatory acceptance provision or discretionary acceptance provision of the Regulation or if the declarations pages contains the compliance aid assurance clause, then the lender may rely on the declarations pages. However, if the declarations page does not provide enough information for the lender to determine whether the policy satisfies the mandatory acceptance provision or discretionary acceptance provision of the Regulation, the lender should request additional information about the policy to aid in making its determination.
Private
Yes. A lender can accept a multiple-peril policy that covers the hazard of flood under the private flood insurance provisions of the Regulation, provided the policy meets the requirements under the Regulation.
Private
Lenders must comply with Federal flood insurance requirements. The requirements for the secondary market are separate from the Regulation. A lender should carefully review these separate requirements for secondary market investors regarding acceptable private flood insurance if the lender plans to sell loans to such investors and should direct questions regarding these requirements to the appropriate entities.
Private
For loans serviced on behalf of lenders supervised by the Agencies, the servicer must comply with the Regulation in determining whether a flood insurance policy issued by a private insurer must be accepted under the mandatory acceptance provision or may be accepted under the discretionary acceptance provision or mutual aid provision. For loans serviced on behalf of other entities not supervised by the Agencies, the servicer should comply with the terms of its contract with that entity. For example, when servicing loans on behalf of
Private
A lender may refer to the website of the State insurance regulator where the collateral property is located to determine whether a particular insurer is licensed, admitted, or otherwise permitted to issue an insurance policy in a particular State. If the lender cannot determine this information from the website, the lender could contact the State insurance regulator directly. Further, information with respect to surplus lines insurer eligibility also may be available in the Consumer Insurance Search (CIS) tool available on the
With regard to nonadmitted alien insurers in particular, lenders could review the NAIC's Quarterly Listing of Alien Insurers. /46/
FOOTNOTE 46 See 15 U.S.C. 8204. END FOOTNOTE
Private
Yes, if the surplus lines insurer is eligible or not disapproved to place insurance in the State or jurisdiction in which the property to be insured is located, lenders may accept policies issued by surplus lines insurers as coverage for noncommercial (i.e., residential) properties.
Consistent with the Act and the Regulation, the Agencies confirm that policies issued by surplus lines insurers for noncommercial properties are covered in the definition of "private flood insurance" and in the discretionary acceptance provision. In the definition of "private flood insurance," surplus lines policies for noncommercial properties are covered as policies that are issued by insurance companies that are "otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located." /47/ Similarly, within the discretionary acceptance provision, noncommercial residential policies issued by surplus lines carriers are covered as policies that are issued by private insurance companies that are "otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located." /48/
FOOTNOTE 47 See 84 FR 4955-4956 (Feb.20, 2019). See also 12 CFR 22.2(k)(1)(i) (OCC); 12 CFR 208.25(b)(9)(i)(A) (Board); 12 CFR 339.2 (FDIC); 12 CFR 614.4925 (FCA); and 12 CFR 760.2 (NCUA). END FOOTNOTE
FOOTNOTE 48 See 84 FR 4962 (
For purposes of the Regulation, the meaning of "otherwise approved" is based on whether applicable State law provides that the surplus lines insurer is eligible or not disapproved to place insurance in that State. Even if the surplus lines insurer is not considered to be engaged in the business of insurance under applicable State law, the surplus lines insurer would still be "otherwise approved" only for purposes of this provision of the Regulation if the insurer is eligible or not disapproved to place insurance in the State.
Private
Even if the policy includes a statement indicating that the insurer is not licensed in the State or jurisdiction in which the property is located, suggesting that the policy is issued by a surplus lines insurer, there are circumstances under which lenders may accept the policy. A lender may accept a policy issued by a surplus lines insurer recognized or not disapproved by the relevant State insurance regulator as protection for loan collateral that is a commercial property. Also, a lender may accept a policy issued by a surplus lines insurer as protection for loan collateral that is a noncommercial property as a policy issued by an insurance company that is "otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located." See Q&A Private
Acting Comptroller of the Currency.
Secretary of the Board.
Dated at
Assistant Executive Secretary.
Dated at
Secretary, Farm Credit Administration Board.
Secretary of the Board,
[FR Doc. 2021-05314 Filed 3-17-21;
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