Author: Steve Shepherd, CRCM
On May 31, 2022, all five federal agencies issued a revised Interagency Questions and Answers Regarding Flood Insurance. The Question & Answer Guidance is largely a context reorganization of the July 2020 proposed guidance and the March 2021 proposed guidance to make it easier for the compliance community to research topics regarding flood insurance requirements. The new Question & Answer Guidance supersedes the 2009 and 2011 guidance. For more information, please refer to the officer Federal Register entry at:
https://www.federalregister.gov/documents/2022/05/31/2022-10414/loans-in-areas-having-special-flood-hazards-interagency-questions-and-answers-regarding-flood
Some noteworthy responses have been identified and are noted below; however, full detail is located in the Question & Answer Guidance.
Applicability 6
The Agencies clarified whether modifications due to Covid repayment ability trigger a MIRE event subject to the flood rules. Under the revised Q&A, “if a loan modification or restructuring involves recapitalizing delinquent payments and other amounts due under the loan, or amounts that were otherwise originally contemplated to be part of the loan pursuant to the contract with the borrower, into the loan’s outstanding principal balance and the maturity date of the loan otherwise stays the same, the Regulation would not apply because the modification or restructuring would not increase, extend, or renew the terms of the loan.”
Applicability 12
The Agencies clarified issues and cases where coverage under the NFIP is not available. Under the new Q&A the Agency noted that lenders may originate loans without flood insurance coverage but must comply with all other parts of the regulation. The Agency noted that there are other safety and soundness considerations and the option of obtaining private flood insurance is available. Additionally, the Agency expects flood insurance to be obtained, and if necessary, by force placement, once the NFIP coverage becomes available.
Applicability 14
The Agencies provided clarification on what, if any, portfolio-wide flood insurance policies meet the flood insurance purchase requirements. The Q&A states: “A lender may not rely on an insurance policy providing portfolio-wide coverage to meet the flood insurance purchase or force placement requirements if the policy only provides coverage to the lender (“single interest”). In contrast, lenders may purchase a master flood insurance policy that provides coverage for its entire portfolio and covers both the lender and the borrower (“dual interest”). Such policies provide coverage for the entire portfolio as well as individual coverage and include the issuance of an individual property policy or certificate after the required notice period.”
Exemptions 1
The flood Q&A offers three exemptions to obtaining flood insurance: 1) State-owned property covered under a policy of self-insurance satisfactory to the Administrator of FEMA; 2) loans where the original principal balance is less than $5,000 and the repayment term is one year or less; and 3) any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence.
Exemptions 3
Clarifies that even if the loan is secured by exempt structures that a flood determination must be pulled on that property.
Mandatory 4
The flood Q&A clarified that a lender is not required to accept a private flood insurance policy solely because the policy contains a compliance aid statement alone and may choose to make its own decision as to whether the policy meets the definition of private flood insurance.
Mandatory 6
Clarifies what additional due diligence needs to be conducted by the lender if the private flood insurance policy contains the compliance aid statement. The additional review conducted would need to include the adequacy of coverage review to determine if the amount of flood insurance covered by the policy is sufficient.
Discretionary 2
Clarifies the documentation requirements of discretionary acceptance. Under the new Q&A, the lender is required to document their conclusions in writing and consistent with general safety and soundness principles.
Discretionary 4
Provides “some” safety and soundness principles to determine if the private flood insurance policy provides sufficient coverage. These are enumerated as: “(1) a policy’s deductible is reasonable based on the borrower’s financial condition; (2) the insurer provides adequate notice of cancellation to the mortgagor and mortgagee to allow for timely force placement of flood insurance, if necessary; (3) the terms and conditions of the policy, with respect to payment per occurrence or per loss and aggregate limits, are adequate to protect the regulated lending institution’s interest in the collateral; (4) the flood insurance policy complies with applicable State insurance laws; and (5) the private insurance company has the financial solvency, strength, and ability to satisfy claims.”
SFHDF 4
Clarifies that a lender may rely on an old flood determination for the increase, renewal, or extension of a loan. However, if the lender makes multiple loans to the same borrower, the lender may rely on previous flood determinations so long as the previous determination is no more than 7 years old and there have been no map revisions or map updates.
Zone 1
Clarifies that an institution no longer needs to reconcile differences between flood zones found on a flood determination and a flood insurance policy. This is because the policies issued under FEMA’s Risk Rating 2.0 are no longer determined by the zone. The flood zone will also no longer appear on the declaration page of NFIP policies.
Zone 3
Clarifies that if a dispute arises between the borrower and the lender as to if a property is located in an area requiring flood insurance, the dispute should be resolved through FEMA.
Notice 2
The Agencies indicated that 10 days prior to closing is regarded as a reasonable time to provide the notice but states that the timing requirement must be sufficient in that the borrower has the opportunity to be aware of their responsibilities timely and has the opportunity to purchase flood insurance before completion of the loan transaction.
Amount 2
The Agencies included the definition of “insurable value.” According to the Q&A, “The insurable value of the building may generally be the same as 100 percent Replacement Cost Value (RCV), which is the cost to replace the building with the same kind of material and construction without deduction for depreciation. In calculating the amount of insurance to require, the lender and borrower (either by themselves or in consultation with the flood insurance provider or other appropriate professional) may choose from a variety of approaches or methods to establish the insurable value. They may use an appraisal based on a cost-value (not market-value) approach, a construction-cost calculation, the insurable value used on a hazard insurance policy (recognizing that the insurable value for flood insurance purposes may differ from the coverage provided by the hazard insurance and that adjustments may be necessary), the replacement cost value listed on the flood insurance policy declarations page, or any other reasonable approach, so long as it can be supported.”
Amount 8
Clarifies that a lender can require more flood insurance coverage than is required by the regulation; however, the financial institution should “assist the borrower in avoiding paying for coverage that exceeds the amount the insured would recover in the event of a loss.”
Construction 5
Clarifies that the 30-day waiting period for insurance applies when a construction loan borrower does not obtain flood insurance at the time of making, increasing, renewing, or extending the loan.
Other Security Interests 7
Clarifies that the amount of contents coverage must be reasonable based on the contents and the collateral value of the loan. An example is given in the Q&A which limits flood insurance based on maximums but also takes into account the estimates of values of contents.
Other Security Interests 12
Clarifies that loans with personal guarantees that are secured by real estate located in a flood zone are subject to the flood requirements.
On May 31, 2022, all five federal agencies issued a revised Interagency Questions and Answers Regarding Flood Insurance. The Question & Answer Guidance is largely a context reorganization of the July 2020 proposed guidance and the March 2021 proposed guidance to make it easier for the compliance community to research topics regarding flood insurance requirements. The new Question & Answer Guidance supersedes the 2009 and 2011 guidance. For more information, please refer to the officer Federal Register entry at:
https://www.federalregister.gov/documents/2022/05/31/2022-10414/loans-in-areas-having-special-flood-hazards-interagency-questions-and-answers-regarding-flood
Some noteworthy responses have been identified and are noted below; however, full detail is located in the Question & Answer Guidance.
Applicability 6
The Agencies clarified whether modifications due to Covid repayment ability trigger a MIRE event subject to the flood rules. Under the revised Q&A, “if a loan modification or restructuring involves recapitalizing delinquent payments and other amounts due under the loan, or amounts that were otherwise originally contemplated to be part of the loan pursuant to the contract with the borrower, into the loan’s outstanding principal balance and the maturity date of the loan otherwise stays the same, the Regulation would not apply because the modification or restructuring would not increase, extend, or renew the terms of the loan.”
Applicability 12
The Agencies clarified issues and cases where coverage under the NFIP is not available. Under the new Q&A the Agency noted that lenders may originate loans without flood insurance coverage but must comply with all other parts of the regulation. The Agency noted that there are other safety and soundness considerations and the option of obtaining private flood insurance is available. Additionally, the Agency expects flood insurance to be obtained, and if necessary, by force placement, once the NFIP coverage becomes available.
Applicability 14
The Agencies provided clarification on what, if any, portfolio-wide flood insurance policies meet the flood insurance purchase requirements. The Q&A states: “A lender may not rely on an insurance policy providing portfolio-wide coverage to meet the flood insurance purchase or force placement requirements if the policy only provides coverage to the lender (“single interest”). In contrast, lenders may purchase a master flood insurance policy that provides coverage for its entire portfolio and covers both the lender and the borrower (“dual interest”). Such policies provide coverage for the entire portfolio as well as individual coverage and include the issuance of an individual property policy or certificate after the required notice period.”
Exemptions 1
The flood Q&A offers three exemptions to obtaining flood insurance: 1) State-owned property covered under a policy of self-insurance satisfactory to the Administrator of FEMA; 2) loans where the original principal balance is less than $5,000 and the repayment term is one year or less; and 3) any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence.
Exemptions 3
Clarifies that even if the loan is secured by exempt structures that a flood determination must be pulled on that property.
Mandatory 4
The flood Q&A clarified that a lender is not required to accept a private flood insurance policy solely because the policy contains a compliance aid statement alone and may choose to make its own decision as to whether the policy meets the definition of private flood insurance.
Mandatory 6
Clarifies what additional due diligence needs to be conducted by the lender if the private flood insurance policy contains the compliance aid statement. The additional review conducted would need to include the adequacy of coverage review to determine if the amount of flood insurance covered by the policy is sufficient.
Discretionary 2
Clarifies the documentation requirements of discretionary acceptance. Under the new Q&A, the lender is required to document their conclusions in writing and consistent with general safety and soundness principles.
Discretionary 4
Provides “some” safety and soundness principles to determine if the private flood insurance policy provides sufficient coverage. These are enumerated as: “(1) a policy’s deductible is reasonable based on the borrower’s financial condition; (2) the insurer provides adequate notice of cancellation to the mortgagor and mortgagee to allow for timely force placement of flood insurance, if necessary; (3) the terms and conditions of the policy, with respect to payment per occurrence or per loss and aggregate limits, are adequate to protect the regulated lending institution’s interest in the collateral; (4) the flood insurance policy complies with applicable State insurance laws; and (5) the private insurance company has the financial solvency, strength, and ability to satisfy claims.”
SFHDF 4
Clarifies that a lender may rely on an old flood determination for the increase, renewal, or extension of a loan. However, if the lender makes multiple loans to the same borrower, the lender may rely on previous flood determinations so long as the previous determination is no more than 7 years old and there have been no map revisions or map updates.
Zone 1
Clarifies that an institution no longer needs to reconcile differences between flood zones found on a flood determination and a flood insurance policy. This is because the policies issued under FEMA’s Risk Rating 2.0 are no longer determined by the zone. The flood zone will also no longer appear on the declaration page of NFIP policies.
Zone 3
Clarifies that if a dispute arises between the borrower and the lender as to if a property is located in an area requiring flood insurance, the dispute should be resolved through FEMA.
Notice 2
The Agencies indicated that 10 days prior to closing is regarded as a reasonable time to provide the notice but states that the timing requirement must be sufficient in that the borrower has the opportunity to be aware of their responsibilities timely and has the opportunity to purchase flood insurance before completion of the loan transaction.
Amount 2
The Agencies included the definition of “insurable value.” According to the Q&A, “The insurable value of the building may generally be the same as 100 percent Replacement Cost Value (RCV), which is the cost to replace the building with the same kind of material and construction without deduction for depreciation. In calculating the amount of insurance to require, the lender and borrower (either by themselves or in consultation with the flood insurance provider or other appropriate professional) may choose from a variety of approaches or methods to establish the insurable value. They may use an appraisal based on a cost-value (not market-value) approach, a construction-cost calculation, the insurable value used on a hazard insurance policy (recognizing that the insurable value for flood insurance purposes may differ from the coverage provided by the hazard insurance and that adjustments may be necessary), the replacement cost value listed on the flood insurance policy declarations page, or any other reasonable approach, so long as it can be supported.”
Amount 8
Clarifies that a lender can require more flood insurance coverage than is required by the regulation; however, the financial institution should “assist the borrower in avoiding paying for coverage that exceeds the amount the insured would recover in the event of a loss.”
Construction 5
Clarifies that the 30-day waiting period for insurance applies when a construction loan borrower does not obtain flood insurance at the time of making, increasing, renewing, or extending the loan.
Other Security Interests 7
Clarifies that the amount of contents coverage must be reasonable based on the contents and the collateral value of the loan. An example is given in the Q&A which limits flood insurance based on maximums but also takes into account the estimates of values of contents.
Other Security Interests 12
Clarifies that loans with personal guarantees that are secured by real estate located in a flood zone are subject to the flood requirements.
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