Outline of Interagency Flood Requirements

SECTION 1 - Flood Insurance Requirements for Federally Regulated Lending Institutions

The agencies have written flood insurance regulations, which have been amended from time to time as discussed in the background section. Each agency maintains separate rules and examination authority over their respective regulation. The outline of flood insurance requirements presented below is not an official rule. Rather, it is an aggregation of the agencies’ rules. While the rules are substantively similar, it is important to review the regulations which are issued by a bank’s prudential regulator on an institution-by-institution basis. As such, in addition to the outline below, a link to each of the agencies’ regulations follows.

Outline of Interagency Flood Requirements

1. Purpose and Scope

a. The purpose of these rules is to implement the requirements of the National

Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129).

b. These rules generally apply to loans secured by buildings or mobile homes located or to be located in areas determined by the Administrator of the Federal Emergency

Management Agency to have special flood hazards. However, certain aspects related to required use of a standard flood hazard determination form and determination fees apply to loans secured by buildings or mobile homes, regardless of location.

NOTE 1

The reason for this is that even if a community does not participate in the NFIP, the lender must still determine whether a property is located in a SFHA. This means notification requirements still apply, and certain fee considerations still apply (for example, does bank charge a fee for pulling the determination form?).

Bank should also consider its loan policy with respect to nonparticipating communities. Despite nonparticipation, flood risk is still an important component of safety and soundness and underwriting the loan. For example, will bank still require private flood insurance even if it is not available through the NFIP? Additionally, bank should consider that federal agency lenders (FHA, SBA, and VA for example) and the GSEs will generally not guarantee or purchase any loans secured by property in a nonparticipating community.

2. Definitions

a. “Act” means the National Flood Insurance Act of 1968, as amended (42 U.S.C. 4001-4129).

b. “Administrator of FEMA” means the Administrator of the Federal Emergency

Management Agency.

c. “Building” means a walled and roofed structure, other than a gas or liquid storage tank, that is principally above ground and affixed to a permanent site, and a walled and roofed structure while in the course of construction, alteration, or repair.

d. “Community” means a State or a political subdivision of a State that has zoning and building code jurisdiction over a particular area having special flood hazards.

e. “Designated loan” means a loan secured by a building or mobile home that is located or to be located in a special flood hazard area in which flood insurance is available under the Act.

f. “Mobile home” means a structure, transportable in one or more sections, that is built on a permanent chassis and designed for use with or without a permanent foundation when attached to the required utilities. The term mobile home does not include a recreational vehicle. For purposes of this part, the term mobile home means a mobile home on a permanent foundation. The term mobile home includes a manufactured home as that term is used in the NFIP.

g. “Mutual aid society” means an organization: i. Whose members share a common religious, charitable, educational, or fraternal bond,

ii. That covers losses caused by damage to members' property pursuant to an agreement, including damage caused by flooding, in accordance with this common bond, and

iii. That has a demonstrated history of fulfilling the terms of agreements to cover losses to members' property caused by flooding.

h. “NFIP” means the National Flood Insurance Program authorized under the Act.

i. “Private flood insurance” means an insurance policy that:

i. Is issued by an insurance company that is:

1. Licensed, admitted, or 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, or

2. Recognized, or not disapproved, as a surplus lines insurer by the insurance regulator of the State or jurisdiction in which the property to be insured is located in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property,

ii. Provides flood insurance coverage that is at least as broad as the coverage provided under an SFIP for the same type of property, including when considering deductibles, exclusions, and conditions offered by the

insurer. To be at least as broad as the coverage provided under an SFIP, the policy must, at a minimum:

1. Define the term “flood” to include the events defined as a “flood” in an SFIP,

2. Contain the coverage specified in an SFIP, including that relating to building property coverage, personal property coverage, if purchased by the insured mortgagor(s), other coverages, and increased cost of compliance coverage,

3. Contain deductibles no higher than the specified maximum, and include similar non-applicability provisions, as under an SFIP, for any total policy coverage amount up to the maximum available under the NFIP at the time the policy is provided to the lender,

4. Provide coverage for direct physical loss caused by a flood and may only exclude other causes of loss that are excluded in an SFIP.

Any exclusions other than those in an SFIP may pertain only to coverage that is in addition to the amount and type of coverage that could be provided by an SFIP or have the effect of providing broader coverage to the policyholder, and

5. Not contain conditions that narrow the coverage provided in an

SFIP,

iii. Includes all of the following:

1. A requirement for the insurer to give written notice 45 days before cancellation or non-renewal of flood insurance coverage to:

a. The insured, and

b. The covered institution that made the designated loan secured by the property covered by the flood insurance, or the servicer acting on its behalf,

2. Information about the availability of flood insurance coverage under the NFIP,

3. A mortgage interest clause similar to the clause contained in an

SFIP, and

4. A provision requiring an insured to file suit not later than one year after the date of a written denial of all or part of a claim under the policy, and

iv. Contains cancellation provisions that are as restrictive as the provisions contained in an SFIP.

j. “Residential improved real estate” means real estate upon which a home or other residential building is located or to be located.

k. “Servicer” means the person responsible for:

i. Receiving any scheduled, periodic payments from a borrower under the terms of a loan, including amounts for taxes, insurance premiums, and other charges with respect to the property securing the loan, and ii. Making payments of principal and interest and any other payments from the amounts received from the borrower as may be required under the terms of the loan.

l. “SFIP” means a standard flood insurance policy issued under the NFIP in effect as of the date private flood insurance is provided to a covered institution.

m. “Special flood hazard area” means the land in the flood plain within a community having at least a one percent chance of flooding in any given year, as designated by the Administrator of FEMA.

n. “Table funding” means a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds.

3. Requirement to purchase flood insurance where available.

a. A covered institution shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the building or mobile home and any personal property that secures a loan and not the land itself.

NOTE 2

This is the beginning of coverage for the flood rules, which begins with whether bank extends credit secured by improved real estate or mobile homes. The terms “make, increase, extend, or renew” decide whether flood insurance is triggered and are commonly referred to as a MIRE event.

Generally, each insurable structure requires a separate insurance policy. Eligibility depends on structure type (ex: residential, industrial, commercial, condominiums, co-operative buildings, etc.). Certain structures (unimproved land and unaffixed mobile homes for example) are not eligible. The amount of flood insurance is then calculated based upon a “lesser of” test. While relatively simple, the test can become somewhat complicated because of the methods required to determine maximum limits, multiple properties, and contents. A calculator has been provided in addition to this toolkit to assist in making this calculation.

If a loan is purchased, sold, or the servicing rights are transferred, be sure to consult the agreement between institutions to understand which parties are obligated to meet flood insurance requirements.

b. Table funded loans.

i. A covered institution that acquires a loan from a mortgage broker or other entity through table funding shall be considered to be making a loan for the purpose of this part.

NOTE 3

In the typical table funding situation, the party providing the funding reviews and approves the credit standing of the borrower and issues a commitment to the broker or dealer to purchase the loan at the time the loan is originated. Frequently, all loan documentation and other statutorily mandated notices are supplied by the party providing the funding, rather than the broker or dealer. The funding party provides the original funding “at the table” when the broker or dealer and the borrower close the loan. Concurrent with the loan closing, the funding party acquires the loan from the broker or dealer.

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NOTE 3 continued…

For flood hazard determination purposes, the substance of the table funded transaction should control and the typical table funded transaction should be considered a loan made, rather than purchased, by the entity that actually supplies the funds. Regulated institutions that provide table funding to close loans originated by a mortgage broker or mobile home dealer will be considered to be “making” a loan for purposes of the flood insurance requirements.

Treating table funded loans as loans made by the funding entity need not result in duplication of flood hazard determinations and borrower notices. The funding entity may delegate to the broker or dealer originating the transaction the responsibility for fulfilling the flood insurance requirements or may otherwise divide the responsibilities with the broker or dealer.

ii. Private flood insurance

1. Mandatory acceptance.

a. A covered institution must accept private flood insurance in satisfaction of the flood insurance purchase requirement in paragraph (a) of this section if the policy meets the requirements for coverage in paragraph (a) of this section.

2. Compliance aid for mandatory acceptance.

NOTE 4

Mandatory acceptance means that bank must accept a private insurance policy to satisfy the flood insurance purchase requirement (upon a MIRE event) if the policy meets the definition of “private flood insurance.” The definition of private flood insurance is above and must meet the minimum coverage requirements that would otherwise be provided under an SFIP.

NOTE 5

a. A covered institution may determine that a policy meets the definition of private flood insurance without further review of the policy, if the following statement is included within the policy or as an endorsement to the policy: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”

3. Discretionary acceptance.

a. A covered institution may accept a flood insurance policy issued by a private insurer that is not issued under the

NFIP and that does not meet the definition of private flood insurance in satisfaction of the flood insurance purchase requirement if the policy:

i. Provides coverage in the amount required,

ii. Is issued by an insurer that is licensed, admitted, or 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, or in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property, is issued by a surplus lines insurer recognized, or not disapproved, by the insurance

Bank should look for the compliance aid when accepting private flood insurance policies, and should have, in its own policies, considerations for private policies which do not include the compliance aid statement. If the private flood insurance policy does not include the compliance aid statement, bank should ensure that it reviews the policy carefully for conformance with the minimum requirements. Remember that mandatory acceptance requires minimum coverage requirements equal under the SFIP.

Additional considerations for the compliance aid statement are covered in the interagency flood FAQs. The relevant FAQs have been provided in the last section of this toolkit.

regulator of the State or jurisdiction where the property to be insured is located,

iii. Covers both the mortgagor(s) and the mortgagee(s) as loss payees, except in the case of a policy that is provided by a condominium association, cooperative, homeowners association, or other applicable group and for which the premium is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense, and

iv. Provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the Covered institution documents its conclusion regarding sufficiency of the protection of the loan in writing.

4. Mutual aid societies. Notwithstanding the requirements for discretionary acceptance, a covered institution may accept a plan issued by a mutual aid society in satisfaction of the flood insurance purchase requirement if:

a. The agencies have determined that such plans qualify as flood insurance for purposes of the Act,

b. The plan provides coverage in the amount required,

c. The plan covers both the mortgagor(s) and the mortgagee(s) as loss payees, and

d. The plan provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the Covered institution documents its conclusion regarding sufficiency of the protection of the loan in writing.

NOTE 6

The starting point of mandatory acceptance is that bank must accept private policies which meet the definition of “private flood insurance.” However, pursuant to the above section 3, bank may choose to accept certain flood insurance policies that do not meet the definition of “private flood insurance” set forth in the regulation if the policy meets certain criteria. This concept is known as “discretionary acceptance.” Pursuant to above section 4, a regulated lending institution may also exercise its discretion to accept certain plans providing flood coverage issued by “mutual aid societies” provided that certain criteria are met.

Bank loan policy should address the conditions under which it is willing, if at all, to exercise discretionary acceptance. Some factors that a regulated lending institution could consider in determining whether a flood insurance policy provides sufficient protection of a loan include:

• whether the flood insurance policy’s deductibles are reasonable based on the borrower’s financial condition,

• whether the insurer provides adequate notice of cancellation to the mortgagor and mortgagee to ensure timely force placement of flood insurance, if necessary,

• whether the terms and conditions of the flood insurance 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,

• whether the flood insurance policy complies with applicable State insurance laws, and

• whether the private insurance company has the financial solvency, strength, and ability to satisfy claims.

In summary, bank must accept policies that meet the definition of “private flood insurance.” A bank may also, at its discretion, accept policies that do not meet that definition.

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A bank may encounter such policies based upon the desires of its customers. It may also encounter such policies in situations where flood insurance is not available under the NFIP. As a result, bank should have policies to ensure that it is able to properly review policies to determine whether they meet the definition of “private flood insurance.” If such policies do not meet that definition, bank should have policies in place to determine whether it will exercise its discretionary acceptance.

4. Exemptions.

a. The flood insurance requirement does not apply with respect to:

i. Any state-owned property covered under a policy of self-insurance satisfactory to the Administrator of FEMA, who publishes and periodically revises the list of states falling within this exemption,

ii. Property securing any loan with an original principal balance of $5,000 or less and a repayment term of one year or less, or

iii. Any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence. For purposes of this paragraph:

1. “A structure that is a part of a residential property” is a structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes,

2. A structure is “detached” from the primary residential structure if it is not joined by any structural connection to that structure, and

3. “Serve as a residence” shall be based upon the good faith determination of the Covered institution that the structure is intended for use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities.

NOTE 7

There are three exemptions to the flood insurance requirements. The third exemption, known as the “detached structure” exemption, applies to any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence. In order to meet this exemption, the structure must be part of a residential property, detached, and not serve as a residence.

In order to be part of a residential property, it must be used primarily for personal, family, or household purposes. For example, a warehouse for commercial storage would not count.

Whether the structure serves as a residence depends upon a good faith determination that the structure is intended for residential use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities, but not necessarily all three.

For example, a small toolshed detached from a residential structure which only houses gardening implements could meet this exemption. On the other hand, perhaps a borrower owns land with a cabin associated with multiple structures. One such structure is a garage which also includes a bed, or a sink, or a shower, or perhaps all three. Because these aspects could facilitate the structures use as a residence, it might not qualify for the exemption.

Bank must determine whether a structure is “detached” based upon these considerations, on a case-by-case basis.

5. Escrow requirement.

a. In general –

i. Applicability. Except as provided in paragraphs (a)(ii) or (c) of this section, a covered institution, or a servicer acting on its behalf, shall require the escrow of all premiums and fees for any flood insurance required for any designated loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after January 1, 2016, payable with the same frequency as payments on the designated loan are required to be made for the duration of the loan.

ii. Exceptions. Paragraph (a)(i) of this section does not apply if:

1. The loan is an extension of credit primarily for business, commercial, or agricultural purposes,

2. The loan is in a subordinate position to a senior lien secured by the same residential improved real estate or mobile home for which the borrower has obtained flood insurance coverage that meets the purchase requirements.

3. Flood insurance coverage for the residential improved real estate or mobile home is provided by a policy that:

a. Meets the purchase requirements,

b. Is provided by a condominium association, cooperative, homeowners association, or other applicable group, and

c. The premium for which is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense,

4. The loan is a home equity line of credit,

5. The loan is a nonperforming loan, which is a loan that is 90 or more days past due and remains nonperforming until it is permanently modified or until the entire amount past due, including principal, accrued interest, and penalty interest incurred as the result of past due status, is collected or otherwise discharged in full, or

6. The loan has a term of not longer than 12 months.

iii. Duration of exception. If an covered institution, or a servicer acting on its behalf, determines at any time during the term of a designated loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after January 1, 2016, that an exception under paragraph (a)(ii) of this section does not apply, then the Covered institution or its servicer shall require the escrow of all premiums and fees for any flood insurance required as soon as reasonably practicable and, if applicable, shall provide any disclosure required under section 10 of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2609) (RESPA).

iv. Escrow account. The covered institution, or a servicer acting on its behalf, shall deposit the flood insurance premiums and fees on behalf of the borrower in an escrow account. This escrow account will be subject to escrow requirements adopted pursuant to section 10 of RESPA, which generally limits the amount that may be maintained in escrow accounts for certain types of loans and requires escrow account statements for those accounts, only if the loan is otherwise subject to RESPA. Following receipt of a notice from the Administrator of FEMA or other provider of flood insurance that premiums are due, the Covered institution, or a servicer acting on its behalf, shall pay the amount owed to the insurance provider from the escrow account by the date when such premiums are due.

b. Notice. For any loan for which a covered institution is required to escrow under paragraph (a) or paragraph (c)(ii) of this section or may be required to escrow under paragraph (a)(iii) of this section during the term of the loan, the covered institution, or a servicer acting on its behalf, shall mail or deliver a written notice with the notice provided informing the borrower that the Covered institution is required to escrow all premiums and fees for required flood insurance, using language that is substantially similar to model clauses on the escrow requirement in appendix A.

c. Small lender exception.

i. Qualification. Except as may be required under applicable State law, paragraphs (i), (ii) and (iv) of this section do not apply to a covered institution:

1. That has total assets of less than $1 billion as of December 31 of either of the two prior calendar years, and

2. On or before July 6, 2012:

a. Was not required under Federal or State law to deposit taxes, insurance premiums, fees, or any other charges in an escrow account for the entire term of any loan secured by residential improved real estate or a mobile home, and

NOTE 8

If required to provide notice, bank should also consider how it confirms receipt of notice.

NOTE 9

b. Did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or any other charges in an escrow account for any loans secured by residential improved real estate or a mobile home.

ii. Change in status. If a covered institution previously qualified for the exception in paragraph (c)(i) of this section, but no longer qualifies for the exception because it had assets of $1 billion or more for two consecutive calendar year ends, the covered institution must escrow premiums and fees for flood insurance pursuant to paragraph (a) for any designated loan made, increased, extended, or renewed on or after July 1 of the first calendar year of changed status.

d. Option to escrow.

i. In general. A covered institution, or a servicer acting on its behalf, shall offer and make available to the borrower the option to escrow all premiums and fees for any flood insurance required for any loan secured by residential improved real estate or a mobile home that is outstanding on January 1, 2016, or July 1 of the first calendar year in which the covered institution has had a change in status pursuant to paragraph (c)(ii) of this section, unless:

1. The loan or the covered institution qualifies for an exception from the escrow requirement under paragraphs (a)(ii) or (c) of this section, respectively,

2. The borrower is already escrowing all premiums and fees for flood insurance for the loan, or

3. The covered institution is required to escrow flood insurance premiums and fees pursuant to paragraph (a) of this section.

In order to qualify for the small lender exception, bank must not have a policy of “consistently and uniformly” requiring any charges in an escrow account. It doesn’t matter why bank requires an escrow account, only that it does. For example, if bank requires escrow for PMI, it does not qualify for the exception.

ii. Notice. For any loan subject to paragraph (d) of this section, the covered institution, or a servicer acting on its behalf, shall mail or deliver to the borrower no later than June 30, 2016, or September 30 of the first calendar year in which the Covered institution has had a change in status pursuant to paragraph (c)(2) of this section, a notice in writing, or if the borrower agrees, electronically, informing the borrower of the option to escrow all premiums and fees for any required flood insurance and the method(s) by which the borrower may request the escrow, using language similar to the model clause in appendix B to this part.

iii. Timing. The covered institution or servicer must begin escrowing premiums and fees for flood insurance as soon as reasonably practicable after the Covered institution or servicer receives the borrower's request to escrow.

6. Required use of standard flood hazard determination form.

a. Use of form. A covered institution shall use the standard flood hazard determination form developed by the Administrator of FEMA when determining whether the building or mobile home offered as collateral security for a loan is or will be located in a special flood hazard area in which flood insurance is available under the Act. The standard flood hazard determination form may be used in a printed, computerized, or electronic manner. A covered institution may obtain the standard flood hazard determination form from FEMA's Web site at www.fema.gov.

b. Retention of form. A covered institution shall retain a copy of the completed standard flood hazard determination form, in either hard copy or electronic form, for the period of time the Covered institution owns the loan.

NOTE 10

In summary, the flood rules require escrow for flood insurance premiums and fees for designated loans secured by residential improved real estate or a mobile home made, increased, renewed, or extended on or after January 1, 2016. In addition, bank must offer and make available the option to escrow for flood insurance premiums and fees to borrowers with designated loans secured by residential improved real estate or a mobile home outstanding as of January 1, 2016. The escrow provisions are designed to improve compliance with flood insurance requirements by ensuring that borrowers with designated loans secured by residential improved real estate or a mobile home set aside funds to maintain flood insurance for the life of the loan.

NOTE 11

The standard flood hazard determination form (SFHDF) is required for all covered loans and is used by lenders to determine the flood risk for their building loans. Because of this, the SFHSDF (often referred to as just “flood determination form” or just “flood certification”) is featured in all of the checklists. The following discussion is designed to help understand the SFHDF.

The SFHDF is authorized by the National Flood Insurance Reform Act of 1994. FEMA oversees the National Flood Insurance Program which makes federally administered flood insurance available throughout the United States and is responsible for development, updates, and making the form available to users.

An institution can use a printed, computerized, or electronic form. It must retain a copy of the completed form, in either hard copy or electronic format, for the life of the loan. FEMA has stated that if an electronic format is used, the format and exact layout of the SFHDF is not required, but the fields and elements listed on the form are required. Accordingly, any electronic format used by an institution must contain all mandatory fields indicated on the SFHDF.

FEMA uses the most accurate flood hazard information available and applies rigorous standards in developing Flood Insurance Rate Maps (FIRMs). However, because of limitations of scale or topographic definition of the source maps used to prepare a FIRM, small areas may be inadvertently shown within a SFHA even though the property is on natural ground and is at or above the elevation of the one-percent-annual-chance flood. This elevation is most commonly referred to as the Base Flood Elevation. Such cases are referred to as "inadvertent inclusions." A flood map will occasionally show a property as being in an SFHA, even though the building on the property is actually above the base flood elevation. To resolve such a situation, a property owner can submit elevation materials with a request to FEMA for a Letter of Map Amendment (LOMA) to remove the property from the SFHA.

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A Letter of Map Revision (LOMR) is appropriate when physical changes are necessary to raise the land above the base flood elevation 100-year flood level. For example, a LOMR request is appropriate when a property, located within a SFHA, is graded and filled to raise the level of the land above the base flood elevation 100-year flood level. The request for a LOMR must be initiated and approved by the community since changes in land level may affect other property owners. Community approval also confirms that the change in the land has been reviewed and is compatible with the community’s planning.

After obtaining a LOMA or LOMR, the borrower must submit it to the lender before the flood insurance requirement is waived. The lender has the discretion to continue to require flood insurance if the lender determines that it is prudent to do so. Decisions as to the applicability of flood insurance may not be based on the lender’s unilateral determination of elevations at which floods may occur. Official elevation determinations and, therefore, map revisions or amendments, LOMR or LOMA may be performed only by FEMA.

Additionally, the lender and borrower may jointly appeal FEMA's determination. In this case, FEMA will issue a letter of determination review (LODR) on whether a building is in a SFHA. A LODR deals only with the location of a building relative to the SFHA boundary shown on the Flood Insurance Rate Map.

If using a third-party to prepare flood determinations, bank should consider how the work is reviewed. For example, what is their process for disputing determinations? What agreements, if any, are there allocating responsibility for compliance? Are the determinations developed and authorized by FEMA?

Bank should also consider how long it will keep a record of flood determinations. Records should be kept, at a minimum, for life of loan. Records may be kept in hard copy or electronic form.

Bank may rely on prior flood determinations under certain circumstances. Generally, the previous determination must not be more than seven years old, and the basis for the previous determination must be recorded on the SFHDF.

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Bank should consider whether it charges a fee for pulling determiniations. If so, it should consider the authority it relies upon to charge a fee, such as contractual language. This should cover when and how the fee is charged. For example, upon occurrence of a MIRE? Remapping? Force placement? All aspects should be considered.

Lastly, bank should ensure that if it charges a fee, it is reasonable, and charged on a consistent basis.

7. Force placement of flood insurance.

a. Notice and purchase of coverage. If a covered institution, or a servicer acting on its behalf, determines at any time during the term of a designated loan, that the building or mobile home and any personal property securing the designated loan is not covered by flood insurance or is covered by flood insurance in an amount less than the amount required, then the Covered institution or its servicer shall notify the borrower that the borrower should obtain flood insurance, at the borrower's expense, in an amount at least equal to the amount required, for the remaining term of the loan. If the borrower fails to obtain flood insurance within 45 days after notification, then the Covered institution or its servicer shall purchase insurance on the borrower's behalf. The Covered institution or its servicer may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance, including premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount.

b. Termination of force-placed insurance.

i. Termination and refund. Within 30 days of receipt by a covered institution, or a servicer acting on its behalf, of a confirmation of a borrower's existing flood insurance coverage, the Covered institution or its servicer shall:

1. Notify the insurance provider to terminate any insurance purchased by the Covered institution or its servicer under paragraph (a) of this section, and

2. Refund to the borrower all premiums paid by the borrower for any insurance purchased by the Covered institution or its servicer under paragraph (a) of this section during any period during which the borrower's flood insurance coverage and the insurance

coverage purchased by the Covered institution or its servicer were each in effect, and any related fees charged to the borrower with respect to the insurance purchased by the Covered institution or its servicer during such period.

ii. Sufficiency of demonstration. For purposes of confirming a borrower's existing flood insurance coverage under paragraph (b) of this section, a covered institution or its servicer shall accept from the borrower an insurance policy declarations page that includes the existing flood insurance policy number and the identity of, and contact information for, the insurance company or agent.

NOTE 12

In summary, the flood rules require that, if at any time during the term of a designated loan, the building or mobile home and any personal property securing the designated loan is not covered by an adequate amount of flood insurance, then bank shall notify the borrower. If the borrower fails to obtain flood insurance within 45 days after notification, then the bank must purchase insurance on the borrower’s behalf. As a result, bank should have appropriate policies and procedures in place to exercise force placement authority where necessary.

The components of force placement are:

• Determining that flood insurance coverage is less than what is required by the FDPA,

• Written notice to the borrower,

• If insurance is not purchased within 45 days from written notice, force placement.

Bank may also charge the borrower for the cost of premiums and fees incurred in purchasing the insurance, including premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount. However, if the borrower later purchases adequate flood insurance, then within 30 days, the borrower must:

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NOTE 12 continued…

• Notify the insurance provider to terminate the existing forceplaced insurance, and

• Refund to the borrower all force-placed insurance premiums and any fees paid for by the borrower during any period of overlap between the borrower’s policy and the force-placed policy.

8. Determination fees.

a. General. Notwithstanding any Federal or State law other than the Flood Disaster

Protection Act of 1973, as amended (42 U.S.C. 4001-4129), any Covered institution, or a servicer acting on its behalf, may charge a reasonable fee for determining whether the building or mobile home securing the loan is located or will be located in a special flood hazard area. A determination fee may also include, but is not limited to, a fee for life-of-loan monitoring. b. Borrower fee. The determination fee authorized by paragraph (a) of this section may be charged to the borrower if the determination:

i. Is made in connection with a making, increasing, extending, or renewing of the loan that is initiated by the borrower,

ii. Reflects the Administrator of FEMA's revision or updating of floodplain areas or flood-risk zones,

iii. Reflects the Administrator of FEMA's publication of a notice or compendium that:

1. Affects the area in which the building or mobile home securing the loan is located, or

2. By determination of the Administrator of FEMA, may reasonably require a determination whether the building or mobile home securing the loan is located in a special flood hazard area, or

iv. Results in the purchase of flood insurance coverage by the lender or its servicer on behalf of the borrower.

c. Purchaser or transferee fee. The determination fee authorized by paragraph (a) of this section may be charged to the purchaser or transferee of a loan in the case of the sale or transfer of the loan.

NOTE 13

In summary, the regulations permit an institution or its servicer to charge a reasonable fee to the borrower for the costs of making a flood hazard determination under the following circumstances:

• The borrower initiates a transaction (making, increasing, extending, or renewing a loan) that triggers a flood hazard determination,

• There is a revision or updating of floodplain areas or risk zones by

FEMA,

• The determination is due to FEMA’s publication of a notice that affects the area in which the loan is located, or

• The determination results in the purchase of flood insurance under the force placement provision.

The loan agreement or other contractual documents between the parties may also permit the imposition of fees. The authority to charge a borrower a reasonable fee for a flood hazard determination extends to a fee for life-of-loan monitoring by either the institution, its servicer, or by a third party, such as a flood hazard determination company

9. Notice of special flood hazards and availability of Federal disaster relief assistance.

a. Notice requirement. When a covered institution makes, increases, extends, or renews a loan secured by a building or a mobile home located or to be located in a special flood hazard area, the Covered institution shall mail or deliver a written notice to the borrower and to the servicer in all cases whether or not flood insurance is available under the Act for the collateral securing the loan.

b. Contents of notice. The written notice must include the following information:

i. A warning, in a form approved by the Administrator of FEMA, that the building or the mobile home is or will be located in a special flood hazard area,

ii. A description of the flood insurance purchase requirements set forth in section 102(b) of the Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4012a(b)),

iii. A statement, where applicable, that flood insurance coverage is available from private insurance companies that issue standard flood insurance policies on behalf of the NFIP or directly from the NFIP,

iv. A statement that flood insurance that provides the same level of coverage as a standard flood insurance policy under the NFIP may also be available from a private insurance company that issues policies on behalf of the company.

v. A statement that the borrower is encouraged to compare the flood insurance coverage, deductibles, exclusions, conditions, and premiums associated with flood insurance policies issued on behalf of the NFIP and policies issued on behalf of private insurance companies and that the borrower should direct inquiries regarding the availability, cost, and comparisons of flood insurance coverage to an insurance agent, and

vi. A statement whether Federal disaster relief assistance may be available in the event of damage to the building or mobile home caused by flooding in a Federally declared disaster.

c. Timing of notice. The Covered institution shall provide the notice required by paragraph (a) of this section to the borrower within a reasonable time before the completion of the transaction, and to the servicer as promptly as practicable after the Covered institution provides notice to the borrower and in any event no later than the time the Covered institution provides other similar notices to the servicer concerning hazard insurance and taxes. Notice to the servicer may be made electronically or may take the form of a copy of the notice to the borrower.

d. Record of receipt. The Covered institution shall retain a record of the receipt of the notices by the borrower and the servicer for the period of time the Covered institution owns the loan.

e. Alternate method of notice. Instead of providing the notice to the borrower required by paragraph (a) of this section, a covered institution may obtain satisfactory written assurance from a seller or lessor that, within a reasonable time before the completion of the sale or lease transaction, the seller or lessor has provided such notice to the purchaser or lessee. The Covered institution shall retain a record of the written assurance from the seller or lessor for the period of time the Covered institution owns the loan.