Alert April 01, 2008

Federal Financial Institutions Regulatory Agencies Release Proposed Revisions to Interagency Flood Insurance Questions and Answers

The FRB, FDIC, OCC, OTS, NCUA and Farm Credit Administration (the “Agencies”) released for comment new and revised interagency questions and answers regarding flood insurance (the “Proposed Q&A’s”).  The current Interagency Questions and Answers regarding Flood Insurance were published in 1997 under the auspices of the Federal Financial Institutions Examination Council and have not been revised since that time.  The Agencies propose to add a new section to address more specific circumstances that a lender may encounter when deciding whether a loan should be a designated loan for the purposes of flood insurance.  The proposed changes also provide guidance as to how lenders should determine the appropriate amount of flood insurance to require a borrower to purchase.  The Proposed Q&A’s include a discussion of the maximum limit of coverage available for particular types of property and clarify that a lender can require more flood insurance than the minimum amount required by the current final regulations of each agency.

The Proposed Q&A’s include substantive modifications to the questions and answers pertaining to construction loans and condominiums such as:

  • Addressing the eligibility for flood insurance of buildings in the course of construction and the timing of when flood insurance must be purchased for such buildings; 
  • Addressing that the flood insurance requirements for residential condominium units are the lesser of the outstanding balance of the loan or the maximum amount of coverage available under the National Flood Insurance Program; 
  • Clarifying what a lender must require of a borrower if the outstanding principal balance of the loan is greater than the maximum amount of coverage available; 
  • Affirming that the mandatory flood insurance requirements apply to loans secured by individual residential condominium units, and;
  • Addressing a lender’s options when a loan secured by a residential condominium is in a multi-unit complex whose condominium association does not obtain or maintain the required amount of flood insurance. 
The Agencies are further proposing new questions and answers in a number of areas, including second lien mortgages, the imposition of civil money penalties, and loan syndications and participations.  The Proposed Q&A’s would explain that, with respect to loan syndications and participations, individual participating lenders are responsible for ensuring compliance with flood insurance requirements.  Finally, the Agencies propose to revise and reorganize certain existing questions and answers to clarify areas of potential misunderstanding and to provide clearer guidance.  Comments on the Proposed Q&A’s are due May 20, 2008.