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CUNA Regulatory Comment Call

April 8, 2008

• NCUA and the other financial institution regulators are in the process of updating the interagency questions and answers regarding flood insurance (Q&As) that were originally published in 1997, and the agencies are requesting public comments as part of this process. The Q&As are intended to serve as guidance on flood insurance requirements for financial institutions, agency personnel, and the public.
• The Q&As are being updated in response to issues that have been brought to the attention of the agencies since they were originally published in 1997. The proposed changes include new questions and answers in a number of areas, including second lien mortgages, civil money penalties, loan participations, construction loans, and condominiums. In addition to addressing new areas, the proposed changes are also intended to provide clearer guidance, including clarifying areas of potential misunderstanding.
• Comments are due by May 20, 2008. Please submit your comments to CUNA by May 12, 2008.

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at mdunn@cuna.coop and to Senior Assistant General Counsel Jeff Bloch at jbloch@cuna.coop; or mail them to Mary and Jeff c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6732, if you would like a copy of the Q&As. You may also access it here.

BACKGROUND

The National Flood Insurance Reform Act of 1994 (Act) comprehensively revised the flood insurance laws. NCUA and the other federal financial institution regulators issued a joint final rule in 1996 to implement the Act. These agencies then decided to issue additional guidance, resulting in the Q&As that were published in 1997. The agencies have now proposed revisions to the Q&As and are requesting comment before finalizing these changes.

DESCRIPTION OF THE CHANGES TO THE Q&As

Here are the significant changes to the Q&As that are being proposed:

• Description of more specific circumstances in which flood insurance would be required.
• Explanation that if a Federal Emergency Management Agency (FEMA) map change removes a building from a flood zone, the lender does not have to continue requiring flood insurance, but has the option to require flood insurance for risk management purposes.
• The lender may, but is not required, to review existing loans on a periodic basis to determine if there is adequate flood insurance.
• More guidance to determine the proper amount of flood insurance that the borrower should be required to purchase and the proper deductible. This would also include additional guidance on the maximum limit of coverage that is available for a particular type of property in a flood zone and would clarify that lenders may require more than the minimum required coverage.
• Additional guidance on the mandatory flood insurance requirements for construction loans that are used to erect buildings that will be located in a flood zone and clarification that raw land located in a flood zone does not require flood insurance. Lenders must make the flood determination prior to the origination of the construction loan. Insurance may be purchased at that time or the lender may permit borrowers defer the purchase until the foundation has been poured and/or the elevation certificate has been issued. The required 30-day waiting period would not apply if the purchase of the insurance is deferred.
• Additional guidance on flood insurance requirements for agricultural buildings and clarification that the only buildings requiring flood insurance would be those within the flood zone.
• Clarification that the amount of flood insurance required for a condominium in a flood zone would be the lesser of the outstanding principal balance of the loan or the maximum amount of coverage available under the flood insurance program. The lender must require additional insurance if the balance of the loan is higher than the maximum amount of available flood insurance, which could either be an individual owner’s policy or a general condominium policy. The lender must force-place the flood insurance if adequate insurance is not purchased within 45 days after the lender sends notification that there is inadequate insurance on the property. These revisions also clarify the penalties if there is inadequate flood insurance. The revised guidance for condominiums will apply to existing loans as of the first flood insurance policy renewal period that follows the effective date of these proposed revisions to the Q&As.
• Clarification that with respect to loan syndications and participations, individual participating lenders are responsible for complying with the flood insurance requirements. This does not mean the individual lenders have to undertake the necessary actions, but must perform due diligence to ensure that the lead lender and agent are taking the necessary actions to ensure compliance.
• Although gap or blanket insurance policies are not an adequate substitute for flood insurance, they may be appropriate if flood insurance or other private policies are unavailable.
• Additional guidance on how lenders should respond if confronted with a discrepancy between the flood insurance zone designations on the hazard determination form and the flood insurance policy. This also addresses the circumstances in which there may be a finding that the lender violated the flood insurance requirements.
• Clarification that the Notice of Special Flood Hazards must be provided to the borrower each time a loan is made, increased, extended, or renewed, even if a new determination is not required.
• Additional information about the civil money penalties that may be assessed, including the circumstances in which they may be assessed and the maximum penalty amounts.

• Do the revised Q&As provide sufficient guidance for complying with the flood insurance requirements? Are there other issues that the Q&As should cover?
  
  

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• Other comments?
  
  

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