[Federal Register: March 21, 2008 (Volume 73, Number 56)] [Notices] [Page 15259-15278] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr21mr08-133] ----------------------------------------------------------------------- DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency [Docket ID OCC-2008-0002] FEDERAL RESERVE SYSTEM [Docket No. OP-1311] FEDERAL DEPOSIT INSURANCE CORPORATION RIN 3064-ZA00 DEPARTMENT OF THE TREASURY Office of Thrift Supervision [Docket ID OTS-2008-0001] FARM CREDIT ADMINISTRATION RIN 3052-AC46 NATIONAL CREDIT UNION ADMINISTRATION RIN 3133-AD41 Loans in Areas Having Special Flood Hazards; Interagency Questions and Answers Regarding Flood Insurance AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury (OTS); Farm Credit Administration (FCA); National Credit Union Administration (NCUA). ACTION: Notice and request for comment. ----------------------------------------------------------------------- SUMMARY: The OCC, Board, FDIC, OTS, FCA, and NCUA (collectively, the Agencies) are soliciting comment on proposed revisions to the Interagency Questions and Answers Regarding Flood Insurance (Interagency Questions and Answers). To help financial institutions meet their responsibilities under Federal flood insurance legislation and to increase public understanding of their flood insurance regulations, the staffs of the Agencies have prepared proposed new and revised guidance addressing the most frequently asked questions and answers about flood insurance. The proposed revised Interagency Questions and Answers contain staff guidance for agency personnel, financial institutions, and the public. DATE: Comments must be submitted on or before May 20, 2008. ADDRESSES: OCC: Because paper mail in the Washington, DC area and at the Agencies is subject to delay, commenters are encouraged to submit comments by e-mail, if possible. Please use the title ``Loans in Areas Having Special Flood Hazards; Interagency Questions and Answers Regarding Flood Insurance'' to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods: E-mail: regs.comments@occ.treas.gov. Mail: Office of the Comptroller of the Currency, 250 E Street, SW., Mail Stop 1-5, Washington, DC 20219. Fax: (202) 874-4448. Hand Delivery/Courier: 250 E Street, SW., Attn: Public Information Room, Mail Stop 1-5, Washington, DC 20219. Instructions: You must include ``OCC'' as the agency name and ``Docket ID OCC-2008-0002'' in your comment. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not enclose any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure. You may review comments and other related materials that pertain to this notice by any of the following methods: Viewing Comments Personally: You may personally inspect and photocopy comments at the OCC's Public Information Room, 250 E Street, SW., Washington, DC. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 874-5043. Upon arrival, visitors will be required to present valid government-issued photo identification and submit to security screening in order to inspect and photocopy comments. Docket: You may also view or request available background documents and project summaries using the methods described above. Board: You may submit comments, identified by Docket No. OP-1311, by any of the following methods: Agency Web Site: http://www.federalreserve.gov. Follow the instructions for submitting comments at http://www.federalreserve.gov/ generalinfo/foia/ProposedRegs.cfm. Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments. E-mail: regs.comments@federalreserve.gov. Include docket number in the subject line of the message. Fax: (202) 452-3819 or (202) 452-3102. Mail: Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551. All public comments are available from the Board's Web site at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons. Accordingly, your comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper in Room MP-500 of the Board's Martin Building (20th and C Streets, NW.) between 9 a.m. and 5 p.m. on weekdays. FDIC: You may submit comments, identified by RIN number 3064-ZA00 by any of the following methods: Agency Web site: http://www.fdic.gov/regulations/laws/ federal/propose.html. Follow instructions for submitting comments on the Agency Web Site. E-mail: Comments@FDIC.gov. Include the RIN number in the subject line of the message. Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429. Hand Delivery/Courier: Guard station at the rear of the 550 17th Street Building (located on F Street) on business days between 7 a.m. and 5 p.m. Instructions: All submissions received must include the agency name and RIN number. All comments received will be posted without change to http://www.fdic.gov/regulations/laws/federal/propose.html including any personal information provided. OTS: You may submit comments, identified by OTS-2007-0001, by any of the following methods: E-mail: regs.comments@ots.treas.gov. Please include ID OTS-2008-0001 in the subject line of the message and include your name and telephone number in the message. Fax: (202) 906-6518. Mail: Regulation Comments, Chief Counsel's Office, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, Attention: OTS-2008-0001. Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: Regulation [[Page 15260]] Comments, Chief Counsel's Office, Attention: OTS-2008-0001. Instructions: All submissions received must include the agency name and docket number for this rulemaking. All comments received will be entered into the docket and posted on Regulations.gov without change, including any personal information provided. Comments, including attachments and other supporting materials received are part of the public record and subject to public disclosure. Do not enclose any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure. Viewing Comments Electronically: OTS will post comments on the OTS Internet Site at http://www.ots.treas.gov/ pagehtml.cfm?catNumber=67&an=1. Viewing Comments On-Site: You may inspect comments at the Public Reading Room, 1700 G Street, NW., by appointment. To make an appointment for access, call (202) 906-5922, send an e-mail to public.info@ots.treas.gov, or send a facsimile transmission to (202) 906-6518. (Prior notice identifying the materials you will be requesting will assist us in serving you.) We schedule appointments on business days between 10 a.m. and 4 p.m. In most cases, appointments will be available the next business day following the date we receive a request. FCA: We offer a variety of methods for you to submit comments. For accuracy and efficiency reasons, we encourage commenters to submit comments by e-mail or through the Agency's Web site or the Federal eRulemaking Portal. You may also send comments by mail or by facsimile transmission. Regardless of the method you use, please do not submit your comment multiple times via different methods. You may submit comments by any of the following methods: E-mail: Send us an e-mail at regcomm@fca.gov. Agency Web Site: http://www.fca.gov. Once you are at the Web site, select ``Legal Info,'' then ``Pending Regulations and Notices.'' Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments. Mail: Gary K. Van Meter, Deputy Director, Office of Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090. Fax: (703) 883-4477. Posting and processing of faxes may be delayed. Please consider another means to comment, if possible. You may review copies of comments we receive at our office in McLean, Virginia, or from our Web site at http://www.fca.gov. Once you are in the Web site, select ``Legal Info,'' and then select ``Public Comments.'' We will show your comments as submitted, but for technical reasons we may omit items such as logos and special characters. Identifying information that you provide, such as phone numbers and addresses, will be publicly available. However, we will attempt to remove e-mail addresses to help reduce Internet spam. NCUA: You may submit comments by any of the following methods (Please send comments by one method only): Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments, NCUA Web Site: http://www.ncua.gov/ RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the instructions for submitting comments. E-mail: Address to regcomments@ncua.gov. Include ``[Your name] Comments on Flood Insurance, Interagency Questions & Answers'' in the e-mail subject line. Fax: (703) 518-6319. Use the subject line described above for e-mail. Mail: Address to Mary Rupp, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Hand Delivery/Courier: Same as mail address. Public Inspection: All public comments are available on the agency's Web site at http://www.ncua.gov/RegulationsOpinionsLaws/ comments as submitted, except as may not be possible for technical reasons. Public comments will not be edited to remove any identifying or contact information. Paper copies of comments may be inspected in NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, call (703) 518-6546 or send an e-mail to OGCMail@ncua.gov. FOR FURTHER INFORMATION CONTACT: OCC: Pamela Mount, National Bank Examiner, Compliance Policy, (202) 874-4428; or Margaret Hesse, Special Counsel, Community and Consumer Law Division, (202) 874-5750, Office of the Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219. Board: Vivian Wong, Senior Attorney, Division of Consumer and Community Affairs, (202) 452-2412; Anjanette Kichline, Senior Supervisory Consumer Financial Services Analyst, (202) 785-6054; or Brad Fleetwood, Senior Counsel, Legal Division, (202) 452-3721, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551. For the deaf, hard of hearing, and speech impaired only, teletypewriter (TTY), (202) 263- 4869. FDIC: Mira N. Marshall, Senior Policy Analyst (Compliance), Division of Supervision and Consumer Protection, (202) 898-3912; or Mark Mellon, Counsel, Legal Division, (202) 898-3884, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429. For the hearing impaired only, telecommunications device for the deaf (TDD): 800-925-4618. OTS: Ekita Mitchell, Consumer Regulations Analyst, (202) 906-6451; Glenn Gimble, Senior Project Manager, (202) 906-7158; or Richard S. Bennett, Senior Compliance Counsel, (202) 906-7409, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552. FCA: Mark L. Johansen, Senior Policy Analyst, Office of Regulatory Policy, (703) 993-4498; or Mary Alice Donner, Attorney Advisor, Office of General Counsel, (703) 883-4033, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090. For the hearing impaired only, TDD: (703) 883-4444. NCUA: Moisette I. Green, Staff Attorney, Office of General Counsel, (703) 518-6540, National Credit Union Administration, 1775 Duke Street, Alexandria, VA 22314-3428. SUPPLEMENTARY INFORMATION: Background The National Flood Insurance Reform Act of 1994 (the Reform Act) (Title V of the Riegle Community Development and Regulatory Improvement Act of 1994) comprehensively revised the two federal flood insurance statutes, the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973. The Reform Act required the OCC, Board, FDIC, OTS, and NCUA to revise their flood insurance regulations and required the FCA to promulgate flood insurance regulations for the first time. The OCC, Board, FDIC, OTS, NCUA, and FCA (collectively, ``the Agencies'') fulfilled these requirements by issuing a joint final rule in the summer of 1996. See 61 FR 45684 (August 29, 1996). In connection with the 1996 joint rulemaking process, the Agencies received a number of requests to clarify specific issues covering a wide spectrum of the proposed rule's provisions. Many of these requests were addressed in the preamble to the joint final rule. The Agencies concluded, however, that given the number, level of detail, and diversity of subject matter of [[Page 15261]] the requests for additional information, guidance addressing the more technical compliance issues would be helpful and appropriate. Consequently, the Agencies decided to issue guidance to address these technical issues subsequent to the promulgation of the final rule (61 FR at 45685-86). That objective was fulfilled by the initial release of the Interagency Questions and Answers in 1997 (1997 Interagency Questions and Answers) by the Federal Financial Institution Examination Council (FFIEC). 62 FR 39523 (July 23, 1997). In response to issues that have been brought to the attention of the Agencies in coordination with the Federal Emergency Management Agency (FEMA), the Agencies are releasing for public comment proposed revisions to the 1997 Interagency Questions and Answers.\1\ Among the changes the Agencies are proposing are the introduction of new questions and answers in a number of areas, including second lien mortgages, the imposition of civil money penalties, and loan syndications/participations. The Agencies are also proposing substantive modifications to questions and answers previously adopted in the 1997 Interagency Questions and Answers pertaining to construction loans and condominiums. Finally, the Agencies are proposing to revise and reorganize certain of the existing questions and answers to clarify areas of potential misunderstanding and to provide clearer guidance to users. It is the intention of the Agencies that after public comment has been received and considered, and the Interagency Questions and Answers have been adopted in final form, they will supersede the 1997 Interagency Questions and Answers and supplement other guidance or interpretations issued by the Agencies and FEMA. --------------------------------------------------------------------------- \1\ The proposed Interagency Questions and Answers have been prepared by staff from the OCC, Board, FDIC, OTS, NCUA and FCA in consultation with and with the assistance of the FFIEC pursuant to 12 U.S.C. 3305(g). --------------------------------------------------------------------------- For ease of reference, the following terms are used throughout this document: ``Act'' refers to the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as revised by the National Flood Insurance Reform Act of 1994 (codified at 42 U.S.C. 4001 et seq.). ``Regulation'' refers to each agency's current final rule.\2\ --------------------------------------------------------------------------- \2\ The Agencies' rules are codified at 2 CFR part 22 (OCC), 12 CFR part 208 (Board), 12 CFR part 339 (FDIC), 12 CFR part 572 (OTS), 12 CFR part 614 (FCA), and 12 CFR part 760 (NCUA). --------------------------------------------------------------------------- Section-by-Section Analysis Section I. Determining When Certain Loans Are Designated Loans for Which Flood Insurance Is Required Under the Act and Regulation The Agencies propose to eliminate current section I entitled ``Definitions'' and replace it with new proposed section I to address more specific circumstances a lender may encounter when deciding whether a loan should be a designated loan for purposes of flood insurance. The Agencies are proposing to move the questions and answers currently in section I into subsequent sections for better organization. Meanwhile, questions and answers currently in other sections of the 1997 Interagency Questions and Answers that deal with determining when a loan is a designated loan under the Act and Regulation would be included in new section I. Specifically, proposed question 1, which covers the applicability of the Regulation to a loan in a nonparticipating community, would be moved from current question 1 of section II. Further, the Agencies propose to move current question 2 of section II, discussing whether a loan is a designated loan when a lender purchases a whole loan, to question 3 of new section I. Current question 9 of section I, discussing whether a loan is a designated loan when a lender restructures a loan, would be moved to question 4 of this new section I, and proposed question 5, which addresses table funded loans, would be moved from question 3 of current section II. In addition, minor nonsubstantive changes have been made to these moved questions and answers to provide additional clarity. The Agencies are also proposing to add two new questions and answers to this section in response to questions the Agencies have received from lenders. Proposed new question 2 explains that, upon a FEMA map change that results in a building or mobile home securing a loan being removed from a special flood hazard area (SFHA), the lender no longer must require mandatory flood insurance; however, the lender may choose to continue to require flood insurance for risk management purposes. Proposed new question 6 explains that portfolio reviews of existing loans are not required by the Act or Regulation; however, sound risk management practices may lead a lender to conduct periodic reviews. These two new questions and answers are based on current guidance the Agencies have provided to lenders. Section II. Determining the Appropriate Amount of Flood Insurance Required Under the Act and Regulation Proposed section II would provide guidance on how lenders should determine the appropriate amount of flood insurance to require the borrower to purchase. The Agencies are proposing to retain existing questions 5 and 7 of section II in new section II and renumbering them as proposed questions 12 and 11, respectively. Although minor changes have been made to these two questions and answers for purposes of clarity, the changes are not substantive. Furthermore, part of the guidance currently provided in existing question 7 would be moved to proposed question 22 in section V, as discussed below. Proposed new question 7 would discuss what is meant by the ``maximum limit of coverage available for the particular type of property under the Act.'' This concept is important because the Regulation states that the amount of flood insurance required ``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.'' Proposed question 7 would introduce and define the insurance term, ``insurable value,'' as it relates to the determination of the maximum limit of coverage available under the Act. Proposed question 7 would also introduce the terms, ``residential building'' and ``nonresidential building.'' These terms would be more fully defined in proposed new questions 8 and 9 of this section, respectively. Proposed new question 10 would discuss how much flood insurance is required on a building located in an SFHA in a participating community. It would also provide an example showing how to calculate the amount of required flood insurance on a nonresidential building. Proposed new question 13 would clarify that a lender can require more flood insurance than the minimum required by the Regulation. The Regulation requires a minimum amount of flood insurance; however, lenders may require more coverage, if appropriate. Proposed new question 14 would address lender considerations regarding the amount of the deductible on a flood insurance policy purchased by a borrower. Generally, the guidance advises a lender to determine the reasonableness of the deductible on a case-by-case basis, taking into account [[Page 15262]] the risk that such a deductible would pose to the borrower and lender. Section III. Exemptions from the mandatory flood insurance requirements As with current section III, proposed section III would contain only one question and answer, which describes the statutory exemptions from the mandatory flood insurance requirements. Proposed question and answer 15 under section III would be revised to provide greater clarity, with no intended change in substance or meaning. Section IV. Flood insurance requirements for construction loans The Agencies are proposing a series of new and revised questions and answers to clarify the requirements regarding the mandatory purchase of flood insurance for construction loans to erect buildings that will be located in an SFHA. The Agencies believe that these questions and answers are necessary in light of recent concerns raised by some regulated lenders regarding borrowers' difficulties in obtaining flood insurance for construction loans at the time of loan origination. Existing question 2 in section I would be revised to provide greater clarity and would be moved to proposed question 16 under proposed section IV. The proposed answer to question 16 would revise the existing guidance to limit its scope and explain that a loan secured by raw land located in an SFHA is not a designated loan that would require flood insurance coverage. The remaining guidance currently in the answer to existing question 2 in section I would be discussed in subsequent questions and answers in section IV in the proposed document, as detailed below. Proposed question 17, derived from current question 1 in section I, would address whether a loan secured or to be secured by a building in the course of construction that is located or to be located in an SFHA in which flood insurance is available under the Act is a designated loan. The answer would provide that a lender must make a flood determination prior to loan origination for a construction loan. If the flood determination shows that the building securing the loan will be located in an SFHA, the lender must provide notice to the borrower, and must comply with the mandatory purchase requirements. Proposed question 18 would explain that, generally, a building in the course of construction is eligible for coverage under a National Flood Insurance Program (NFIP) policy, and that coverage may be purchased prior to the start of construction. Proposed question 19 would address the timing of when flood insurance must be purchased for buildings under the course of construction. The Act and Regulation provide that lenders may not make, increase, extend, or renew any loan secured by improved real estate or a mobile home that is located or to be located in an SFHA unless the building is covered by adequate flood insurance. One way for lenders to comply with the mandatory purchase requirement for a loan secured by a building in the course of construction that is located in an SFHA is to require borrowers to have a flood insurance policy in place at the time of loan origination. Recently, lenders have informed agency staff, however, that borrowers have been encountering difficulties in obtaining flood insurance for construction loans at the time of loan origination due to insurers' refusals to write policies on undeveloped land until either an elevation certificate has been issued for the structure or at least two walls and a roof for the building have been erected. The Agencies have also received reports that borrowers who are able to obtain flood insurance for construction loans at loan origination often pay the highest premiums possible because elevations for the insured property have not yet been established. To address these concerns, the Agencies, in the answer to proposed question 19, would provide lenders with flexibility regarding the timing of the mandatory purchase requirement for construction loans by permitting lenders to allow borrowers to defer the purchase of flood insurance until a foundation slab has been poured and/or an elevation certificate has been issued. Lenders, however, must require the borrower to have flood insurance in place before funds are disbursed to pay for building construction on the property securing the loan (except as necessary to pour the slab or perform preliminary site work). A lender who elects this approach and does not require flood insurance at loan origination must have adequate internal controls in place to ensure compliance. The Agencies also propose to add new question 20 to clarify whether the 30-day waiting period for an NFIP policy applies when the purchase of flood insurance is deferred in connection with a construction loan since there has been confusion among lenders on this issue in the past. Per guidance from FEMA, the answer would provide that the 30-day waiting period would not apply in such cases.\3\ The NFIP would rely on the insurance agent's representation that the exception applies unless a loss has occurred during the first 30 days of the policy period. --------------------------------------------------------------------------- \3\ FEMA, Mandatory Purchase of Flood Insurance Guidelines, (September 2007) at 30. FEMA has made available a new version of this booklet electronically at http://www.fema.gov/library/ viewRecord.do?id=2954. Hard copies are available by calling FEMA's Publication Warehouse at (800) 480-2520. --------------------------------------------------------------------------- Section V. Flood insurance requirements for agricultural buildings The Agencies are proposing a new section V to address the flood insurance requirements for agricultural buildings that are taken as security for a loan, but that have limited utility to a farming operation. The section would also address loans secured by multiple buildings where some buildings are located in a flood hazard area and some buildings are not. The proposed answer to new question 21 would explain that all buildings taken as security for a loan and located in an SFHA require flood insurance. Lenders have the option of carving a building from the security for a loan; however, the Agencies believe that it is typically inappropriate for credit risk management reasons to do so. The guidance in current question 7 under section II would be split between question 11 under proposed section II, as discussed above, and question 22 under proposed section V. The proposed answer to question 22 would explain that a lender is always required to determine whether a building securing a loan is located in an SFHA, but that only those buildings located in an SFHA and within a participating community are required to have flood insurance. Flood insurance need not be required on those properties that (1) are not located in a special flood hazard area (whether or not within a participating community) or (2) are located in a special flood hazard area that is not within a participating community. Section VI. Flood insurance requirements for residential condominiums For organizational purposes, the Agencies are proposing to consolidate questions and answers relating to the Regulation's flood insurance requirements for residential condominiums into a new section VI. In addition to modifying and expanding the two existing questions in the 1997 Interagency Questions and Answers on residential condominiums, the Agencies are proposing to add five additional [[Page 15263]] questions and answers to provide better clarity on the requirements. Proposed question and answer 24 would modify and expand current question 8 under section II to more completely address the Regulation's flood insurance requirements for residential condominium units. The proposed answer would first explain that the amount of flood insurance coverage on the condominium unit required by the Regulation is the lesser of the outstanding principal balance of the loan or the maximum amount of coverage available under the NFIP. The proposed answer would then explain that if the outstanding principal balance of the loan is greater than the maximum amount of coverage available under the NFIP, the lender must require a borrower whose loan is secured by a residential condominium unit to either: Ensure the condominium owners association has purchased an NFIP Residential Condominium Building Association Policy (RCBAP) covering either 100 percent of the insurable value (replacement cost) of the building, including amounts to repair or replace the foundation and its supporting structures, or an amount equal to the total number of units in the condominium building times $250,000, whichever is less; or Obtain an individual unit owner's dwelling policy in an amount sufficient to meet the Regulation's flood insurance requirements, if there is no RCBAP or the RCBAP coverage is less than either 100 percent of the insurable value (replacement cost) of the building or the amount equal to the total number of units in the condominium building times $250,000, whichever is less. The proposed answer revises and clarifies the current answer to question 8 under section II. The current answer provides that ``to meet federal flood insurance requirements, an RCBAP should be purchased in an amount of at least 80 percent of the replacement value of the building or the maximum amount available under the NFIP (currently $250,000 multiplied by the number of units), whichever is less.'' The proposed question and answer recognizes that neither the Act nor the Regulation addresses explicitly the appropriate level of RCBAP coverage; rather, they address the general purchase requirement applicable to all types of buildings and mobile homes: The lesser of the outstanding principal balance of the loan or the maximum amount of insurance available under the NFIP. The proposed question and answer acknowledges the standard set forth in the Regulation, and clarifies that the maximum amount of insurance available under the NFIP for a residential condominium unit is the lesser of the maximum limit available for a residential condominium unit (currently, $250,000) or the insurable value of the unit (the replacement value of the building divided by the number of units).\4\ The proposed question and answer would also reflect that where the outstanding principal balance of the loan is greater than the maximum amount of coverage available under the NFIP, an RCBAP written at 80 percent of the replacement cost value of the building does not meet the Regulation's flood insurance requirements (unless that amount were equal to the maximum amount of insurance available under the NFIP, which is $250,000 multiplied by the number of units), whereas the current answer suggested that such a coverage level was adequate. While FEMA's recent guidance prescribes 80 percent replacement cost value coverage as the minimum amount necessary to avoid imposition of a co-insurance penalty at the time of loss,\5\ proposed answer 24 clarifies that this amount of insurance is insufficient to comply with the Act's and Regulation's minimum requirements. The proposed answer would provide that where the outstanding principal balance of the loan is greater than the maximum amount of coverage available under the NFIP and the RCBAP is written at less than 100 percent of the insurable value (replacement cost) of the building or an amount equal to $250,000 multiplied by the number of units, whichever is less, the lender must require the borrower to obtain an individual unit owner's dwelling policy to meet the Regulation's flood insurance requirements. --------------------------------------------------------------------------- \4\ In recent guidance, FEMA expressly discusses the statutory standard for determining the required amount of flood insurance for a condominium. FEMA Mandatory Purchase of Flood Insurance Guidelines, at 46. \5\ FEMA's recent guidance encourages condominium associations to obtain 100 percent coverage. Id. at 47. --------------------------------------------------------------------------- The Agencies are proposing the modification contained in proposed question 24 and its answer to be in accordance with the general mandatory purchase requirement in the Regulation. As FEMA has noted: Although unit owners have a shared interest in the common areas of the condominium building, as well as in their own unit, unit owners are unable to individually protect such common areas. Therefore, the RCBAP, insured to its full replacement cost value (RCV) to the extent possible under the NFIP, is the correct way to insure a residential condominium building against flood loss. A properly placed RCBAP protects the financial interests of the association, unit owners, and lenders and also satisfies the statutory requirements.\6\ --------------------------------------------------------------------------- \6\ See id. at 46. The Agencies plan that any guidance adopted as final in question and answer 24 would apply to any loan that is made, increased, extended, or renewed after the effective date of the revised guidance. The Agencies further plan that the revised guidance would apply to any loan made prior to the effective date of the revised guidance, which a lender determines to be covered by flood insurance in an amount less than required by the Regulation, as set forth in proposed question and answer 24, at the first flood insurance policy renewal period following the effective date of the revised guidance. Proposed question 27 would modify and expand current question 9 under section II to address lenders' options when a loan secured by a residential condominium unit is in a multi-unit complex whose condominium association allows its existing flood insurance policy to lapse. Specifically, if the borrower/unit owner or the condominium association fails to purchase adequate flood insurance within 45 days of the lender's notification of inadequate insurance coverage, the lender must force place flood insurance to cover the unit owner's dwelling in an amount adequate to meet the Regulation's flood insurance requirements. The Agencies are also proposing five new questions and answers to address additional issues regarding flood insurance requirements for residential condominiums. Proposed new question 23 would be added to specifically affirm that the mandatory flood insurance purchase requirements under the Act and Regulation apply to loans secured by individual residential condominium units, including those in multi- story condominium complexes located in an SFHA in which flood insurance is available under the Act. Proposed new question 25 would address lenders' options when a loan secured by a residential condominium unit is in a multi-unit complex whose condominium association does not obtain or maintain the amount of flood insurance coverage required under the Regulation. Specifically, it would provide that a lender must require the borrower to purchase an individual unit owner's dwelling policy in an amount sufficient to meet the Regulation's flood insurance requirements. The proposed answer would also detail what is considered an adequate amount of flood insurance under the Regulation and provide an example. [[Page 15264]] Proposed new question 26 would address the steps a lender must take if the RCBAP coverage is insufficient to meet the Regulation's mandatory purchase requirements for a loan secured by an individual residential condominium unit. The proposed answer would also summarize some of the risks to which the lender and the individual unit owner/ borrower may be exposed should a loss occur where the condominium association did not maintain adequate flood insurance coverage under an RCBAP. Proposed new question 28 would be added to explain how the RCBAP's co-insurance penalty applies when, at the time of loss, the RCBAP's coverage amount is less than 80 percent of either the building's replacement cost or the maximum amount of flood insurance available for that building under the NFIP (whichever is less). Examples of how to calculate the penalty would also be provided. Proposed new question 29 would be added to explain the interplay between the individual unit owner's dwelling policy coverage limitations and the RCBAP. Section VII. Flood insurance requirements for home equity loans, lines of credit, subordinate liens, and other security interests in collateral located in an SFHA Proposed new Section VII, which addresses flood insurance requirements for home equity loans, lines of credit, subordinate liens, and other security interests in collateral located in an SFHA, would include seven questions from current section I and parts of two questions from current section V. Specifically, current questions 3, 4, 5, 6, 7, 8, and 10 would be renumbered as questions 30, 31, 34, 35 and 36, 37, 38, and 39 respectively. Current question 5 in section V would be split into proposed questions 32 and 33. Proposed questions and answers 30, 31, and 39 would include minor wording changes without any intended change in substance or meaning. Proposed question 32 would expand on part of current section V, question 5, but would not change the substance of the answer. New question 34 would be revised to clarify the issue discussed in current question 5 of section I without any change in substance or meaning. New questions 35 and 36 would be added to clarify the issues discussed in current question 6 of section I. Section VIII. Flood insurance requirements for loan syndications/ participations The Agencies are proposing to include a new section VIII and new question 40 in response to questions from lenders. The proposed question and answer would explain that, with respect to loan syndications and participations, individual participating lenders are responsible for ensuring compliance with flood insurance requirements. The Agencies believe that the risk of flood loss can be a significant threat to the value of improved real property securing loans, especially in light of many recent catastrophic flood-related events such as Hurricane Katrina. Therefore, the Agencies believe that each lender in a loan participation/syndication arrangement that is secured by improved real property located in a special flood hazard area should be responsible for ensuring that the respective interest of the lender in the collateral that secures the lender's portion of the loan is protected against the risk of flood loss, at least to the amount required by the Regulation. This does not mean that each lender in a syndication or participant in a loan must individually undertake such activities as obtaining a flood determination or monitoring whether flood insurance premiums are paid. Rather, it means that the participating lender should perform upfront due diligence to ensure both that the lead lender or agent has undertaken the necessary activities to ensure that the borrower obtains appropriate flood insurance and that the lead lender or agent has adequate controls to monitor the loan(s) on an on-going basis for compliance with the flood insurance requirements. The participating lender should require as a condition to the participation, syndication or other credit risk sharing agreement that the lead lender or agent will provide participating lenders with sufficient information on an ongoing basis to monitor compliance with flood insurance requirements. Section IX. Flood insurance requirements in the event of the sale or transfer of a designated loan and/or its servicing rights The heading to proposed section IX has been modified to provide greater clarity with no intended change in substance or meaning. The current questions 1, 2, 3, 4, 5, and 6 under current section IX would be renumbered as proposed questions 42, 43, 44, 45, 46, and 47, respectively, with minor revisions to questions and answers 42 and 46 to provide greater clarity, with no intended change in substance or meaning. Proposed section IX would also incorporate and expand current question 6 under section II as proposed question and answer 41. Proposed question 41 would expound on the two scenarios from current question 6 to provide greater clarity, with no intended change in substance or meaning. Section X. Escrow requirements Current section IV on escrow requirements would be moved to proposed section X but would remain largely unchanged. Question 1 under current section IV, relating to the date loan originations were subject to the escrow requirement, would be deleted, as it is now obsolete. Questions 2 through 7 under current section IV would be renumbered as proposed questions 48 through 53, respectively, with minor changes for greater clarity with no intended change in substance or meaning. Section XI. Forced placement of flood insurance For organizational purposes, the Agencies are proposing to move existing questions 1, 2, and 3 in Part VI to questions 54, 55, and 56 in section XI of the proposed document, respectively. The Agencies are proposing minor revisions to proposed question and answer 54 to provide greater clarity, with no intended change in substance or meaning. Section XII. Gap insurance policies The Agencies are proposing to add a new section and question and answer on the appropriateness of gap or blanket insurance policies, often purchased by lenders to ensure adequate life-of-loan flood insurance coverage for designated loans, as a result of questions received by the Agencies on such policies. Gap or blanket insurance policies are lender-paid private policies that are meant to cover a lender's entire portfolio of loans for insurance shortfalls or expired policies. The proposed answer to question 57 of section XII would explain that, generally, gap or blanket insurance is not an adequate substitute for NFIP insurance, as a gap or blanket policy typically protects only the lender's, not the borrower's interest, and cannot be transferred when a loan is sold. The question and answer would acknowledge, however, that in limited circumstances, a gap or blanket policy may satisfy flood insurance obligations in instances where NFIP and private insurance for the borrower are otherwise unavailable. Section XIII: Required use of the Standard Flood Hazard Determination Form (SFHDF) Current section V would be moved to proposed section XIII, and questions 1, [[Page 15265]] 2, 3, and 4 of current section V would be renumbered as proposed questions 58, 59, 60, and 61, respectively. The Agencies are proposing some minor changes to the answers for these questions to provide additional clarity with no intended change in substance or meaning. For organizational purposes, the guidance found in question 5 of current section V would be moved to proposed questions 32 and 33 under proposed section VII, as discussed above. Section XIV. Flood determination fees Current section VII would be moved to proposed section XIV. Questions 1 and 2 in current section VII would be renumbered as questions 62 and 63, respectively, with only minor language modifications, with no intended change in substance or meaning. Section XV. Flood zone discrepancies The Agencies are proposing a new section and two new questions concerning issues where there is a discrepancy between the flood hazard zone designation on a flood hazard determination form and the flood hazard zone designation on the flood insurance policy. Proposed new question 64 would address how lenders should respond when confronted with a discrepancy between the flood hazard zone designations on the flood hazard determination form and the flood insurance policy. The question discusses the legitimate reasons why such discrepancies may exist and describes how to resolve differences if there is no legitimate reason for them. Proposed question 65 discusses when such flood zone discrepancies in a loan portfolio will result in a finding that the lender violated federal flood insurance requirements. If there are repeated instances in the lender's loan portfolio of discrepancies between the flood hazard zone listed on a flood hazard determination and the flood hazard zone listed on a flood insurance policy, and the lender has not taken steps to resolve such discrepancies, then an agency may find that the lender has violated the mandatory purchase requirements. Section XVI. Notice of special flood hazards and availability of Federal disaster relief The Agencies propose to move current section VIII to proposed section XVI. Therefore, questions 1, 2, 3, 4, 5, and 6 under current section VIII would be renumbered as proposed questions 66, 67, 68, 69, 70, and 71, respectively, with nonsubstantive changes made to provide additional clarity to the answers. For organizational purposes, question 1 under current section X would be consolidated under this new section XVI and renumbered as question 73. Furthermore, a new question 72 is proposed to be added to clarify that the Notice of Special Flood Hazards must be provided to the borrower each time a loan is made, increased, extended, or renewed, even when a new determination is not required. Section XVII. Mandatory civil money penalties The Agencies are proposing a new section and two new questions concerning the imposition of mandatory civil money penalties for violations of the flood insurance requirements. Proposed new question 74 would list the sections of the Act that trigger mandatory civil money penalties when examiners find a pattern or practice of violations of those sections. The question would also include information about statutory limits on the amount of such penalties. Proposed new question 75 would discuss the general standards the Agencies consider when determining whether violations constitute a pattern or practice for which civil money penalties are mandatory. These considerations are not dispositive of individual cases, but serve as a reference point for reviewing the particular facts and circumstances. Redesignation Table The following redesignation table is provided as an aide to assist the public in reviewing the proposed revisions to the 1997 Interagency Questions and Answers. ------------------------------------------------------------------------ Current Proposed ------------------------------------------------------------------------ Section I. Definitions: Section I, Question 1..... Section IV, Question 17. Section I, Question 2..... Section IV, Question 16. Section I, Question 3..... Section VII, Question 30. Section I, Question 4..... Section VII, Question 31. Section I, Question 5..... Section VII, Question 34. Section I, Question 6..... Section VII, Question 35; and Section VII, Question 36. Section I, Question 7..... Section VII, Question 37. Section I, Question 8..... Section VII, Question 38. Section I, Question 9..... Section I, Question 4. Section I, Question 10.... Section VII, Question 39. Section II. Requirement to Purchase Flood Insurance Where Available: Section II, Question 1.... Section I, Question 1. Section II, Question 2.... Section I, Question 3. Section II, Question 3.... Section I, Question 5. Section II, Question 4.... Deleted as obsolete. Section II, Question 5.... Section II, Question 12. Section II, Question 6.... Section IX, Question 41. Section II, Question 7.... Section II, Question 11; and Section V, Question 22. Section II, Question 8.... Section VI, Question 24. Section II, Question 9.... Section VI, Question 27. Section III. Exemptions....... Section III. Exemptions from the mandatory flood insurance requirements. Section III, Question 1... Section III, Question 15. Section IV. Escrow Section X. Escrow requirements. Requirements. Section IV, Question 1.... Deleted as obsolete. Section IV, Question 2.... Section X, Question 48. Section IV, Question 3.... Section X, Question 49. [[Page 15266]] Section IV, Question 4.... Section X, Question 50. Section IV, Question 5.... Section X, Question 51. Section IV, Question 6.... Section X, Question 52. Section IV, Question 7.... Section X, Question 53. Section V. Required Use of Section XIII. Required use of Standard Standard Flood Hazard Flood Hazard Determination Form Determination Form (SFHDF). (SFHDF). Section V, Question 1..... Section XIII, Question 58. Section V, Question 2..... Section XIII, Question 59. Section V, Question 3..... Section XIII, Question 60. Section V, Question 4..... Section XIII, Question 61. Section V, Question 5..... Section VII, Question 32; and Section VII, Question 33. Section VI. Forced Placement Section XI. Forced placement of flood of Flood Insurance. insurance. Section VI, Question 1.... Section XI, Question 54. Section VI, Question 2.... Section XI, Question 55. Section VI, Question 3.... Section XI, Question 56. Section VII. Determination Section XIV. Flood determination fees. Fees. Section VII, Question 1... Section XIV, Question 62. Section VII, Question 2... Section XIV, Question 63. Section VIII. Notice of Section XVI. Notice of special flood Special Flood Hazards and hazards and availability of Federal Availability of Federal disaster relief. Disaster Relief. Section VIII, Question 1.. Section XVI, Question 66. Section VIII, Question 2.. Section XVI, Question 67. Section VIII, Question 3.. Section XVI, Question 68. Section VIII, Question 4.. Section XVI, Question 69. Section VIII, Question 5.. Section XVI, Question 70. Section VIII, Question 6.. Section XVI, Question 71. Section IX. Notice of Section IX. Flood insurance requirements Servicer's Identity. in the event of the sale or transfer of a designated loan and/or its servicing rights. Section IX, Question 1.... Section IX, Question 42. Section IX, Question 2.... Section IX, Question 43. Section IX, Question 3.... Section IX, Question 44. Section IX, Question 4.... Section IX, Question 45. Section IX, Question 5.... Section IX, Question 46. Section IX, Question 6.... Section IX, Question 47. Section X Appendix A to the Section XVI. Notice of special flood Regulation-Sample Form of hazards and availability of Federal Notice of Special Flood disaster relief. Hazards and Availability of Federal Disaster Relief Assistance. Section X, Question 1..... Section XVI, Question 73. ------------------------------------------------------------------------ Public Comments The Agencies invite public comment on the proposed new and revised Interagency Questions and Answers. If financial institutions, bank examiners, community groups, or other interested parties have unanswered questions or comments about the Agencies' flood insurance regulations, they should submit them to the Agencies. The Agencies will consider including these questions and answers in the final guidance. Solicitation of Comments Regarding the Use of ``Plain Language'' Section 722 of the Gramm-Leach-Bliley Act of 1999, 12 U.S.C. 4809, requires the federal banking Agencies to use ``plain language'' in all proposed and final rules published after January 1, 2000. Although this proposed guidance is not a proposed rule, comments are nevertheless invited on whether the proposed interagency questions and answers are stated clearly and effectively organized, and how the guidance might be revised to make it easier to read. The text of the proposed Interagency Questions and Answers follows: Interagency Questions and Answers Regarding Flood Insurance The Interagency Questions and Answers are organized by topic. Each topic addresses a major area of the revised flood insurance law and regulations. For ease of reference, the following terms are used throughout this document: ``Act'' refers to the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as revised by the National Flood Insurance Reform Act of 1994 (codified at 42 U.S.C. 4001 et seq.). ``Regulation'' refers to each agency's current final rule.\7\ The OCC, Board, FDIC, OTS, NCUA, and FCA (collectively, ``the Agencies'') are providing answers to questions pertaining to the following topics: --------------------------------------------------------------------------- \7\ The Agencies' rules are codified at 12 CFR part 22 (OCC), 12 CFR part 208 (Board), 12 CFR part 339 (FDIC), 12 CFR part 572 (OTS), 12 CFR part 614 (FCA), and 12 CFR part 760 (NCUA). I. Determining when certain loans are designated loans for which flood insurance is required under the Act and Regulation. II. Determining the appropriate amount of flood insurance required under the Act and Regulation. III. Exemptions from the mandatory flood insurance requirements. IV. Flood insurance requirements for construction loans. V. Flood insurance requirements for agricultural buildings. VI. Flood insurance requirements for [[Page 15267]] residential condominiums. VII. Flood insurance requirements for home equity loans, lines of credit, subordinate liens, and other security interests in collateral located in an SFHA. VIII. Flood insurance requirements for loan syndications/ participations. IX. Flood insurance requirements in the event of the sale or transfer of a designated loan and/or its servicing rights. X. Escrow requirements. XI. Forced placement of flood insurance. XII. Gap insurance policies. XIII. Required use of Standard Flood Hazard Determination Form (SFHDF). XIV. Flood determination fees. XV. Flood zone discrepancies. XVI. Notice of special flood hazards and availability of Federal disaster relief. XVII. Mandatory civil money penalties. I. Determining When Certain Loans Are Designated Loans for Which Flood Insurance is Required Under the Act and Regulation 1. Does the Regulation apply to a loan where the building or mobile home securing such loan is located in a community that does not participate in the National Flood Insurance Program (NFIP)? Answer: Yes. The Regulation does apply; however, a lender need not require borrowers to obtain flood insurance for a building or mobile home located in a community that does not participate in the NFIP, even if the building or mobile home securing the loan is located in a Special Flood Hazard Area (SFHA). Nonetheless, a lender, using the standard Special Flood Hazard Determination Form (SFHDF), must still determine whether the building or mobile home is located in an SFHA. If the building or mobile home is determined to be located in an SFHA, a lender is required to notify the borrower. In this case, a lender, generally, may make a conventional loan without requiring flood insurance, if it chooses to do so. However, a lender may not make a Government-guaranteed or insured loan, such as an SBA, VA, or FHA, loan secured by a building or mobile home located in an SFHA in a community that does not participate in the NFIP. See 42 U.S.C. 4106(a). Also, a lender is responsible for exercising sound risk management practices to ensure that it does not make a loan secured by a building or mobile home located in an SFHA where no flood insurance is available, if doing so would be an unacceptable risk. 2. What is a lender's responsibility if a particular building or mobile home that secures a loan, due to a map change, is no longer located within an SFHA? Answer: The lender is no longer obligated to require mandatory flood insurance; however, the borrower can elect to convert the existing NFIP policy to a Preferred Risk Policy. For risk management purposes, the lender may, by contract, continue to require flood insurance coverage. 3. Does a lender's purchase of a loan, secured by a building or mobile home located in an SFHA in which flood insurance is available under the Act, from another lender trigger any requirements under the Regulation? Answer: No. A lender's purchase of a loan, secured by a building or mobile home located in an SFHA in which flood insurance is available under the Act, alone, is not an event that triggers the Regulation's requirements, such as making a new flood determination or requiring a borrower to purchase flood insurance. Requirements under the Regulation, generally, are triggered when a lender makes, increases, extends, or renews a designated loan. A lender's purchase of a loan does not fall within any of those categories. However, if a lender becomes aware at any point during the life of a designated loan that flood insurance is required, the lender must comply with the Regulation, including force placing insurance, if necessary. Depending upon the circumstances, safety and soundness considerations may sometimes necessitate such due diligence upon purchase of a loan as to put the lender on notice of lack of adequate flood insurance. If the purchasing lender subsequently extends, increases, or renews a designated loan, it must also comply with the Regulation. 4. Does the Regulation apply to loans that are being restructured because of the borrower's default on the original loan? Answer: Yes, if the loan otherwise meets the definition of a designated loan and if the lender increases the amount of the loan, or extends or renews the terms of the original loan. 5. Are table funded loans treated as new loan originations? Answer: Yes. Table funding, as defined under HUD's Real Estate Settlement Procedure Act (RESPA) rule, 24 CFR 3500.2, is a settlement at which a loan is funded by a contemporaneous advance of loan funds and the assignment of the loan to the person advancing the funds. A loan made through a table funding process is treated as though the party advancing the funds has originated the loan. The funding party is required to comply with the Regulation. The table funding lender can meet the administrative requirements of the Regulation by requiring the party processing and underwriting the application to perform those functions on its behalf. 6. Is a lender required to perform a review of its, or its servicer's, existing loan portfolio for compliance with the flood insurance requirements under the Act and Regulation? Answer: No. Apart from the requirements mandated when a loan is made, increased, extended, or renewed, a regulated lender need only review and take action on any part of its existing portfolio for safety and soundness purposes, or if it knows or has reason to know of the need for NFIP coverage. Regardless of the lack of such requirement in the Act and Regulation, however, sound risk management practices may lead a lender to conduct scheduled periodic reviews that track the need for flood insurance on a loan portfolio. II. Determining the Appropriate Amount of Flood Insurance Required Under the Act and Regulation 7. The Regulation states that the amount of flood insurance required ``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.'' What is meant by the ``maximum limit of coverage available for the particular type of property under the Act''? Answer: ``The maximum limit of coverage available for the particular type of property under the Act'' depends on the value of the secured collateral. First, under the NFIP, there are maximum caps on the amount of insurance available. For single-family and two-to-four family dwellings and other residential buildings located in a participating community under the regular program, the maximum cap is $250,000. For nonresidential structures located in a participating community under the regular program, the maximum cap is $500,000. (In participating communities that are under the emergency program phase, the caps are $35,000 for single-family and two-to-four family dwellings and other residential structures, and $100,000 for nonresidential structures). In addition to the maximum caps under the NFIP, the Regulation also provides that ``flood insurance coverage under the Act is limited to the overall value of the property securing the designated loan minus the value of the land on which the property is located,'' which is commonly referred to as the ``insurable value'' of a structure. The NFIP does not insure land; therefore, land values should not be included in [[Page 15268]] the calculation. An NFIP policy will not cover an amount exceeding the ``insurable value'' of the structure. In determining coverage amounts for flood insurance, lenders often follow the same practice used to establish other hazard insurance coverage amounts. However, unlike the insurable valuation used to underwrite most other hazard insurance policies, the insurable value of improved real property for flood insurance purposes also includes the repair or replacement cost of the foundation and supporting structures. It is very important to calculate the correct insurable value of the property; otherwise, the lender might inadvertently require the borrower to purchase too much or too little flood insurance coverage. For example, if the lender fails to exclude the value of the land when determining the insurable value of the improved real property, the borrower will be asked to purchase coverage that exceeds the amount the NFIP will pay in the event of a loss. (Please note, however, when taking a security interest in improved real property where the value of the land, excluding the value of the improvements, is sufficient collateral for the debt, the lender must nonetheless require flood insurance to cover the value of the structure if it is located in a participating community's SFHA). 8. What are examples of residential buildings? Answer: Residential buildings include one-to-four family dwellings; apartment or other residential buildings containing more than four dwelling units; condominiums and cooperatives in which at least 75 percent of the square footage is residential; hotels or motels where the normal occupancy of a guest is six months or more; and rooming houses that have more than four roomers. A residential building may have incidental non-residential use, such as an office or studio, as long as the total area of such incidental occupancy is limited to less than 25 percent of the square footage of the building. 9. What are examples of nonresidential buildings? Answer: Nonresidential buildings include small business concerns, churches, schools, farm buildings (including grain bins and silos), pool houses, clubhouses, recreational buildings, mercantile structures, agricultural and industrial structures, warehouses, hotels and motels with normal room rentals for less than six months' duration, nursing homes, and mixed-use buildings with less than 75 percent residential square footage. 10. How much insurance is required on a building located in an SFHA in a participating community? Answer: The amount of insurance required by the Act and Regulation is the lesser of: The outstanding principal balance of the loan(s) or The maximum amo