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Federal Register / Vol. 86, No. 51 / Thursday, March 18, 2021 / Proposed Rules insurance under the Regulation. The proposed answer also would clarify that a lender is not required to accept flood insurance policies that only meet the criteria set forth in the discretionary acceptance or mutual aid provisions in the Regulation.
Proposed new Q&A Mandatory 2
would address when a lender must review a flood policy issued by a private flood insurer to make sure the policy meets the mandatory acceptance criteria, other than at loan origination.
The proposed response would explain that, other than at origination, a lender must review a flood insurance policy issued by a private insurer when the policy is up for renewal, or any time the borrower presents the lender with any new flood insurance policy issued by a private insurer. The Agencies would clarify that a lender must review the policy in these instances in addition to when a triggering event occurs making, increasing, extending or renewing a loan.
During this review, a lender may determine that the policy meets the mandatory acceptance criteria without further review if the policy or an endorsement to the policy includes the compliance aid assurance clause.
However, if the policy does not meet the mandatory acceptance criteria, the lender may still accept it if it meets the discretionary acceptance criteria or, if applicable, the mutual aid plan criteria.
The proposed answer would also explain that if the policy does not meet any such criteria, the lender must notify the borrower in accordance with the force placement provisions of the Regulation. If the borrower does not purchase flood insurance that complies with the Regulation, the lender must purchase insurance on the borrowers behalf. In addition, the Agencies would clarify that a lender may rely on a previous review of a flood insurance policy under the discretionary acceptance provision, provided there are no changes to the terms of the policy. However, as required by the Regulation and discussed below in proposed new Q&A Discretionary 4, the lender must document its conclusion regarding sufficient protection of the loan in writing. The Agencies are also including a reference to proposed new Q&A Discretionary 4.
Proposed new Q&A Mandatory 3
would address whether the private flood insurance requirements under the Regulation require a lender to change its policy of not originating a mortgage in non-participating communities or coastal barrier regions where the NFIP is not available. The proposed answer would explain that the Regulation does
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not require a lender to originate a loan that does not meet the lenders underwriting criteria. The Agencies would note that the flood insurance purchase requirement only applies to loans secured by structures located or to be located in an SFHA in which flood insurance is available under the Act. As stated in proposed Q&A Applicability 1
in the July 2020 Proposed Questions and Answers, the flood insurance purchase requirement does not apply within non-participating communities where NFIP insurance is not available under the Act. Therefore, the proposed answer would state that the lender does not need to change its policy of not originating mortgages in areas where NFIP insurance is unavailable solely because of the private flood insurance requirements under the Regulation.
Proposed new Q&A Mandatory 4
would address whether the compliance aid assurance clause could act as a conformity clause that would make a private policy conform to the definition of private flood insurance under the Regulation. The Agencies propose to clarify that the compliance aid assurance clause is not intended to act as a conformity clause but rather to facilitate the ability of lenders and consumers to recognize policies that meet the definition of private flood insurance and to promote the consistent acceptance of policies that meet this definition.
Proposed new Q&A Mandatory 5
would provide that a lender is not required to accept a flood insurance policy issued by a private insurer solely because the policy contains the compliance aid assurance clause if the lender chooses to conduct its own review and determines the flood insurance policy actually does not meet the mandatory acceptance requirements.
The proposed answer also would note that if a flood insurance policy issued by a private insurer does not include the compliance aid assurance clause, the lender must still review the policy to determine if it meets the requirements for private flood insurance as set forth in the Regulation before the lender may choose to reject the policy.
Proposed new Q&A Mandatory 6
would discuss whether a lender is required to conduct an additional review of a flood insurance policy under the mandatory acceptance provision if the policy includes the compliance aid assurance clause. The proposed answer would state that under the mandatory acceptance provision of the Regulation, if a policy or an endorsement to the policy contains the compliance aid assurance clause, a lender is not required to conduct any further review
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of the policy in order to determine that the policy meets the definition of private flood insurance. The Agencies also propose to clarify that the language of the compliance aid assurance clause must be stated as set forth in the Regulation in order for the lender to rely on the protections of the compliance aid assurance clause. However, the proposed answer would provide that a lender need not reject a policy containing the compliance aid assurance clause if the formatting, font, punctuation, and similar stylistic effects that do not change the substantive meaning of the clause are different from the compliance aid assurance clause set forth in the Regulation. The proposed answer would also include a reference to proposed new Q&A Mandatory 7.
Proposed new Q&A Mandatory 7
would describe additional reviews a lender must conduct when a flood insurance policy issued by a private insurer includes the compliance aid assurance clause, as the clause only assists a lender in making the determination that a flood insurance policy meets the definition of private flood insurance in the Regulation, and not other requirements specified in the Regulation. Specifically, the lender also must ensure that the coverage is 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, and also should ensure that other key aspects of the policy are accurate, such as the borrowers name and property address.
The proposed answer would also include a reference to proposed new Q&A Mandatory 6.
Proposed new Q&A Mandatory 8
would address whether a lender may use the criteria under the discretionary acceptance provision to decide whether to accept a policy that does not contain the compliance aid assurance clause without first reviewing the policy to determine if it meets the mandatory acceptance provision. The proposed answer would clarify that a lender may first review the policy to determine whether it meets the criteria under the discretionary acceptance provision.
However, if the policy is not accepted under the discretionary acceptance provision, the lender would still need to determine whether it must accept the policy under the mandatory acceptance criteria. The proposed answer would also remind lenders to document that a policy provides sufficient protection of the loan if the lender accepts the policy under the discretionary acceptance provision of the Regulation.

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