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Federal Register / Vol. 86, No. 51 / Thursday, March 18, 2021 / Proposed Rules
Lastly, new proposed Q&A Mandatory 9 would note that if the compliance aid assurance clause is included on the declarations page, a lender may accept the policy without further review to determine whether the policy meets the definition of private flood insurance.
However, a lender must also ensure compliance with the mandatory purchase requirement.
II. Private Flood Insurance Discretionary Acceptance The Agencies propose to add four new Q&As to provide additional clarity on the discretionary acceptance provision of the Regulation. These new Q&As would be designated as Discretionary 14. Proposed new Q&A
Discretionary 1 would address whether lenders are required to accept flood insurance policies that meet the discretionary acceptance criteria. The proposed answer would note that the discretionary acceptance criteria in the Regulation set forth the minimum acceptable criteria that a flood insurance policy must have for the lender to accept the policy under the discretionary acceptance provision. The proposed answer would clarify that it is at the lenders discretion to accept a policy that meets the discretionary acceptance criteria so long as the policy does not meet the mandatory acceptance criteria.
Proposed new Q&A Discretionary 2
would address the requirements for documentation to demonstrate that a policy provides sufficient protection of a loan when a lender accepts that policy under the discretionary acceptance criteria. The proposed answer would explain that the Regulation requires the lender to document its conclusion in writing that the policy provides sufficient protection of the loan, consistent with safety and soundness principles. In addition, the proposed answer would include a reference to proposed Q&A Coverage 1 from the July 2020 Proposed Questions and Answers, which discusses some factors to consider when determining whether a flood insurance policy issued by a private insurer provides sufficient protection of the loan, consistent with safety and soundness principles.16

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16 These
factors include whether: 1 A policys deductibles are reasonable based on a borrowers financial condition; 2 the insurer provides adequate notice of cancellation to the mortgagor and the mortgagee; 3 the terms and conditions of the policy with respect to payment per occurrence or per loss and aggregate limits are adequate to protect the lending institutions interest in the collateral; 4 the flood insurance policy complies with applicable State insurance laws; and 5 the private insurance company has the financial
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Furthermore, the proposed answer would note that while the Regulation does not require any specific documentation to demonstrate that the policy provides sufficient protection of the loan, lenders may include any information that reasonably supports the lenders conclusion following review of the policy.
Proposed new Q&A Discretionary 3
would address how a lender could evaluate concerns related to an insurers solvency, strength, and ability to pay claims in order to determine whether an insurance policy provides sufficient protection of a loan, consistent with general safety and soundness principles.
The proposed answer would provide that a lender may evaluate an insurers solvency, strength, and ability to satisfy claims by obtaining information from the State insurance regulators office of the State in which the property securing the loan is located, among other options.
The proposed answer would further indicate that a lender could rely on the licensing or other processes used by the State insurance regulator for such an evaluation. The proposed answer would also include a reference to proposed Q&A Coverage 1 from the July 2020
Proposed Questions and Answers.
Proposed new Q&A Discretionary 4
would address whether a lender is required to review a flood insurance policy upon renewal if that policy was issued by a private insurer and was originally accepted in accordance with the discretionary acceptance requirements. The proposed answer would provide that if a lender had accepted a flood insurance policy issued by a private insurer in accordance with the discretionary acceptance requirements and the policy is renewed, the lender would be required to review the policy upon renewal to ensure that it continues to meet the discretionary acceptance requirements. The proposed answer would also state that a lender would need to document its conclusion regarding sufficiency of the protection of the loan in writing upon each renewal to indicate that the policy continues to provide sufficient protection of the loan.
III. Private Flood InsuranceGeneral Compliance The Agencies propose to add 11 new Q&As on topics related to the private flood insurance provisions of the Regulation that are not covered in sections I and II above. The new proposed Q&As would be designated as Private Flood Compliance 111.
strength, solvency and ability to satisfy claims. See 85 FR 40442, 40458 July 6, 2020.

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New proposed Q&A Private Flood Compliance 1 would address questions on the maximum deductible that a flood insurance policy issued by a private insurer can have for properties located in an SFHA. Under the proposed answer, the Agencies would clarify that the analysis would depend on whether the lender is accepting the flood insurance policy under the mandatory acceptance provision or the discretionary acceptance provision.
Specifically, for a private flood insurance policy that the lender is accepting under the mandatory acceptance provision, the proposed answer would state that the Regulation provides that the policy must contain a deductible that is at least as broad as the maximum deductible in the Standard Flood Insurance Policy SFIP
under the NFIP, which means that the deductible is no higher than the specified maximum under an SFIP for any total coverage amount up to the maximum available under the NFIP at the time the policy is provided to the lender. The proposed answer would provide that a policy with a coverage amount exceeding that available under the NFIP may have a deductible exceeding the specific maximum deductible under an SFIP. However, the proposed answer would also advise that for safety and soundness purposes, the lender should consider whether the deductible is reasonable based on the borrowers financial condition, consistent with guidance the Agencies proposed in Q&A Amount 9 17 in the July 2020 Proposed Questions and Answers and with how deductibles may be evaluated under the discretionary acceptance provision. The proposed answer would also set forth examples to aid in compliance.
The Agencies note that this proposed guidance regarding the deductible for a private flood insurance policy with a coverage amount exceeding that available under the NFIP is different from the informal advice the Agencies previously provided in supplementary information to the private flood insurance rule.18 In the supplementary information to the private flood insurance rule, the Agencies advised that even for private flood insurance 17 Proposed Q&A Amount 9, adapted from current Q&A 17, provides that a lender should determine the reasonableness of the deductible on a case-bycase basis, taking into account the risk that such a deductible would pose to the borrower and the lender. Proposed Q&A Amount 9 also states that a lender may not allow the borrower to use a deductible amount equal to the insurable value of the property to avoid the mandatory purchase requirement for flood insurance. See 85 FR 40442
at 40463 July 6, 2020.
18 See 84 FR 4953 at 4957 Feb. 20, 2019.

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