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Federal Register / Vol. 86, No. 51 / Thursday, March 18, 2021 / Proposed Rules
Proposed new Q&A Private Flood Compliance 7 would address the question of how the private flood insurance requirements of the Regulation would work in conjunction with requirements of secondary market investors, such as the Federal National Mortgage Association Fannie Mae and the Federal Home Loan Mortgage Corporation Freddie Mac. The proposed answer would first remind lenders that they must comply with the Federal flood insurance requirements.
The proposed answer would then note that secondary market investor requirements are separate from the requirements of the Regulation.
Therefore, if a lender plans to sell loans to such an investor, the proposed answer would advise that a lender should carefully review the investors requirements and direct questions regarding these requirements to the appropriate entities.
The Agencies are proposing new Q&A
Private Flood Compliance 8 to provide guidance to servicers for loans covered by flood insurance mandated by the Act.
Specifically, the proposed answer would clarify that for loans serviced on behalf of lenders supervised by the Agencies, the servicer must comply with the Regulation in determining whether a flood insurance policy issued by a private insurer must be accepted under the mandatory acceptance provision or may be accepted under the discretionary acceptance or mutual aid provisions. However, for loans serviced on behalf of other entities not supervised by the Agencies, the proposed answer would state that the servicer should comply with the terms of its contract with such an entity. The proposed answer would suggest that when servicing loans on behalf of Fannie Mae or Freddie Mac, where there are insurer rating requirements specified within those entities servicing guidance or other relevant authorities that are not included in the Regulation, the servicer should adhere to those servicing requirements.
The Agencies also propose to add three new Q&As to provide guidance regarding optional methods lenders can use to address questions on whether an insurer is licensed, admitted, or otherwise approved to do business in a particular State, which is one of the factors lenders must evaluate under both the mandatory acceptance and discretionary acceptance provisions.
Proposed new Q&A Private Flood Compliance 9 would explain how a lender could determine whether an insurer is licensed, admitted, or otherwise approved in a particular
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State, or whether a surplus lines 20 or nonadmitted alien insurer 21 is permitted to issue an insurance policy in a particular State. The proposed answer would suggest that a lender may review the website of the State insurance regulator where the collateral property is located to determine whether a particular insurer is licensed, admitted, or otherwise permitted to issue insurance in a particular State.
The proposed answer also would advise that a lender could contact the State insurance regulator directly. Further, the proposed answer notes that the information with respect to surplus lines insurer eligibility may be available in the Consumer Insurance Search CIS
tool available on the National Association of Insurance Commissioners NAIC website.22 The proposed answer would state that lenders also may consult commercial service providers regarding the eligibility of surplus lines insurers in particular States as long as the lenders have a reasonable basis to believe that these service providers have reliable information. With regard to nonadmitted alien insurers in particular, the proposed answer would suggest that lenders could review the NAICs Quarterly Listing of Alien Insurers.23
Proposed new Q&A Private Flood Compliance 10 would address whether lenders may accept policies issued by private insurers that are surplus lines insurers for noncommercial residential properties. The proposed answer would explain that if the surplus lines insurer is eligible or not disapproved to place insurance in the State or jurisdiction in which the property to be insured is located, lenders may accept policies issued by surplus lines insurers as coverage for noncommercial i.e., 20 The National Association of Insurance Commissioners NAIC notes, the surplus lines market inclusive of U.S. and non-U.S. domiciled insurers is a distinct segment of the industry consisting of non-admitted specialized insurers covering risks not available within the admitted market . . . Surplus lines insurers are subject to regulatory requirements and are overseen for solvency by their domiciliary State or country.
https content.naic.org/cipr_topics/topic_surplus_
lines.htm. For specific definitions related to surplus lines insurers, lenders should review the State law in which the property is located.
21 The NAIC notes that whereas States monitor the eligibility of U.S. domiciled surplus lines insurers, alien insurers eligible to write surplus lines premium are listed on the NAIC
Quarterly Listing of Alien Insurers https
www.naic.org/prod_serv_alpha_
listing.htmquarterly_alien Alien insurers are prohibited from establishing a U.S. branch office.
https content.naic.org/cipr_topics/topic_surplus_
lines.htm.
22 See https content.naic.org/cis_consumer_
information.htm.
23 See https www.naic.org/prod_serv_alpha_
listing.htmquarterly_alien.

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residential properties. In addition, consistent with the Act and the Regulation, the proposed answer would confirm that policies issued by surplus lines insurers for noncommercial properties are covered in the definition of private flood insurance and in the discretionary acceptance provision.24 In the definition of private flood insurance, surplus lines policies for noncommercial properties are covered as policies that are issued by insurance companies that are otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located. The proposed answer also would note that within the discretionary acceptance provision, noncommercial residential policies issued by surplus lines carriers are covered as policies that are issued by private insurance companies that are otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located.
As noted above, if the surplus lines insurer is eligible or not disapproved to place insurance in the State or jurisdiction in which a property to be insured is located, the surplus lines insurer is deemed to be otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located for purposes of the Act and Regulation.
Therefore, the proposed answer would note that even if the surplus lines insurer is not considered to be engaged in the business of insurance under applicable State law, the surplus lines insurer nevertheless would meet the criteria only for purposes of this provision of the Regulation if the insurer is eligible or not disapproved to place insurance in the State or jurisdiction in which a property to be insured is located.
For example, under section 1776 of the California Insurance Code, the 24 During discussion of the Biggert-Waters Act on the Senate floor, Sen. Crapo noted that surplus lines insurers can provide flood insurance coverage for residential properties and asked for clarification regarding the inclusion of surplus lines coverage in the definition of private flood insurance. In his response, Sen. Johnson stated, The definition of private flood insurance includes private flood insurance provided by a surplus lines insurer and is not intended to limit surplus lines eligibility to nonresidential properties. While the Senator is correct that surplus lines insurance is specifically mentioned in that context, overall the definition accommodates private flood insurance from insurers who are licensed, admitted, or otherwise approved in the State where the property is located. 158 Cong. Rec. S6051 daily ed. Sept. 10, 2012.

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