The federal bank regulatory agencies have issued revisions to the Interagency Questions and Answers Regarding Flood Insurance that were most recently published on July 21, 2009. The guidance released on October 14 includes two new questions and answers. The first, Question and Answer 9, relates to insurable value. The second, Question and Answer 61, relates to force placement of flood insurance. Question and Answer 9 provides guidance on calculating the “insurable value” of a property for purposes of determining the required amount of flood insurance under the National Flood Insurance Program (“NFIP”). The guidance clarifies that the full insurable value of a building is the same as 100% replacement cost value (“RCV”) of the insured building. Lenders have a certain amount of flexibility in determining the RCV of a building. According to the guidance, a lender (either alone or in consultation with a flood insurance provider or other professional) may consider permissible methods, such as the RCV used in a hazard insurance policy (recognizing that replacement cost for flood insurance will include the foundation), an appraisal based on a cost-value (not market-value) approach before depreciation deductions, and/or a construction cost calculation. The guidance emphasizes that, when calculating the minimum amount of insurance that is required to be purchased, the insurable value is only relevant to the extent that it is lower than either the outstanding principal balance of the loan or the maximum amount of insurance available under the NFIP.
Nutter Notes: Question and Answer 61 provides guidance on how soon lenders have to force place flood insurance after the end of the 45-day notice period that must be observed before a lender may force place insurance. The regulations that implement the NFIP provide that the lender or its servicer must purchase insurance on the borrower’s behalf if the borrower fails to obtain flood insurance within 45 days after notification that such insurance is required. The final guidance does not establish a specific number of days after the end of the 45-day notice period as a “safe harbor” for completion of the force placement process. The agencies said that they expect the lender to have policies and procedures in place to allow force placement generally to commence when the 45-day notice period has expired. However, the guidance also recognizes that the process of force placing flood insurance may not always occur immediately on the 46th day and that a brief delay in force placing the required insurance is acceptable if the lender can provide a reasonable explanation for the delay. Finally, the agencies have withdrawn another question from the 2009 proposal regarding insurable value and have issued three additional proposed updates to questions and answers relating to force placement of flood insurance for public comment. Comments on the proposed questions and answers are due by December 1, 2011.