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BFD works only for directly connected neighbors. BFD neighbors must be no more than one IP hop away. Multihop configurations are not supported -> "BFD detects local link failure" is correct. Typically, BFD can be used at any protocol layer. However, the Cisco implementation of BFD for Cisco IOS Releases 12.2(18)SXE, 12.0(31)S, and 12.4(4)T supports only Layer 3 clients, in particular, the BGP, EIGRP, IS-IS, and OSPF routing protocols. Reference: https://www.cisco.com/c/en/us/td/docs/ios/12_0s/feature/guide/fs_bfd.html