Federal Agencies Issue Rule on Loans in Areas Having Special Flood Hazards
Loans in Areas Having Special Flood Hazards
A Rule by the Comptroller of the Currency, the
Publication Date:
Agencies:
Dates: The effective date of amendatory instructions 1, 6, 7, 8, 10, 15, 16, 21 and 22 is
Effective Date:
Entry Type: Rule
Action: Final rule.
Document Citation: 80 FR 43215
Page: 43215 -43263 (49 pages)
CFR: 12 CFR 172
12 CFR 208
12 CFR 22
12 CFR 339
12 CFR 614
12 CFR 760
Agency/Docket Numbers: Docket ID OCC-2014-0016
Regulation H, Docket No. R-1498
RIN: 1557-AD84
3052-AC93
3064-AE27
3133-AE40
7100 AE22
Document Number: 2015-15956
Shorter URL: https://federalregister.gov/a/2015-15956
Action
Final Rule.
Summary
DATES:
The effective date of amendatory instructions 1, 6, 7, 8, 10, 15, 16, 21 and 22 is
FOR FURTHER INFORMATION CONTACT:
OCC:
Board:
FCA:
NCUA:
SUPPLEMENTARY INFORMATION:
I. Background
A. Introduction
In
In
The Agencies are issuing this final rule to implement the escrow provisions and the detached structures provision detailed in the
B. Flood Insurance Statutes
The National Flood Insurance Act of 1968 (1968 Act) [8] and the FDPA, as amended, govern the National Flood Insurance Program (NFIP). [9] The 1968 Act made Federally subsidized flood insurance available to owners of improved real estate or mobile homes located in special flood hazard areas if the community where the improved real estate or mobile home is located participates in the NFIP. A special flood hazard area (SFHA) is an area within a floodplain having a one percent or greater chance of flood occurrence in any given year. [10] SFHAs are delineated on maps issued by the
Until the adoption of the FDPA in 1973, the purchase of flood insurance was voluntary. The FDPA made the purchase of flood insurance mandatory in connection with loans made by regulated lending institutions when the loans are secured by improved real estate or mobile homes located in a SFHA in a participating community. The FDPA directed the OCC, Board,
Title V of the
The Reform Act required the OCC, Board,
C. The Biggert-Waters and HFIAA Amendments
Among other changes, [16] Biggert-Waters significantly amended the NFIP requirements over which the Agencies have jurisdiction. Specifically, Biggert-Waters: (i) Increased the maximum civil money penalty (CMP) that the Agencies may impose per violation when there is a pattern or practice of flood violations and eliminated the limit on the total amount of penalties that the Agencies may assess against a regulated lending institution during any calendar year; [17] (ii) required the Agencies to issue a rule to direct regulated lending institutions to escrow premiums and fees for flood insurance on residential improved real estate, unless the regulated lending institution meets the statutory small institution exception; [18] (iii) required the Agencies to issue a rule to direct regulated lending institutions to accept private flood insurance, as defined by Biggert-Waters, and to notify borrowers of the availability of private flood insurance; [19] and (iv) amended the force-placed insurance requirement to clarify that regulated lending institutions may charge a borrower for the cost of premiums and fees incurred for coverage beginning on the date on which the borrower's flood insurance coverage lapsed or did not provide sufficient coverage and to prescribe the procedures for terminating force-placed insurance. [20]
HFIAA further amended the changes set forth in Biggert-Waters. Among these changes were amendments that tied the escrow requirement to the origination, refinance, increase, extension, or renewal of a loan on or after
As previously discussed in guidance issued by the Agencies, [24] the CMP provisions [25] and the force-placed insurance requirements in Biggert-Waters were effective upon enactment of Biggert-Waters. Similarly, the provision in HFIAA excluding certain detached structures from the mandatory flood insurance purchase requirement became effective upon the enactment of HFIAA. In contrast, Biggert-Waters and HFIAA require the Agencies to issue regulations implementing both the escrow and private flood insurance provisions.
II. The Agencies' Proposed Revisions
A. Summary of the
In the
The
The
Finally, consistent with Biggert-Waters, the
B. Summary of the
Under the
In addition, the
The
C. Overview of Public Comments
The Agencies received 81 written comments on the
The Agencies received numerous comments supporting the exemption for certain detached structures from the mandatory flood insurance purchase requirement. Many of these commenters requested clarifications of the terms used in the exemption, including the meanings of the terms "residential property," "detached structure," and "serve as a residence." The Agencies also sought comment on whether the exemption should be restricted to consumer purpose loans. Many commenters opposed the Agencies incorporating such a limitation. Some commenters also wanted the Agencies to expand the exemption to include non-residential property. Commenters also were uniformly opposed to the Agencies stating that regulated lending institutions need not perform a flood hazard determination for any properties or structures that are exempt from the mandatory flood insurance purchase requirement because a flood hazard determination is often needed to determine what types of structures exist on the property.
Many commenters also offered suggestions on the Agencies' proposed escrow provisions. Several commenters recommended that the Agencies apply the general escrow requirement to applications received on or after
In addition, the Agencies received many comment letters that addressed force placement issues. Commenters generally supported the proposed provisions on force placement. However, commenters sought clarification on various force placement issues, such as, sufficiency of proof of coverage when a borrower obtains flood insurance after the lender or its servicer has force placed the insurance; the definition of the term "lapsed;" whether force-placed insurance only should be terminated when the borrower provides proof of NFIP-compliant flood insurance coverage; whether a refund for any period of overlapping coverage should be made to the borrower by the lender within 30 days of the borrower obtaining coverage; when a lender should cancel force-placed flood insurance; what constitutes proof of coverage for purposes of determining whether a borrower has obtained alternative flood insurance coverage; and how to resolve force placement issues when a borrower is in default.
Finally, the Agencies received numerous comment letters on the private flood insurance provisions the Agencies proposed in the
III. Summary of the Final Rule
The amendments finalized by this rulemaking are summarized below and more specifically described in V. Section-by-Section Analysis of this preamble. Although the Agencies' final regulations are substantively consistent, the format of the regulatory text varies to conform to each Agency's current regulation.
The final rule sets forth the new exemption in the FDPA, as amended by section 13 of HFIAA, to the mandatory flood insurance purchase requirement for any structure that is a part of a residential property, but is detached from the primary residential structure and does not serve as a residence. Consistent with commenters' suggestions, the final rule includes clarifications of the terms "a structure that is part of a residential property," "detached," and "serve as a residence."
In accordance with the FDPA, as amended by Biggert-Waters and HFIAA, the final rule also requires regulated lending institutions, or servicers acting on their behalf, to escrow premiums and fees for flood insurance for any loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after
Moreover, the final rule implements the following additional exceptions from the escrow requirement, as amended by HFIAA for: (i) Loans that are in a subordinate position to a senior lien secured by the same property for which flood insurance is being provided; (ii) loans secured by residential improved real estate or a mobile home that is part of a condominium, cooperative, or other project development, provided certain conditions are met; (iii) loans that are extensions of credit primarily for a business, commercial, or agricultural purpose; (iv) home equity lines of credit; (v) nonperforming loans; and (vi) loans with terms not longer than 12 months. The Agencies are clarifying in the final rule that, when a regulated lending institution determines that an exception no longer applies, the institution must require the escrow of flood insurance premiums and fees.
The Agencies note that the escrow provisions in the Agencies' rules in effect on
The final rule also implements the requirement under HFIAA that regulated lending institutions not excepted from the escrow requirement offer and make available to a borrower the option to escrow flood insurance premiums and fees for loans that are outstanding as of
The Agencies' final rule includes new and revised sample notice forms and clauses. Specifically, the final rule amends the current Sample Form of Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance, set forth as Appendix A in the Agencies' respective regulations, to add language concerning the escrow requirement. The Agencies are adopting minor amendments to the language the Agencies proposed in the
The final rule also includes an additional sample clause, Sample Clause for Option to Escrow for Outstanding Loans, as Appendix B, to assist institutions in complying with the requirement to inform borrowers of outstanding loans about their option to escrow flood insurance premiums and fees. The Agencies are making minor language and formatting changes to Appendix B as proposed in the
Furthermore, consistent with Biggert-Waters, the Agencies' final rule amends the force placement of flood insurance provisions to clarify that a lender or its servicer has the authority to charge a borrower for the cost of flood insurance coverage commencing on the date on which the borrower's coverage lapsed or became insufficient. The final rule also stipulates the circumstances under which a lender or its servicer must terminate force-placed flood insurance coverage and refund payments to a borrower. It also sets forth the documentary evidence a lender must accept to confirm that a borrower has obtained an appropriate amount of flood insurance coverage.
The Agencies also adopt needed technical corrections proposed in the 2013 Proposed Rule. For example, the Agencies' final rule corrects all references to the head of
The escrow and option to escrow provisions in this final rule, as well as the revisions to Appendix A and new Appendix B, will become effective on
IV. Legal Authority
Section 102(b) of the FDPA (42 U.S.C. 4012a(b)), as amended, provides that the Agencies (after consultation and coordination with the
Section 102(c) of the FDPA (42 U.S.C. 4012a(c)) sets forth specific exceptions to the mandatory flood insurance purchase requirement. The Agencies are authorized to implement these exceptions.
Section 102(d) of the FDPA (42 U.S.C. 4012a(d)), as amended by section 25 of HFIAA, states that the Agencies (after consultation and coordination with the
Section 102(d) of the FDPA, as amended by HFIAA, also directs the Agencies to implement the seven exceptions to this requirement that are set forth in the statute. Section 25(b) of HFIAA further states that the Agencies (after consultation and coordination with the
V. Section-by-Section Analysis
__.__Authority, Purpose, and Scope
As discussed in the
As part of the OCC's consolidation of its flood insurance rule, the OCC also proposed the insertion of the term "Federal savings association" where necessary throughout its flood insurance rule. No comments were received on this proposed change. The OCC therefore adopts the change as proposed.
__.__Definitions
As noted above in __.__Authority, purpose, and scope, the Agencies proposed technical amendments to change the references to the head of
OCC-Only Definitions
The OCC proposed amendments to the definition section for purposes of integrating its national bank and Federal savings association flood insurance rules. First, the proposed rule provided that the term "Federal savings association" means a Federal savings association as defined in 12 U.S.C. 1813(b)(2) and any service corporations thereof. This definition is identical to the definition of "Federal savings association" in 12 CFR part 172, except that part 172 specifically referenced "subsidiaries." Current 12 CFR part 22 does not specifically include a reference to bank operating subsidiaries because such subsidiaries are subject to the rules applicable to the operations of their parent bank pursuant to 12 CFR 5.34. Because Federal savings association operating subsidiaries also are subject to the same rules applicable to the parent savings association, as provided by 12 CFR 5.38(e)(3), the inclusion of "subsidiary" in this definition is unnecessary and its removal will not affect the applicability of 12 CFR part 22 to Federal savings association operating subsidiaries.
Second, the OCC proposed to remove the definition of "bank," which the rule currently defines as meaning a national bank, and replaced "bank" with "national bank" throughout the final rule. The OCC did not receive any comments on these technical changes. However, the final rule adds a definition of "national bank" to include Federal branches and agencies of a foreign bank. Federal branches and agencies are currently subject to the same flood insurance requirements as national banks. [32] The addition of this definition clarifies the scope of the rule and promotes consistency throughout the OCC's rules and regulations.
__.__Requirement To Purchase Flood Insurance Where Available
The current regulation provides that a regulated lending institution shall not make, increase, extend, or renew any designated loan [33] unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. This provision further provides that flood insurance coverage is limited to the overall value of the property securing the designated loan minus the value of the land on which the property is located. The
In response to these comments, the Agencies emphasize that the proposed change does not set forth a new requirement, but merely clarifies the long-standing legal interpretation that Federal flood insurance coverage does not apply to land. In proposing this change, the Agencies simply intended to reduce confusion by clarifying the meaning of the term to reflect what is actually covered. In response to the comment that suggests the use of replacement cost or the appraised value of the property minus the land, it is the Agencies' opinion that using other insurance terms to clarify the coverage limit would not reflect what is covered under Federal flood insurance legislation as accurately as the proposed language. For these reasons, the Agencies adopt the language as proposed.
__.__Exemptions
Section 13 of HFIAA, which amends section 102(c) of the FDPA (42 U.S.C. 4012a(c)), adds a new exemption to the mandatory flood insurance purchase requirement. Specifically, HFIAA provides that flood insurance is not required, in the case of any residential property, on any structure that is a part of such property, but is detached from the primary residential structure and does not serve as a residence. The
Numerous commenters provided general support for the proposed rule's implementation of the exemption for detached structures. Commenters strongly supported providing lenders with the discretion to exempt low-value non-residential structures from the mandatory purchase obligation. Many commenters requested that the Agencies clarify the meaning of various terms to assist lenders in applying the exemption and to ensure consistent application of the exemption.
Several commenters asserted that the detached structure exemption should be available regardless of whether the loan is made for a business, agricultural, or commercial purpose, contrary to the Agencies' suggestion. These commenters maintained that lenders should be able to exclude non-residential detached structures regardless of the loan's purpose, as long as the loan is secured by residential property. Numerous commenters, including trade associations, financial institutions, and individuals, suggested that the final rule should broaden the exemption to include business, agricultural, and commercial loans and not apply solely to consumer loans. Commenters noted that loan proceeds may be used for different purposes than that of the property that secures those proceeds and that section 13 of HFIAA does not limit the exemption only to consumer loans. Several commenters noted that a borrower who uses a residence to secure a business, commercial, or agricultural purpose loan faces the same affordability challenges when required to insure a low-value detached structure as a borrower who uses the same collateral to secure a consumer loan. One commenter noted that low-value structures are a common issue for both consumer and commercial borrowers and therefore should be treated consistently.
The Agencies acknowledge that, with respect to flood insurance, the purpose of a loan may be immaterial to the borrower when the borrower uses his or her residence to secure the loan. Therefore, the Agencies agree with commenters that the detached structure exemption should be available in connection with consumer loans as well as those made for business, commercial, or agricultural purposes if the loan is secured by a residence.
The Agencies considered the various comments concerning the definition of "residential property." Several commenters, including trade associations and financial institutions, suggested that "residential property" should be defined consistently with "residential improved real estate" [34] as defined in the FDPA. Another commenter suggested "residential property" should be interpreted as a parcel of collateral property containing a 1-4 family building actually used as a residence. Several commenters suggested the Agencies adopt a definition of "residential property" that focuses on the structure's residential use--regardless of its nature or size--consistent with similar definitions in the FDPA. These commenters believed the term should be broadly defined to encompass any residential structure, including single-family dwellings, 1-4 family dwellings, multi-family dwellings, and mixed-use buildings as long as the primary purpose of the building is for a residential purpose. A trade association suggested the Agencies look to the
As previously explained, the Agencies have determined that the meaning of the term "residential property" should not focus on a loan's purpose. In addition, the Agencies have determined that using the FDPA definition of "residential improved real estate" would render the exemption too expansive for its intended purpose because it could result in exempting all commercial or agricultural structures on a property merely because a residence is also located on the property. The Agencies believe detached structures used for commercial, agricultural, or other business purposes should be protected adequately by flood insurance as collateral given their value to the borrower and lender, and should not be covered by the detached structures exemption.
The Agencies, however, did find the HUD definition of "residential property" to be helpful. [36] The HUD lead-based paint regulation seeks to limit its scope only to properties and structures used solely for residential purposes, and to exclude land used for agricultural, commercial, industrial, or other non-residential purposes. The Agencies have determined that "residential property" in the detached structure exemption should be similar to the HUD regulation's definition in that it should apply only to structures for which there is a residential use and not to structures for which there is a commercial, agricultural, or other business use.
Additionally, the Agencies were guided by Regulation Z, which implements the Truth in Lending Act (TILA), and its well-established interpretations for further clarification on residential purpose because TILA generally covers consumer extensions of credit. [37] In particular, Regulation Z applies to credit "primarily for personal, family, or household purposes." [38] Consistent with Regulation Z, for purposes of the detached structures exemption, the final rule clarifies that the phrase "a structure that is part of a residential property" refers to a structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes. The Agencies are aware that certain structures may be used for both residential and business purposes and therefore have decided to limit the exemption only to structures with a primarily residential purpose. Furthermore, the final rule makes clear that the exemption applies only to structures that the lender deems part of the residential property.
Although the Agencies decline to adopt the FDPA's definition of "residential improved real estate" for "residential property," the Agencies agree with commenters that "residential property" should be interpreted as broadly as "residential improved real estate" as set forth in the
Several commenters also suggested that the Agencies provide further clarification of the term "detached" and how to interpret the statutory phrase "detached from the primary residential structure." One trade association commenter believed "detached" should be defined more precisely than the Agencies did in the
To be exempt from the mandatory flood insurance purchase requirement, the detached structure also may not "serve as a residence." The Agencies received numerous comments on the necessity for additional clarification on this aspect of the exemption. Some commenters suggested it would be helpful to describe the features or facilities that, if present, could indicate that a structure serves as a residence, but ultimately to defer to a lender's good faith determination. Several commenters suggested the Agencies provide a bright line test to facilitate determinations, such as total square footage or assessed value. Some commenters suggested a bright line test of whether a structure is designed for use as a residence, not how the structure is being used either at the time of the triggering event or subsequently. One large trade association suggested that "serve as a residence" be defined to include sleeping, bathroom, and kitchen facilities, while a large bank commenter asserted that a structure lacking one or more of these facilities should be deemed non-residential. Another trade association commenter suggested referring to the definition of "residence" set forth in the
Based on these comments, the Agencies believe it would be beneficial to clarify the meaning of "serve as a residence." However, given the numerous types of detached structures that could serve as a residence, the Agencies find that a single bright line test, for example, square footage or appraised value, to determine whether a structure serves as a residence, is not appropriate. Instead, the Agencies have concluded that a more practical approach to applying this exemption is to rely on the good faith determination of a lender on whether a detached structure serves as a residence. The Agencies believe the lender is in the best position to consider all the facts and circumstances involving a detached structure securing a loan, and this approach is similar to how the
The Agencies note that the
Moreover, some commenters suggested that the standard for whether a structure serves as a residence should be its actual use as a residence. The Agencies disagree with employing "actual use" as the sole indicator of a structure serving as a residence. Such a standard would exclude homes under construction, vacant rental units, vacant garage apartments, and numerous other structures from being deemed to serve as a residence. Although the Agencies decline to accept "actual use" as an appropriate indicator of residency by itself, a lender should take reasonable steps to determine if a structure is actually occupied by a resident. Therefore, the Agencies clarify that whether a detached structure in a residential property serves as a residence shall be based upon the regulated lending institution's good faith determination that the structure is intended for use or actually used as a residence.
Additionally, with respect to the "serve as a residence" provision, several commenters, including financial institutions, trade associations, and an individual, requested that the Agencies confirm that there is no duty to monitor residential collateral subsequent to the lender's making, increasing, renewing, or extending a loan to determine whether an exempt detached structure has been repurposed to serve as a residence. The Agencies agree that there is no duty to monitor the status of a detached structure following the lender's initial determination due to the minimal post-closing communications with borrowers or lack of systematic inspections of the property. In response to these commenters, the Agencies clarify that a lender must re-examine the status of a detached structure upon a qualifying triggering event under the FDPA--making, increasing, renewing, or extending a loan. However, consistent with existing obligations under the FDPA, if a lender subsequently determines that a property has become subject to the mandatory flood insurance purchase requirement and, as a result, the collateral is underinsured, the lender has a duty to inform the borrower of the obligation to increase insurance coverage. [43] If the borrower fails to increase the flood insurance to the appropriate amount, the lender must force place flood insurance, as required by the FDPA.
Moreover, as the Agencies noted in the
Several commenters supported the ability of lenders to require flood insurance for safety and soundness purposes or if it is in the best interest of the borrower, even if not required by statute. The Agencies reaffirm that a lender may require flood insurance on a detached structure, even though the statute does not require it, to protect the lender's and borrower's collateral securing the loan. [45]
In addition, a trade association suggested the Agencies consider adding language in the Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance (Notice of Special Flood Hazards) on the ability of a lender to waive flood insurance requirements for detached structures because some borrowers might not receive the Special Information Booklet. [46] The Agencies believe that the commenter's suggestion has merit and have determined that it also would be appropriate to amend the notice to include the related disclosure required by section 13(b) of HFIAA. This additional disclosure is intended to ensure that borrowers receive full disclosure on this aspect of flood insurance coverage, as discussed below in the SUPPLEMENTARY INFORMATION related to Appendices A & B.
Finally, the Agencies are adopting a change to their regulations in this section to amend the reference to the head of
__.__Escrow requirement
In General
The Agencies proposed to revise their regulations in the
Consistent with section 25(b) of HFIAA, the Agencies proposed that the escrow requirement would apply to any loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after
One financial institution commenter suggested that the Agencies' regulations be amended to reference "designated" loans because that is a defined term for loans that are subject to the mandatory flood insurance purchase requirement. The commenter also recommended that the regulation be amended to state that the escrow payments be payable with the same frequency as payments on the loan are "required to be" made for the duration of the loan because such wording would be technically accurate. The Agencies agree with these suggested changes, and the final rule adopts the changes recommended by the commenter.
Several financial institution and trade association commenters suggested that the Agencies apply the escrow requirement to loan applications received on or after
Another financial institution commenter requested that the Agencies clarify that a flood map change on or after
Finally, some credit union association commenters recommended that the escrow status be detailed on an insurance declarations page and that changes in escrow status should be reported to insurance companies who should, in turn, notify all lienholders and homeowners of changes in escrow. The Agencies note that the FDPA, as amended, does not address how insurance companies compose their declarations pages or when and how they must notify lienholders and homeowners regarding escrow status. Accordingly, the Agencies decline to make that requested change.
Dated:
Comptroller of the Currency.
By order of the
Robert deV. Frierson,
Secretary of the Board.
By order of the Board of Directors of the
Executive Secretary.
Dated at
By order of the Board of the
Secretary.
Dated at
By order of the Board of the
Secretary of the Board.
Dated at
Editor's note: For the full-text of this document, click this link or copy it into your browser: https://www.federalregister.gov/articles/2015/07/21/2015-15956/loans-in-areas-having-special-flood-hazards.
-1216783
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News