Federal Agencies Issue Rule on Loans in Areas Having Special Flood Hazards

Targeted News Service

WASHINGTON, July 21 -- The Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation, Farm Credit Administration, and National Credit Union Administration published the following rule in the Federal Register:

Loans in Areas Having Special Flood Hazards

A Rule by the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the National Credit Union Administration on 07/21/2015

Publication Date: Tuesday, July 21, 2015

Agencies: Department of the Treasury

Federal Deposit Insurance Corporation

Federal Reserve System

Farm Credit Administration

National Credit Union Administration

Office of the Comptroller of the Currency

Dates: The effective date of amendatory instructions 1, 6, 7, 8, 10, 15, 16, 21 and 22 is October 1, 2015. The effective date of amendatory instructions 2, 3, 4, 5, 9, 11, 12, 13, 14, 17, 18, 19, 20, 23, 24, 25, and 26 is January 1, 2016.

Effective Date: 10/01/2015

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

The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration (FCA), and the National Credit Union Administration (NCUA) (collectively, the Agencies) are amending their regulations regarding loans in areas having special flood hazards to implement certain provisions of the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA), which amends some of the changes to the Flood Disaster Protection Act of 1973 mandated by the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters). Specifically, the final rule requires the escrow of flood insurance payments on residential improved real estate securing a loan, consistent with the changes set forth in HFIAA. The final rule also incorporates an exemption in HFIAA for certain detached structures from the mandatory flood insurance purchase requirement. Furthermore, the final rule implements the provisions of Biggert-Waters related to the force placement of flood insurance. Finally, the final rule integrates the OCC's flood insurance regulations for national banks and Federal savings associations. The Agencies plan to address the private flood insurance provisions in Biggert-Waters in a separate rulemaking.

DATES:

The effective date of amendatory instructions 1, 6, 7, 8, 10, 15, 16, 21 and 22 is October 1, 2015. The effective date of amendatory instructions 2, 3, 4, 5, 9, 11, 12, 13, 14, 17, 18, 19, 20, 23, 24, 25, and 26 is January 1, 2016.

FOR FURTHER INFORMATION CONTACT:

OCC: Rhonda L. Daniels, Compliance Specialist, Compliance Policy Division, (202) 649-5405; Margaret C. Hesse, Senior Counsel, Community and Consumer Law Division, (202) 649-6350; or Heidi M. Thomas, Special Counsel, Legislative and Regulatory Activities Division, (202) 649-5490, for persons who are deaf or hard of hearing, TTY, (202) 649-5597, Office of the Chief Counsel.

Board: Lanette Meister, Senior Supervisory Consumer Financial Services Analyst (202) 452-2705; Vivian W. Wong, Counsel (202) 452-3667, Division of Consumer and Community Affairs; or Daniel Ericson, Counsel (202) 452-3359, Legal Division; for users of Telecommunications Device for the Deaf (TDD) only, contact (202) 263-4869.

FDIC: Navid Choudhury, Counsel, Consumer Compliance Section, (202) 898-6526, Legal Division; or John Jackwood, Senior Policy Analyst, (202) 898-3991, Division of Depositor and Consumer Protection.

FCA: Paul K. Gibbs, Senior Accountant, Office of Regulatory Policy (703) 883-4203, TTY (703) 883-4056; or Mary Alice Donner, Senior Counsel, Office of General Counsel (703) 883-4020, TTY (703) 883-4056.

NCUA: Frank Kressman, Associate General Counsel, Office of General Counsel, (703) 518-6540.

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

In October 2013, the Agencies jointly issued a proposal to implement certain provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 [1] (Biggert-Waters) over which the Agencies have jurisdiction (the October 2013 Proposed Rule). [2] Specifically, the October 2013 Proposed Rule would have required regulated lending institutions [3] to escrow flood insurance premiums and fees on residential improved real estate securing a loan, unless the regulated lending institution met the statutory small institution exception. The October 2013 Proposed Rule also would have required regulated lending institutions to accept private flood insurance coverage, as defined in Biggert-Waters, to satisfy the mandatory flood insurance purchase requirement. Furthermore, the October 2013 Proposed Rule contained provisions to implement the Biggert-Waters changes related to force-placed flood insurance.

In March 2014, the President signed into law the Homeowner Flood Insurance Affordability Act of 2014 [4] (HFIAA), which amends some of the changes made by Biggert-Waters to the Flood Disaster Protection Act (FDPA). [5] The Agencies jointly issued a proposal in October 2014 (the October 2014 Proposed Rule) to implement the provisions in HFIAA over which they have jurisdiction. [6] The October 2014 Proposed Rule would have required regulated lending institutions to escrow flood insurance premiums and fees on residential improved real estate securing a loan, consistent with HFIAA's amendments to Biggert-Waters, and excluded certain detached structures from the mandatory flood insurance purchase requirement.

The Agencies are issuing this final rule to implement the escrow provisions and the detached structures provision detailed in the October 2014 Proposed Rule. In addition, this final rule incorporates the force-placed flood insurance provisions that the Agencies proposed in the October 2013 Proposed Rule, which were unaffected by HFIAA. The Agencies plan to address the private insurance provisions of the October 2013 Proposed Rule in a separate rulemaking. In connection with the issuance of this final rule, the Agencies have coordinated and consulted with the Federal Financial Institutions Examination Council (FFIEC), as required by certain provisions of the flood insurance statutes. [7] Furthermore, the Agencies encourage lenders to consult Biggert-Waters and HFIAA for further information about revisions to the flood insurance statutes that will not be implemented through the Agencies' rulemakings.

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 Federal Emergency Management Agency (FEMA) for individual communities. [11] A community establishes its eligibility to participate in the NFIP by adopting and enforcing floodplain management measures that regulate new construction and by making substantial improvements within its SFHAs to eliminate or minimize future flood damage. [12]

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, FDIC, NCUA, and the former Office of Thrift Supervision (OTS) [13] to issue regulations governing the lending institutions that they supervised. These regulations also require lenders to notify borrowers that the secured property is located in a SFHA and whether Federal disaster assistance is available with respect to the property in the event of a flood.

Title V of the Riegle Community Development and Regulatory Improvement Act of 1994, also known as the National Flood Insurance Reform Act of 1994 (Reform Act), comprehensively amended the Federal flood insurance statutes. [14] The Reform Act established new requirements for Federally regulated lending institutions, such as the escrow for flood insurance premiums under certain conditions and mandatory force placement of flood insurance coverage. The Reform Act was intended to increase compliance with the mandatory flood insurance purchase requirements and participation in the NFIP to provide additional income to the National Flood Insurance Fund and to decrease the financial burden of flooding on the Federal government, taxpayers, and flood victims. In addition, the Reform Act broadened the mandatory flood insurance purchase requirement to include lenders regulated by the FCA.

The Reform Act required the OCC, Board, FDIC, NCUA, and the former OTS to revise their flood insurance regulations and required the FCA to promulgate flood insurance regulations for the first time. The Agencies fulfilled these requirements by issuing a joint final rule in August 1996. [15]

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 January 1, 2016, and provided additional exceptions to the escrow requirement. [21] HFIAA also mandated that the Agencies by regulation direct regulated lending institutions that are not excepted from the escrow requirements to provide an option to borrowers to escrow flood insurance premiums and fees for outstanding loans. [22] In addition, HFIAA provided a new exemption to the mandatory flood insurance purchase requirement for a structure that is part of a residential property but is detached from the primary residential structure and does not serve as a residence. [23]

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 October 2013 Proposed Rule

In the October 2013 Proposed Rule, the Agencies proposed to revise their respective flood insurance regulations to implement the Biggert-Waters amendments addressing the escrow of flood insurance payments, private flood insurance, and force-placed insurance. The October 2013 Proposed Rule would have required a regulated lending institution, or servicer acting on its behalf, to escrow premiums and fees for flood insurance for any loan secured by residential improved real estate or a mobile home that was made or outstanding on or after July 6, 2014, unless the institution qualified for the statutory exception for small institutions. [26]

The October 2013 Proposed Rule also would have amended the provisions concerning the force placement of flood insurance 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. Furthermore, the October 2013 Proposed Rule would have stipulated the circumstances under which a lender or its servicer must terminate force-placed flood insurance coverage and refund payments to a borrower and the documentary evidence a lender must accept to confirm that a borrower has obtained an appropriate amount of flood insurance coverage.

The October 2013 Proposed Rule included new and revised sample notice forms and clauses that included language concerning the availability of private flood insurance coverage, consistent with Biggert-Waters, and that provided sample language for regulated lending institutions to use to comply with the proposal's escrow notice requirement. The OCC and the FDIC proposed in the October 2013 Proposed Rule to integrate their flood insurance regulations for national banks and Federal savings associations and for State non-member banks and State savings associations, respectively.

Finally, consistent with Biggert-Waters, the October 2013 Proposed Rule would have required a regulated lending institutions to accept private flood insurance that meets the statutory definition to satisfy the mandatory purchase requirement and specifically requested comment on various issues related to this requirement. [27]

B. Summary of the October 2014 Proposed Rule

Under the October 2014 Proposed Rule, the Agencies proposed to exempt certain detached structures on residential property from the mandatory flood insurance purchase requirement and to amend the requirement to escrow flood insurance premiums and fees, consistent with the Biggert-Waters escrow provisions as amended by HFIAA. Specifically, the October 2014 Proposed Rule would have provided that flood insurance would not be required for any structure that is part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence, consistent with HFIAA.

In addition, the October 2014 Proposed Rule generally would have required 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 January 1, 2016. The Agencies also proposed in the October 2014 Proposed Rule several exceptions to the escrow requirement as set forth in Biggert-Waters and HFIAA, including an exception for certain regulated lending institutions with total assets of less than $1 billion, and exceptions for business, commercial, and agricultural purpose loans, certain subordinate lien loans, certain condominium and similar loans, home equity lines of credit, nonperforming loans, and short-term loans.

The October 2014 Proposed Rule also would have required regulated lending institutions not subject to an escrow exception to offer borrowers the option to escrow loans outstanding as of January 1, 2016. Regulated lending institutions that no longer qualified for the small lender exception of less than $1 billion in assets also would have had to comply with the general escrow requirement and the option to escrow requirement.

C. Overview of Public Comments

The Agencies received 81 written comments on the October 2013 Proposed Rule and 52 written comments on the October 2014 Proposed Rule. Between the two proposed rules, the Agencies received comments from a wide range of commenters, such as: Financial institutions (including banks, credit unions, and farm credit institutions); various trade associations (including bankers' trade associations, credit union trade associations, a farm credit trade association, home building and realtor trade associations, and a flood hazard determination trade association); the insurance industry (including insurance companies, trade associations, and brokers); individuals; public interest/consumer advocates; state insurance regulators; and a municipal government. In addition to receiving written comments, the Agencies conferred with several stakeholders in the flood insurance community, including state insurance regulators, the National Association of Insurance Commissioners (NAIC) staff, and FEMA staff. [28]

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 January 1, 2016. Some commenters suggested clarifications of the language of the escrow notice. Commenters were supportive of the exceptions to the escrow requirement, and some commenters asked for additional exceptions. Most commenters on the proposed escrow provisions requested clarifications on the various exceptions to the escrow requirement. There were also comments questioning whether regulated lending institutions are expected to monitor the status of excepted loans to ensure they continue to meet the exception from the escrow requirement, especially with respect to excepted subordinate lien loans and nonperforming loans. Furthermore, the Agencies received several comments on the proposed rule to implement the option to escrow requirement. Commenters were supportive of the Agencies' interpretation that the option to escrow requirement does not apply to loans and issuers that are excepted from the general escrow requirement. The Agencies also received comments supporting the proposal that a regulated lending institution must establish an escrow "as soon as reasonably practicable" after a consumer requests the option to escrow, although other commenters requested further clarification.

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 October 2013 Proposed Rule. As the Agencies have explained above, the Agencies plan to address these issues in a separate rulemaking.

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 January 1, 2016. The FDPA, as amended by Biggert-Waters, also provides that, except as may be required under applicable State law, a regulated lending institution would not be required to escrow if it has total assets of less than $1 billion and, as of the date of enactment of Biggert-Waters, July 6, 2012, was not required by Federal or State law to escrow taxes or insurance for the term of the loan and did not have a policy of uniformly and consistently escrowing taxes and insurance. The Agencies are implementing this exception in the final rule with some clarifications. Furthermore, the Agencies are adopting transition rules for regulated lending institutions that have a change in status and no longer qualify for this small-lender exception.

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 July 5, 2012, the day before Biggert-Waters was enacted, remain in effect, and will be enforced by the Agencies, through December 31, 2015, the day before the effective date of the escrow provisions. [29]

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 January 1, 2016. The final rule is generally consistent with the language the Agencies proposed in the October 2014 Proposed Rule. However, the Agencies are providing additional time, until June 30, 2016, for regulated lending institutions to mail or deliver information to borrowers about the option to escrow, based on some commenters' suggestions. The Agencies' final rule also adopts the proposal to require regulated lending institutions that no longer qualify for the small lender exception to offer and make available to a borrower the option to escrow flood insurance premiums and fees.

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 October 2014 Proposed Rule regarding the escrow requirement in light of recommendations from commenters. Moreover, the Agencies concur with commenters' suggestions to include language in Appendix A similar to the language HFIAA section 13(b) requires to be included in the Special Information Booklet in connection with the exemption from the mandatory flood insurance purchase requirement for certain detached structures. Appendix A, as amended by the Agencies in this final rule, also contains language proposed in the October 2013 Proposed Rule to include the disclosures required by section 102(b)(6) of the FDPA, as added by section 100239 of Biggert-Waters, regarding the availability of private flood insurance coverage and other technical changes.

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 October 2014 Proposed Rule to be consistent with a commenter's recommendations and to improve readability.

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 FEMA from "Director" to "Administrator." [30] In addition, the OCC is finalizing the integration of its flood insurance regulations for national banks and Federal savings associations. The FDIC has integrated its flood insurance regulations for State non-member banks and State savings associations in a separate rulemaking. [31]

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 January 1, 2016, consistent with HFIAA. Although the amendments to Appendix A include changes unrelated to the escrow provisions, the Agencies are delaying the effective date of all changes to the Appendix in the interest of reducing compliance burden on regulated lending institutions. All other provisions implemented in this final rule will become effective on October 1, 2015.

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 FFIEC) shall by regulation direct regulated lending institutions not to make, increase, extend, or renew any loan secured by improved real estate or a mobile home located or to be located in an area that has been identified by the Administrator of FEMA as an area having special flood hazards and in which flood insurance has been made available under the NFIP, unless the building or mobile home and any personal property securing such loan is covered for the term of the loan by flood insurance. Thus, section 102(b) of the FDPA grants the Agencies rulemaking authority and also requires the Agencies to implement this mandatory flood insurance purchase requirement for regulated lending institutions by regulation.

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 FFIEC) must by regulation require all premiums and fees for flood insurance under the 1968 Act for residential improved real estate or a mobile home be paid to the regulated lending institution or servicer for any loan secured by the improved real estate or mobile home with the same frequency as payments on the loan are made for the duration of the loan. The statute requires that such funds be deposited in an escrow account on behalf of the borrower and used to pay the flood insurance provider when premiums are due. Section 25(b) of HFIAA applies these requirements to loans that are originated, refinanced, increased, extended, or renewed on or after January 1, 2016.

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 FFIEC) shall by regulation direct that each regulated lending institution offer and make available to a borrower of an outstanding loan the option to have the borrower's payment of flood insurance premiums and fees escrowed.

V. Section-by-Section Analysis

__.__Authority, Purpose, and Scope

As discussed in the October 2013 Proposed Rule, the title of the head of FEMA has changed from "Director" to "Administrator" since the Agencies last revised their flood insurance regulations. The Agencies proposed a technical amendment consistent with that change. No comments were received on the proposed technical amendment to designate correctly the head of FEMA. The Agencies therefore adopt the change in title of the head of FEMA from "Director" to "Administrator" in the scope section as proposed, and in subsequent sections of their regulations.

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 FEMA from "Director" to "Administrator" in the definitions. The Agencies are adopting these changes as proposed.

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 October 2013 Proposed Rule would have revised the language relating to the coverage limit to reflect more accurately what is actually covered under Federal flood insurance statutes. Specifically, the Agencies proposed that the language be amended to state that flood insurance coverage is limited to the building or mobile home and any personal property securing the loan and not the land itself. Some commenters indicated the proposed amendment may add confusion because there may be concern that the amendment indicates a change from past practice. One commenter suggested defining the value of the building as either the replacement cost of the structure or the appraised value minus the land value as determined from the appraisal or the insurable value as obtained from the insurance agent writing the policy.

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 October 2014 Proposed Rule would have incorporated this exemption as provided in HFIAA into the Agencies' regulations. The Agencies solicited comment on whether the final rule should clarify certain terms in the provision, such as "residence" and "residential property." For instance, the Agencies suggested that there may be some ambiguity as to when a structure may serve as a residence even if it may not conform to certain State or local requirements for residential property or when a detached structure should be deemed a residence. Specifically, the Agencies solicited comment on whether the term "residential property" should not only refer to the type of property securing the loan, but also to the loan's purpose. Thus, the Agencies suggested in the October 2014 Proposed Rule that the detached structure exemption could be available only if the residence serving as collateral does not secure a loan made primarily for a business, commercial, or agricultural purpose.

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 Department of Housing and Urban Development (HUD) lead-based paint regulations for a definition of "residential property." One commenter inquired whether the detached structures exemption excludes all detached structures on a property with a primary residence or only those the lender deems to be part of the residential property. Lastly, two commenters believe the final rule should leave the term undefined, similar to the treatment of the term in other Federal statutes. [35]

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 Interagency Questions and Answers Regarding Flood Insurance (Q&As). Commenters in particular referenced Q&A 51, which indicates that "residential improved real estate" does not distinguish whether a building is single- or multi-family, or owner- or renter-occupied, and includes single-family dwellings, two- to four-family dwellings, multi-family dwellings containing five or more residential units, and mixed-use buildings, so long as the building is used primarily for residential purposes. [39]

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 October 2014 Proposed Rule and that a structure joined to a residence by a covered walkway or breezeway should be treated as a separate, stand-alone residential structure. Two commenters believed "detached" should be defined as "standing alone; not joined by any structural connection to any structure to which flood insurance is required." Other commenters provided varying definitions of the term as well. The Agencies agree that a clear definition of "detached" would ensure consistent application by lenders in determining which structures qualify for the exemption. Therefore, for purposes of the detached structure exemption, the Agencies have drafted the final rule to clarify that a structure is "detached" from the primary residential structure if it is not joined by any structural connection to the residential structure. That is, a structure is "detached" if it stands alone. This clarification is consistent with the coverage provision of the NFIP's Standard Flood Insurance Policy (SFIP) for additions and extensions to a dwelling unit.

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 Internal Revenue Service (IRS) regulations, [40] while some commenters referenced other Federal regulations for similar definitions. Lastly, one commenter suggested a structure must be occupied to be considered a residence and that a structure intended only for periodic use or that serves as a home office should not be deemed a residence.

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 IRS evaluates whether property constitutes a "residence." [41] In making this determination, as suggested by several commenters, the lender should focus on a structure's intended use. By focusing on the intended use of the structure, a lender could determine objectively whether a structure could serve as a residence and therefore not qualify for the exemption.

The Agencies note that the IRS definition of "residence" provides that a residence generally contains sleeping, bathroom, and kitchen facilities. [42] The Agencies agree that a structure that serves as a residence would generally have such facilities. Therefore, a lender could examine the structure for the presence of these facilities to make a determination of whether it serves as a residence. However, the Agencies decline to accept certain commenters' suggestions that a structure must contain sleeping, bathroom, and kitchen facilities, and that the lack of at least one of these facilities would render the structure non-residential. Detached structures can vary greatly in terms of size, value, purpose, and facilities. Furthermore, not all three facilities are necessary in order for a structure to serve as an individual's residence. For example, a structure can have sleeping and kitchen facilities, while the resident makes use of a separate structure as a bathroom facility. Similarly, a structure can have sleeping and bathroom facilities but lack kitchen facilities. Because a structure without one or more of these facilities may be intended for use as a residence, the final rule provides that a structure could serve as a residence if it generally includes sleeping, bathroom, or kitchen facilities.

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 October 2014 Proposed Rule, although the exemption would address borrowers' and lenders' concerns by excluding relatively low-value detached structures from the mandatory flood insurance purchase requirement if they secure a designated loan, there may be some detached structures that are of relatively high value, such as a detached greenhouse. The Agencies further noted that, although the statute does not require flood insurance for such structures, as a matter of safety and soundness, lenders may nevertheless require coverage on these detached structures, and that such coverage also may be in the borrower's best interest. Furthermore, the Agencies also noted in the October 2014 Proposed Rule that section 13(b) of HFIAA, which the Consumer Financial Protection Bureau (CFPB) has implemented, amends section 5(b) of the Real Estate Settlement Procedures Act of 1974 (RESPA) to require a related disclosure in the Special Information Booklet provided to borrowers informing them that they may still wish to obtain, and mortgage lenders may still require borrowers to maintain, flood insurance even if not required by the FDPA. [44]

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 FEMA from "Director" to "Administrator" as discussed above in the SUPPLEMENTARY INFORMATION related to __.__Authority, purpose, and scope.

__.__Escrow requirement

In General

The Agencies proposed to revise their regulations in the October 2014 Proposed Rule in accordance with section 102(d) of the FDPA (42 U.S.C. 4012a(d)), as amended by section 25 of HFIAA, [47] to require a regulated lending institution, or a servicer acting on behalf of a regulated lending institution, to escrow all premiums and fees for flood insurance required for loans secured by residential improved real estate or a mobile home unless the loan or the lending institution qualifies for one of the statutory exceptions. In addition, under the October 2014 Proposed Rule, these premiums and fees would be payable with the same frequency as payments on the loan are made for the duration of the loan. Several commenters, including a municipal government commenter, supported the escrow requirement, although some financial institution commenters opposed the requirement. As escrows are required by the statute, the Agencies are adopting a final rule that will implement the escrow requirement in section 102(d) of the FDPA, as amended.

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 January 1, 2016. Although section 25(b) of HFIAA applies the escrow requirement to loans "originated, refinanced, increased, extended, or renewed," the Agencies proposed regulatory language in the October 2014 Proposed Rule that applies the requirement to loans "made, increased, extended, or renewed" to be consistent with the way these triggering events are referenced elsewhere in the regulation. [48] Several commenters agreed with the Agencies' proposal, and the Agencies adopt this non-substantive wording change in the final rule.

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 January 1, 2016. These commenters stated that loan applications could be received prior to January 1, 2016, but may not close before January 1, 2016. Thus, these commenters suggested, these loans may initially be designated as non-escrow loans, but if they close on or after January 1, 2016, lenders will have to re-categorize these loans as loans requiring the escrow of flood insurance premiums and fees. The Agencies note that the statute specifically and clearly applies the escrow requirement to loans that experience a triggering event on or after January 1, 2016. Furthermore, the Agencies believe that lenders have the capability to anticipate whether loan applications submitted prior to January 1, 2016 may close on or after January 1, 2016 and thus should structure those transactions accordingly. Therefore, the Agencies decline to make the change suggested by these commenters.

Another financial institution commenter requested that the Agencies clarify that a flood map change on or after January 1, 2016 that causes a building, which had not previously been located in an SFHA, to be located in an SFHA would not impose a duty on a lender to begin escrowing flood insurance premiums and fees for a loan that is secured by such building. Section 102(d) of the FDPA, as amended, applies to loans that experience a triggering event on or after January 1, 2016. Because a map change is not a triggering event, lenders would not be required to escrow flood insurance premiums and fees based solely on that change.

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: June 16, 2015.

Thomas J. Curry,

Comptroller of the Currency.

By order of the Board of Governors of the Federal Reserve System, June 18, 2015.

Robert deV. Frierson,

Secretary of the Board.

By order of the Board of Directors of the Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

Dated at Washington, DC, this 16th day of June, 2015.

By order of the Board of the Farm Credit Administration.

Dale L. Aultman,

Secretary.

Dated at McLean, VA, this 16th day of June, 2015.

By order of the Board of the National Credit Union Administration.

Gerard Poliquin,

Secretary of the Board.

Dated at Alexandria, VA, this 18th day of June, 2015.

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.

Myron Struck, editor, Targeted News Service, Springfield, Va., 703/304-1897; editor@targetednews.com; http://www.targetednews.com

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