Federal Register Extracts

Agency: "Office of the Assistant Secretary for Housing--Federal Housing Commissioner, Department of Housing and Urban Development (HUD)."

SUMMARY: This final rule amends Federal Housing Administration (FHA) regulations to allow mortgagors the option to purchase private flood insurance on FHA-insured mortgages for properties located in Special Flood Hazard Areas (SFHAs), in satisfaction of the mandatory purchase requirement of the Flood Disaster Protection Act of 1973 (the FDPA). The FDPA, as amended, requires the owner of a property mapped in a SFHA, and located in a community participating in the National Flood Insurance Program, to purchase flood insurance as a condition of receiving a mortgage backed by the Government Sponsored Entities (GSEs), Department of Veterans Affairs (VA), U.S. Department of Agriculture (USDA), or Federal Housing Administration (FHA). In consideration of public comments, HUD's experience implementing the program, and HUD's goals of aligning with the Biggert-Waters Act while mitigating risk and protecting taxpayers' funds, this final rule adopts HUD's November 23, 2020, proposed rule with minor changes.

DATES:

Effective date: December 21, 2022.

FOR FURTHER INFORMATION CONTACT: Elisa Saunders, Director, Office of Single Family Program Development, Office of Housing, Department of Housing and Urban Development, 451 7th Street SW, Room 9184, Washington, DC 20410-8000; telephone number 202-708-2121 (this is not a toll-free number). HUD welcomes and is prepared to receive calls from individuals who are deaf or hard of hearing, as well as individuals with speech and communication disabilities. To learn more about how to make an accessible telephone call, please visit https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs.

SUPPLEMENTARY INFORMATION:

I. Background

National Flood Insurance Program Statutory Framework and the Biggert-Waters Act of 2012 The National Flood Insurance Act of 1968 (the 1968 Act) and the FDPA, as amended, govern the National Flood Insurance Program (NFIP). /1/ The 1968 Act makes federally backed flood insurance available to owners of improved real estate or manufactured homes located in special flood hazard areas (SFHAs) if their community participates in the NFIP.

FOOTNOTE 1 See Public Law 90-448 (1968); Public Law 93-234 (1973). These statutes are codified at 42 U.S.C. 4001 et seq. END FOOTNOTE

Until the adoption of the FDPA in 1973, the purchase of flood insurance was voluntary. Section 102 of the FDPA made the purchase of flood insurance mandatory. Specifically, it provides that no Federal officer or agency may approve any financial assistance for acquisition or construction /2/ in any area identified as having SFHAs and in which the sale of flood insurance has been made available under the 1968 Act, unless the building or mobile home and any personal property is covered by flood insurance. The National Flood Insurance Reform Act of 1994 /3/ (Reform Act) requires the owner of a property located in a community participating in the NFIP, and mapped in a SFHA, to purchase flood insurance as a condition of receiving a mortgage backed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the government-sponsored enterprises or GSEs), VA, USDA, or FHA.

FOOTNOTE 2 Defined at 42 U.S.C. 4003(a)(4). END FOOTNOTE

FOOTNOTE 3 Title V of the Riegle Community Development and Regulatory Improvement Act of 1994, Public Law 103-325 (1994). END FOOTNOTE

The Biggert-Waters Flood Insurance Reform Act of 2012, amended in 2014, (Biggert-Waters Act) /4/ further amended the Federal flood insurance statutes to encourage private-sector participation. However, it does not impose requirements on FHA-insured loans. The Biggert-Waters Act requires the Federal entities for lending regulation (the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the National Credit Union Administration (NCUA), and the Farm Credit Administration (FCA), and collectively, Federal regulators), to direct lenders to accept private flood insurance to satisfy the mandatory purchase requirement, instead of NFIP insurance, if the private flood insurance meets the conditions defined further in the statute at 42 U.S.C. 4012a(b)(7). In addition, the Biggert-Waters Act also requires Federal agency lenders and the GSEs to accept private flood insurance, as defined by the statute. The Biggert-Waters Act also mandates that federally regulated lenders, Federal agency lenders, and lenders who sell to or service loans on behalf of the GSEs must accept private flood insurance policies that meet the definition of "private flood insurance" in the Biggert Waters Act as satisfaction of mandatory purchase and flood insurance coverage requirements under the FDPA. /5/ On February 20, 2019, the Federal regulators jointly issued a final rule, published at 84 FR 4953 in the Federal Register, implementing the private flood insurance provisions of the Biggert-Waters Act. For more information on the statutory framework for NFIP, see HUD's proposed rule published at 85 FR 74630 on November 23, 2020.

FOOTNOTE 4 Public Law 112-141 (2012). END FOOTNOTE

FOOTNOTE 5 See id. END FOOTNOTE

HUD's Proposed Rule

On November 23, 2020 (85 FR 74630), HUD proposed to amend FHA regulations at 24 CFR parts 201, 203, and 206, to allow owners the option to purchase private flood insurance on FHA-insured mortgages for properties located in SFHAs, consistent with the FDPA and in harmony with private flood insurance requirements under the Biggert-Waters Act. As explained in the proposed rule, mortgagee's acceptance of private flood insurance policies would provide borrowers with more flood insurance choices, promote consistency with industry standards, reduce the regulatory restrictions on flood insurance for FHA-insured loans, and harmonize FHA policies with the congressional intent expressed in the Biggert-Waters Act to encourage an expanded private flood insurance market.

HUD's proposed rule included a provision with a compliance aid designed to help mortgagees evaluate whether a flood insurance policy meets HUD's definition of "private flood insurance." HUD's proposal provided, however, that a mortgagee may make its own determination and choose not to rely on this statement and that the provision would not relieve a mortgagee of the requirement to accept a policy that both meets the definition of "private flood insurance" and fulfills the flood insurance coverage requirement, even if the policy does not include the compliance aid statement. In other words, this provision would not permit mortgagees to reject policies solely because they are not accompanied by the compliance aid statement. Mortgagees that are regulated lending institutions may seek additional compliance aids on the policy.

HUD's proposed rule also sought public input on specific aspects of HUD's proposal. HUD sought public comment on whether FHA regulations should state that a mortgagee may accept a qualifying private flood insurance policy in lieu of an NFIP policy or that a mortgagee must accept a qualifying private flood insurance policy in lieu of an NFIP policy. Additionally, HUD sought public feedback on its proposed compliance aid. Specifically, HUD sought public comment on the language and option for the proposed HUD compliance aid for private flood insurance policies to demonstrate compliance with HUD's definition and requirements for private flood insurance.

HUD noted that its proposed rule differed from the Federal regulators' rule, published in the Federal Register at 84 FR 4953 on February 20, 2019, in several ways. Both rules offer a compliance aid to help mortgagees evaluate whether a flood insurance policy meets the definition of "private flood insurance." However, as explained in HUD's proposed rule, HUD's compliance aid differs from the Federal regulators' compliance aid provided in their final rule. HUD explained that this is due to differences in authorities governing the Federal regulators and FHA. The Federal regulators rely on the governing authority of the Biggert-Waters Act, which does not cover FHA. Additionally, unlike the Federal regulators' joint rule, HUD did not propose to permit Mortgagees to exercise their discretion to accept flood insurance policies, provided by private insurers or mutual aid societies, that do not meet the definition and requirements for a private flood insurance policy as laid out in HUD's proposed rule. As stated in HUD's proposed rule, due to the differences between HUD's and the Federal regulators' rules, compliance with the Federal regulators' final rule should not be interpreted as compliance with HUD's requirements.

II. Changes Made at the Final Rule Stage

In consideration of the public comments, HUD's experience implementing the program, and HUD's goals of aligning with the Biggert-Waters Act while mitigating risk and protecting taxpayers' funds, this final rule adopts with minor changes HUD's proposal published on November 23, 2020 (85 FR 74630). What follows is a summary of HUD's changes to 24 CFR parts 201, 203, and 206 made by this final rule. See HUD's proposed rule for more detailed information.

SEC 201.28 Flood and Hazard Insurance, and Coastal Barriers Properties

HUD revises SEC 201.28 to better align it with the requirements of 42 U.S.C. 4012a(a) and [Sec.] SEC 203.16a and 206.45. Specifically, the revision adds a reference to the statutory requirements for community participation in NFIP and NFIP's availability in that community. HUD is adding this language to ensure that prospective homeowners seeking homes in communities that do not participate in NFIP are aware that they will not be able to obtain a private flood insurance policy and still meet FHA insurance requirements. In addition, HUD is adding language to clarify that lenders may rely on the compliance aid statement as provided in SEC 203.16a(c).

SEC 203.16a Mortgagor and Mortgagee Requirement for Maintaining Flood Insurance Coverage

--This is a summary of a Federal Register article originally published on the page number listed below--

Final rule.

CFR Part: "24 CFR Parts 201, 203, and 206"

RIN Number: "RIN 2502-AJ43"

Citation: "87 FR 70733"

Document Number: "Docket No. FR-6084-F-02"

Federal Register Page Number: "70733"

"Rules and Regulations"