Rule2022-25258
Acceptance of Private Flood Insurance for FHA-Insured Mortgages
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 21, 2022
Effective
December 21, 2022
Issuing agencies
Housing and Urban Development Department
Abstract
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.
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<title>Federal Register, Volume 87 Issue 223 (Monday, November 21, 2022)</title>
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[Federal Register Volume 87, Number 223 (Monday, November 21, 2022)]
[Rules and Regulations]
[Pages 70733-70744]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-25258]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 201, 203, and 206
[Docket No. FR-6084-F-02]
RIN 2502-AJ43
Acceptance of Private Flood Insurance for FHA-Insured Mortgages
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, Department of Housing and Urban Development (HUD).
ACTION: Final rule.
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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 <a href="https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs">https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs</a>.
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
[[Page 70734]]
homes located in special flood hazard areas (SFHAs) if their community
participates in the NFIP.
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\1\ See Public Law 90-448 (1968); Public Law 93-234 (1973).
These statutes are codified at 42 U.S.C. 4001 et seq.
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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.
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\2\ Defined at 42 U.S.C. 4003(a)(4).
\3\ Title V of the Riegle Community Development and Regulatory
Improvement Act of 1994, Public Law 103-325 (1994).
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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.
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\4\ Public Law 112-141 (2012).
\5\ See id.
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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
[[Page 70735]]
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 final rule makes two changes to Sec. 203.16a as proposed.
Initially, the final rule adds Sec. 203.16a(a)(1)(iii), and addresses
the applicability of Sec. 203.16a if a mortgage is to cover property
improvements that are not otherwise covered by the flood insurance
standard for condominium projects established under Sec.
203.43b(d)(6)(iii) or (i)(1). HUD makes this technical change for
clarity given the scope of properties that may constitute a condominium
project.
Second, HUD's proposed rule at Sec. 203.16a(d) stated that flood
insurance must be maintained during such time as the mortgage is
insured in an amount at least equal to the lowest of three possible
amounts, consistent with the statutory requirements in Section 102 of
the FDPA. One option proposed by paragraph (d)(1) of this section was
to use the statutory language providing for coverage in an amount equal
to the ``Development or project cost less estimated land cost.'' This
final rule revises paragraph (d)(1) to clarify the meaning of
``Development or project cost less estimated land cost''. HUD is now
providing that paragraph (d)(1) is an amount equal to ``100 percent
replacement cost of the insurable value of the improvements, which
consists of the development or project cost less estimated land cost.''
This language is codified in HUD's Home Equity Conversion Mortgage
(HECM) regulations at Sec. 206.45(c)(3)(i). This final rule makes this
technical change for clarity and consistency and alignment with HECM
regulations.
Sec. 206.45 HECM Requirements for Private Flood Insurance Coverage
This final rule makes several minor revisions to Sec. 206.45 as
proposed. Initially, HUD is adding a restatement of the definition and
requirements for flood insurance to Sec. 206.45. HUD is also revising
Sec. 206.45(c)(2) to add for HECM mortgages the loss payee and
compliance aid language that is in Sec. 203.16a(c). This final rule
adds paragraph (c)(4) to Sec. 206.45 to restate the definition of
private flood insurance in Sec. 203.16a(e). HUD is amending Sec.
206.45 by replacing the cross references to the definition in Sec.
203.16a with cross references to Sec. 206.45(c)(4). HUD has determined
that greater clarity can be achieved by keeping private flood insurance
requirements related to HECM in part 206. Additionally, this increases
consistency between HECM and forward-facing mortgage regulations and
affords the same benefits to both HECM and forward-facing mortgage
mortgagors.
Second, similar to Sec. 203.16a(a)(1)(iii), this final rule adds a
paragraph to Sec. 206.45. Under this new paragraph (c)(1)(i)(C), the
requirements of Sec. 206.45(c) apply if a mortgage is to cover
property improvements that are not otherwise covered by the flood
insurance standard for condominium projects established under Sec.
203.43b(d)(6)(iii) or (i)(1). HUD makes this technical change for
consistency within HUD's regulations and clarity given the scope of
properties that may comprise a condominium project.
Finally, this final rule reorganizes the text of Sec. 206.45(c)(1)
into new paragraphs (c)(1) and (2) for clarity and structural
consistency with Sec. 203.16a and adds a header to paragraph (c)(3).
III. The Public Comments
The public comment period for the November 23, 2020, proposed rule
closed on January 22, 2021. HUD received 31 (thirty-one) public
comments in response to the proposed rule from brokers, homeowners,
mortgagees, insurance agents, first-time home buyers, FHA borrowers,
non-profit organizations, and other interested parties. This section
presents the significant issues, questions, and suggestions submitted
by public commenters, and HUD's responses to these issues, questions,
and suggestions.
General Support and Benefits of HUD's Proposed Rule
Many commenters supported HUD's proposal to permit FHA borrowers to
purchase private flood insurance. Many commenters cited how the
proposed rule would save homeowners money, increase affordability and
options for buyers, and offer broader insurance coverage at a lower
price. Some commenters urged HUD to move forward with a final rule as
soon as possible for FHA borrowers to realize the intended benefit.
One commenter noted that COVID-19 has presented obstacles of its
own and the proposed rule will help families save money during the
pandemic.
HUD Response: HUD appreciates the feedback and is publishing this
rule to align with the intention of the Biggert-Waters Act. This rule
allows borrowers the option to purchase private flood insurance in lieu
of an NFIP policy, where flood insurance is required. Private flood
insurance policies might offer borrowers greater coverage, less
expensive rates, and lower deductibles.
Comments: Private Insurance Is Less Expensive and Offers More Coverage
Many commenters stated that Federal flood insurance policies are
significantly more expensive than private insurance. Moreover,
commenters stated that private insurance offered more coverage for
lower premiums. One commenter stated that they considered refinancing
their home into a conventional loan so they could buy private insurance
because of the price of Federal flood insurance policies. Another
commenter quoted the premium they received for Federal flood insurance
at $5,500 with a $2,000 deductible, compared to the premium for private
insurance at $1,100 with a $1,000 deductible for the same coverage. One
commenter stated that even though their home has not had a flood in
about 70 years the premiums for required insurance are ``still insanely
high.'' Other commenters stated that each year the cost of Federal
flood insurance continues to rise significantly. These commenters
generally agreed that private flood insurance would help low to middle
income families save money, expand homeownership to first time
homeowners, and help homeowners stay in their homes rather than having
to sell because of expensive NFIP flood insurance. Another commenter
said that because private flood insurance typically provides more
coverage than an NFIP policy, it is less likely that FHA insurance will
be required after floods.
HUD Response: HUD is encouraged that borrowers will be offered
greater choice in selecting a flood insurance policy, which will reduce
differences between FHA-insured mortgages and other mortgage options,
while maintaining fiscal responsibility to FHA borrowers and taxpayers.
The range of flood insurance rates and deductibles varies greatly
based on the characteristics of each property. A private flood
insurance policy might allow some borrowers to obtain a less expensive
policy.
[[Page 70736]]
Comments: Offering Private Insurance Promotes Affordability and Buying
Options and May Expand the Flood Insurance Market
Commenters stated that private flood insurance is more affordable
and gives more individuals and families the opportunity to own or
refinance homes, along with the ability to save money. For example,
allowing private flood insurance for FHA-insured loans will give more
consumers who do not have ``extra funds to afford the current flood
insurance premiums'' the opportunity to become homeowners. One
commenter stated that FHA-insured loans are supposed to represent
``affordable housing.'' The commenter continued, however by stating
that borrowers are forced to get Federal flood insurance policies
through FEMA which are double the cost of private flood insurance and
which prohibit many prospective homeowners from buying due to costs.
Another commenter noted that the high rates for Federal flood insurance
could make a difference in someone being able to buy their dream home.
Another commenter stated that their ``elderly clients are tired of
having to sell their homes because their [Federal flood insurance
policy] rates are so high.''
Several commenters supported the proposed rule because it could
give homeowners and buyers financial breathing room and allow people to
purchase homes without restrictions on purchasing power arising from
the cost of flood insurance. One commenter noted the difficulty in
advising clients that they are not eligible for a $500 private flood
policy and are required to purchase a $3000 policy due to FHA
requirements. The commenter also stated that in some cases the costs of
FEMA insurance cause people to not be able to purchase a new home at
all.
Another commenter stated that consumers should be allowed to choose
their flood insurance policy, and that the current rule restricts
consumer choice, creates inequities between FHA and more conventional
loan holders, and raises barriers for FHA-insured loan products, which
sometimes precludes first-time home buyers from closing on a home. One
commenter stated, from the seller's point of view, that after potential
buyers with an FHA-insured loan realize that they will be adding ``over
$100 to their house payment for flood insurance,'' buyers choose not to
go forward with the sale.
One commenter emphasized that the rule's proposal to permit private
flood insurance is significant and critical to consumer choice because
``about 20 percent of home purchase first liens and about 15 percent of
refinance transactions on 1-4 family dwelling are FHA-insured.'' The
commenter stated that every year there are thousands of borrowers who
are not able to choose private flood insurance that is more affordable.
One commenter supported the proposed rule explaining that it would
give homeowners the option to purchase private flood insurance during
periods where NFIP may lapse. Additionally, one commenter noted that
the rule would grow the private flood insurance market to complement
the NFIP and expand consumer flood insurance options.
HUD Response: Changes to HUD's flood insurance regulations to allow
acceptance of private flood insurance policies offer access to a
broader range of flood insurance options. Private flood insurance
policies could provide potential cost savings to some borrowers
compared to the cost of NFIP policies.\6\ Additionally, in the event of
a lapse in appropriations for NFIP, a private insurance option could be
available to borrowers.
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\6\ Please see the Regulatory Impact Analysis for the November
23, 2020, proposed rule for more information, at <a href="https://www.regulations.gov/document/HUD-2020-0078-0040">https://www.regulations.gov/document/HUD-2020-0078-0040</a>.
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Comments: HUD's Proposed Rule Aligns With Industry Standards, Law, and
Principles of Affordability, Consumer Choice, and Fiscal Responsibility
Some commenters stated that the proposed rule would more closely
align HUD regulations with industry standards, statutory law, and
principles of good governance, consumer choice, affordable housing, and
fiscal prudence.
One commenter stated that the proposed rule will achieve HUD's
stated goal of more closely aligning FHA regulations ``with industry
standards and reduc[ing] the regulatory restrictions on flood insurance
for FHA-insured loans.'' The commenter also stated that the proposed
rule would reduce regulatory restrictions on flood insurance for FHA-
insured loans, provide greater consumer choice, and enhance
homeownership opportunities for its members.
Another commenter stated that HUD's rule aligns with the Biggert-
Waters Act's clear direction to all Federal agency regulated mortgagees
to accept certain private flood insurance. The commenter stated that,
``[d]rawing a distinction between agencies that `insure' versus `lend'
is a hyper-technical legal reading of the statute that does not comply
with the spirit--if not the exact letter--of the law.'' Similarly, the
commenter stated that laws should be uniformly and consistently applied
across the Federal Government, and that an ``agency should not exploit
a technical drafting error to avoid compliance with a statute,
especially when Congressional intent is clear.'' Finally, the commenter
said HUD's rule is fiscally prudent because providing for FHA mortgagee
acceptance of private policies not only bolsters the FHA Fund but also
protects taxpayers.
HUD Response: HUD's intention is to align as much as possible with
other Federal agencies, the intentions of the Biggert-Waters Act, and
industry standards where appropriate, while issuing distinct
regulations when necessary.
HUD is committed to removing barriers to affordable housing,
supporting affordable housing opportunities, homeownership, and
facilitating access to credit for borrowers. This rule could increase
the entry-level housing supply in communities where flood insurance is
required, while mitigating risk and protecting taxpayers' funds. This
rule is not expected to have a substantial direct budgetary impact to
FHA's Mutual Mortgage Insurance (MMI) Fund.
Mandatory Versus Permissive Requirement (Whether HUD's Rule Should
State That Mortgagees ``May Accept'' or ``Must Accept'' Private Flood
Insurance Policies That Meet the Definition Under HUD's Rule and the
Biggert-Waters Flood Insurance Reform Act of 2012 (``Biggert-Waters
Act''))
Comments: Support for a Permissive Requirement (Mortgagees ``May
Accept'')
Some commenters agreed with HUD's decision to make optional
mortgagees' acceptance of private flood insurance policies that meet
the definition of private flood insurance under HUD's rule and the
Biggert-Waters Flood Insurance Reform Act of 2012 (``Biggert-Waters
Act'') (a mortgagee ``may accept'' a private flood insurance policy).
One commenter stated that ``it is more appropriate to give
[mortgagees] discretion to accept private flood policies by saying that
they `may' accept a private flood policy if it meets all of the
definitions. While we respect that the borrower has the freedom of
choice to find a private policy (provided the policy fits all of the
required definitions/parameters), it is also important that the
mortgagee has a choice based on past experiences with providers and
their own risk tolerance levels.''
[[Page 70737]]
Another commenter noted that mortgagees have greater expertise and
a shared interest with borrowers in ensuring that the property is
adequately covered by flood insurance. The commenter stated that
directing mandatory acceptance could be warranted only in the presence
of overwhelming policy reasons to do so, which are not present here.
Another commenter explained that adding a mandatory acceptance
requirement in HUD's regulations (``must accept'') could create
additional burdens for those mortgagees and servicers that are not
subject to the Biggert-Waters Act requirement to accept private flood
insurance since they may have to develop new procedures and processes
to review private flood insurance policies. The commenter also noted
that requiring the acceptance of private flood insurance could mean
that some mortgagees and servicers would continue not to accept private
flood insurance which could result in higher costs and limited choices
for FHA borrowers.
Comments: Support for a Mandatory Requirement (Mortgagees ``Must
Accept'')
Some commenters supported a mandatory requirement that mortgagees
accept private flood insurance policies that meet the definition and
requirements for a private flood insurance policy under HUD's rule and
the Biggert-Waters Act. One commenter stated that having consistency
between HUD's rule and that of the Federal financial regulators is
beneficial to the consumer because it ``provides consumer choice and
prevents [mortgagees] from competing on underwriting guidelines.''
One commenter explained that mandating the acceptance of private
flood insurance would help further FEMA's ``Moon Shot Initiative'' to
double the number of properties covered by flood insurance.
Another commenter stated that mandating private insurance would
``harmonize FHA policies with Congressional intent to expand the
private flood insurance market.''
Another commenter stated that changing the practice of denying
property owners access to private flood insurance is long overdue and
that a mortgagee should be required to accept qualifying private flood
insurance in lieu of an NFIP policy.
HUD Response: HUD recognizes the value of consistency across the
housing finance industry with respect to flood insurance and the
importance of providing borrowers the option to select flood insurance
coverage that best matches their needs.
HUD recognizes the importance of allowing mortgagees discretion to
accept private flood insurance policies that meet HUD's requirements.
This approach is similar to HUD's policy for accepting hazard
insurance, where mortgagees have discretion to accept a policy. HUD
requires the mortgagee to provide evidence of acceptable insurance
coverage, where required, and does not prescribe which provider the
mortgagee accepts. Under HUD's regulations for FHA-insured mortgages,
HUD will not pay a claim to mortgagees for surchargeable damages that
should have been covered by the required flood or hazard insurance;
therefore, it is in the mortgagee's financial interest to ensure that
the borrower has adequate coverage from a responsible insurance
provider.
HUD does not anticipate this rule playing a role in furthering
FEMA's ``Moonshot Initiative'' to increase the number of properties
with flood insurance. Although FEMA has indicated its desire for more
properties to carry flood insurance to help protect them against
potential flood losses, FEMA's initiative seems targeted at homeowners
who are not currently required to carry flood insurance, such as those
who have paid off their mortgage. With this rule, HUD is not expanding
the requirement for which FHA-insured mortgages are required to carry
flood insurance.
Consideration of Whether HUD's Rule Should Offer a Discretionary Option
for Mortgagees To Accept Policies That Do Not Meet the Definition of
Private Flood Insurance Under HUD's Rule and the Biggert-Waters Act
Comments: Opposition to a Discretionary Option
One commenter applauded HUD for rejecting the ``discretionary
acceptance'' option that was in the final joint rule published by the
banking regulators. The Federal regulators' rule has a provision that
provides that mortgagees may accept flood insurance that does not meet
the definition of flood insurance in the banking regulator's joint
final rule. The commenter stated the discretionary acceptance option
``runs counter to Congressional intent of NFIP reforms'' and that
``[i]t is quite clear by the definition of private flood insurance in
Section 100239 of the Biggert-Waters Flood Insurance Reform Act of
2012, that Congress wanted clear sideboards on what qualified as a
private flood insurance policy for the purposes of meeting the
mandatory purchase requirement under the NFIP.'' The commenter found
the Federal regulators' rule to circumvent ``Congressional sideboards
by enacting failed legislative proposals from 2016 through
rulemaking.'' The commenter continued that a discretionary acceptance
option ``could lead to excessive deductibles'' which would lower
premiums but increase out-of-pocket ``costs for the mortgagor to then
ultimately recover when an event occurs.'' The commenter concluded that
discretionary acceptance does not provide consumer protections and
would result in taxpayers being forced to cover additional disaster
losses.
Comments: Support for a Discretionary Option
Some commenters recommended that HUD provide a discretionary
acceptance option. Commenters stated that if HUD does not provide FHA
mortgagees with a discretionary acceptance provision, FHA borrowers
effectively would be barred from the use of private insurance policies
that may be available to non-FHA borrowers. This would undermine HUD's
objectives of helping borrowers and providing more consumer choice in
options for flood insurance products.
One commenter stated that following the Federal regulators' current
framework, which includes a discretionary acceptance provision, will
best protect the interest of insured borrowers and mortgagees by giving
borrowers options to less expensive flood policies with the same or
better coverage, and by giving mortgagees the flexibility to make their
own determination of the adequacy of such policies.
Another commenter stated that without a discretionary acceptance
provision, HUD's proposed rule may not actually afford consumers the
options it seeks to provide because the proposal would only provide
credit unions with the ability to accept private flood insurance in
lieu of a Federal flood insurance policy if all the factors defining
``private flood insurance'' are present. The commenter stated that
providing a discretionary acceptance provision would ease operations,
minimize delays in the homebuying process, and enhance consumer choice.
For example, without such a provision, credit unions may send private
flood insurance policies to a specialist for review, if there is no
expert on staff, to ensure the credit union may accept the policy. This
may, in turn, lead to longer closing times and borrower frustration
with the homebuying process.
One commenter pointed out that HUD's rule does not appear to allow
[[Page 70738]]
mortgagees to accept all residential policies offered by surplus line
insurers, namely nonresidential commercial policies. The commenter
explained that restricting acceptance to only commercial surplus lines
coverage could hinder access to additional choices for residential
flood insurance products. Surplus lines carriers may also be able to
offer residential consumers additional coverage features or greater
limits than the NFIP at a more affordable price.
Another commenter suggested that HUD ``should allow discretionary
acceptance of a private flood insurance policy regardless of HUD's
decision on whether accepting private flood insurance is a mandatory
requirement or optional under its final regulations.'' The commenter
explained that this would promote harmony with the Flood Disaster
Protection Act and consumer choice for FHA borrowers. Most mortgagees
already ``must'' accept private flood insurance that meets the Biggert-
Waters Act definition, under the Federal regulators' rule. So, if HUD's
definition is ``the same or substantially similar to the FDPA
definition,'' from which the Federal regulators' definition derives,
then ``[HUD's separate rule and definition] would appear to marginally
help create the consistency and harmony with the FDPA that HUD is
attempting to do.'' However, if HUD uses a permissive (e.g., ``may
accept''), then some mortgagees will continue to not accept private
flood insurance, even if the policy meets the definition. ``This could
result in higher costs and limited choices for FHA borrowers.''
Therefore, HUD should offer a discretionary option in either case to
permit mortgagees to accept policies that do not strictly conform to
the statutory, and derivative, definitions.
The commenter explained that a discretionary option is especially
crucial if HUD makes it mandatory that mortgagees accept policies that
meet the definitions. A discretionary option would address elements
important to institutional risk and consumer protections. The commenter
stated that the statutory definition of ``private flood insurance'' is
imprecise or impractical when considering actual insurance contracts,
existing state law, and state approval processes; and, therefore, the
final rule ``can provide further detail'' by establishing discretionary
acceptance criteria.
HUD Response: HUD has determined that discretionary acceptance of
policies that do not meet HUD's requirements would not protect
borrowers or FHA's MMI Fund. HUD appreciates the feedback but believes
that permitting mortgagees the discretion to accept flood insurance
policies that do not meet HUD's private flood insurance requirements
would not sufficiently mitigate risk and protect taxpayers' funds.
HUD is concerned about the lack of deductible limits for
discretionary acceptance of flood insurance policies in the Federal
regulators' rule, which could open borrowers to significant costs.
There is no requirement that a deductible under these policies be no
greater than that of a comparable NFIP policy; therefore, a policy that
seems less expensive may have significantly higher deductibles leading
to potentially prohibitively costly out-of-pocket expenses for the
borrower when an event occurs. HUD is concerned that having uncapped
deductible limits could have a negative impact on the financial
stability of FHA-insured borrowers, which could lead to higher risk of
default and foreclosure. Furthermore, HUD does not believe that
eliminating the option for discretionary acceptance will significantly
reduce choice for most FHA-insured borrowers.
HUD appreciates the commenters' desire for uniformity and HUD has
strived to align with other agencies' requirements where appropriate.
While HUD aims to align with the Biggert-Waters Act, allowing
mortgagees to permit a discretionary acceptance option does not align
with the best interests of HUD's borrowers or the MMI Fund.
Comments Suggested Criteria for a Discretionary Option
Some commenters that recommended HUD add a discretionary acceptance
option also contended that HUD should include provisions outlining
discretionary acceptance criteria identical or similar to the Federal
agencies' final regulation. One commenter offered suggested revisions
to the regulatory text.
One commenter stated that HUD should allow mortgagees, specifically
credit unions, ``to accept private flood insurance policies in lieu of
NFIP policies on FHA-insured mortgages, if the compliance aid is
present, if the policy meets the mandatory acceptance criteria under
the definition of `private flood insurance' or if the policy meets the
discretionary acceptance criteria outlined in the [Federal regulators']
Interagency Rule.''
Commenters recommended that the regulations permit FHA mortgagees
to accept private flood insurance policies that meet discretionary
acceptance criteria, even where those policies may not necessarily
satisfy the technical definition of ``private flood insurance'' in the
Biggert-Waters Act. One commenter pointed to the Federal regulators'
regulations, which ``require at least four criteria that must be
satisfied before a mortgagee can exercise its discretion to accept [a]
private flood insurance policy.'' \7\ The commenter reasoned that the
Biggert-Waters Act was meant to create a floor for policies that must
be accepted or could not be rejected, and that it remains the province
of the states to determine what constitutes acceptable insurance. This
commenter also stated that a discretionary provision can be drafted in
a manner that provides consumer choice while maintaining the safety and
integrity of the Mutual Mortgage Insurance Fund, similar to the way
that the Federal regulators' rule protects the associated Federal
insurance programs.
---------------------------------------------------------------------------
\7\ See the four criteria explained at 84 FR 4953, 4962.
---------------------------------------------------------------------------
Commenters provided an example of how these principles should
inform HUD's addition of a discretionary acceptance option: Under the
discretionary acceptance provision of the Federal regulators' final
rules and, where permitted by state insurance law, a mortgagee has the
discretion to accept a private flood insurance policy that contains a
30-day notice provision rather than a 45-day notice provision as
required under the Biggert-Waters Act. Commenters recommended HUD use
this example to help guide its creation of discretionary option
criteria.
One commenter emphasized that it is important for mortgagees to
understand whether a private policy requires a separate or included
disclosure with a statement of the availability of Federal flood
insurance policies. The commenter said that ``[Flood Disaster
Protection Act] criteria require that a private policy must include a
statement of the availability of flood insurance under the NFIP. In
current practice this statement (when provided) is being provided by
private carriers as a separate disclosure rather than embedded language
in the actual policy contract. Discretionary acceptance criteria from
FHA could exclude this as a required element or could clarify that this
separate disclosure is satisfactory and meets the intent of the FDPA.''
HUD Response: HUD appreciates the specific feedback provided.
However, HUD believes it is in the best interest of borrowers and HUD's
fiduciary responsibility to the Mutual Mortgage Insurance Fund to not
offer a discretionary option and to require all private flood insurance
policies to meet
[[Page 70739]]
the definition of private flood insurance under this rule.
Consideration of Whether HUD Should Align Its Compliance Aid With the
Federal Regulators' Compliance Aid
Comments: Support for HUD's Proposed Compliance Aid
Some commenters supported HUD's compliance aid or the inclusion of
a compliance aid generally. Commenters supported HUD's compliance aid
because it would assist mortgagees with the review of private flood
insurance policies to ensure they are compliant with FHA's regulations,
assist mortgagees in determining whether a policy meets the definition
of ``private flood insurance'' without further review of the policy,
and prove particularly helpful to smaller mortgagees that may lack
resources or technical expertise to adequately review flood insurance
policies.
Comments: Support for Making HUD's Compliance Aid Similar or Identical
to the Federal Regulators'
Some commenters generally supported the addition of a compliance
aid, but strongly recommended that HUD's compliance aid statement be
identical or made more similar to Federal regulators' compliance aid
language. Commenters wrote that this would ensure ``the policy meets
the definition of `private flood insurance' and fulfills the
requirements of both the Federal regulators and HUD.'' Further, this
would enable FHA borrowers to immediately benefit from work done by the
industry on the Federal regulators' compliance aid since February 2019.
The commenter explained, ``At this point, the specific language of the
Federal regulators' compliance aid has already been incorporated into
the state insurance legislative and regulatory infrastructure.'' The
commenter provided an example from a state that enacted a new private
flood insurance act in September 2020 that requires that a private
flood policy must state that it meets the private flood insurance
requirements specified in 42 U.S.C. 4012a(b) and may not contain
provisions that, when taken as a whole, are not in compliance with that
statutory provision. The commenter also explained that the Federal
regulators' compliance aid language has been incorporated into
legislation being developed by the National Council of Insurance
Legislators (NCOIL), titled the Private Primary Residential Flood
Insurance Model Act.\8\
---------------------------------------------------------------------------
\8\ NCOIL Adopts Private Primary Residential Flood Insurance
Model Act, Nat'l Council of Insurance Legislators, Sept. 24, 2020,
<a href="https://ncoil.org/2020/09/24/ncoil-adopts-private-primary-residential-flood-insurance-model-act/">https://ncoil.org/2020/09/24/ncoil-adopts-private-primary-residential-flood-insurance-model-act/</a>.
---------------------------------------------------------------------------
Commenters stated that making HUD's compliance aid more similar or
identical to the Federal regulators' will relieve compliance burden on
FHA/HUD mortgagees and provide ``certainty'' and prevent confusion for
both mortgagees and consumers that private flood insurance policies
meet requirements and will or should be accepted ``without further
analysis.''
One commenter suggested that HUD clarify ``at least as broad as''
when it comes to deductibles and coverages, ``specifically cautioning
against excessive deductibles and ensuring the policy has an equivalent
to Increased Cost of Coverage (ICC) that is found in an NFIP policy.''
The commenter explained their concern that the private sector's
equivalent to ICC is ``often optional rather than mandatory as with
NFIP policies.''
Some commenters pointed out that some insurers may choose not to
include both HUD's and the Federal regulators' compliance aid
statements, which would ``narrow the pool of available private flood
insurance coverage the [proposed rule] is intended to provide to FHA
borrowers.'' Even if insurers did include both compliance aid
statements, commenters explained that the experience of implementing
the Federal regulators' compliance aid demonstrates that including two
sets of compliance aid language would not be a simple process. Using
different language for an FHA compliance aid would require insurers and
mortgagees to use different sets of insurance policies and other
documentation for FHA-insured loans. Another commenter suggested that
an ``FHA specific compliance aid is superfluous and will add an
unnecessary cost to an already costly transaction.'' Similarly, another
commenter explained that changes and procedures were put in place
following the Federal regulators' 2019 rule and a second process for
HUD's compliance aid would impose further burden.
One commenter recommended that if HUD does not adopt the Federal
regulators' compliance aid, then HUD should clarify language in its
compliance aid regarding the scope of coverage. This language should
highlight limited utility in that the compliance aid only ensures
compliance with HUD's regulations and not with the interagency rule.
Placing this additional language into the compliance aid will provide
clarity and put mortgagees on notice that, notwithstanding inclusion of
HUD's compliance aid, if a separate compliance aid that conforms to the
Federal regulators' rule is not present, they will have to review the
private flood insurance policy to determine its compliance with the
Federal regulators' rule.
HUD Response: HUD appreciates the feedback regarding the compliance
aid. The intention of the compliance aid is to assist mortgagees in
understanding when an insurance policy coverage meets the definition of
private flood insurance. The compliance aid is a voluntary option that
private flood insurance companies may choose to provide.
HUD believes providing a compliance aid is important to assist
mortgagees to understand when a private flood insurance policy meets
HUD's requirements. This will facilitate the closing process by
allowing the mortgagee to rely on the compliance aid instead of the
mortgagee taking the time and developing the technical expertise to
review the details of each private insurance policy. This aid also
ensures that lack of technical expertise regarding flood insurance does
not becomes an obstacle to the implementation of this policy.
HUD recognizes the value of consistency across the housing finance
industry with respect to flood insurance. However, HUD's legal
authority and requirements are distinct from that of the Federal
regulators. The Biggert Waters Act does not require HUD to provide a
private flood insurance option; therefore, HUD cannot rely on the
authority of the Biggert-Waters Act referenced in the Federal
regulators' compliance aid and must rely on its own authority.
Furthermore, this rule is distinct from the Federal regulators' rule
regarding the ``may accept'' versus ``must accept'' requirement, the
discretionary acceptance option, and mutual aid associations.
Therefore, a different compliance aid is necessary to highlight this
distinction; HUD's compliance aid will specify compliance with HUD's
requirements.
HUD believes it is in the best interest of borrowers and HUD's
fiduciary responsibility to protect taxpayers' funds to have a distinct
compliance aid to help ensure the requirements in this rule are met.
Additional Concerns Related to Aligning HUD's Proposed Rule With the
Federal Regulators' Rule
While generally in support of the proposed rule, some commenters
offered recommendations to improve the proposed rule. These commenters
[[Page 70740]]
agreed that the proposed rule would substantially benefit FHA
borrowers, but suggested HUD more closely align its regulations with
the Federal regulators' rule.
Comments: Support for Permitting Mortgagees To Accept Coverage Provided
by Mutual Aid Societies
Some commenters recommended HUD, like the Federal regulators,
permit mortgagees to accept coverage provided by mutual aid societies
consistent with the Biggert-Waters Act. Commenters wrote that if such
provisions are excluded, ``individuals and families, whose religious
beliefs, or other strictures conflict with the purchase of traditional
NFIP or private flood insurance policies'' would be excluded from being
able to take advantage of private flood insurance which was intended to
benefit all Americans. One commenter recommended using a provision
comparable to the Federal regulators' mutual aid society provision.
This commenter cited 12 CFR 22.3(3), which was amended by the Federal
regulators' joint interim rule and suggested HUD adopt similar
language. The changes would conform HUD's proposed rule to the Federal
regulators' joint rule and permit acceptance of coverage by mutual aid
societies.
HUD Response: HUD appreciates the comments and recognizes the value
of consistency across the housing finance industry and has strived to
balance those interests as appropriate. Unlike the requirements for
NFIP and other private flood insurance providers, mutual aid
associations are not required to be licensed, admitted, or otherwise
approved to engage in the business of insurance by the insurance
regulator of the State or jurisdiction in which the property to be
insured is located. FHA does not have the expertise or authority to
evaluate the ability of mutual aid associations to fulfill their
obligations with regards to their insurance policies or their
demonstrated history of fulfilling the terms of agreements to cover
losses to members' property caused by flooding. Without specific
guidance from FHA, mortgagees would be forced to evaluate the financial
soundness of mutual aid associations which might be interpreted
differently, causing confusion as well as an undue burden to
mortgagees.
Given that mutual aid associations, as defined in the Federal
regulators' rule, are not regulated by a State Insurance Regulator and
that HUD's role is not to regulate financial institutions, HUD has
determined that accepting flood insurance policies provided by mutual
aid associations could create a financial risk to borrowers and the MMI
Fund.
Comments: Aligning HUD's Rule With the Federal Regulators' Rule Will
Create Better Consistency in the Industry and Promote Correct
Application of Regulations
One commenter noted that aligning HUD's rule with the Federal
regulators' rule would allow borrowers and mortgagees to draw on the
policies, documentation, and practices that mortgagees, flood insurance
companies, and others have already adopted under the Federal
regulators' requirements--which would reduce the risk of mortgagees
misapplying FHA regulations. Other commenters recommended consistency
throughout the lending process and within industry standards to
maintain discretionary acceptance criteria.
Some commenters supported HUD's proposed definition of private
flood insurance. However, one commenter recommended HUD better align
its definition with the Federal regulators' definition in their joint
final rule. The commenter reasoned that while some differences between
the specific language in the two regulations are necessary and
appropriate (e.g., using ``FHA'' rather than ``regulated lending
institution''), other differences create risk that a reader could make
an incorrect inference that differences are intended to have
substantive impact, which appears not to be the case.
Another commenter explained that ``[a]dopting identical language in
[HUD's] regulation would be consistent with HUD's proposed approach to
the acceptance of private flood insurance.'' Then the commenter
referred to the definition of ``private flood insurance'' in the
proposed FHA regulation and the Federal regulators' final regulations
and explained that both explicitly incorporate the definition at 42
U.S.C. 4012a(b)(7). The commenter stated that HUD's proposed definition
of ``private flood insurance'' is not materially different from the
definitions of ``private flood insurance'' in the Federal agencies'
final regulations, and HUD's proposed regulation could fairly be
characterized as a ``corresponding regulation.''
One commenter stated it is critical that HUD implement regulations
consistent with the Federal flood insurance regulations regarding the
definition of ``private flood insurance,'' language used in the
compliance aid statement, and a mortgagee's discretionary acceptance of
a private flood insurance policy that is sufficient protection for the
loan.
HUD Response: HUD appreciates the comments and recognizes the value
of consistency across the housing finance industry and has strived to
align with the other agency's requirements where possible and
appropriate. The discretionary acceptance provision under the Federal
regulators' rule creates financial risk for FHA borrowers and the MMI
Fund.
Other Issues Raised by Commenters
Comments: Concerns About Continuous Coverage
One commenter expressed a concern for the loss of continuous
coverage since private flood insurance is not seen as continuous
coverage by the NFIP, meaning borrowers will lose subsidies they have
with NFIP if they decide to go back after switching to private flood
insurance. For example, homeowners who seek FHA mortgages may already
be financially constrained and should they need to return to NFIP for
flood insurance it could result in them having higher premiums.
Additionally, even if the homeowner is informed of this risk, it may
not prevent someone who is focused on cost savings from deciding to
switch, putting them in a detrimental position that is long-term and
may affect the sale of their property.
The commenter pointed out legislation that has already been
introduced and seeks to ``amend the definition of continuous coverage
to include the provision of private flood insurance.'' \9\ The
commenter expects this legislation to pass into law soon and to become
a part of the comprehensive reform of the NFIP. The commenter stated
that for these reasons, the rule is premature and should be postponed
until legislation is adopted that will protect homeowners who choose to
switch back to NFIP. The new legislation will ensure homeowners can
have previous subsidized rates after having continuous coverage either
through NFIP or private flood insurance.
---------------------------------------------------------------------------
\9\ See H.R. 2874, 115th Cong. (2017); H.R. 1666, 116th Cong.
(2019); S. 1313, 115th Cong. (2017).
---------------------------------------------------------------------------
HUD Response: HUD appreciates the comment and the commentator's
desire to protect homeowners from increased prices under private flood
insurance policies. HUD notes and appreciates commenters' concerns
about proposed legislation. HUD is publishing this rule to align with
the intention of the Biggert-Waters Act. HUD only has authority to act
on current law; legislation cited by commenters was not signed into
law. Other agencies' forthcoming rules may consider not only borrowers
but all homeowners with federally backed mortgages who
[[Page 70741]]
have the option to purchase a private flood insurance policy in lieu of
an NFIP policy, where one is required.
Comments: HUD's Regulatory Burden Analysis Is Flawed
One commenter stated that the regulatory burden analysis claims
that most private flood insurance is sold on the surplus lines market
as opposed to the admitted market and dominated by large international
insurers. The commenter stated this is ``a complete misunderstanding of
the surplus lines market and refuted in a closer reading of the report
cited as the source of the information.'' \10\
---------------------------------------------------------------------------
\10\ The commenter cited Carolyn Kousky, et al., The Emerging
Private Residential Flood Insurance Market in the United States,
Risk Management and Decision Processes Center, Wharton, University
of Pennsylvania (2018). The commenter stated that the report
explains that, ```large surplus lines carriers `E&S companies work
with wholesalers known as managing general agencies (MGAs) or
managing general underwriters (MGUs). An MGA/MGU works on behalf of
the insurer and organizes and manages its book of business. The MGA/
MGU will employ the underwriters, develop premium-setting practices,
issue policies on the insurer's behalf, and manage claims payments.
They get a fee or share of premiums for these services. An MGU, as
opposed to an MGA, also undertakes the underwriting. MGAs vary
significantly in their size and scope. Some offer a wide range of
E&S products; others focus on only a specific category of coverage
or just one product. Some operate nationally; others work only in a
given region or locality (Hull 2002).' ''
---------------------------------------------------------------------------
HUD Response: HUD appreciates the feedback and concern regarding
data sourcing. As stated, there is limited data regarding flood
insurance companies. HUD utilized a peer reviewed study published in
professional risk industry journals, which is considered a reliable
source of data.
This data was taken from Kousky et al. (2018). The authors' paper
is among the limited existing studies on residential private flood
insurance. The authors stated that ``more policies are written by
surplus lines carriers than by admitted carriers. . . . This is
unsurprising, since surplus lines firms tend to cover new or
catastrophic risks for which consumers may have trouble finding
coverage in the admitted market.'' \11\ In addition, ``the largest US
homeowners insurance companies have generally been hesitant to enter
the flood [insurance] market, although a few have begun to enter
through subsidiaries.'' \12\
---------------------------------------------------------------------------
\11\ Id. at 2.
\12\ Id.
---------------------------------------------------------------------------
HUD expects that more private insurers--either admitted carriers or
surplus lines carriers, and of any company size--will be offering flood
insurance soon or have already started offering flood insurance,
especially after the Federal regulators passed their rule on the
acceptance of private flood insurance. ``As insurers' familiarity with
flood catastrophe models grows, as underwriting experience develops,
and as state regulatory structures evolve, the number of private flood
policies in force could continue to grow, including among admitted
carriers.'' \13\
---------------------------------------------------------------------------
\13\ Id.
---------------------------------------------------------------------------
Comments: HUD's Rule Would Address Issues Raised in a Recent HUD OIG
Report
Some commenters stated that the proposed rule would help address an
issue raised by HUD's Office of Inspector General (OIG) in a report
issued January 5, 2021.\14\ The recent report found that at least 3,870
FHA-insured loans totaling $940 million ``had private flood insurance
coverage instead of the required national flood insurance program
coverage, coverage that did not meet the minimum required amount, or no
coverage at the time the loan was closed and endorsed.'' \15\ Every
other Federal lending authority now allows, and in many cases requires,
the acceptance of private flood insurance, leaving FHA mortgagees with
an untenable choice: follow their regulator's private flood insurance
requirement and risk the FHA insurance down the road, or walk away from
FHA loan products entirely. The commenters stated that this is an
unacceptable situation.
---------------------------------------------------------------------------
\14\ Office of Inspector Gen., U.S. Dep't of Hous. & Urban Dev.,
Audit Rep. No. 2021-KC-0002 (2021), <a href="https://www.hudoig.gov/sites/default/files/2021-01/2021-KC-0002.pdf">https://www.hudoig.gov/sites/default/files/2021-01/2021-KC-0002.pdf</a> (``Audit Rep. No. 2021-KC-
0002'').
\15\ FHA Insured $940 Million in Loans for Properties in Flood
Zones Without the Required Flood Insurance, HudOig.Gov. Jan. 5,
2021, <a href="https://www.hudoig.gov/reports-publications/report/fha-insured-940-million-loans-properties-flood-zones-without-required">https://www.hudoig.gov/reports-publications/report/fha-insured-940-million-loans-properties-flood-zones-without-required</a>.
---------------------------------------------------------------------------
HUD Response: HUD agrees that this rule should help reduce
confusion for borrowers and mortgagees, who may not have realized that
HUD did not previously accept private flood insurance policies in lieu
of NFIP policies, although other Federal agencies did. This issue was
identified in a recent HUD OIG audit.\16\ This rule should remove that
source of confusion and non-compliance by allowing FHA borrowers to
purchase a flood insurance policy that meets HUD's requirements.
---------------------------------------------------------------------------
\16\ See Audit Rep. No. 2021-KC-0002, supra note 8.
---------------------------------------------------------------------------
IV. Findings and Certifications
Executive Order 12866 and Executive Order 13563
Under Executive Order 12866 (Regulatory Planning and Review), a
determination must be made whether a regulatory action is significant
and therefore, subject to review by the Office of Management and Budget
(OMB) in accordance with the requirements of the order. Executive Order
13563 (Improving Regulations and Regulatory Review) directs executive
agencies to analyze regulations that are ``outmoded, ineffective,
insufficient, or excessively burdensome, and to modify, streamline,
expand, or repeal them in accordance with what has been learned.''
Executive Order 13563 also directs that, where relevant, feasible, and
consistent with regulatory objectives, and to the extent permitted by
law, agencies are to identify and consider regulatory approaches that
reduce burdens and maintain flexibility and freedom of choice for the
public.
This rule was determined to be a ``significant regulatory action''
under section 3(f) of Executive Order 12866 (but not an economically
significant action under section 3(f)(1) of the Executive order).
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.)
generally requires an agency to conduct a regulatory flexibility
analysis of any rule subject to notice and comment rulemaking
requirements, unless the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities.
As explained in HUD's November 23, 2020, proposed rule, supervised
mortgagees are among FHA-approved lenders. These mortgagees are
supervised by the Federal regulators. Based on the analysis developed
by the Federal regulators and published as part of their final rule
(see 84 FR 4953), the Federal regulators determined that allowing
private flood insurance in mortgage transactions conducted by these
mortgagees would not have a significant economic impact on a
substantial number of small entities they supervised. This finding is
also true for the share of regulated lending institutions supervised by
the Federal regulators that are FHA-approved lenders.
Small entities also include small businesses, small not-for-profit
organizations, and small governmental jurisdictions. This rule,
however, offers a benefit to all FHA-approved mortgagees regardless of
the size of the firm. Allowing private insurers to compete provides
business opportunities to those private insurers. The rule provides a
compliance aid which will allow all mortgagees, including small
mortgagees that may
[[Page 70742]]
lack technical expertise regarding flood insurance policies, to
conclude that a policy meets the definition of ``private flood
insurance'' without further review of the policy if the policy, or an
endorsement to the policy, states: ``This policy meets the definition
of private flood insurance contained in 24 CFR 203.16a(e) for FHA-
insured mortgages.'' This proposed rule would also reduce the burden to
all mortgagees, including those small entities, by aligning FHA's
regulations with those issued by the Federal regulators.
For flood insurance companies, there is less data. However,
existing analysis by Kousky et al. (2018) \17\ on private insurers that
are currently providing flood insurance shows that these private
insurance companies are mostly surplus line carriers that operate
globally. This finding implies that such carriers cannot be considered
as small entities. Taking advantage of the business opportunities is
more difficult for small firms because large firms are inherently
favored by their ability to spread flood risk. However, as the private
flood insurance market expands, it is expected to become less
concentrated, to the benefit of small entities. Overall, HUD believes
that this rule will not have a significant impact on a substantial
number of small entities, and the impact of the rule on those small
entities impacted will be beneficial rather than adverse. Therefore,
HUD certifies that this rule is not expected to have a significant
economic impact on small entities.
---------------------------------------------------------------------------
\17\ Kousky, C., H. Kunreuther, B. Lingle, and L. Shabman
(2018). The Emerging Private Residential Flood Insurance Market in
the United States, Risk Management and Decision Processes Center,
Wharton, University of Pennsylvania, July.
---------------------------------------------------------------------------
Environmental Impact
A Finding of No Significant Impact (FONSI) with respect to the
environment was made at the proposed rule stage in accordance with HUD
regulations at 24 CFR part 50, which implement section 102(2)(C) of the
National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). The
FONSI remains applicable and is available for public inspection on
<a href="http://www.regulations.gov">www.regulations.gov</a>.
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either (i) imposes substantial direct compliance costs on state and
local governments and is not required by statute, or (ii) preempts
state law, unless the agency meets the consultation and funding
requirements of section 6 of the Executive order. This rule does not
have federalism implications and would not impose substantial direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive order.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1531-1538) (UMRA) establishes requirements for Federal agencies to
assess the effects of their regulatory actions on state, local, and
tribal governments, and on the private sector. This rule does not
impose any Federal mandates on any state, local, or tribal governments,
or on the private sector, within the meaning of the UMRA.
List of Subjects
24 CFR Part 201
Claims, Health facilities, Historic preservation, Home improvement,
Loan programs-housing and community development, Manufactured homes,
Mortgage insurance, Reporting and recordkeeping requirements.
24 CFR Part 203
Hawaiian Natives, Home improvement, Indians-lands, Loan programs-
housing and community development, Mortgage insurance, Reporting and
recordkeeping requirements, Solar energy.
24 CFR Part 206
Aged, Condominiums, Loan programs-housing and community
development, Mortgage insurance, Reporting and recordkeeping
requirements.
For the reasons discussed in the preamble, HUD amends 24 CFR parts
201, 203, and 206 as follows:
PART 201--TITLE I PROPERTY IMPROVEMENT AND MANUFACTURED HOME LOANS
0
1. The authority citation for part 201 continues to read as follows:
Authority: 12 U.S.C. 1703; 15 U.S.C. 1639c; 42 U.S.C. 3535(d).
0
2. In Sec. 201.28, revise paragraph (a) to read as follows:
Sec. 201.28 Flood and hazard insurance, and Coastal Barriers
properties.
(a) Flood insurance. No property improvement loan or manufactured
home loan shall be eligible for insurance under this part if the
property securing repayment of the loan is located in a special flood
hazard area identified by the Federal Emergency Management Agency
(FEMA), unless the community in which the area is situated is
participating in the National Flood Insurance Program, flood insurance
under the National Flood Insurance Program (NFIP) is available with
respect to such property improvements, and flood insurance on the
property is obtained by the borrower in compliance with section 102 of
the Flood Disaster Protection Act of 1973 (42 U.S.C. 4012a). Such
insurance shall be in the form of the standard policy issued under the
National Flood Insurance Program (NFIP) or private flood insurance, as
defined in 24 CFR 203.16a. Such insurance shall be obtained at any time
during the term of the loan that the lender determines that the secured
property is located in a special flood hazard area identified by FEMA
and shall be maintained by the borrower for the remaining term of the
loan, or until the lender determines that the property is no longer in
a special flood hazard area, or until the property is repossessed or
foreclosed upon by the lender. The amount of such insurance shall be at
least equal to the unpaid balance of the Title I loan, and the lender
shall be named as the loss payee for flood insurance benefits. A lender
may determine that a private flood insurance policy meets the
definition of private flood insurance, as defined in 24 CFR 203.16a,
without further review of the policy, if the compliance aid statement
provided in 24 CFR 203.16a(c) is included within the policy or as an
endorsement to the policy.
* * * * *
PART 203--SINGLE FAMILY MORTGAGE INSURANCE
0
3. The authority citation for part 203 continues to read as follows:
Authority: 12 U.S.C. 1707, 1709, 1710, 1715b, 1715z-16, 1715u,
and 1715z-21; 15 U.S.C. 1639c; 42 U.S.C. 3535(d).
0
4. Revise Sec. 203.16a to read as follows:
Sec. 203.16a Mortgagor and mortgagee requirement for maintaining
flood insurance coverage.
(a) In general. (1) The requirements of this section apply if a
mortgage is to cover property improvements that:
(i) Are located in an area designated by the Federal Emergency
Management Agency (FEMA) as a floodplain area having special flood
hazards;
(ii) Are otherwise determined by the Commissioner to be subject to
flood hazard; or
(iii) Are not otherwise covered by the flood insurance standard for
condominium projects established under Sec. 203.43b(d)(6)(iii) or
(i)(1).
[[Page 70743]]
(2) No mortgage may be insured that covers property improvements
located in an area that has been identified by FEMA as an area having
special flood hazards unless the community in which the area is
situated is participating in the National Flood Insurance Program and
flood insurance under the National Flood Insurance Program (NFIP) is
available with respect to such property improvements. Such requirement
for flood insurance shall be effective one year after the date of
notification by FEMA to the chief executive officer of a flood prone
community that such community has been identified as having special
flood hazards.
(3) For purposes of this section, property improvement means a
dwelling and related structures/equipment essential to the value of the
property and subject to flood damage.
(b) Flood insurance obligation. The mortgagor and mortgagee shall
be obligated, by a special condition to be included in the mortgage
commitment, to obtain and maintain either NFIP flood insurance or
private flood insurance coverage on the property improvements.
(c) Insurance policy. A mortgagee may accept a flood insurance
policy in the form of the standard policy issued under the NFIP or a
private flood insurance policy as defined in this section, and the
mortgagee shall be named as the loss payee for flood insurance
benefits. A mortgagee may determine that a private flood insurance
policy meets the definition of private flood insurance in this section,
without further review of the policy, if the following statement is
included within the policy or as an endorsement to the policy: ``This
policy meets the definition of private flood insurance contained in 24
CFR 203.16a(e) for FHA-insured mortgages.''
(d) Duration and amount of coverage. The flood insurance must be
maintained during such time as the mortgage is insured in an amount at
least equal to the lowest of the following:
(1) 100 percent replacement cost of the insurable value of the
improvements, which consists of the development or project cost less
estimated land cost; or
(2) The maximum amount of NFIP insurance available with respect to
the particular type of property; or
(3) The outstanding principal balance of the loan.
(e) Private flood insurance defined. The term ``private flood
insurance'' means an insurance policy that:
(1) Is issued by an insurance company that is:
(i) Licensed, admitted, or otherwise approved to engage in the
business of insurance in the State or jurisdiction in which the insured
building is located, by the insurance regulator of that State or
jurisdiction; or
(ii) In the case of a policy of difference in conditions, multiple
peril, all risk, or other blanket coverage insuring nonresidential
commercial property, is recognized, or not disapproved, as a surplus
lines insurer by the insurance regulator of the State or jurisdiction
where the property to be insured is located;
(2) Provides flood insurance coverage that is at least as broad as
the coverage provided under a standard flood insurance policy under the
National Flood Insurance Program for the same type of property,
including when considering deductibles, exclusions, and conditions
offered by the insurer. To be at least as broad as the coverage
provided under a standard flood insurance policy under the National
Flood Insurance Program, the policy must, at a minimum:
(i) Define the term ``flood'' to include the events defined as a
``flood'' in a standard flood insurance policy under the National Flood
Insurance Program;
(ii) Contain the coverage specified in a standard flood insurance
policy under the National Flood Insurance Program, including that
relating to building property coverage; personal property coverage, if
purchased by the insured mortgagor(s); other coverages; and increased
cost of compliance coverage;
(iii) Contain deductibles no higher than the specified maximum, and
include similar non-applicability provisions, as under a standard flood
insurance policy under the National Flood Insurance Program, for any
total policy coverage amount up to the maximum available under the NFIP
at the time the policy is provided to the lender;
(iv) Provide coverage for direct physical loss caused by a flood
and may only exclude other causes of loss that are excluded in a
standard flood insurance policy under the National Flood Insurance
Program. Any exclusions other than those in a standard flood insurance
policy under the National Flood Insurance Program may pertain only to
coverage that is in addition to the amount and type of coverage that
could be provided by a standard flood insurance policy under the
National Flood Insurance Program or have the effect of providing
broader coverage to the policyholder; and
(v) Not contain conditions that narrow the coverage provided in a
standard flood insurance policy under the National Flood Insurance
Program;
(3) Includes all of the following:
(i) A requirement for the insurer to give 45 days' written notice
of cancellation or non-renewal of flood insurance coverage to:
(A) The insured;
(B) The mortgagee, if any; and
(C) Federal Housing Administration (FHA), in cases where the
mortgagee has assigned the loan to FHA in exchange for claim payment;
(ii) Information about the availability of flood insurance coverage
under the National Flood Insurance Program;
(iii) A mortgage interest clause similar to the clause contained in
a standard flood insurance policy under the National Flood Insurance
Program; and
(iv) A provision requiring an insured to file suit not later than 1
year after the date of a written denial of all or part of a claim under
the policy; and
(4) Contains cancellation provisions that are as restrictive as the
provisions contained in a standard flood insurance policy under the
National Flood Insurance Program.
0
5. In Sec. 203.343, revise paragraph (b)(3) to read as follows:
Sec. 203.343 Partial release, addition or substitution of security.
* * * * *
(b) * * *
(3) The property to which the dwelling is removed is in an area
known to be reasonably free from natural hazards or, if in a flood
zone, the mortgagor will insure or reinsure under the National Flood
Insurance Program or obtain equivalent private flood insurance coverage
as defined in Sec. 203.16a.
* * * * *
PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE
0
6. The authority citation for part 206 continues to read as follows:
Authority: 12 U.S.C. 1715b, 1715z-20; 42 U.S.C. 3535(d).
0
7. In Sec. 206.45, revise paragraph (c) to read as follows:
Sec. 206.45 Eligible properties.
* * * * *
(c) Borrower and mortgagee requirement for maintaining flood
insurance coverage--(1) In general. (i) The requirements of this
paragraph (c) apply if a mortgage is to cover property improvements
that:
(A) Are located in an area designated by the Federal Emergency
Management Agency (FEMA) as a floodplain area having special flood
hazards;
[[Page 70744]]
(B) Are otherwise determined by the Commissioner to be subject to a
flood hazard; or
(C) Are not otherwise covered by the flood insurance standard for
condominium projects established under 24 CFR 203.43b(d)(6)(iii) or
(i)(1).
(ii) No mortgage may be insured that covers property improvements
located in an area that has been identified by FEMA as an area having
special flood hazards, unless the community in which the area is
situated is participating in the National Flood Insurance Program
(NFIP) and flood insurance is obtained by the borrower. Such flood
insurance shall be in the form of the standard policy issued under the
NFIP or private flood insurance as defined in paragraph (c)(6) of this
section. Such requirement for flood insurance shall be effective one
year after the date of notification by FEMA to the chief executive
officer of a flood prone community that such community has been
identified as having special flood hazards.
(iii) For purposes of this section, property improvement means a
dwelling and related structures/equipment essential to the value of the
property and subject to flood damage.
(2) Flood insurance obligation. During such time as the mortgage is
insured, the borrower and mortgagee shall be obligated, by a special
condition to be included in the mortgage commitment, to obtain and to
maintain flood insurance coverage under either the NFIP or equivalent
private flood insurance coverage as defined in paragraph (c)(6) of this
section on the property improvements. The mortgagee shall be named as
the loss payee for flood insurance benefits. A mortgagee may determine
that a private flood insurance policy meets the definition of private
flood insurance in this section, without further review of the policy,
if the compliance aid statement provided in 24 CFR 203.16a(c) is
included within the policy or as an endorsement to the policy.
(3) Duration and amount of coverage. The flood insurance must be
maintained during such time as the mortgage is insured in an amount at
least equal to the lowest of the following:
(i) 100 percent replacement cost of the insurable value of the
improvements, which consists of the development or project cost less
estimated land cost; or
(ii) The maximum amount of the NFIP insurance available with
respect to the particular type of the property; or
(iii) The outstanding principal balance of the loan.
(4) Private flood insurance defined. The term ``private flood
insurance'' means an insurance policy that:
(i) Is issued by an insurance company that is:
(A) Licensed, admitted, or otherwise approved to engage in the
business of insurance in the State or jurisdiction in which the insured
building is located, by the insurance regulator of that State or
jurisdiction; or
(B) In the case of a policy of difference in conditions, multiple
peril, all risk, or other blanket coverage insuring nonresidential
commercial property, is recognized, or not disapproved, as a surplus
lines insurer by the insurance regulator of the State or jurisdiction
where the property to be insured is located;
(ii) Provides flood insurance coverage that is at least as broad as
the coverage provided under a standard flood insurance policy under the
National Flood Insurance Program for the same type of property,
including when considering deductibles, exclusions, and conditions
offered by the insurer. To be at least as broad as the coverage
provided under a standard flood insurance policy under the National
Flood Insurance Program, the policy must, at a minimum:
(A) Define the term ``flood'' to include the events defined as a
``flood'' in a standard flood insurance policy under the National Flood
Insurance Program;
(B) Contain the coverage specified in a standard flood insurance
policy under the National Flood Insurance Program, including that
relating to building property coverage; personal property coverage, if
purchased by the insured mortgagor(s); other coverages; and increased
cost of compliance coverage;
(C) Contain deductibles no higher than the specified maximum, and
include similar non-applicability provisions, as under a standard flood
insurance policy under the National Flood Insurance Program, for any
total policy coverage amount up to the maximum available under the NFIP
at the time the policy is provided to the lender;
(D) Provide coverage for direct physical loss caused by a flood and
may only exclude other causes of loss that are excluded in a standard
flood insurance policy under the National Flood Insurance Program. Any
exclusions other than those in a standard flood insurance policy under
the National Flood Insurance Program may pertain only to coverage that
is in addition to the amount and type of coverage that could be
provided by a standard flood insurance policy under the National Flood
Insurance Program or have the effect of providing broader coverage to
the policyholder; and
(E) Not contain conditions that narrow the coverage provided in a
standard flood insurance policy under the National Flood Insurance
Program;
(iii) Includes all of the following:
(A) A requirement for the insurer to give 45 days' written notice
of cancellation or non-renewal of flood insurance coverage to:
(1) The insured;
(2) The mortgagee, if any; and
(3) Federal Housing Administration (FHA), in cases where the
mortgagee has assigned the loan to FHA in exchange for claim payment;
(B) Information about the availability of flood insurance coverage
under the National Flood Insurance Program;
(C) A mortgage interest clause similar to the clause contained in a
standard flood insurance policy under the National Flood Insurance
Program; and
(D) A provision requiring an insured to file suit not later than 1
year after the date of a written denial of all or part of a claim under
the policy; and
(iv) Contains cancellation provisions that are as restrictive as
the provisions contained in a standard flood insurance policy under the
National Flood Insurance Program.
* * * * *
Sec. 206.134 [Amended]
0
8. In Sec. 206.134, amend paragraph (b)(3) by adding the phrase ``or
obtain equivalent private flood insurance coverage, as defined in Sec.
203.16a of this chapter'' after ``National Flood Insurance Program''.
Julia R. Gordon,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 2022-25258 Filed 11-18-22; 8:45 am]
BILLING CODE 4210-67-P
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</html>Indexed from Federal Register on November 21, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.