Loans in Areas Having Special Flood Hazards
Federal RegisterAug 29, 1996
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[Federal Register Volume 61, Number 169 (Thursday, August 29, 1996)]
[Rules and Regulations]
[Pages 45684-45716]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21860]
[[Page 45683]]
_______________________________________________________________________
Part IV
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 22
Federal Reserve System
12 CFR Part 208
Federal Deposit Insurance Corporation
12 CFR Part 339
Department of the Treasury
Office of Thrift Supervision
12 CFR Parts 563 and 572
Farm Credit Administration
12 CFR Part 614
_______________________________________________________________________
Loans in Areas Having Special Flood Hazards; Final Rule
Federal Register / Vol. 61, No. 169 / Thursday, August 29, 1996 /
Rules and Regulations
[[Page 45684]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 22
[Docket No. 96-20]
RIN 1557-AB47
FEDERAL RESERVE SYSTEM
12 CFR Part 208
[Regulation H, Docket No. R-0897]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 339
RIN 3064-AB66
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 563 and 572
[No. 96-82]
RIN 1550-AA82
FARM CREDIT ADMINISTRATION
12 CFR Part 614
RIN 3052-AB57
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 760
Loans in Areas Having Special Flood Hazards
AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of
Governors of the Federal Reserve System; Federal Deposit Insurance
Corporation; Office of Thrift Supervision, Treasury; Farm Credit
Administration; National Credit Union Administration.
ACTION: Joint final rule.
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SUMMARY: The Comptroller of the Currency (OCC), Board of Governors of
the Federal Reserve System (Board), Federal Deposit Insurance
Corporation (FDIC), Office of Thrift Supervision (OTS), and National
Credit Union Administration (NCUA) are amending their regulations, and
the Farm Credit Administration (FCA) is issuing new regulations,
regarding loans in areas having special flood hazards. This action is
required by statute to implement the provisions of the National Flood
Insurance Reform Act of 1994. This joint final rule establishes new
escrow requirements for flood insurance premiums, adds references to
the statutory authority and the requirement for lenders and servicers
to ``force place'' flood insurance under certain circumstances,
enhances flood hazard notice requirements, sets forth new authority for
lenders to charge fees for determining whether a property is located in
a special flood hazard area, and contains various other provisions
necessary to implement the National Flood Insurance Reform Act of 1994.
EFFECTIVE DATES: October 1, 1996; except for subpart S of part 614,
which will be effective October 4, 1996, and part 760, which will be
effective November 1, 1996.
FOR FURTHER INFORMATION CONTACT:
OCC: Carol Workman, Compliance Specialist (202/874-4858),
Compliance Management; Margaret Hesse, Senior Attorney, Community and
Consumer Law Division (202/874-5750), or Jacqueline Lussier, Senior
Attorney, Legislative and Regulatory Activities Division (202/874-
5090), Office of Chief Counsel, Office of the Comptroller of the
Currency, 250 E Street, SW., Washington, DC 20219.
Board: Diane Jackins, Senior Review Examiner, (202/452-3946),
Division of Consumer and Community Affairs; Lawranne Stewart, Senior
Attorney (202/452-3513), or Rick Heyke, Attorney (202/452-3688), Legal
Division, Board of Governors of the Federal Reserve System, 20th Street
and Constitution Avenue, NW., Washington, DC 20551. For the hearing
impaired only, Telecommunication Device for the Deaf (TDD), Earnestine
Hill or Dorothea Thompson (202/452-3544).
FDIC: Mark Mellon, Counsel, Regulation and Legislation Section
(202/898-3854), Legal Division, or Ken Baebel, Senior Review Examiner
(202/942-3086), Division of Compliance and Consumer Affairs, Federal
Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC
20429.
OTS: Larry Clark, Senior Manager, Compliance and Trust Programs
(202/906-5628), or Ronald Dice, Program Analyst (202/906-5633),
Compliance Policy; Catherine Shepard, Senior Attorney, Regulations and
Legislation Division (202/906-7275), Office of Chief Counsel, Office of
Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.
FCA: Robert G. Magnuson, Policy Analyst, Regulation Development
(703/883-4498), Office of Examination; or William L. Larsen, Senior
Attorney, Legal Counsel Division (703/883-4020), Office of General
Counsel, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA
22102-5090. For the hearing impaired only, TDD (703/883-4444).
NCUA: Kimberly Iverson, Program Officer (703/518-6375), Office of
Examination and Insurance; or Jeffrey Mooney, Staff Attorney (703/518-
6563), Office of General Counsel, National Credit Union Administration,
1775 Duke Street, Alexandria, VA 22314-3428.
SUPPLEMENTARY INFORMATION:
I. Background
The National Flood Insurance Program (NFIP) is administered
primarily under two statutes: the National Flood Insurance Act of 1968
(1968 Act) and the Flood Disaster Protection Act of 1973 (1973
Act).1 The 1968 Act made Federally subsidized flood insurance
available to owners of improved real estate or mobile homes located in
special flood hazard areas if their community participates in the NFIP.
A special flood hazard area (SFHA) is an area within a flood plain
having a one percent or greater chance of flood occurrence in any given
year. SFHAs are delineated on maps issued by FEMA for individual
communities. A community establishes its eligibility to participate in
the NFIP by adopting and enforcing floodplain management measures to
regulate new construction and by making substantial improvements within
its SFHAs to eliminate or minimize future flood damage.
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\1\ These statutes are codified at 42 U.S.C. 4001-4129. The
Federal Emergency Management Agency (FEMA) administers the NFIP; its
regulations implementing the NFIP appear at 44 CFR parts 59-77.
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The 1973 Act amended the NFIP by requiring the OCC, Board, FDIC,
OTS, and NCUA to issue regulations governing the lending institutions
they supervise (regulated lending institutions or regulated lenders).
These agencies' regulations directed lenders to require flood insurance
on improved real estate or mobile homes serving as collateral for a
loan (security property) if the security property was located, or was
to be located, in a SFHA in a participating community. To implement
statutory amendments enacted in 1974, the regulations required lenders
to notify borrowers that their security property is located in a SFHA
and of the availability of Federal disaster assistance with respect to
the property in the event of a flood.
Title V of the Riegle Community Development and Regulatory
Improvement Act of 1994 2 (CDRI Act),
[[Page 45685]]
which is called the National Flood Insurance Reform Act of 1994 (Reform
Act), comprehensively revised the Federal flood insurance
statutes.3 The Reform Act is intended to increase compliance with
flood insurance requirements and participation in the NFIP in order to
provide additional income to the National Flood Insurance Fund and to
decrease the financial burden of flooding on the Federal government,
taxpayers, and flood victims.4 The Reform Act requires the OCC,
Board, FDIC, OTS, and NCUA to revise their current flood insurance
regulations and requires the FCA to promulgate flood insurance
regulations for the first time. In order to fulfill these statutory
requirements, the six agencies published a joint NPRM in the fall of
1995. See 60 FR 53962 (October 18, 1995).5 The agencies now
complete the rulemaking process by issuing this joint final rule.
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\2\ Pub. L. 103-325, tit. V, 108 Stat. 2160, 2255-87 (September
23, 1994).
\3\ A more detailed description of the pertinent provisions of
the CDRI Act appears in the preamble to the agencies' joint notice
of proposed rulemaking (proposal or NPRM). See 60 FR 53962, 53963-65
(October 18, 1995). This preamble refers to the 1968 Act, the 1973
Act, and the Reform Act collectively as the Federal flood insurance
statutes.
\4\ H.R. Conf. Rep. No. 652, 103d Cong., 2d Sess. 195 (1994)
(Conference Report).
\5\ In conducting this rulemaking, all six of the agencies have
coordinated and consulted with the Federal Financial Institutions
Examination Council (FFIEC), as required by certain of the CDRI Act
provisions. The heads of five of the six agencies (OCC, Board, FDIC,
OTS, and NCUA) comprise the membership of the FFIEC.
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Four of the agencies--the OCC, Board, FDIC, and OTS--are required
by section 303 of the CDRI Act 6 to review their regulations in
order to streamline and modify the regulations to improve efficiency,
reduce unnecessary costs, and eliminate unwarranted constraints on
credit availability. This joint final rule satisfies the regulation
review requirement that section 303 applies to these four agencies. The
OCC's portion of the joint final rule is part of its Regulation Review
Program. Similarly, this joint final rule is part of the programs
initiated by the Board, FDIC, OTS, NCUA, and FCA to reduce unnecessary
regulatory burden and to simplify and clarify their regulations.
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\6\ 12 U.S.C. 4873.
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Section 303 also requires the OCC, Board, FDIC, and OTS to work
jointly to make uniform all regulations and guidelines implementing
common statutory or supervisory policies. This joint final rule also
satisfies this portion of section 303. All six of the agencies have
reviewed their flood insurance regulations with these purposes in mind.
The agencies believe that the joint final rule provides the
institutions they regulate with significant flexibility, and minimize
the regulatory burden imposed upon regulated lending institutions and
loan servicers acting on their behalf, consistent with the requirements
of the statute, thus reducing the costs of compliance to those entities
and enabling them to operate more efficiently.
II. Overview of Comments Received
The agencies received 138 comment letters on the joint NPRM. The
commenters included 12 national banks, two national bank subsidiaries,
six state member banks, 15 state nonmember banks, nine savings
associations, four Farm Credit organizations, 20 credit unions, 22
financial services holding companies, three State and local government
agencies, eight Federal Reserve Banks, 21 trade associations, three
flood determination firms, and one insurance agency. In addition, the
agencies received comments from five law firms, four mortgage
companies, and two consulting services. FEMA also submitted comments.
Thirty-nine commenters expressed general support for the joint
NPRM. The majority of these commenters provided specific suggestions
for improvement and clarification of the proposal. Twenty-two
commenters responded unfavorably to the proposal, characterizing it as
overly burdensome or unnecessary. In addition, as discussed later, many
commenters sought clarification on specific issues covering a wide
spectrum of the proposal's provisions.
The joint final rule is similar to the agencies' proposal in many
respects. The agencies, however, have carefully considered the comment
letters and have made a number of changes in response to commenters'
suggestions and in order to reduce regulatory burden. The topic-by-
topic discussion identifies and discusses the significant comments
received, describes the provisions of the joint final rule, and
highlights changes made by the agencies. Each agency's portion of the
joint final rule is substantively consistent, although the format of
the regulatory text varies to accommodate the format used at each
agency.
III. Description of the Joint Final Rule
A. Need for Supplemental Guidance
The purpose of the Reform Act is to strengthen and enhance the
NFIP, and the primary focus of the agencies' joint final rule
implementing the Reform Act is to carry out the purpose of the Reform
Act. Depending on the location and activities of a regulated lending
institution, adequate flood insurance coverage may be important from a
safety and soundness perspective as a component of prudent underwriting
and as a means of protecting the lender's ongoing interest in its
collateral. Accordingly, the preamble to the proposal noted issues that
could raise safety and soundness concerns in some circumstances and
invited comment on these issues so that the agencies could consider
whether to provide informal guidance, separate from the joint final
rule, that addresses safe and sound banking concerns presented by
regulated lenders' flood insurance programs. In particular, the
agencies requested comment on the need for guidance related to
purchased loans and institutions with significant exposure to flood
hazards.
Commenters sought guidance from the agencies on a wide range of
topics including the applicability of the flood insurance rules with
respect to condominiums, cooperatives, agricultural buildings,
subordinate liens, manufactured homes, home equity lines of credit,
fixtures, residential and commercial construction loans, FEMA's appeal
process for contested flood hazard determinations, and the standard
flood hazard determination form. Eighteen commenters stated that
general guidance on safety and soundness issues would be useful, with
most preferring informal guidance. Other commenters, primarily credit
unions, requested more detailed guidance on compliance with the joint
final rule.
A number of commenters stated that additional guidance is not
necessary or appropriate, emphasizing that standard financial
institution practices are sufficient to protect an institution's
interest in its collateral. These commenters stated that the risk
profiles of institutions differ, and that the individual institution is
in the best position to identify and control major forms of financial
risks. A few commenters indicated that each institution should develop
and implement risk management procedures to address issues such as
geographic lending concentrations and portfolio concentrations.
The joint final rule addresses certain of these concerns,
including, for example, agricultural buildings, manufactured homes, the
FEMA appeals process, and the standard flood hazard determination form.
However, given the number, level of detail, and diversity of subject
matter of the requests for additional information, the agencies have
concluded that informal staff guidance addressing the more technical
compliance issues would be helpful and
[[Page 45686]]
appropriate. Consequently, the agencies intend to issue informal
guidance to address these technical issues subsequent to the
promulgation of the joint final rule.
B. Topic-by-Topic Discussion
Authority, Purpose, and Scope
The OCC, Board, FDIC, and OTS proposed in the joint NPRM to expand
this section to add detailed statements of authority, purpose, and
scope. The FCA proposed language similar to that of the other agencies.
The NCUA proposed to replace the question and answer format of its
flood insurance regulations with standard regulation text so that its
flood insurance regulations are consistent with the other agencies. No
comments were received on this section and the agencies adopt it as
proposed.
Loan Servicers
The agencies proposed to apply their regulations implementing the
escrow, forced placement, and flood hazard determination fee provisions
of the Reform Act to regulated lending institutions and to loan
servicers acting on behalf of regulated lending institutions. As
indicated in the preamble to the proposal, the agencies do not
interpret the NFIP to impose obligations on a loan servicer independent
from the obligations it imposes on the owner of a loan. The agencies
concluded that loan servicers were covered by certain provisions of the
Reform Act primarily to ensure that they could perform for the lender
the administrative tasks related to the forced placement of flood
insurance--including providing the requisite notices to borrowers,
arranging for the insurance, and collecting and transmitting insurance
premiums--without fear of liability to the borrower for the imposition
of unauthorized charges.7
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\7\ The agencies also noted that section 102(f) of the 1973 Act
as added by the Reform Act, 42 U.S.C. 4012a(f), does not authorize
them to seek civil money penalties against loan servicers that are
not regulated lending institutions. The statute's failure to impose
liability on servicers independent of lenders reinforces the
conclusion that a servicer's obligation to comply with NFIP
requirements arises from its contractual relationship with a lender.
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The proposal indicated that a regulated lender could fulfill its
responsibilities under the NFIP by ensuring that its loan servicing
contracts obligated its servicers to perform the duties required by the
Federal flood insurance statutes. The agencies also stated that, where
there were deficiencies in existing arrangements, lenders should ensure
that their loan servicing agreements were revised to provide for the
loan servicer to fulfill Federal flood insurance requirements.
The agencies received 21 comments on this issue. Several commenters
addressed the relationship between regulated lender and loan servicer
with respect to fulfillment of Federal flood insurance requirements and
requested detailed additions to the regulatory language to clarify how
this relationship is intended to function. One commenter requested that
the final rule provide that the lender may rely upon the servicer to
fulfill such requirements so long as the lender performs reasonable
audits. Another requested that the final rule provide that an
originating lender may transfer liability for flood insurance
requirements to a servicer, but a third requested clarification that
the lender's responsibilities are non-delegable despite its
relationship with its servicer. Another commenter requested
clarification of the responsibilities of a regulated lender acting as a
servicer as opposed to a non-regulated servicer.
In response to these comments, the agencies emphasize that the
obligation of a loan servicer to fulfill administrative duties with
respect to Federal flood insurance requirements arises from the
contractual relationship between the loan servicer and the lender or
from other commonly accepted standards for performance of servicing
obligations. The lender remains ultimately liable for fulfillment of
those responsibilities, and must take adequate steps to ensure that the
loan servicer will maintain compliance with the flood insurance
requirements. The agencies also wish to emphasize that there is no
distinction between a regulated lending institution as servicer and a
non-regulated servicer with respect to flood insurance requirements,
since either entity acting as servicer will be doing so under the terms
of a loan servicing contract. The provisions in the joint final rule
with respect to escrow requirements, forced placement, and flood hazard
determination fees therefore provide--as in the proposal--that these
requirements may be fulfilled either by a regulated lender or a
servicer acting on its behalf.
Definitions
The proposal added or revised several definitions, including
definitions of the terms building, designated loan, mobile home, and
servicer, and also added several other definitions to streamline the
agencies' flood insurance regulations, including definitions of the
term Director, residential improved real estate, and special flood
hazard area.
The agencies received 20 comments on these definitions. Ten
commenters requested clarification on the definition of mobile home.
For purposes of the appendix to 44 CFR part 61, which sets forth FEMA's
standard flood insurance policy, ``mobile home'' (the term used in the
Federal flood insurance statutes) is defined to have the same meaning
as ``manufactured home.'' 8 The text of the proposal is modified
to reflect that the two terms have the same meaning. In order to ensure
consistency with the term as used in the Reform Act and avoid
conflicting interpretations, the agencies believe it is appropriate to
defer to FEMA's interpretations with respect to what is a ``properly
secured'' mobile home for flood insurance purposes.
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\8\ See 44 CFR 59.1 (defining manufactured home), 44 CFR 61.13
and Appendix A to 44 CFR part 61 (FEMA's standard flood insurance
policy defining mobile home as meaning manufactured home); 58 FR
62420 (Nov. 26, 1993). FEMA recently amended 44 CFR part 65, which
sets forth the procedures to be followed for the review by FEMA of a
contested flood hazard determination, to substitute the term
``manufactured home'' for ``mobile home.'' FEMA explained that it
made this change because the former term is now the preferred term
in the industry. See 60 FR 62213 (Dec. 5, 1995).
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Two commenters requested a definition of the phrase ``making,
increasing, extending, or renewing a loan.'' The agencies believe that
Congress intended the flood insurance purchase requirements to be
applicable at origination, or at any time thereafter during the life of
the loan when the institution determines that the security property is
located in an area having special flood hazards.9 The specific
issues that arise in connection with this phrase are discussed later in
this preamble in ``Loan Purchase as Equivalent to Making a Loan,''
``Loan Acquisitions Involving Table Funding Arrangements,'' and ``Use
of Standard Flood Hazard Determination Form.''
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\9\ Conference Report at 197.
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Two commenters suggested revisions of the definition of residential
improved real estate. These comments are discussed later in this
preamble in ``Escrow of Flood Insurance Payments.''
Flood Insurance Requirement
The proposal did not amend substantively the existing regulatory
provision that implements the statutory requirement that flood
insurance must be purchased for the term of a loan when the security
property is located in a SFHA in a community that participates in the
NFIP. The proposal also did not amend substantively the existing
regulatory provision with respect to the minimum amount of insurance
required by statute for such
[[Page 45687]]
property. The Reform Act made no changes to these statutory
requirements.
The agencies received 28 comments on this issue. Five commenters
requested that the final rule provide that the amount of flood
insurance may be limited to the overall value of the property minus the
value of the land. When flood insurance is required, the policy must
cover the outstanding principal balance of the loan or the maximum
amount available under the NFIP, whichever is less. The flood insurance
statutes are intended to provide coverage to the improvements. As
suggested by the commenters who addressed this point, the joint final
rule provides that, in addition to the statutorily prescribed dollar
limits, flood insurance coverage under the NFIP is limited to the
overall value of the property less than the value of the land.
Five commenters requested that the final rule provide that Federal
flood insurance requirements do not apply to loans where a security
interest in improved real property is only taken ``out of an abundance
of caution.'' Section 102(b)(1) of the 1973 Act, as amended by the
Reform Act,\10\ provides that a regulated lending institution may not
make, increase, extend, or renew any loan secured by improved real
property that is located in a special flood hazard area unless the
improved real property is covered by the minimum amount of flood
insurance required by statute. The requested exception is not available
under the 1973 Act.
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\10\ See 42 U.S.C. 4012a(b)(1).
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One commenter inquired whether flood insurance coverage could be
purchased for ``developed lots,'' that is, land that secures a loan to
improve the property by streets, sewers, and utilities (but no ``above-
ground'' improvements such as buildings) so it may then be sold to
homebuilders who may construct residential housing on the developed
lots. As previously noted in this section, flood insurance generally is
available only with respect to a structure or mobile home and not with
respect to the land on which the structure or mobile home sits. Flood
insurance therefore would not be available under the NFIP for property
used to secure a development loan of the type described in this
paragraph.
One commenter asked whether the requirement to maintain flood
insurance coverage for the term of the loan continues if a regulated
lender sells the loan to a non-regulated lender while retaining
servicing rights. The commenter wanted to ascertain whether the
servicer in such a situation would have the authority to force place
insurance and whether the servicer would be subject to criticism upon
examination if the non-regulated lender instructed the servicer not to
force place.
As noted in the discussion on ``Loan Servicers,'' the agencies
believe that the obligation of a loan servicer to fulfill Federal flood
insurance requirements arises from the contractual relationship between
the loan servicer and the regulated lender or other commonly accepted
standards for performance. The duties of a regulated lender with
respect to Federal flood insurance requirements for a particular loan
cease upon the sale of the loan unless the seller agrees to retain
responsibility for such requirements under a loan servicing agreement
with the transferee owner. When a loan servicer force places flood
insurance, it does so on behalf of the lender in accordance with the
loan servicing agreement. If a lender instructs a loan servicer not to
force place flood insurance, the responsibility for that instruction,
and for any deficiency in compliance, remains with the lender.
One commenter requested that the final rule state that a regulated
lender has no duty to change the amount of insurance coverage on a loan
unless the loan is increased, extended or renewed. The agencies note in
response that a lender may have to increase the amount of coverage on a
loan in instances other than the increase, extension, or renewal of a
loan, such as when the amount of insurance available under the 1968 Act
has been increased and the lender determines that the borrower does not
have adequate coverage.
One commenter stated that the proposal did not address the
requirements for ``contents coverage'' for loans secured by personal
property within a structure located in a SFHA. The agencies agree with
the commenter that contents coverage is not required unless, as
specified in section 102(b) of the 1973 Act,\11\ personal property
secures the loan in addition to improved real property. The proposal
included language requiring flood insurance for any personal property
securing a loan that is also secured by real property. The agencies
believe that this language adequately addresses this point.
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\11\ 42 U.S.C. 4012a(b)(1).
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One commenter requested that the final rule state that a lender may
refuse to make a loan in a SFHA when Federal flood insurance is not
available, such as in communities that do not participate in the NFIP.
The agencies' flood insurance regulations in effect before the
effective date of this joint final rule state that the requirement to
obtain flood insurance for security property applies only to those
areas where flood insurance has been made available under the 1968 Act.
The proposal stated that the requirement applies only to a designated
loan, a term defined to mean a loan secured by a building or mobile
home located or to be located in a SFHA where flood insurance is
available under the 1968 Act. The effect of these two provisions is the
same, namely, that a lender may exercise discretion and decline to make
a loan in a SFHA where Federal flood insurance is not available. The
agencies therefore believe that the requested change is not necessary.
The same commenter requested that the final rule expressly state
that a lender may require flood insurance on any loan, even when not
required by the final rule. A requirement for flood insurance on
security property that is not subject to the Federal flood insurance
statutes is a matter of contract between the lender and borrower.
Consistent with the agencies' view that the joint final rule should
include only those provisions necessary to implement the flood
insurance statutes, the agencies have not included this provision in
the joint final rule.
Loan Purchase as Equivalent to Making a Loan
The proposal noted that the agencies' regulations in effect until
the effective date of this joint final rule differ as to whether a loan
purchase constitutes the ``making'' of a loan that would trigger an
obligation to make a flood hazard determination. The OCC and the Board
have taken the position that a loan purchase does not trigger such an
obligation. The OTS has treated a loan purchase as the equivalent of
``making'' a loan, and the NCUA has taken the position that if flood
insurance is required for a Federal credit union (FCU) to make a loan,
then flood insurance is necessary for an FCU to purchase a loan. The
FDIC has not previously taken a position.
The proposal highlighted the agencies' desire for regulatory
uniformity. Accordingly, the OTS proposed to remove loan purchases from
its flood insurance regulations; the FDIC proposed to adopt the
position of the OCC and the Board; and the NCUA invited comment on
whether it should maintain its position.
The agencies received 44 letters on this issue. The overwhelming
majority agreed that a loan purchase should not require a flood hazard
determination. Three commenters, including FEMA,
[[Page 45688]]
believed that a loan purchase should be considered the ``making'' of a
loan.
As noted in the preamble to the proposal, the 1973 Act identifies
the events that trigger a lender's obligation to review the adequacy of
flood insurance coverage on an affected loan (e.g., the making,
increasing, extending, or renewing of a loan). The Reform Act does not
include a loan purchase in this list of specified tripwires. As a
practical matter, a loan purchaser may always require, as a condition
of purchase, that the seller determine whether the property securing
the loan is located in a SFHA.
The preamble further noted that, with respect to loans sold in the
secondary mortgage market, the inclusion of a loan purchase as a
tripwire event may be unnecessary because of the expansion of the scope
of the NFIP's coverage with regard to Fannie Mae and Freddie Mac (the
largest volume purchasers of residential mortgage loans).12
Finally, the preamble to the proposal noted that including a loan
purchase as a regulatory tripwire could result in the imposition of
duplicative and potentially inconsistent requirements on the seller and
the purchaser of a resential mortgage loan sold in the secondary
market.
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\12\ The agencies note that both Fannie Mae and Freddie Mac
require their respective sellers and servicers to be in full
compliance with the flood insurance statutes. See Fannie Mae
Announcement No. 95-10 (June 8, 1995), Freddie Mac Bulletin No. 94-
18 (December 8, 1994).
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For these reasons, and to promote consistent treatment for all
regulated lending institutions, the OTS and FDIC are hereby adopting
the position of the OCC and the Board that a loan purchase is not an
event that triggers the obligation to make a flood hazard
determination. While the authority of Farm Credit System institutions
is limited with regard to loan purchases, the FCA also concurs with the
position of the OCC and the Board on this issue.
The NCUA requested comment on its position that a borrower must
obtain adequate flood insurance before an FCU can purchase the
borrower's loan if flood insurance coverage would have been required
for the FCU to have made the loan initially. Two commenters agreed with
the NCUA and 14 commenters suggested that the NCUA adopt the other
agencies' position. Ten of the commenters that disagreed with the NCUA
stated that the agencies should be consistent on this issue. Seven
commenters suggested that the NCUA's position treats loan purchasing as
a triggering event and requires credit unions to unnecessarily
duplicate the original lenders' flood insurance determinations. Two
commenters suggested that credit unions should be able to check the
flood status of a loan before purchasing it.
The NCUA agrees that a loan purchase does not trigger a flood
hazard determination and that requiring a determination when an FCU
purchases a loan could be duplicative. However, the NCUA's regulation
governing loan purchases provides additional requirements for
FCUs.13 Section 701.23(b)(1)(i) only permits an FCU to purchase
its members' loans if the FCU could grant the loan or if the FCU
refinances the loan within 60 days. Accordingly, before an FCU
purchases a member's loan to hold in its portfolio, the FCU must
determine whether the improved real property securing the loan has
adequate flood insurance coverage. This may be accomplished by
reviewing the loan documentation or by making a new determination. The
FCU avoids these additional requirements when the FCU originates real-
estate-secured loans on an ongoing basis and purchases loans to package
and sell in the secondary mortgage market.14
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\13\ 12 CFR 701.23.
\14\ 12 CFR 701.23(b)(1)(i).
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Finally, the NCUA notes that while the agency's flood insurance
regulations, 12 CFR part 760, apply to all Federally-insured credit
unions, Sec. 701.23 applies only to FCUs. A Federally-insured State-
chartered credit union should follow the loan purchasing guidelines of
its state regulator.
Loan Acquisitions Involving Table Funding Arrangements
The agencies invited comment on whether a regulated lender that
provides table funding to close a loan originated by a mortgage broker
or mobile home dealer should be deemed to be ``making'' or
``purchasing'' the loan for purposes of the flood insurance
requirements. In the typical table funding situation, the party
providing the funding reviews and approves the credit standing of the
borrower and issues a commitment to the broker or dealer to purchase
the loan at the time the loan is originated. Frequently, all loan
documentation and other statutorily mandated notices are supplied by
the party providing the funding, rather than the broker or dealer. The
funding party provides the original funding ``at the table'' when the
broker or dealer and the borrower close the loan. Concurrent with the
loan closing, the funding party acquires the loan from the broker or
dealer. While the transaction is, in substance, a loan made by the
funding party, it is structured as the purchase of a loan. The preamble
to the proposal indicated that the agencies were inclined to treat
table funded loans like loans made, rather than purchased, by the
funding party.
The preamble to the proposal outlined guidance provided by the
regulations of the Department of Housing and Urban Development (HUD)
implementing the Real Estate Settlement Procedures Act of 1974 (RESPA),
12 U.S.C. 2601-2616,15 and the Financial Accounting Standards
Board (FASB) 16 for distinguishing between making and purchasing
loans.
---------------------------------------------------------------------------
\15\ See 24 CFR 3500.2, 3500.5(b)(7).
\16\ See FASB, Emerging Issues Task Force (EITF) Abstracts, EITF
Issue No. 92-10, ``Loan Acquisitions Involving Table Funding
Arrangements,'' 1993 (interpreting FASB Statement of Financial
Accounting Standards No. 65, ``Accounting for Certain Mortgage
Banking Activities'') (FASB Statement No. 65). This EITF table
funding interpretation elaborated on guidance that has been
superseded. See FASB, Statement of Financial Accounting Standards
No. 122, ``Accounting for Mortgage Servicing Rights,'' May 1995
(superseding FASB Statement No. 65).
---------------------------------------------------------------------------
The agencies invited comment on: (1) their position that a table
funded transaction is more like the making of a loan by the provider of
funds than a purchase of a loan in the secondary market; and (2)
whether the RESPA or FASB standard is a more appropriate guideline for
defining a table funded transaction as either the making or the
purchase of a loan.
The agencies received 40 letters on this issue. Twenty commenters
agreed with the agencies that a table funded transaction is more like
making a loan, eight believed the transaction is more like a loan
purchase, and seven expressed some other view. Some commenters
addressed only whether the RESPA or FASB standards provided more
appropriate guidance. Fourteen commenters supported the RESPA standard
while thirteen supported the FASB standard.
The commenters who favored the RESPA standard asserted that RESPA
provides a better model for determining the appropriate treatment of
table funded transactions because it reflects the realities of the
market place and focuses on the structure of the transaction. Some
commenters also noted that it would be less confusing and burdensome
for lenders, and less likely to result in errors by lenders, to treat
the same transaction in a consistent manner for purposes of both RESPA
and the Reform Act.
The commenters who supported the FASB standard asserted that it is
clearer and more workable. Some stated that the broker or dealer
originating the transaction is usually responsible for the
[[Page 45689]]
flood hazard determination. If the transaction is not treated as a loan
purchase, the acquiring regulated lender would have to perform a
duplicative flood hazard determination--and the duplicative costs would
have to be absorbed by the lender or borrower.
The joint final rule reflects the agencies' position that, for
flood hazard determination purposes, the substance of the table funded
transaction should control and that the typical table funded
transaction should be considered a loan made, rather than purchased, by
the entity that actually supplies the funds. Regulated lenders who
provide table funding to close loans originated by a mortgage broker or
mobile home dealer will be considered to be ``making'' a loan for
purposes of the flood insurance requirements. The agencies believe that
this treatment most closely reflects the realities of such
transactions, which are purchases only in a technical sense. The
presence of a mortgage broker or a mobile home dealer in the
transaction should not obscure the fact that the entity supplying the
funds is actually primarily responsible for the credit decision and
will bear any risk inherent in the loan upon completion of the
transaction.
The agencies have also concluded that it is appropriate to use the
RESPA standard to define when a table funded loan will be treated as
the making of a loan. Under the current RESPA regulations, table
funding is defined as a settlement at which a loan is funded by a
contemporaneous advance of loan funds and an assignment of the loan to
the person advancing the funds. This RESPA definition is used to
determine whether a transaction will be treated as a loan or as a
secondary market transaction. The funding entity is responsible for
meeting the disclosure requirements of RESPA if the transaction is a
loan; the funding entity generally would have no responsibilities under
RESPA if the transaction is a secondary market transaction. The purpose
for which the RESPA standard was developed is therefore similar to the
purpose for which the standard would be used in connection with the
flood insurance regulations.
The FASB standard referenced in the proposal, on the other hand,
was intended to provide guidance to lenders on the proper accounting
treatment for mortgage servicing rights and loan origination costs, and
focused on factors such as which entity is the first titled owner of
the loan, whether the broker is independent of the lender and sells
loans to more than one lender, and whether the broker has been
indemnified by the lender for the market and credit risks connected
with the loan. Based on these criteria, the FASB guidance permitted
transactions to be treated as purchased loans even where the lender had
a significant level of involvement in the underwriting process.
In order to ensure that lenders are aware of the treatment of table
funded transactions, the joint final rule includes a definition of
table funding that is identical to the current RESPA definition. The
joint final rule also states that a lender that acquires a loan from a
mortgage broker or other entity through table funding will be
considered to be making a loan for the purposes of the joint final
rule.
The agencies also note that treating table funded loans as loans
made by the funding entity need not result in duplication of flood
hazard determinations and borrower notices, a possibility that
concerned several commenters. The funding entity may delegate to the
broker or dealer originating the transaction the responsibility for
fulfilling the flood insurance requirements or may otherwise divide the
responsibilities with the broker or dealer, as is currently done with
respect to the RESPA requirements.
Applicability of Federal Flood Insurance Requirements to Subsidiaries
In the preamble to the proposal, each of the agencies briefly
discussed the applicability of its flood insurance rules to the
subsidiaries of the institutions it regulates. The OCC noted that a
national bank's operating subsidiary is subject to the rules applicable
to the operations of its parent bank as provided under 12 CFR 5.34.
Similarly, the Board noted that a state member bank's operating
subsidiary is subject to the rules applicable to the operations of its
parent bank, and the OTS said that a savings association's operating
subsidiary is subject to the rules applicable to its parent thrift. The
FDIC stated that its authority to regulate insured nonmember banks
extends to activities that such institutions may conduct through a
subsidiary. The FCA indicated that a Farm Credit System service
corporation does not have the authority to extend credit. The NCUA
indicated that a credit union's subsidiary organization, called a
credit union service organization (CUSO), is not a ``regulated lending
institution'' subject to the Reform Act, but as a practical matter, a
CUSO must adhere to the flood insurance requirements. The agencies also
indicated that the question of whether the Federal flood insurance
statutes apply to a mortgage banking subsidiary of a regulated lending
institution is mooted to some extent by the Reform Act's amendment
requiring Fannie Mae and Freddie Mac to ensure that flood insurance
requirements are met for the loans they purchase.
The OTS also noted in the proposal that its current regulations did
not apply to service corporations but that the OTS interpreted the
Reform Act's new definition of ``regulated lending institution,''
including the phrase ``similar institution subject to the supervision
of a Federal entity for lending regulation,'' to include subsidiaries
of thrift institutions that are service corporations. The OTS proposed
to apply its flood insurance regulations to service corporations that
engage in mortgage lending. The OTS believed that this position was
consistent with the Reform Act's statutory language and Congressional
intent, and would ensure uniform and consistent treatment for regulated
financial institutions.
The FDIC invited comment on its proposed interpretation to require
subsidiaries of insured nonmember banks that engage in lending secured
by real estate to comply with the flood insurance requirements.
The agencies received eight comment letters on this issue. Seven
supported the OTS's and FDIC's positions. One, a thrift trade
association, opposed extending flood insurance regulations to service
corporations because of the unfair burden that would be placed on bank
and thrift subsidiaries relative to mortgage bankers. The agencies
received one comment letter that supported the NCUA's position.
Based on the commenters' responses and the desire for regulatory
consistency, the OTS's portion of the joint final rule applies to
service corporations. The OTS believes that the purpose of the Federal
flood insurance statutes is best served by treating loans made by
service corporations in the same way as loans made elsewhere in the
corporate structure by the thrift institution or its operating
subsidiaries. The FDIC's portion of the joint final rule makes
subsidiaries of insured nonmember banks subject to Federal flood
insurance requirements by defining the term ``bank'' to include a
subsidiary of such institutions. The positions of the other agencies,
as reflected in their statements in the preamble to the proposal, are
unchanged.
Exemptions
The proposal retained the exemption from the basic flood insurance
requirement for State-owned property that is self-insured in a manner
[[Page 45690]]
satisfactory to the Director of FEMA, and added the Reform Act's new
exemption for loans with an original principal balance of $5,000 or
less and a repayment term of one year or less. The agencies received 19
comment letters on this issue. Fifteen commenters requested expansion
of the statutory exemption for loans in the amount of $5,000 or less
with a term of one year or less. Because the exemption has been
established by statute (see 42 U.S.C. 4012a(c)(2)), it may only be
expanded by a legislative amendment. The joint final rule therefore
adopts the language as proposed.
Escrow of Flood Insurance Payments
Definition of residential improved real estate. As required by the
Reform Act, the proposal stated that a regulated lender must require
the escrow of flood insurance premiums for loans secured by residential
improved real estate if the lender requires the escrow of other funds
to cover other charges associated with the loan, such as taxes,
premiums for hazard or fire insurance, or any other fees. The proposal
also cautioned that, depending on the type of loan, the escrow account
for flood insurance premiums may be subject to section 10 of RESPA, 12
U.S.C. 2609,17 which generally limits the amount that may be
maintained in escrow accounts for consumer mortgage loans, and requires
notices containing escrow account statements for those accounts.
---------------------------------------------------------------------------
\17\ The regulations of HUD implementing section 10 appear at 24
CFR 3500.17 (1995); see also 60 FR 8812 (Feb. 15, 1995), 60 FR 24734
(May 9, 1995), 61 FR 13232 (Mar. 26, 1996) and 61 FR 29238 (June 7,
1996) (revising Sec. 3500.17).
---------------------------------------------------------------------------
There are differences between the scope of the Reform Act's
coverage and the scope of RESPA's coverage that raise a question about
how the two laws should be applied together. The Reform Act's escrow
provision applies to loans secured by ``residential improved real
estate,'' a term defined in the Reform Act as improved real estate for
which the improvement is a residential building.18 This definition
does not distinguish between mortgage loans secured by one to four
family residential buildings and commercial loans secured by
residential buildings. Under the language of the proposal, therefore,
the Reform Act's escrow provision applied to both home mortgage loans
and commercial loans--including, for example, mortgages on apartment
buildings or construction loans secured by residential buildings--but,
only if the lender requires the escrow of other charges for those
loans.
---------------------------------------------------------------------------
\18\ 42 U.S.C. 4012a(d)(4). The proposal defined the term as
real estate upon which a home or other residential building is
located or to be located.
---------------------------------------------------------------------------
RESPA, on the other hand, applies to a ``federally related mortgage
loan,'' which is defined as a loan secured by a first or subordinate
lien on residential real property designed principally for the
occupancy of from one to four families.19 Further, by regulation
HUD has determined that RESPA does not cover construction financing,
loans primarily for business, commercial, or agricultural purposes,
loans secured by 25 acres or more of real estate, whether residential
or commercial, and loans on vacant or undeveloped property not
developed within two years.20 Similarly, the limits on amounts
escrowed and the escrow account statement requirements prescribed by
RESPA section 10, which is the only RESPA section that the Reform Act
makes applicable to flood insurance premiums, apply only to consumer
mortgage loans.
---------------------------------------------------------------------------
\19\ 19 12 U.S.C. 2602(1)(A).
\20\ See 24 CFR 3500.5(b).
---------------------------------------------------------------------------
In the proposal, the agencies resolved the differences between the
scope of coverage of the two statutes by applying RESPA section 10 only
to flood insurance escrow accounts for loans that are already subject
to RESPA generally, i.e., escrows for consumer mortgage loans. The
agencies took the position that (1) the escrow of flood insurance
premiums is required whenever the lender escrows other charges
associated with the loan, but (2) the detailed requirements of RESPA
section 10 do not apply unless the loan itself is subject to RESPA.
The agencies received 20 comments on the scope of the escrow
requirement. Five commenters generally agreed with the proposal, while
15 requested additional clarification on specific matters. Five
commenters said that the term residential improved real estate as
defined in the proposal could be interpreted to include loans on multi-
family properties, which are mortgage loans secured by five or more
family residential units typically processed as commercial loans made
for a business purpose. These commenters recommended that the agencies
limit the Reform Act's escrow requirement only to those loans that are
subject to RESPA. Some commenters requested that the final rule
distinguish between mortgage loans secured by one to four family
residential units and mortgage loans secured by multi-family units, and
asked that the definition be modified so that it applies only to the
former type of mortgage loans. They stated that if this change were
made, lenders would not have to escrow for flood insurance on mortgage
loans secured by five or more family units, thereby easing their
administrative burdens. They also pointed out that this would take
advantage of a well-understood approach to distinguishing between loans
on residential and other property, and thereby minimize confusion and
increase compliance.
Industry commenters also pointed out that loans on commercial
property are processed quite differently from consumer loans and often
are subject to extensive negotiation of terms. Escrows on such loans
may reflect required property maintenance expenditures or compensating
balances as a pricing term rather than the types of payments covered by
escrows on consumer mortgage loans. On the other hand, FEMA, although
observing that the Reform Act neither required nor authorized the
agencies to require escrows on commercial properties, recommended that
the agencies impose a similar escrow requirement on commercial property
loans as well.
The escrow provisions of the Reform Act are designed to improve
compliance with flood insurance requirements by ensuring that
homeowners located in special flood hazard areas obtain and maintain
flood insurance for the life of the loan. The Conference Report stated
that a major reason for the lack of compliance with the NFIP is that
many homeowners stop paying premiums on their flood insurance
policies.21 However, the Reform Act itself simply does not
restrict the flood insurance escrow requirement to consumer mortgage
loans. The determinative factor in the coverage of the escrow
requirement is not the purpose of the loan, but the purpose of the
building--whether it is primarily used for residential purposes.
---------------------------------------------------------------------------
\21\ Conference Report at 198.
---------------------------------------------------------------------------
Section 10 of RESPA, the only RESPA provision that the Reform Act
makes applicable to flood insurance escrow accounts, limits the amounts
that lenders and servicers may legally require borrowers to deposit in
escrow accounts.22 In 1994, HUD amended its RESPA regulations
23 to interpret section 10 of RESPA by establishing a nationwide
standard escrow accounting method known as aggregate accounting and
giving lenders and servicers specific guidance on the requirements of
section 10. The final rule required lenders and servicers to use the
aggregate accounting method for escrow accounts involving
[[Page 45691]]
consumer mortgage loans, instead of the method known as single-item
analysis accounting, and provided a phase-in period for existing escrow
accounts to convert to the aggregate accounting method.24 This
change was intended to reduce the cost of home ownership, by ensuring
that funds would not be held in escrow accounts in excess of the
amounts necessary to protect lenders' interests in preserving loan
collateral.25 It appears that Congress intended to apply the same
section 10 limits to the new flood insurance escrow accounts required
under the Reform Act. Because of the differences between the scope of
coverage of the Reform Act and RESPA, however, the agencies do not
believe that the Reform Act is intended to impose the particular
requirements of section 10 on loans that are not subject to RESPA
generally, for example, commercial loans secured by residential
buildings. There is nothing in the legislative history of the Reform
Act suggesting that Congress meant to extend the scope of section 10 of
RESPA in this way through the enactment of the Reform Act, and absent
specific direction from Congress, the agencies did not believe that
they had the authority to expand RESPA's section 10 coverage to loans
that are not otherwise subject to RESPA.
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\22\ 12 U.S.C. 2609.
\23\ HUD, Final Rule on Escrow Accounting Procedures, 59 FR
53890 (Oct. 26, 1994) (adding 24 CFR 3500.17).
\24\ 59 FR at 53890. The rule also established formats and
procedures for initial and annual escrow account statements.
\25\ Id. at 53890-91.
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In addition, RESPA only applies to mobile home loans if they are
also secured by real estate, whereas the Reform Act applies to mobile
home loans whether or not secured by real estate. RESPA also exempts
all loans secured by 25 acres or more of real estate, whether
residential, commercial, or agricultural, whereas the Reform Act
applies to all such loans if secured by structures primarily used for
residential purposes. While RESPA and the Reform Act cover
refinancings,26 the Reform Act also covers increases, extensions,
and renewals.
---------------------------------------------------------------------------
\26\ See Conference Report at 197.
---------------------------------------------------------------------------
In the joint final rule, the text of the agencies' definition of
residential improved real estate is the same as was proposed. It
primarily covers loans that are otherwise subject to RESPA. But,
because the Reform Act defines ``residential improved real estate'' as
``improved real estate for which the improvement is a residential
building,'' multi-family properties containing five or more residential
units are covered under the Reform Act's escrow provisions, as are
single family dwellings (including mobile homes) and two to four family
dwellings. A construction loan, loan secured by 25 acres or more of
real estate, or commercial loan is subject to the escrow requirements
if the loan is secured by improved real estate primarily used for
residential purposes and an escrow account is required in connection
with the loan for taxes, insurance premiums, fees, and other charges.
Finally, except for escrows on consumer mortgage loans, the escrow
accounts established for these loans need not comply with the
requirements of section 10 of RESPA. The agencies have also made minor
conforming changes to the text of the escrow provision.
Types of escrow accounts covered. Six commenters asked for
clarification of what constitutes a ``required'' escrow. The commenters
were divided on whether a ``voluntary'' escrow account (where the
borrower requests the lender to establish an escrow account) should
trigger a flood insurance escrow requirement. The Reform Act mandates a
flood insurance escrow only when a regulated lending institution
requires an escrow account for taxes, insurance, fees, or other
charges. Although exclusion of voluntary escrows could lead to the
possibility of evasion and difficulties in examining for compliance,
the agencies do not believe that the Reform Act mandates escrow of
flood insurance premiums in connection with escrow accounts
specifically requested by the borrower. However, where a lender is
escrowing for hazard insurance premiums or taxes without also escrowing
for flood insurance premiums, the lender will have the burden of
demonstrating that the escrow arrangement is truly voluntary.
In determining whether an escrow account arrangement is voluntary,
the agencies believe it is appropriate to look to the loan policies of
the regulated lender and the contractual agreement underlying the loan.
If the loan documentation permits the lender to require an escrow
account, and the lender's loan policies normally would require an
escrow account for a loan with particular characteristics, an escrow
account in connection with such a loan generally would not be
considered to be voluntary. An escrow arrangement generally would be
viewed as voluntary, however, if the policies of the lender do not
require the establishment of an escrow account in connection with the
particular type of loan, even though the loan documentation may permit
a lender to require the establishment of an escrow account.
Additionally not all accounts established in connection with a loan
secured by residential improved real estate are considered to be escrow
accounts that would trigger the requirement for the escrow of flood
insurance premiums. For example, accounts established in connection
with commercial loans for such items as interest or maintenance
reserves or compensating balances are not considered to be escrow
accounts for the purposes of this provision. As a general matter,
accounts established in connection with the underlying agreement
between the buyer and seller or that relate to the commercial venture
itself, rather than to the protection of the property, would not be
considered to trigger the escrow requirements for flood insurance
premiums.
Several commenters asked if the requirement to escrow flood
insurance premiums would be triggered only if other escrows were
required on the particular loan in question, rather than if the
institution generally required escrows on other loans of similar type.
The agencies agree that the final rule should be applied on a loan-by-
loan basis within similar types of loans.
Several commenters asked whether voluntary payments for credit life
insurance would trigger a flood insurance escrow. The agencies note, as
did some of these commenters, that HUD takes the position that
voluntary payments for credit life insurance do not constitute escrows
for purposes of RESPA,27 and, accordingly, believe that payments
under credit life insurance and similar types of contracts should not
trigger the escrow of flood insurance premiums. Escrows for hazard
insurance such as fire, storm, wind, or earthquake are the types of
insurance that trigger the requirement to escrow flood insurance
premiums if such insurance is required on the loan.
---------------------------------------------------------------------------
\27\ See 60 FR 24733 (May 9, 1995) (revising 24 CFR 3500.17).
---------------------------------------------------------------------------
Various commenters opposed flood insurance escrows in general or
thought that insurance companies or municipalities would be the logical
entities to enforce the purchase and maintenance of flood insurance.
However, the agencies note that the requirement is mandated by the
Reform Act. Other commenters pointed out that their institutions lack
the capability for escrows, either in general or with respect to mobile
homes. Both the statute and this joint final rule specify that escrow
of flood hazard insurance payments is required only when other payments
also are escrowed.
[[Page 45692]]
Forced Placement
The proposal set forth the requirement imposed by the Reform Act on
a regulated lender or a servicer acting on its behalf to purchase or
``force place'' flood insurance for the borrower if the lender or the
servicer determines that adequate coverage is lacking. The agencies
received 31 comments on this issue.
Four commenters asked if a loan could be made without flood
insurance in place provided the lender gave notice to the borrower at
closing that flood insurance must be obtained by the borrower within 45
days from the date of closing and that the lender would force place
insurance if the borrower had not complied by the end of that period.
Section 102(e)(2) of the 1973 Act, as amended, 42 U.S.C. 4012a(e)(2),
provides for forced placement of flood insurance 45 days after the
borrower is notified of deficient flood insurance coverage. The
agencies do not interpret this provision of the Reform Act as granting
a borrower 45 days from loan closing to arrange for flood insurance on
the security property.
The agencies believe that the addition of the forced placement
authority does not lessen the need for flood insurance to be in place
at the time a loan is made. Section 102(e) of the 1973 Act provides
that the agencies must require a regulated lending institution not to
make, increase, extend, or renew any loan secured by improved real
property located in a SFHA unless the security property is covered by
the minimum amount of flood insurance required by the statute. The
agencies interpret this provision to mean that the flood insurance
regulations must require that such insurance be in place at the time a
lender makes a loan that is secured by improved real property located
in a SFHA.
The agencies believe that the forced placement provision of the
Reform Act is designed to complement the other statutory tripwires for
ensuring that security property located in a SFHA is adequately covered
by flood insurance. As a practical matter, forced placement should not
be necessary at the time of making, increasing, extending, or renewing
a loan, when the lender is obligated to require that flood insurance be
in place. Rather, forced placement authority is designed to be used if,
over the term of the loan, the lender or its servicer determines that
flood insurance coverage on the security property is deficient under
section 102(e) of the 1973 Act.
To further emphasize this point, the agencies are removing the
phrase ``at the time of origination or'' from the final version of the
forced placement regulation. The agencies realize that this phrase
tracks the statutory language set forth in section 102(e)(1) of the
1973 Act. The agencies believe, however, that the removal of this
phrase will not substantively alter the requirements of the rule since
this joint final rule still provides, in accordance with the statute,
that a lender or servicer acting on its behalf is under a duty during
the term of a designated loan to force place insurance if the lender or
servicer acting on the lender's behalf determines that the security
property is not adequately insured. The removal of this phrase
clarifies (1) that flood insurance coverage must be in effect at the
time of closing of a designated loan, and (2) the duties of a lender or
its servicer with respect to forced placement of flood insurance.
One commenter requested clarification as to the precise amount of
flood insurance a lender or servicer acting on its behalf is required
to force place. Section 102(b)(1) of the 1973 Act, as amended, 42
U.S.C. 4012a(b)(1), states that security property located in a SFHA
must be covered for the term of the loan by flood insurance in an
amount at least equal to the outstanding principal balance of the loan
or the maximum limit of coverage available under Federal flood
insurance statutes, whichever is less. A regulated lender must
therefore initiate procedures to force place flood insurance whenever
the amount of coverage in place is not equal to the lesser of the
outstanding principal balance of the loan or the maximum stipulated by
statute for the particular category of property securing the loan. The
amount that must be force placed is equal to the difference between the
present amount of coverage and the lesser of the outstanding principal
balance or the maximum coverage limit.
One commenter suggested that forced placement should be at the
lender's discretion while another commented that the final rule should
state that lenders have both the legal authority and obligation to
force place flood insurance. The agencies wish to make it plain that
under section 102(e) of the 1973 Act lenders are both authorized and
obligated to force place flood insurance if necessary. The joint final
rule therefore provides that a lender, or servicer acting on the
lender's behalf, upon discovering that security property is not covered
by an adequate amount of flood insurance, must, after providing notice
and an opportunity for the borrower to obtain the necessary amount of
flood insurance, purchase flood insurance in the appropriate amount on
the borrower's behalf.
Portfolio Review
The preamble to the proposal indicated that neither the Reform Act
nor the proposed rule required a regulated lending institution or
servicer acting on the lender's behalf to conduct a review of all loans
in portfolio as of September 23, 1994, that is, a retroactive portfolio
review. The Reform Act does not revise the list of events that trigger
a determination (the making, increasing, renewing, or extension of a
loan, sometimes referred to as the statutory tripwires). The proposal
also indicated that a requirement for retroactive portfolio review
would impose a costly and unnecessary burden on regulated lending
institutions.
Similarly, the agencies did not propose to require a regulated
lending institution or servicer acting on its behalf to conduct
portfolio reviews on a prospective basis. The preamble noted that the
1968 and 1973 Acts, as amended by the Reform Act, do not prescribe
portfolio review as the means that a lender or servicer acting on its
behalf must use to determine whether security property is adequately
covered by flood insurance. The flood statutes do not require that
determinations be made at any particular time, other than in connection
with making, increasing, extending, or renewing a loan. Nonetheless,
the preamble indicated that a regulated lending institution and
servicer acting on its behalf should develop policies and procedures to
ensure that, when a determination has been made that property securing
a loan is located in a SFHA, they satisfy the requirements of the
Reform Act's forced placement provision.
The proposal also noted that it might be appropriate as a matter of
safety and soundness for the agencies to ensure that institutions that
are significantly exposed to the risks for which flood insurance is
designed to compensate determine the adequacy of flood insurance
coverage by (1) periodic reviews, or (2) reviews triggered by remapping
of areas represented in a regulated lending institution's loan
portfolio.
The agencies invited comment on the advisability of issuing
guidance in this area and on how the guidance should differentiate
among regulated lending institutions based on their levels of exposure
to flood risk. In particular, the agencies invited comment on the
methods that regulated lending institutions already use or are
considering for determining the adequacy of flood insurance coverage;
[[Page 45693]]
the cost (or other burden) associated with portfolio reviews; and on
whether the additional loans for which flood insurance would be
required as a result of portfolio reviews would be significant in
relation to a regulated lending institution's or its servicer's
portfolio.
The agencies received 76 comment letters on this issue, the most
letters received on one topic. Forty-four commenters agreed with the
agencies' view that the Reform Act does not require retroactive or
prospective portfolio review. The same number agreed with the agencies'
view that the final rule should not impose a requirement for
retroactive or prospective portfolio reviews. Eleven commenters urged
the agencies not to issue additional guidance as a safety and soundness
matter for institutions that are significantly exposed to the risks for
which flood insurance is designed to compensate. However, fourteen
commenters recommended that the agencies issue informal guidance
addressing, for example, when an institution is ``significantly
exposed.''
Twenty commenters stated that the decision whether to engage in
portfolio review should be left to the lender. Six recommended that the
decision should be determined as a result of examinations, and not
dictated in advance by regulations or agency guidance. Some of these
commenters stated that the agencies should impose a portfolio review
burden only on those individual institutions found in examinations to
have inadequate systems in place. Others recommended that safety and
soundness issues with respect to the adequacy of flood insurance should
be handled on a case-by-case basis through the examination process.
An issue that generated significant comment is whether the Reform
Act's forced placement provision implicitly imposes on lenders an
affirmative obligation to monitor loans for FEMA map changes for the
life of the loan. Ten commenters requested the agencies to address this
uncertainty in the final rule.
Nine commenters questioned whether the agencies' position on
portfolio review is consistent with the forced placement language of
the Reform Act. These commenters stated that the forced placement
provision appears to require some action on the lender's part in
response to remappings, as a lender will not know whether to force
place flood insurance unless it is apprised of changes in the flood
zone status of the property. These commenters indicated that the
preamble's statement that prospective portfolio review is not required
implies that a lender is not required to monitor for map changes
subsequent to origination. Another commenter also pointed out that in
order to comply with the forced placement provision, a lender may be
obliged to conduct a retroactive portfolio review to determine whether
it is required to force place insurance on any loans in its portfolio.
Fourteen commenters, however, stated that prospective monitoring is
not required because the Reform Act did not group map changes with the
statutory tripwires listed in the basic purchase provision of the
Reform Act. In their view, a lender does not have a duty to track for
map changes. Seven commenters recommended that the final rule
explicitly state that there is no duty to track for map changes or that
ongoing monitoring is not required. Others pointed out that a
requirement to make flood determinations upon remapping alone, without
an intervening tripwire event, would impose costly and unnecessary
burdens on lenders.
One commenter urged that the final rule provide that the lender's
flood determination obligation after loan origination is limited only
to the tripwire events, unless the lender, for its own portfolio risk
management reasons, wishes to adopt a different approach. Fourteen
commenters suggested that life of loan monitoring is one less expensive
method lenders could use, pointing out that the cost for ongoing
tracking of loans for flood map changes would be lower than the cost of
performing periodic reviews or entire portfolio reviews triggered by
remappings. Five commenters stated that the additional loans for which
flood insurance would be required as a result of portfolio reviews
would be insignificant in relation to the lender's or its servicer's
portfolio.
The agencies reiterate their view that the Reform Act does not
require lenders to engage in retroactive or prospective portfolio
reviews or any other specific method for carrying out their
responsibilities under the Federal flood insurance statutes. The Reform
Act clearly requires lenders to check the status of security property
for loans when triggered by the statutory tripwires. The Reform Act did
not add remappings to the list of statutory tripwires. The Reform Act
does not require lenders to monitor for map changes, and the agencies
will not impose such a requirement by regulation. The joint final rule
does not require that determinations be made at any time other than
when a loan is made, increased, extended, or renewed. If, however, at
any time during the life of the loan, the lender, or servicer acting on
the lender's behalf, determines that required flood insurance is
lacking, the Reform Act requires the lender, or servicer acting on the
lender's behalf, to initiate forced placement procedures. A lender, or
servicer acting on the lender's behalf, continues to be responsible for
ensuring that where flood insurance was required at origination, the
borrower renews the flood insurance policy and continues to renew it
for as long as flood insurance is required for the security property.
If a borrower allows a policy to lapse when insurance is required, the
lender, or servicer acting on its behalf, is required to commence
forced placement procedures.\28\
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\28\ The insurance provider routinely notifies the lender, or
servicer acting on behalf of the lender, along with the borrower
when the insurance contract is due for renewal. The insurance
provider also routinely notifies the lender or its servicer as well
as the borrower if the insurance provider has not received the
policy renewal.
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The preamble to the proposal stated that depending on the location
and activities of a lender, adequate flood insurance coverage may be
important from a safety and soundness perspective as a component of
prudent underwriting and as a means of protecting the lender's ongoing
interest in its collateral. The agencies believe that each lender is in
the best position to tailor its flood insurance policies and procedures
to suit its business. Lenders should evaluate and, when necessary,
modify their flood insurance programs to comport with both the
requirements of Federal flood insurance statutes and regulations and
principles of safe and sound banking. The agencies believe that more
experience should be gained before a decision is made that further
guidance is necessary for institutions in areas that have significant
exposure to flood hazards. The agencies caution, however, that an
institution with a lending area that includes communities that are
subject to significant flood hazards, but that do not participate in
the NFIP, presents special problems that may not be adequately
addressed by the procedures generally used to limit flood risks, such
as monitoring of remappings and other procedures.
Penalties
The proposal noted that the penalty provisions of the Reform Act
are self-executing and do not require the agencies to develop
regulations to implement them. Thus, the agencies did not propose
regulations on the penalty provisions. The agencies received six
comment letters on this issue. Two recommended that the final rule set
out the statutory provisions contained in
[[Page 45694]]
section 102(f) and (g) of the 1973 Act, as amended by the Reform Act,
42 U.S.C. 4012a(f) and (g). Two others requested that the final rule
provide guidance on how the agencies intend to implement the broad
enforcement authority given to them to take remedial action under
section 102(g) of the 1973 Act. One asked the agencies to provide
guidance on how the phrase ``pattern or practice'' of noncompliance
will be construed, expressing the concern that interpretations should
be uniform and not left completely to the discretion of individual
examiners. The agencies have determined not to repeat the provisions of
the statute in the joint final rule.
One commenter suggested that the final rule refer to the procedural
rules that apply to such enforcement actions. The uniform rules of
practice and procedure for agency administrative enforcement actions
developed by the OCC, Board, FDIC, OTS, and NCUA (Uniform Rules) apply
to such actions. Those rules were amended recently to apply the Uniform
Rules to the civil money penalty provisions and the remedial actions
described in section 102(f) and (g) of the 1973 Act.\29\
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\29\ See 61 FR 28021 (June 4, 1996) and 61 FR 20330-20356 (May
6, 1996). The FCA expects to make similar amendments to its rules of
practice. See 12 CFR part 662.
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Determination Fees
General. The proposed rule included a provision that set forth the
authorization conferred by the Reform Act on a lender, or servicer
acting on the lender's behalf, to charge a reasonable fee for the costs
of making a flood hazard determination under specified circumstances:
if the borrower initiates the transaction (making, increasing,
extending, or renewing a loan) that triggers a flood hazard
determination; if the determination reflects FEMA's revision of flood
maps; or if the determination results in the purchase of flood
insurance by the lender, or servicer acting on behalf of the lender,
under the forced placement provision.
The agencies received 43 comment letters on this issue. Fifteen
commenters requested that the final rule clarify that the authority to
charge a reasonable fee for the costs of making a flood hazard
determination covers a ``life-of-loan'' charge to the borrower that
would pay for monitoring of the flood hazard status of the security
property for the term of the loan. The agencies believe that the
statutory authority to charge a borrower a reasonable fee for a flood
hazard determination does extend to a fee for life-of-loan monitoring
by either the lender, or servicer acting on behalf of the lender, or by
a third party, such as a flood hazard determination company.
While the Reform Act specifies the circumstances that may give rise
to the charging of a determination fee, the Act does not expressly
provide what may be included in the determination fee nor does the
joint final rule adopt a rigid definition. However, the agencies agree
that a determination fee may include, among other things, reasonable
fees for the costs of an initial flood hazard determination, as well as
reasonable fees for a lender, servicer, or third party to monitor the
flood hazard status of a security property during the life of a loan
for purposes of making determinations on an ongoing basis.
Consequently, the joint final rule has been clarified to provide that a
determination fee may include, but is not limited to, a life-of-loan
monitoring fee. Because the authority to charge a life-of-loan
monitoring fee is based on the authority to charge a determination fee,
the monitoring fee may be charged only if one of the specified events
in the statute occurs.
A commenter asked whether the authority to charge a reasonable
determination fee extended to a situation where there has been a
remapping, but the security property was found not to be in a SFHA.
Section 102(h) of the 1973 Act, 42 U.S.C. 4012a(h), does not
distinguish between positive and negative flood hazard determinations
in its authorization to charge a reasonable fee for that service in the
event of a remapping. Consequently, the agencies believe that a lender,
or servicer acting on the lender's behalf, may charge a fee in either
situation.
One commenter inquired whether authority to charge determination
fees extended only to determinations by third parties. Section 102(h)
of the 1973 Act does not distinguish between determinations done in-
house by a lender or servicer acting on its behalf and those performed
by another entity. The agencies believe that a lender, or servicer
acting on its behalf, may charge a determination fee if either of the
entities performs this service itself or if the lender or its servicer
arranges to have a third party perform the determination.
One commenter requested that the final rule provide that a lender
may include out of pocket costs, internal costs, and profit as part of
a reasonable flood hazard determination fee. Another suggested that a
reasonable fee should cover the costs of notification, obtaining flood
insurance, and adding flood insurance premiums to the loan balance. The
agencies decline, however, to list all of the components of a
reasonable flood hazard determination fee (which may include a life-of-
loan monitoring fee) in the joint final rule because that determination
may vary depending upon circumstances and is best determined on a case-
by-case basis by the regulated lending institution.
Truth in Lending Act Issues. Seven commenters raised issues
concerning the interaction between the rules concerning flood insurance
and rules under the Truth in Lending Act, 15 U.S.C. 1601 et seq.,
particularly with respect to the treatment of determination fees
charged at consummation that include life-of-loan coverage and fees
charged subsequent to closing.
Some commenters argued that Regulation Z \30\ should not require
the portion of a life-of-loan monitoring fee that is not related to the
initial determination to be included as part of the finance charge. One
commenter stated that, in its experience, the addition of a portion of
the life-of-loan monitoring fee to the finance charge did not have a
significant impact on the finance charge disclosed, although the costs
involved in breaking down charges for the purposes of Regulation Z
impose a burden on lenders.
---------------------------------------------------------------------------
\30\ The Board's Regulation Z, 12 CFR part 226, implements the
Truth in Lending Act.
---------------------------------------------------------------------------
The official staff commentary to Regulation Z (12 CFR part 226
(Supplement I)) explains the proper treatment of life-of-loan fees. The
commentary states that fees for services that will be performed
periodically during the loan term, including fees for determinations as
to whether security property is in a SFHA, may not be excluded from the
finance charge, regardless of when the fee is charged. The commentary
further indicates that any portion of a fee that does not relate to the
initial decision to grant credit must be included in the finance
charge.\31\ If creditors are uncertain about what portion of a fee is
related to the initial decision to grant credit, the entire fee may be
treated as a finance charge. Further consideration of this issue would
be beyond the scope of this rulemaking.
---------------------------------------------------------------------------
\31\ See 12 CFR part 226, Supplement I--Official Staff
Interpretations, 12 CFR Sec. 226.4, comment 4(c)(7)-3 (1996).
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Several commenters indicated that determination fees assessed after
consummation, such as fees for a new determination following a
remapping, should not be included as part of the finance charge
disclosures under Regulation Z. These commenters argued
[[Page 45695]]
that whether or not a new determination will be necessary and a fee
imposed during the loan term is unknown at the time disclosure is
provided. Regulation Z and the commentary state that, generally, if a
disclosure provided at or before consummation becomes inaccurate
because of a subsequent event, the inaccuracy does not result in a
violation. Accordingly, no additional clarification is needed.
Notice Requirements
Borrower. The proposed rule closely tracked the specific notice
requirements of section 1364 of the 1968 Act, as amended by the Reform
Act, 42 U.S.C. 4104a. Moreover, like the statute, the proposal
contained a provision authorizing regulated lending institutions to use
an alternate form of notice in certain situations. The alternate notice
provision allows the lender to rely on assurances from a seller or
lessor that the seller or lessor has provided the requisite notice to
the purchaser or lessee of the property who is the ultimate recipient,
or borrower, of the lender's funds. The need for this alternate form of
notice would arise, for example, in a situation where the lender is
providing financing through a developer for the purchase of condominium
units by multiple borrowers. The lender may not deal directly with the
individual condominium unit purchaser and, in such a case, need not
provide notice to each purchaser but may instead rely on the developer/
seller's assurances that the developer/seller has given the necessary
notice. The same may be true for a cooperative conversion, in which
case the sponsor of the conversion may be providing the required notice
to the purchasers of the cooperative shares. A purchaser of shares in a
cooperative may be considered to be a ``lessee'' rather than a
purchaser with respect to the underlying real property. For the reasons
explained later, the agencies are adopting the notice requirements
provision essentially as it was proposed with minor revisions to
clarify the text.
Twenty-two commenters expressed broad support for the continued use
of the term ``borrower'' in the notice requirement rather than the
phrase ``purchaser or lessee'' used in the statute. The joint final
rule retains the term ``borrower,'' except that the alternate notice
provision has been revised to clarify that the recipient of the notice
to the borrower in cases where the alternate method applies will be the
purchaser or lessee of the property.
Twenty commenters, citing increasingly compressed time frames for
loan approval and closing in certain circumstances, requested specific
guidance on what is meant by the ``reasonable time'' standard for
notice delivery established by section 1364 of the 1968 Act, and
followed by the agencies in the proposed rule. Other commenters noted
that the ``Use of Prescribed Form of Notice'' provision of the proposed
rule appeared to establish a conflicting standard of reasonable time--
ten days--for notice purposes. These commenters asked which standard
controlled. The agencies believe that the statutory standard of
providing written notification of special flood hazards within a
reasonable period before completion of the transaction offers regulated
lending institutions sufficient flexibility to meet the statutory goal
of providing adequate notice to borrowers and servicers, while
accommodating the need in appropriate circumstances for an abbreviated
notice period.
What constitutes ``reasonable'' notice will necessarily vary
according to the circumstances of particular transactions. Regulated
lending institutions should bear in mind, however, that a borrower
should receive notice timely enough to ensure that (1) The borrower has
the opportunity to become aware of the borrower's responsibilities
under the NFIP; and (2) where applicable, the borrower can purchase
flood insurance before completion of the loan transaction. In light of
these considerations, the joint final rule does not establish a fixed
time period during which a lender provides notice to the borrower. To
avoid any confusion regarding application of the ``reasonableness''
standard to notice delivery, the proposed rule authorizing use of the
sample form of notice provided in appendix A of the rule has been
revised to provide that delivery of notice based on the sample form of
notice must take place within a reasonable time before the completion
of the transaction. The agencies generally continue to regard ten days
as a ``reasonable'' time interval.
Two commenters also raised questions regarding the alternate method
of notice provision in the proposed rule. One commenter questioned
whether the seller or lessor of the property--as opposed to the
lender--is supposed to make the determination regarding the flood
status of a security property pursuant to this provision. Another
commenter questioned whether the seller or lessor must use the sample
form of notice set forth in appendix A to the final rule.
In response, the agencies note that this section of the joint final
rule does not shift the burden of determining flood status from the
lender to the seller or lessor. Rather, it implements the provision of
section 1364(a)(1) of the 1968 Act that permits borrower notice
delivered by a seller or lessor to substitute for lender notice so long
as the lender receives satisfactory assurances that the notice has been
delivered to the borrower. The prescribed contents of the notice do not
change when the seller or lessor provides notice to the borrower.
Before relying on the alternate form of notice, a lender must have a
written assurance that the notice provided by the seller or lessor
contained all the elements required by section 1364 of the 1968 Act.
The alternate notice provision in the joint final rule is not intended
to set a lower notification standard. The seller or lessor notice is
subject to the same content requirement as notice by the lender, but a
seller or lessor need not use the sample form of notice provided in
appendix A to the final rule in order for a lender to rely on the
notice.
The agencies received three comments concerning the effect of the
proposed notice provisions on lenders that finance the purchase of
mobile homes. These commenters noted that, in some mobile home lending
transactions, the lender may not know where the mobile home is to be
located until just prior to the time of loan closing. In other so-
called ``home only'' transactions, the purchaser of the mobile home
buys and finances the home separately from the land on which it
ultimately will be located. These commenters asserted that they would
be unable to comply with the notice requirements until they learn where
the mobile home will be located and can thus determine whether the
mobile home will be located in a SFHA.
Consistent with the previous discussion in this section of the
reasonable notice standard, the agencies believe that the notice
requirements of the 1968 Act, as amended, can be met by lenders in
mobile home loan transactions if notice is provided to the borrower as
soon as practicable after determination that the mobile home is or will
be located in a SFHA and before completion of the loan transaction.
Particularly in those circumstances where time constraints can be
anticipated, regulated lenders should use their best efforts to provide
adequate notification of flood hazards to borrowers at the earliest
practicable time.
Moreover, the agencies will not apply the borrower notice
requirements to those ``home only'' mobile home transactions that close
before the permanent location for the mobile home
[[Page 45696]]
is known. Clearly, a lender cannot determine whether flood insurance is
required before the location of the mobile home has been fixed. When
the lender learns the location of the mobile home, the lender must
determine whether the mobile home is in a SFHA, notify the borrower and
require the purchase of any required flood insurance. The agencies
recommend that lenders consider notifying borrowers in ``home only''
mobile home transactions, at the time the loan closes, that they will
be required to have and pay for flood insurance if the mobile home they
purchase is eventually located in a SFHA in a participating community.
The joint final rule does not require this type of notice because the
statute does not require it. The agencies' recommendation reflects
their view that it would be prudent practice for lenders to avoid
imposing unanticipated obligations and costs on borrowers if and when
flood insurance becomes necessary.
Servicer. The Reform Act added loan servicers to the entities that
must be notified of special flood hazards, and the proposal requested
comment on the appropriate timing of notice to the servicer. Thirty
commenters felt that notification to the servicer in advance of the
closing would not be possible or would serve no purpose. Commenters
also pointed out that transfer to a servicer can take up to four months
and that in many cases the servicer's identity will not be known until
well after the closing. A number of alternative schedules were
suggested, including a requirement that the notice of special flood
hazards be transmitted to the servicer along with the other data on
hazard insurance and taxes required to service a loan with an escrow,
so that the servicer can escrow for flood insurance payments along with
other escrowing for hazard insurance and taxes. In recognition that the
servicer is often not identified prior to closing, the joint final rule
requires notice to the servicer as promptly as practicable after the
lender provides notice to the borrower, and provides that notice to the
servicer must be given no later than at the time the lender transmits
to the servicer other loan data concerning hazard insurance and taxes.
Six commenters recommended that the final rule state that a copy of
the notice to the borrower would suffice to fulfill the notice
requirement to the servicer. The proposal permitted the lender to use
the same notice for both the borrower and servicer. That provision is
adopted without change in the joint final rule. The proposed rule also
has been revised to explicitly state that delivery of a copy of the
borrower's notice to the servicer suffices as notice to the servicer.
Several commenters recommended that a separate notice to a servicer
affiliated with the lender not be required. The agencies do not agree
with this recommendation. The statute requires the lender to notify the
servicer of special flood hazards, and the joint final rule reflects
this requirement. Moreover, even in the case of servicing by an
affiliate, the lender would ordinarily transmit a file to the servicer,
either in writing or electronically, to enable the servicer to collect
and disburse payments, and the notice of special flood hazards can be
transmitted as part of that process without imposing an undue
regulatory burden.
The proposed rule has been revised to indicate that the notice to
the servicer may be transmitted in written or electronic form.
FEMA or FEMA's Designee. The joint final rule also implements the
statutory requirement that, in connection with making, increasing,
extending, renewing, selling, or transferring a loan secured by
improved real estate or a mobile home located in a SFHA, regulated
lenders notify the Director of FEMA or the Director's designee of the
identity of the loan servicer and of any change in the servicer. Notice
of the identity of the servicer will enable FEMA to provide notice to
the servicer of a loan 45 days before the expiration of a flood
insurance contract, as required by section 1364(c) of the 1968 Act, as
amended. FEMA has designated the insurance provider as its designee to
receive notice of the servicer's identity and of any change therein,
and at FEMA's request this designation is stated in the joint final
rule.
Six commenters requested a model form of notice to the Director of
FEMA or the Director's designee, or guidance on the information to be
included in the notice. Some commenters suggested that, in the case of
a loan subject to RESPA where a Notice of Transfer of servicing to the
borrower is required, sending to the Director or the Director's
designee a copy of such Notice of Transfer should suffice. The agencies
believe that delivery of a copy of the Notice of Transfer, which
includes the name, address, and other information concerning the
servicer, may be sufficient if the sender includes enough information
on or with the notice to enable the Director or the Director's designee
to identify the loan and the security property. Other forms of notice
also are sufficient if the notice provides information that enables the
Director or the Director's designee to identify the loan, the security
property, the servicer, and the servicer's address.
Several commenters inquired about electronic transmission of the
notice, and one inquired about the possibility of batch transmission.
As in the case of notice to the servicer, the joint final rule permits
electronic transmission of the notice to the Director or the Director's
designee. The agencies also note that nothing in the joint final rule
prohibits a timely batch transmission.
Several commenters questioned the need to notify the Director or
the Director's designee if the lender or an affiliate of the lender is
the loan servicer. The agencies believe that the statute requires
notice by the lender to the Director or designee of the initial
servicer, and the joint final rule reflects this requirement. However,
since the Director has chosen the insurance provider as his designee,
the agencies believe that the regulatory burden of notification is
minor because there is ordinarily an exchange of information between
the lender and the insurance provider at the time a loan is made.
Therefore, the agencies have not adopted this suggestion.
Three commenters objected to notifying FEMA when a loan is sold on
a ``service released'' basis, where the servicing is sold along with
the loan. Failure to provide such notice would defeat the purpose of
the requirement, however, as FEMA will have no record of the identity
of either the owner or servicer of the loan. The joint final rule is
therefore unchanged in this regard.
Three commenters expressed confusion over a lender's obligation in
the event of a subsequent transfer of servicing by a transferee
servicer, on the grounds that the lender would not necessarily be aware
of the transfer. The agencies note that under section 1364(b)(1) of the
1968 Act, as amended, the duty to provide notice to FEMA follows the
servicing, and the joint final rule reflects this. Accordingly, the
obligation to notify the Director or designee of subsequent changes is
transferred to the new servicer along with a transfer of servicing.
Two commenters wanted to limit notice to the ``making'' of a loan
and any transfer of servicing, on the grounds that notices in
connection with increasing, extending, renewing, selling, or
transferring a loan will be redundant. The statute, however, requires
notice in all such cases. Moreover, in the case of a loan made before
the effective date of the joint final rule, a notice on an increase,
extension, renewal, sale, or transfer of the loan will be the first
legally required notice to the Director or the Director's designee.
Therefore, the
[[Page 45697]]
agencies have not adopted this suggestion.
Five commenters argued that it is an unnecessary regulatory burden
to notify FEMA when the servicing is transferred or the loan is paid
off. The statute requires notice to the Director or the Director's
designee when servicing is transferred, but neither the statute nor the
joint final rule requires notice when a loan is paid off.
Appendix A--Sample Form of Notice
The agencies received 22 comments on the sample form of notice set
forth in appendix A of the proposed regulation. Five commenters asked
whether use of the sample form of notice is mandatory. The agencies
stress that use of the sample form of notice is not mandatory. A
regulated lender may choose to use the sample form as presented in
appendix A of the joint final rule to comply with the notice
requirements of section 1364 of the 1968 Act. In addition, lenders may
personalize, change the format of, and add information to the sample
form if they wish to do so. The agencies stress that the sample form
merely provides an example of an acceptable form that notice may take.
However, to ensure compliance with the notice requirements contained in
the joint final rule, a lender-revised notice form must provide the
borrower at a minimum with the information in the sample form of
notice.
The agencies made several changes to the sample form in response to
suggestions from commenters. To streamline the sample form, the
agencies combined the introductory paragraphs of the sample notice. The
agencies adopted a language change suggested by FEMA regarding the
statistical risk of flooding in a SFHA. To increase borrower
recognition of their flood insurance responsibilities under the NFIP,
the agencies added a reference to the authority and obligation of a
regulated lender to force place flood insurance under the 1973 Act.
Finally, to clarify that flood insurance is not available for land, the
agencies added a sentence that with respect to the amount of flood
insurance coverage allowable under the NFIP, the value of the land
should be deducted from the overall value of the security property.
Use of Standard Flood Hazard Determination Form
The proposed rule required a regulated lender to use the standard
flood hazard determination form (SFHD form) developed by FEMA 32
to determine whether the building or mobile home offered as security
property is or will be located in a SFHA in which flood insurance is
available under the 1968 Act. The proposed rule allowed the lender to
use the form in a printed, computerized or electronic form. The
proposed rule required the lender to retain a copy of the completed
form, in either hard copy or electronic form, for the period of time
the lender owns the loan.
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\32\ See 60 FR 35276 (July 6, 1995) (codified at 44 CFR 65.16
and Appendix A to part 65).
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The agencies received 22 comments regarding use of the SFHD form.
Four commenters raised issues dealing with the format of the form. For
example, two commenters requested clarification about how an
electronically maintained form could be used and whether it must be in
the same format as the hard-copy form. FEMA addressed the format of an
electronically maintained form in the preamble of its final rule
adopting the SFHD form.33 FEMA stated that if an electronic format
is used, the format and exact layout of the SFHD form is not required,
but the fields and elements listed on the form are required. Any
electronic format used by lenders must contain all mandatory fields
indicated on the SFHD form.
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\33\ The agencies required regulated lending institutions to use
the FEMA-devised SFHD form by means of a joint final rule issued
without notice and comment prior to the issuance of the proposal to
implement the other Reform Act amendments. The agencies' proposal
incorporated that provision. See 60 FR 35286 (July 6, 1995).
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One commenter asked whether FEMA and the agencies could work
together to combine the SFHD form, the notice of flood hazards to the
borrower and servicer, and notice commencing the forced placement
procedure. The agencies have not adopted this suggestion because the
three documents have different purposes. The SFHD form must be used in
connection with all loans to determine whether the security property is
or will be located in an area having special flood hazards. On the
other hand, the notice to the borrower and the servicer must be
provided to the borrower and servicer only when the security property
is located in a SFHA. The Reform Act does not require the agencies to
develop a specific form of notice to borrowers for use in connection
with the forced placement procedures. For example, a lender, or
servicer acting on the lender's behalf, may choose to send the notice
directly. Others may decide to use the insurance company that issues
the forced placement policy to send the notice. FEMA has developed the
Mortgage Portfolio Protection Program (MPPP) to assist lenders in
connection with forced placement procedures. For information concerning
the contents of the notification letters used under the MPPP, lenders
should consult FEMA's MPPP Notice.34
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\34\ Notice by FEMA, 60 FR 44881 (August 29, 1995).
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Thirteen commenters addressed the topics of the guarantee of
information provided by a third party and reliance on a previous
determination under section 1365(d) and (e) of the 1968 Act. The
agencies' proposed rule did not specifically address these issues, but
the preamble discussed them. The preamble explained that the Reform Act
permits lenders to rely on third-party flood hazard determinations only
if the third party guarantees the accuracy of the information provided
to the lender. The Reform Act also permits a lender to rely on a
previous determination whether or not the security property is located
in a SFHA. A lender is exempt from liability for errors in the previous
determination if the previous determination is not more than seven
years old and the basis for it was recorded on the SFHD form mandated
by the Reform Act. There are, however, two circumstances in which a
lender may not rely on a previous determination: (1) if FEMA's map
revisions or updates show that the security property is now located in
a SFHA, or (2) if the lender contacts FEMA and discovers that map
revisions or updates affecting the security property have been made
after the date of the previous determination.
Several commenters requested clarification about the statutory
provision that a regulated lender may not rely on a previous
determination unless the determination was made on FEMA's SFHD form.
The agencies believe that this is the correct reading of the statutory
provision. Section 1365 of the 1968 Act, as amended by the Reform Act,
42 U.S.C. 4104b, states that a person increasing, extending, renewing,
or purchasing a loan secured by improved real estate or a mobile home
may rely on a previous determination if the basis for the previous
determination was set forth on FEMA's SFHD form.
Two commenters pointed out that pursuant to section 1365 of the
1968 Act, a lender cannot rely on a previous determination set forth on
a SFHD form when it makes a loan, only when it increases, extends,
renews or purchases a loan. The agencies agree with this interpretation
of section 1365 of the 1968 Act but note that subsequent transactions
by the same lender with respect to the same property will be
[[Page 45698]]
treated as renewals and will require no new determination.
The agencies adopt this provision as proposed.
Recordkeeping Requirements
The proposed rule included two recordkeeping requirements: (1)
retention of a copy of the completed SFHD form, in either hard copy or
electronic form, for the period of time the regulated lender owns the
loan; and (2) retention of the record of the receipt of notice to the
borrower and the servicer for the period of time the regulated lender
owns the loan. In addition, the agencies asked for comment on whether
the final rule should require the lender to retain in its files a copy
of each notice to FEMA of the identity of the servicer and/or a copy of
each mandatory notice to borrowers and servicers. The agencies received
58 comment letters addressing these and other issues pertaining to
recordkeeping.
Of the 25 comment letters addressing whether the final regulation
should require the lender to retain in its files a copy of the notice
to FEMA of the identity of the servicer, 19 commenters believed that
such a requirement is unnecessary. Like the proposed rule, the joint
final rule does not require that the lender retain in its loan files a
copy of the notice to FEMA of the identity of the loan servicer. The
joint final rule continues to implement the statutory requirement that
lenders must notify FEMA in writing of the identity of the loan
servicer and/or of a transfer in servicing rights.
Commenters were mixed in their views whether a regulated lender
should be required to maintain a copy in its loan files of the notice
to the borrower and the servicer. The joint final rule does not require
that a copy of these notices be maintained in the loan files because
the Reform Act does not require it.
Like section 1364 of the 1968 Act, as amended, and the proposed
rule, the joint final rule requires lenders to retain a record of the
receipt of the notices by the borrower and the servicer for the period
of time the lender owns the loan. A number of commenters requested
clarification about what constitutes a ``record of receipt.'' The joint
final rule does not prescribe a particular form for the record of
receipt. However, the agencies believe that the record of receipt
should contain a statement from the borrower indicating that the
borrower has received the notification. Examples of records of receipt
may include a borrower's signed acknowledgment on a copy of the notice,
a borrower-initialed list of documents and disclosures that the lender
provided the borrower, or a scanned electronic image of a receipt or
other document signed by the borrower. A lender may keep the record of
receipt provided by the borrower and the servicer in the form that best
suits the lender's business practices.
Two commenters supported the requirement that lenders must retain a
copy of the completed SFHD form, in either hard-copy or electronic
form, for the period of time the lender owns the loan. One commenter
stated that a copy of the completed form should be retained in the
appropriate loan file; the other commenter stated that it need not
necessarily be kept in the loan file. The agencies have adopted the
SFHD form retention requirement of the proposed rule unchanged. The
joint final rule does not specify the location where the copy must be
kept. A lender may, but is not required to, retain the copy in the
relevant loan file.
Seven commenters stressed that lenders should be able to retain
both the record of the receipt of the notices by the borrower and the
servicer and the SFHD form in electronic form. As discussed earlier,
lenders may retain these records electronically. Lenders are expected,
however, to be able to retrieve these electronic records within a
reasonable time pursuant to a document request from their Federal
supervisory agency.
Agricultural Lending Considerations
Six commenters responded to the discussion in the preamble to the
proposal on agricultural lending considerations. The comments generally
related to the characteristics that make agricultural lending different
from other types of commercial and residential mortgage lending for
purposes of flood insurance. Unlike residential lending, where most of
the value of the loan collateral is in the residence, in agricultural
lending the value of the collateral is concentrated not only in the
land, but also in multiple farm buildings. The commenters asserted that
it will be difficult to value agricultural buildings for flood
insurance purposes. Some agricultural buildings have valuable utility
to farm operations but are of relatively nominal market value. Other
buildings may have a higher market value but comprise a relatively low
percentage of the total loan collateral. Commenters also opined that
many agricultural structures would suffer little damage in a flood. To
the extent that NFIP flood insurance pricing does not recognize
differences in the market value and susceptibility to flood damage of
various agricultural structures, commenters asserted that borrowers of
regulated agricultural lenders will be forced to pay the same rates for
flood insurance as are applicable to other types of commercial
structures. Thus, these commenters maintained that participation in the
NFIP may be disproportionately expensive for regulated agricultural
lenders and their borrowers.
To address these issues, one commenter requested reconsideration of
the appropriateness of the proposed regulation for agricultural
lending. Another commenter suggested that the agencies create a
separate definition for agricultural buildings that would make it
possible to treat agricultural structures on a collateral property as a
group for flood insurance purposes.
While recognizing that agricultural lenders and their borrowers may
be in a different position from others affected by the requirements of
the NFIP, the agencies have concluded that Congress did not intend to
differentiate agricultural from other types of lenders in the Federal
flood insurance legislation. Agricultural lending by commercial banks,
thrifts, and credit unions has been covered by the flood insurance
statutes since the passage of the 1973 Act. The Reform Act extended the
scope of the NFIP to the institutions of the Farm Credit System, which
lend substantially in the agricultural sector. The Reform Act clearly
identifies the regulated lending institutions covered by the NFIP and
offers no leeway for a regulatory exclusion of agricultural lenders.
Similarly, issues related to pricing of flood insurance, while
obviously significant to regulated lenders and their borrowers, are not
within the regulatory purview of the agencies.35
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\35\ As regards the treatment of a group of agricultural
buildings for flood insurance purposes, the preamble to the proposal
noted that FEMA permits borrowers to insure their nonresidential
buildings using one policy with a schedule separately listing the
buildings. However, each building must be covered by flood
insurance.
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As noted in the preamble to the proposal, the FCA encourages Farm
Credit System institutions, as well as other agricultural lenders, to
work with FEMA to resolve questions regarding the operation and cost
structure of the NFIP as it applies to insurance of agricultural
structures. In its comment letter on the proposed rule FEMA indicated
that it is studying wet floodproofing techniques to determine whether
wet floodproofing criteria can be included in the NFIP floodplain
management regulations.36
[[Page 45699]]
Concurrently, FEMA has indicated that it plans to determine the
appropriate flood insurance rates for agricultural structures under the
NFIP. Any proposed changes in the NFIP floodplain management
regulations will occur through a rulemaking process that provides for
public notice and comment. The agencies urge agricultural lenders and
their borrowers to participate in pertinent FEMA proceedings so that
they may have an opportunity to raise these issues with FEMA. In the
agencies' view, these issues are subject to FEMA's administrative and
regulatory jurisdiction as administrator of the NFIP.
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\36\ In this connection, one commenter questioned why the
proposal did not address the effect of section 580 of the Reform
Act, 42 U.S.C. 4022(a)(2), with respect to agricultural structures.
Section 580 relates to flood mitigation and floodplain management
efforts under the NFIP and is not directly relevant to these
regulations, which implement the Reform Act provisions pertaining to
regulated lenders. Section 580 does appear pertinent, however, to
wet floodproofing and other questions relating to coverage of
certain repeated loss agricultural structures under the NFIP, which
may be the subject of FEMA rulemaking.
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FEMA Flood Hazard Determination Appeals
The proposed rule did not address the process for appealing flood
hazard determinations to FEMA; however, the agencies received eleven
letters with comments about various aspects of the process. Many of the
commenters' concerns are addressed in FEMA's final rule entitled
``Review of Determinations for Required Purchase of Flood Insurance''
and in the preamble to that final rule.37 For example, two
commenters commented on whether the borrower and the lender must
jointly submit an appeal, or whether an appeal submitted by one or the
other would be accepted. In its final rule, FEMA clarified that a
request must be submitted jointly by the lender and the borrower.
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\37\ See 60 FR 62213 (December 5, 1995) (to be codified at 44
CFR 65.17).
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Two commenters recommended that the agencies' final regulation
include instructions on how to file a flood determination appeal with
FEMA. The agencies believe it is inappropriate to provide this
information in the joint final rule because the flood determination
appeal process is governed by FEMA and delineated in FEMA's
regulations. The agencies understand that FEMA is currently developing
a ``sample letter'' with filing instructions for use by lenders and
borrowers in submitting an appeal to FEMA.
Three commenters asked which party, the lender or the borrower,
should pay FEMA's fee for deciding the appeal. While this is a matter
for the lender and the borrower to determine, the agencies believe that
the party who requests the appeal of a flood determination generally
will bear the cost of the appeal. An appeal is typically initiated at
the request of a borrower who believes the property securing the loan
is, in fact, not located in an SFHA, despite a flood determination to
the contrary. The appeal fee is not charged by the lender as an
incident to or condition of the credit. The official staff commentary
to Regulation Z provides that charges imposed by someone other than the
creditor are generally finance charges only if the creditor requires
the borrower to use the third party's services, or the creditor retains
the charge.
Finally, four commenters inquired about the flood insurance
requirement when a flood determination appeal is in process. FEMA
responded to similar questions in the preamble to its final rule.
Generally, under section 102(e)(3) of the 1973 Act, 42 U.S.C.
4012a(e)(3), the mandatory flood insurance requirement is temporarily
delayed until FEMA responds to an appeal. If FEMA fails to respond
before the later of 45 days or the closing of the loan, the mandatory
flood insurance purchase requirement is delayed until FEMA provides a
response.
Miscellaneous Issues
Standards with respect to purchased loans. Five commenters
requested guidance on minimum standards for loan participations and
purchased loans. Six other commenters indicated that no guidance on
purchased loans is necessary because institutions can manage their own
risks internally. Some of those commenters also noted that additional
guidance would be tantamount to increased regulatory burden.
If institutions purchasing loans use underwriting standards that
address flood insurance, such as requirements for representations from
the seller that flood insurance has been purchased for security
property located in a special flood hazard area, the agencies agree
that no further guidance is necessary. Where an institution's portfolio
includes more than an insignificant number of purchased loans and its
underwriting standards do not address flood insurance coverage,
however, the agencies would expect the institution to have other
procedures in place to ensure that it does not expose itself to
significant risks through such purchases.
Moreover, the agencies believe that the effects of the Reform Act-
mandated standards for flood insurance for loans purchased by Fannie
Mae and Freddie Mac should be gauged over a period of time before
determining whether further guidance is necessary for institutions in
areas that have significant exposure to flood hazards. Institutions
with significant lending in non-participating communities should have
procedures to ensure that loans on properties in flood hazard areas
where flood insurance is not available do not constitute an
unacceptably large portion of the institution's loan portfolio.
Subordinate Liens. The agencies received 14 comments concerning
flood insurance requirements for second mortgages or home equity loans.
Because a second mortgage or a home equity loan is secured by a
building or mobile home, these loans are covered by the flood insurance
requirements, unless one of the statutory exemptions specifically
applies.
Effective Date of Flood Insurance Policies. Some commenters asked
about the applicability in various lending situations of the 30-day
delay in effectiveness of flood insurance policies as prescribed in
section 1306 of the 1968 Act, as amended by the Reform Act, 42 U.S.C.
4013. FEMA addressed this issue in its Policy Issuance 8-95, dated
December 5, 1995. FEMA determined that the 30-day waiting period
generally is not applicable to the purchase of flood insurance in
connection with making, increasing, extending, or renewing a loan.
IV. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act as
amended, 5 U.S.C. 605(b), the OCC, Board, FDIC, OTS, and NCUA (banking
agencies) hereby certify that this joint final rule will not have a
significant economic impact on a substantial number of small entities.
Moreover, this joint final rule is required by the Reform Act.
Accordingly, a regulatory flexibility analysis is not required.
In response to comments received during the public comment period
(a substantial number representing smaller entities), the banking
agencies have attempted to minimize regulatory burden by: (1) adding
and revising definitions to make technically complex flood insurance
rules more readily understood; (2) determining that the purchase of a
loan is not the equivalent of the making of a loan for flood insurance
purposes; and (3) minimizing the recordkeeping and notice requirements
to include only those matters required by the statute.
[[Page 45700]]
As a general matter, the joint final rule does not impose standards
that are in excess of industry standards with respect to flood
insurance, as those standards are reflected in the underwriting
standards for Fannie Mae and Freddie Mac. Further, for those lenders
already covered by existing flood insurance requirements, the joint
final rule does not represent a significant increase over the burden
imposed under the current rules. For such lenders, the joint final rule
would increase burden above that imposed under the current rules in the
following cases: (1) where residential property securing a loan is
located in a special flood hazard area and the lender requires escrows
for other tax and insurance payments, premiums for required flood
insurance must be escrowed as well; (2) the content of the notices
currently provided to borrowers is modified to provide additional
information to the borrower; and (3) notice to FEMA of the servicer of
the loan secured by property located in a special flood hazard area is
required to permit FEMA to contact the servicer if the flood insurance
lapses.38 The banking agencies believe that these increases in
burden will result only in minor additional expenses for depository
institutions.
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\38\ The provision concerning forced placement of flood
insurance is self-implementing and is included in the joint final
rule only to ensure that regulated lenders are aware of the
authority and requirements of that provision. Including the
provision in the joint final rule does not impose any additional
burden on regulated lenders.
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V. Paperwork Reduction Act of 1995
The OCC, Board, FDIC, OTS, and NCUA (banking agencies) invite
comment on:
(1) Whether the collection of information contained in this joint
final rule is necessary for the proper performance of each agency's
functions, including whether the information has practical utility;
(2) The accuracy of each agency's estimate of the burden of the
information collection;
(3) Ways to enhance the quality, utility, and clarity of the
information to be collected; and
(4) Ways to minimize the burden of the information collection on
respondents, including the use of automated collection techniques or
other forms of information technology.
The banking agencies asked similar questions in the proposal.
Several commenters indicated that the banking agencies had
underestimated the paperwork burden associated with the flood rules.
For purposes of allocating the paperwork burden for the flood rules,
FEMA is charged with the hours for completing the SFHD form (FEMA form
81-93; OMB Control No. 3067-0264), while the banking agencies are
charged with the recordkeeping burden associated with the SFHD form and
the notifications and additional recordkeeping required when a property
is located in a SFHA. The separation of burden responsibility and
reporting easily could cause the paperwork burden of these rules to
appear to be understated. When viewed in conjunction with FEMA's
burden, however, the banking agencies believe that the recordkeeping
and notification burden estimates associated with these rules are
reasonable.
Respondents/recordkeepers are not required to respond to this
collection of information unless it displays a currently valid OMB
control number.
OCC: The collection of information requirements contained in the
OCC's portion of this joint final rule have been approved by the Office
of Management and Budget under OMB Control No. 1557-0202 in accordance
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments
on the collection of information requirements should be sent to the
Office of Management and Budget, Paperwork Reduction Project (1557-
0202), Washington, DC 20503, with a copy to the Legislative and
Regulatory Activities Division (1557-0202), Office of the Comptroller
of the Currency, 250 E Street, SW., Washington, DC 20219.
The collection of information requirements relating to the OCC's
portion of this joint final rule are found in 12 CFR 22.6, 22.7, 22.9,
and 22.10. This information is required to evidence compliance with the
requirements of the NFIP with respect to lenders (national banks) and
borrowers (anyone who applies for a loan secured by improved real
property or a mobile home which may be located in a SFHA). The likely
respondents/recordkeepers are national banks.
Estimated average annual burden hours per respondent/recordkeeper:
26 hours.
Estimated number of respondents and/or recordkeepers: 3,000.
Estimated total annual reporting and recordkeeping burden: 78,000
hours.
Start-up costs to respondents: None.
Records are to be maintained for the period of time the respondent/
recordkeeper owns the loan.
Board: In accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(i); see also 5 CFR 1320 Appendix A Item 1), the Board
reviewed its portion of this joint final rule under the authority
delegated to the Board by the Office of Management and Budget and
assigned OMB control number 7100-0280. Send comments regarding the
burden estimate, or any other aspect of this collection of information,
including suggestions for reducing the burden, to: Secretary, Board of
Governors of the Federal Reserve System, 20th and C Streets, NW.,
Washington, DC 20551; and to the Office of Management and Budget,
Paperwork Reduction Project (7100-0280), Washington, DC 20503.
The collection of information requirements relating to the Board's
portion of this joint final rule are included in 12 CFR 208.23. This
information is required to evidence compliance with the requirements of
the NFIP with respect to lenders (state chartered member banks) and
borrowers (anyone who applies for a loan secured by improved real
property or a mobile home which may be located in a SFHA). The
respondents/recordkeepers are for-profit financial institutions,
including small businesses.
It is estimated that there will be 1,042 respondent/recordkeepers
and a total of 26,800 hours of annual hour paperwork burden. The
estimated annual hour paperwork burden per respondent/recordkeeper is
25.7 hours, 1 hour for recordkeeping and a total of 24.7 hours for: (1)
Notifying the borrower and the servicer; (2) notifying the Director of
FEMA of initial servicers; and (3) if necessary, notifying the Director
of FEMA when a loan servicer has changed. Banks likely will add the
required records to their existing usual and customary loan
documentation. Thus there is estimated to be no significant annual cost
burden over the annual hour burden. Additionally, the Board estimates
that there is no associated capital or start up cost as banks are
expected to use their current word processing programs to produce the
notices.
Records are to be maintained for the period of time the respondent/
recordkeeper owns the loan. Because the records would be maintained at
state member banks and the notices are not provided to the Board, no
issue of confidentiality under the Freedom of Information Act arises.
FDIC: The collections of information contained in the FDIC's
portion of this joint final rule have been approved by the Office of
Management and Budget under OMB Control No. 3064-0120 in accordance
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments
on the collections of information should be sent to the Office of
Management and Budget,
[[Page 45701]]
Paperwork Reduction Project (3064-0120), Washington, DC 20503, with
copies of such comments to be sent to Steven F. Hanft, Office of the
Executive Secretary, Room F-453, Federal Deposit Insurance Corporation,
550 17th Street, NW., Washington, DC 20429.
The collections of information requirements relating to the FDIC's
portion of this joint final rule are found in 12 CFR 339.6, 339.7,
339.9, and 339.10. This information is required to evidence compliance
with the requirements of the NFIP with respect to lenders (state
chartered nonmember banks) and borrowers (anyone who applies for a loan
secured by improved real estate or a mobile home which may be located
in a SFHA).
The likely respondents/recordkeepers are insured nonmember banks
and their subsidiaries.
Estimated number of respondents/recordkeepers: 6,250.
Estimated average annual burden hours per respondent/recordkeeper:
26 hours.
Estimated total annual reporting and recordkeeping burden: 162,500
hours.
Start-up costs to respondents: None.
Records are to be maintained for the period of time the respondent/
recordkeeper owns the loan.
OTS: The collection of information requirements contained in the
OTS's portion of this joint final rule have been approved by the Office
of Management and Budget under OMB Control No. 1550-0088 in accordance
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments
on the collection of information should be sent to the Office of
Management and Budget, Paperwork Reduction Project (1550-0088),
Washington, DC 20503, with a copy to the OTS, 1700 G Street, NW.,
Washington, DC 20552.
The collection of information requirements relating to the OTS's
portion of this joint final rule are found in 12 CFR 572.6, 572.7,
572.9, and 572.10. This information is required to evidence compliance
with the requirements of the NFIP with respect to lenders (savings
associations) and borrowers (anyone who applies for a loan secured by
improved real property or a mobile home which may be located in a
SFHA). The likely recordkeepers are OTS-regulated savings associations.
Estimated number of respondents and/or recordkeepers: 1,500.
Estimated average annual burden hours per recordkeeper: 26 hours.
Estimated total annual reporting and recordkeeping burden: 39,000
hours.
Start-up costs to respondents: None.
Records are to be maintained for the period of time respondent/
recordkeeper owns the loan.
NCUA: The collection of information requirements contained in the
NCUA's portion of this joint final rule were approved by the Office of
Management and Budget under OMB Control No. 3133-0143. Written comments
on the collection of information should be sent to the Office of
Management and Budget, OMB Reports Management Branch, New Executive
Office Building, Room 10202, Washington, DC 20503. Attn: Alexander
Hunt.
The collection of information requirements relating to the NCUA's
portion of this joint final rule are found in 12 CFR 760.6, 760.7,
760.9 and 760.10. This information is required to evidence compliance
with the requirements of the NFIP with respect to lenders (Federally-
insured credit unions) and borrowers (members that apply for a loan
secured by improved real estate or a mobile home which may be located
in a SFHA). The likely recordkeepers are Federally-insured credit
unions.
Estimated number of respondents and/or recordkeepers: 700.
Estimated average annual burden hours per respondent/recordkeeper:
26 hours.
Estimated total annual reporting and recordkeeping burden: 16,325
hours.
Start-up costs to respondents: None.
Records are to be maintained for the period of time the respondent/
recordkeeper owns the loan.
VI. Executive Order 12866
OCC and OTS: The OCC and the OTS each has determined that its
portion of this joint final rule is not a significant regulatory action
as defined in Executive Order 12866.
VII. Executive Order 12612
Executive Order 12612 requires the NCUA to consider the effects of
its actions on State interests. The NCUA's portion of this joint final
rule will apply to all Federally-insured credit unions and reduce
regulatory requirements. The NCUA Board has determined that the NCUA's
portion of the joint final rule would not have a substantial direct
effect on the States, on the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government.
VIII. Unfunded Mandates Reform Act of 1995
OCC and OTS: Section 202 of the Unfunded Mandates Reform Act of
1995, Pub. L. 104-4, 109 Stat. 48 (1995) (Unfunded Mandates Act)
requires that covered agencies prepare a budgetary impact statement
before promulgating a rule that includes a Federal mandate that may
result in the expenditure by State, local, and tribal governments, in
the aggregate, or by the private sector, of $100 million or more in any
one year. If a budgetary impact statement is required, section 205 of
the Unfunded Mandates Act also requires covered agencies to identify
and consider a reasonable number of regulatory alternatives before
promulgating a rule. As discussed in the preamble, this joint final
rule revises current OCC and OTS flood insurance regulations as
prescribed by the Reform Act. The Reform Act specifically requires six
agencies, including the OCC and OTS, to implement certain of the Reform
Act's amendments through regulations. Therefore, to the extent that the
joint final rule imposes new Federal requirements, the requirements are
statutorily mandated by the Reform Act. Nevertheless, the OCC and OTS
each has determined that its portion of the joint final rule will not
result in expenditures by State, local, and tribal governments, or by
the private sector, of $100 million or more in any one year.
Accordingly, the OCC and OTS have not prepared budgetary impact
statements or specifically addressed the regulatory alternatives
considered.
List of Subjects
12 CFR Part 22
Flood insurance, Mortgages, National banks, Reporting and
recordkeeping requirements.
12 CFR Part 208
Accounting, Agriculture, Banks, banking, Confidential business
information, Crime, Currency, Federal Reserve System, Flood insurance,
Mortgages, Reporting and recordkeeping requirements, Securities.
12 CFR Part 339
Flood insurance, Reporting and recordkeeping requirements.
12 CFR Part 563
Accounting, Advertising, Crime, Currency, Flood insurance,
Investments, Reporting and recordkeeping requirements, Savings
associations, Securities, Surety bonds.
12 CFR Part 572
Flood insurance, Reporting and recordkeeping requirements, Savings
associations.
12 CFR Part 614
Agriculture, Banks, banking, Flood insurance, Foreign trade,
Reporting and recordkeeping requirements, Rural areas.
12 CFR Part 760
[[Page 45702]]
Credit unions, Mortgages, Flood insurance, Reporting and
recordkeeping requirements.
Office of the Comptroller of the Currency
12 CFR CHAPTER I
Authority and Issuance
For the reasons set forth in the joint preamble, part 22 of chapter
I of title 12 of the Code of Federal Regulations is revised to read as
follows:
PART 22--LOANS IN AREAS HAVING SPECIAL FLOOD HAZARDS
Sec.
22.1 Authority, purpose, and scope.
22.2 Definitions.
22.3 Requirement to purchase flood insurance where available.
22.4 Exemptions.
22.5 Escrow requirement.
22.6 Required use of standard flood hazard determination form.
22.7 Forced placement of flood insurance.
22.8 Determination fees.
22.9 Notice of special flood hazards and availability of Federal
disaster relief assistance.
22.10 Notice of servicer's identity.
Appendix A to Part 22--Sample Form of Notice of Special Flood Hazards
and Availability of Federal Disaster Relief Assistance
Authority: 12 U.S.C. 93a; 42 U.S.C. 4012a, 4104a, 4104b, 4106,
and 4128.
Sec. 22.1 Authority, purpose, and scope.
(a) Authority. This part is issued pursuant to 12 U.S.C. 93a and 42
U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.
(b) Purpose. The purpose of this part is to implement the
requirements of the National Flood Insurance Act of 1968 and the Flood
Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129).
(c) Scope. This part, except for Secs. 22.6 and 22.8, applies to
loans secured by buildings or mobile homes located or to be located in
areas determined by the Director of the Federal Emergency Management
Agency to have special flood hazards. Sections 22.6 and 22.8 apply to
loans secured by buildings or mobile homes, regardless of location.
Sec. 22.2 Definitions.
(a) Act means the National Flood Insurance Act of 1968, as amended
(42 U.S.C. 4001-4129).
(b) Bank means a national bank or a bank located in the District of
Columbia and subject to the supervision of the Comptroller of the
Currency.
(c) Building means a walled and roofed structure, other than a gas
or liquid storage tank, that is principally above ground and affixed to
a permanent site, and a walled and roofed structure while in the course
of construction, alteration, or repair.
(d) Community means a State or a political subdivision of a State
that has zoning and building code jurisdiction over a particular area
having special flood hazards.
(e) Designated loan means a loan secured by a building or mobile
home that is located or to be located in a special flood hazard area in
which flood insurance is available under the Act.
(f) Director of FEMA means the Director of the Federal Emergency
Management Agency.
(g) Mobile home means a structure, transportable in one or more
sections, that is built on a permanent chassis and designed for use
with or without a permanent foundation when attached to the required
utilities. The term mobile home does not include a recreational
vehicle. For purposes of this part, the term mobile home means a mobile
home on a permanent foundation. The term mobile home includes a
manufactured home as that term is used in the NFIP.
(h) NFIP means the National Flood Insurance Program authorized
under the Act.
(i) Residential improved real estate means real estate upon which a
home or other residential building is located or to be located.
(j) Servicer means the person responsible for:
(1) Receiving any scheduled, periodic payments from a borrower
under the terms of a loan, including amounts for taxes, insurance
premiums, and other charges with respect to the property securing the
loan; and
(2) Making payments of principal and interest and any other
payments from the amounts received from the borrower as may be required
under the terms of the loan.
(k) Special flood hazard area means the land in the flood plain
within a community having at least a one percent chance of flooding in
any given year, as designated by the Director of FEMA.
(l) Table funding means a settlement at which a loan is funded by a
contemporaneous advance of loan funds and an assignment of the loan to
the person advancing the funds.
Sec. 22.3 Requirement to purchase flood insurance where available.
(a) In general. A bank shall not make, increase, extend, or renew
any designated loan unless the building or mobile home and any personal
property securing the loan is covered by flood insurance for the term
of the loan. The amount of insurance must be at least equal to the
lesser of the outstanding principal balance of the designated loan or
the maximum limit of coverage available for the particular type of
property under the Act. Flood insurance coverage under the Act is
limited to the overall value of the property securing the designated
loan minus the value of the land on which the property is located.
(b) Table funded loans. A bank that acquires a loan from a mortgage
broker or other entity through table funding shall be considered to be
making a loan for the purposes of this part.
Sec. 22.4 Exemptions.
The flood insurance requirement prescribed by Sec. 22.3 does not
apply with respect to:
(a) Any State-owned property covered under a policy of self-
insurance satisfactory to the Director of FEMA, who publishes and
periodically revises the list of States falling within this exemption;
or
(b) Property securing any loan with an original principal balance
of $5,000 or less and a repayment term of one year or less.
Sec. 22.5 Escrow requirement.
If a bank requires the escrow of taxes, insurance premiums, fees,
or any other charges for a loan secured by residential improved real
estate or a mobile home that is made, increased, extended, or renewed
on or after October 1, 1996, the bank shall also require the escrow of
all premiums and fees for any flood insurance required under Sec. 22.3.
The bank, or a servicer acting on behalf of the bank, shall deposit the
flood insurance premiums on behalf of the borrower in an escrow
account. This escrow account will be subject to escrow requirements
adopted pursuant to section 10 of the Real Estate Settlement Procedures
Act of 1974 (12 U.S.C. 2609) (RESPA), which generally limits the amount
that may be maintained in escrow accounts for certain types of loans
and requires escrow account statements for those accounts, only if the
loan is otherwise subject to RESPA. Following receipt of a notice from
the Director of FEMA or other provider of flood insurance that premiums
are due, the bank, or a servicer acting on behalf of the bank, shall
pay the amount owed to the insurance provider from the escrow account
by the date when such premiums are due.
Sec. 22.6 Required use of standard flood hazard determination form.
(a) Use of form. A bank shall use the standard flood hazard
determination form developed by the Director of FEMA (as set forth in
Appendix A of 44
[[Page 45703]]
CFR part 65) when determining whether the building or mobile home
offered as collateral security for a loan is or will be located in a
special flood hazard area in which flood insurance is available under
the Act. The standard flood hazard determination form may be used in a
printed, computerized, or electronic manner.
(b) Retention of form. A bank shall retain a copy of the completed
standard flood hazard determination form, in either hard copy or
electronic form, for the period of time the bank owns the loan.
Sec. 22.7 Forced placement of flood insurance.
If a bank, or a servicer acting on behalf of the bank, determines
at any time during the term of a designated loan that the building or
mobile home and any personal property securing the designated loan is
not covered by flood insurance or is covered by flood insurance in an
amount less than the amount required under Sec. 22.3, then the bank or
its servicer shall notify the borrower that the borrower should obtain
flood insurance, at the borrower's expense, in an amount at least equal
to the amount required under Sec. 22.3, for the remaining term of the
loan. If the borrower fails to obtain flood insurance within 45 days
after notification, then the bank or its servicer shall purchase
insurance on the borrower's behalf. The bank or its servicer may charge
the borrower for the cost of premiums and fees incurred in purchasing
the insurance.
Sec. 22.8 Determination fees.
(a) General. Notwithstanding any Federal or State law other than
the Flood Disaster Protection Act of 1973 as amended (42 U.S.C. 4001-
4129), any bank, or a servicer acting on behalf of the bank, may charge
a reasonable fee for determining whether the building or mobile home
securing the loan is located or will be located in a special flood
hazard area. A determination fee may also include, but is not limited
to, a fee for life-of-loan monitoring.
(b) Borrower fee. The determination fee authorized by paragraph (a)
of this section may be charged to the borrower if the determination:
(1) Is made in connection with a making, increasing, extending, or
renewing of the loan that is initiated by the borrower;
(2) Reflects the Director of FEMA's revision or updating of
floodplain areas or flood-risk zones;
(3) Reflects the Director of FEMA's publication of a notice or
compendium that:
(i) Affects the area in which the building or mobile home securing
the loan is located; or
(ii) By determination of the Director of FEMA, may reasonably
require a determination whether the building or mobile home securing
the loan is located in a special flood hazard area; or
(4) Results in the purchase of flood insurance coverage by the bank
or its servicer on behalf of the borrower under Sec. 22.7.
(c) Purchaser or transferee fee. The determination fee authorized
by paragraph (a) of this section may be charged to the purchaser or
transferee of a loan in the case of the sale or transfer of the loan.
Sec. 22.9 Notice of special flood hazards and availability of Federal
disaster relief assistance.
(a) Notice requirement. When a bank makes, increases, extends, or
renews a loan secured by a building or a mobile home located or to be
located in a special flood hazard area, the bank shall mail or deliver
a written notice to the borrower and to the servicer in all cases
whether or not flood insurance is available under the Act for the
collateral securing the loan.
(b) Contents of notice. The written notice must include the
following information:
(1) A warning, in a form approved by the Director of FEMA, that the
building or the mobile home is or will be located in a special flood
hazard area;
(2) A description of the flood insurance purchase requirements set
forth in section 102(b) of the Flood Disaster Protection Act of 1973,
as amended (42 U.S.C. 4012a(b));
(3) A statement, where applicable, that flood insurance coverage is
available under the NFIP and may also be available from private
insurers; and
(4) A statement whether Federal disaster relief assistance may be
available in the event of damage to the building or mobile home caused
by flooding in a Federally declared disaster.
(c) Timing of notice. The bank shall provide the notice required by
paragraph (a) of this section to the borrower within a reasonable time
before the completion of the transaction, and to the servicer as
promptly as practicable after the bank provides notice to the borrower
and in any event no later than the time the bank provides other similar
notices to the servicer concerning hazard insurance and taxes. Notice
to the servicer may be made electronically or may take the form of a
copy of the notice to the borrower.
(d) Record of receipt. The bank shall retain a record of the
receipt of the notices by the borrower and the servicer for the period
of time the bank owns the loan.
(e) Alternate method of notice. Instead of providing the notice to
the borrower required by paragraph (a) of this section, a bank may
obtain satisfactory written assurance from a seller or lessor that,
within a reasonable time before the completion of the sale or lease
transaction, the seller or lessor has provided such notice to the
purchaser or lessee. The bank shall retain a record of the written
assurance from the seller or lessor for the period of time the bank
owns the loan.
(f) Use of prescribed form of notice. A bank will be considered to
be in compliance with the requirement for notice to the borrower of
this section by providing written notice to the borrower containing the
language presented in appendix A to this part within a reasonable time
before the completion of the transaction. The notice presented in
appendix A to this part satisfies the borrower notice requirements of
the Act.
Sec. 22.10 Notice of servicer's identity.
(a) Notice requirement. When a bank makes, increases, extends,
renews, sells, or transfers a loan secured by a building or mobile home
located or to be located in a special flood hazard area, the bank shall
notify the Director of FEMA (or the Director's designee) in writing of
the identity of the servicer of the loan. The Director of FEMA has
designated the insurance provider to receive the bank's notice of the
servicer's identity. This notice may be provided electronically if
electronic transmission is satisfactory to the Director of FEMA's
designee.
(b) Transfer of servicing rights. The bank shall notify the
Director of FEMA (or the Director's designee) of any change in the
servicer of a loan described in paragraph (a) of this section within 60
days after the effective date of the change. This notice may be
provided electronically if electronic transmission is satisfactory to
the Director of FEMA's designee. Upon any change in the servicing of a
loan described in paragraph (a) of this section, the duty to provide
notice under this paragraph (b) shall transfer to the transferee
servicer.
Appendix A to Part 22--Sample Form of Notice of Special Flood Hazards
and Availability of Federal Disaster Relief Assistance
We are giving you this notice to inform you that:
The building or mobile home securing the loan for which you have
applied is or will be located in an area with special flood hazards.
[[Page 45704]]
The area has been identified by the Director of the Federal
Emergency Management Agency (FEMA) as a special flood hazard area
using FEMA's Flood Insurance Rate Map or the Flood Hazard Boundary
Map for the following community: ________________. This area has at
least a one percent (1%) chance of a flood equal to or exceeding the
base flood elevation (a 100-year flood) in any given year. During
the life of a 30-year mortgage loan, the risk of a 100-year flood in
a special flood hazard area is 26 percent (26%).
Federal law allows a lender and borrower jointly to request the
Director of FEMA to review the determination of whether the property
securing the loan is located in a special flood hazard area. If you
would like to make such a request, please contact us for further
information.
______ The community in which the property securing the loan is
located participates in the National Flood Insurance Program (NFIP).
Federal law will not allow us to make you the loan that you have
applied for if you do not purchase flood insurance. The flood
insurance must be maintained for the life of the loan. If you fail
to purchase or renew flood insurance on the property, Federal law
authorizes and requires us to purchase the flood insurance for you
at your expense.
Flood insurance coverage under the NFIP may be
purchased through an insurance agent who will obtain the policy
either directly through the NFIP or through an insurance company
that participates in the NFIP. Flood insurance also may be available
from private insurers that do not participate in the NFIP.
At a minimum, flood insurance purchased must cover the
lesser of:
(1) the outstanding principal balance of the loan; or
(2) the maximum amount of coverage allowed for the type of
property under the NFIP.
Flood insurance coverage under the NFIP is limited to the
overall value of the property securing the loan minus the value of
the land on which the property is located.
Federal disaster relief assistance (usually in the form
of a low-interest loan) may be available for damages incurred in
excess of your flood insurance if your community's participation in
the NFIP is in accordance with NFIP requirements.
______ Flood insurance coverage under the NFIP is not available
for the property securing the loan because the community in which
the property is located does not participate in the NFIP. In
addition, if the non-participating community has been identified for
at least one year as containing a special flood hazard area,
properties located in the community will not be eligible for Federal
disaster relief assistance in the event of a Federally-declared
flood disaster.
Dated: August 14, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
Federal Reserve System
12 CFR CHAPTER II
Authority and Issuance
For the reasons set forth in the joint preamble, part 208 of
chapter II of title 12 of the Code of Federal Regulations is amended as
set forth below:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
1. The authority citation for part 208 is revised to read as
follows:
Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 371d, 461,
481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-1, 3105,
3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 781(b), 781(g),
781(i), 781-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 5318; 42 U.S.C.
4012a, 4104a, 4104b, 4106, and 4128.
2. In Sec. 208.8, paragraph (e) is removed and reserved, and
appendix A--Sample Notices following paragraph (k)(6)(iii) is removed.
3. A new Sec. 208.23 is added at the end of subpart A to read as
follows:
Sec. 208.23 Loans in areas having special flood hazards.
(a) Purpose and scope--(1) Purpose. The purpose of this section is
to implement the requirements of the National Flood Insurance Act of
1968 and the Flood Disaster Protection Act of 1973, as amended (42
U.S.C. 4001-4129).
(2) Scope. This section, except for paragraphs (f) and (h) of this
section, applies to loans secured by buildings or mobile homes located
or to be located in areas determined by the Director of the Federal
Emergency Management Agency to have special flood hazards. Paragraphs
(f) and (h) of this section apply to loans secured by buildings or
mobile homes, regardless of location.
(b) Definitions. (1) Act means the National Flood Insurance Act of
1968, as amended (42 U.S.C. 4001-4129).
(2) Building means a walled and roofed structure, other than a gas
or liquid storage tank, that is principally above ground and affixed to
a permanent site, and a walled and roofed structure while in the course
of construction, alteration, or repair.
(3) Community means a State or a political subdivision of a State
that has zoning and building code jurisdiction over a particular area
having special flood hazards.
(4) Designated loan means a loan secured by a building or mobile
home that is located or to be located in a special flood hazard area in
which flood insurance is available under the Act.
(5) Director of FEMA means the Director of the Federal Emergency
Management Agency.
(6) Mobile home means a structure, transportable in one or more
sections, that is built on a permanent chassis and designed for use
with or without a permanent foundation when attached to the required
utilities. The term mobile home does not include a recreational
vehicle. For purposes of this section, the term mobile home means a
mobile home on a permanent foundation. The term mobile home includes a
manufactured home as that term is used in the NFIP.
(7) NFIP means the National Flood Insurance Program authorized
under the Act.
(8) Residential improved real estate means real estate upon which a
home or other residential building is located or to be located.
(9) Servicer means the person responsible for:
(i) Receiving any scheduled, periodic payments from a borrower
under the terms of a loan, including amounts for taxes, insurance
premiums, and other charges with respect to the property securing the
loan; and
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