Loans in Areas Having Special Flood Hazards
| Published date | 20 February 2019 |
| Citation | 84 FR 4953 |
| Record Number | 2019-02650 |
| Section | Rules and Regulations |
| Court | Farm Credit Administration,Federal Deposit Insurance Corporation,National Credit Union Administration,The Comptroller Of The Currency Office |
Federal Register, Volume 84 Issue 34 (Wednesday, February 20, 2019)
[Federal Register Volume 84, Number 34 (Wednesday, February 20, 2019)]
[Rules and Regulations]
[Pages 4953-4975]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-02650]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 22 and 172
[Docket ID OCC-2014-0016]
RIN 1557-AD84
FEDERAL RESERVE SYSTEM
12 CFR Part 208
[Regulation H, Docket No. R-1498]
RIN 7100 AE-22
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 339
RIN 3064-AE50
FARM CREDIT ADMINISTRATION
12 CFR Part 614
RIN 3052-AC93
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 760
RIN 3133-AE64
Loans in Areas Having Special Flood Hazards
AGENCY: Office of the Comptroller of the Currency, Treasury; Board of
Governors of the Federal Reserve System; Federal Deposit Insurance
Corporation; Farm Credit Administration; National Credit Union
Administration.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), the Federal Deposit
Insurance Corporation (FDIC), the Farm Credit Administration (FCA), and
the National Credit Union Administration (NCUA) are amending their
regulations regarding loans in areas having special flood hazards to
implement the private flood insurance provisions of the Biggert-Waters
Flood Insurance Reform Act of 2012 (Biggert-Waters Act). Specifically,
the final rule requires regulated lending institutions to accept
policies that meet the statutory definition of ``private flood
insurance'' in the Biggert-Waters Act; and permits regulated lending
institutions to exercise their discretion to accept flood insurance
policies issued by private insurers and plans providing flood coverage
issued by mutual aid societies that do not meet the statutory
definition of ``private flood insurance,'' subject to certain
restrictions.
DATES: This rule is effective on July 1, 2019.
FOR FURTHER INFORMATION CONTACT:
OCC: Rhonda L. Daniels, Compliance Specialist, Compliance Policy
Division, (202) 649-5405; Sadia Chaudhary, Counsel, (202) 649-6350,
Heidi M. Thomas, Special Counsel, or Melissa Lisenbee, Senior Attorney,
(202) 649-5490, Chief Counsel's Office. For persons who are hearing
impaired, TTY, (202) 649-5597.
Board: Lanette Meister, Senior Supervisory Consumer Financial
Services Analyst, (202) 452-2705; Vivian W. Wong, Senior Counsel, (202)
452-3667, Division of Consumer and Community Affairs; or Daniel
Ericson, Senior Counsel, (202) 452-3359, Legal Division; for users of
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.
FDIC: Simin Ho, Senior Policy Analyst, Division of Depositor and
Consumer Protection, (202) 898-6907, sho@fdic.gov; Navid Choudhury,
Counsel, Consumer Compliance Unit, Legal Division, nchoudnury@fdic.gov
(202) 898-6526.
FCA: Paul K. Gibbs, Associate Director, Office of Regulatory Policy
(703) 883-4203, TTY (703) 883-4056; or Mary Alice Donner, Senior
Counsel, Office of General Counsel (703) 883-4020, TTY (703) 883-4056.
NCUA: Sarah Chung, Senior Staff Attorney, or Thomas Zells, Staff
Attorney, Office of General Counsel, (703) 518-6540; or Jeff Marshall,
Policy Officer, (703) 518-6360.
SUPPLEMENTARY INFORMATION:
I. Background
A. Flood Insurance Statutes
The National Flood Insurance Act of 1968 (1968 Act) \1\ and the
Flood Disaster Protection Act of 1973 (FDPA),\2\ as amended,
(collectively referenced herein as the Federal flood insurance
statutes) govern the National Flood Insurance Program (NFIP).\3\ These
laws make Federally subsidized flood insurance available to owners of
improved real estate or mobile homes located in participating
communities and require the purchase of flood insurance in connection
with a loan made by a regulated lending institution \4\ when the loan
is secured by improved real estate or a mobile home located in a
special flood hazard area (SFHA) \5\ in which flood insurance is
available under the NFIP. The laws specify the amount of insurance that
must be purchased, and also require such insurance be maintained for
the term of the loan. (The requirement for flood insurance, and the
term and amounts of such coverage, are hereinafter described as ``the
flood insurance purchase requirement.'') The OCC, Board, FDIC, FCA, and
NCUA (collectively, the Agencies) each have issued regulations
implementing these statutory requirements for the lending institutions
they supervise.\6\
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\1\ Public Law 90-448, 82 Stat. 572 (1968).
\2\ Public Law 93-234, 87 Stat. 975 (1973).
\3\ 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.
\4\ The FDPA defines ``regulated lending institution'' to mean
any bank, savings and loan association, credit union, farm credit
bank, Federal land bank association, production credit association,
or similar institution subject to the supervision of a Federal
entity for lending regulation. 42 U.S.C. 4003(a)(1).
\5\ An SFHA is an area within a flood plain having a one percent
or greater chance of flood occurrence in any given year. 44 CFR
59.1. SFHAs are delineated on maps issued by FEMA for individual
communities. 44 CFR part 65. A community establishes its eligibility
to participate in the NFIP by adopting and enforcing flood plain
management measures that regulate new construction and by making
substantial improvements within its SFHAs to eliminate or minimize
future flood damage. 44 CFR part 60.
\6\ See 12 CFR part 22 (OCC), part 208 (Board), part 339 (FDIC),
part 614 Subpart S (FCA), and part 760 (NCUA).
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The Biggert-Waters Act \7\ amends the Federal flood insurance
statutes that the Agencies have authority to implement and enforce.
Among other things, the Biggert-Waters Act: (1) Requires the Agencies
to issue a rule regarding the escrow of premiums and fees for flood
insurance; \8\ (2) clarifies the requirement to force place insurance;
\9\ and (3) requires the Agencies to issue a rule to direct regulated
lending institutions to accept ``private flood insurance,'' as defined
by the Biggert-Waters Act, and to notify borrowers of the availability
of
[[Page 4954]]
flood insurance coverage issued by private insurers.\10\
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\7\ Public Law 112-141, 126 Stat. 916 (2012).
\8\ Section 100209 of the Biggert-Waters Act, amending section
102(d) of the FDPA (42 U.S.C. 4012a(d)).
\9\ Section 100244 of the Biggert-Waters Act, amending section
102(e) of the FDPA (42 U.S.C. 4012a(e)).
\10\ Section 100239 of the Biggert-Waters Act, amending section
102(b) of the FDPA (42 U.S.C. 4012a(b)) and section 1364(a)(3)(C) of
the 1968 Act (42 U.S.C. 4104a(a)(3)(C)).
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B. Regulatory History
In October 2013, the Agencies jointly issued a proposed rule to
implement the escrow, force placement, and private flood insurance
provisions of the Biggert-Waters Act (the October 2013 Proposed
Rule).\11\ With respect to private flood insurance, the October 2013
Proposed Rule would have required a regulated lending institution to
accept all policies meeting the statutory definition of ``private flood
insurance'' in the Biggert-Waters Act (mandatory acceptance). The
October 2013 Proposed Rule also included a safe harbor provision that
would have allowed regulated lending institutions to rely on the
expertise of State insurance regulators to determine whether a policy
meets the statutory definition of ``private flood insurance'' and must
be accepted by the institution. Additionally, the Agencies specifically
solicited comment on whether the rule should include a provision
expressly permitting regulated lending institutions to exercise their
discretion to accept flood insurance provided by private insurers that
does not meet the Biggert-Waters Act's definition of ``private flood
insurance'' (discretionary acceptance) and what criteria the Agencies
might require for such a policy.
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\11\ 78 FR 65108 (Oct. 30, 2013).
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Of the 81 written comments received on the October 2013 Proposed
Rule, 51 comments addressed some aspect of private flood insurance.
Most commenters requested more guidance regarding the statutory
definition of ``private flood insurance.'' Most commenters also
supported a provision specifically permitting the discretionary
acceptance of flood insurance issued by private insurers. However, many
of these commenters raised concerns about including prescriptive
criteria in the discretionary acceptance provision, noting that private
flood insurance policies vary based on the nature of the property and
the needs and financial capability of the borrower. Commenters also
supported a safe harbor provision although some commenters, including
State insurance regulators, had concerns with the safe harbor as
proposed.
In March 2014, the Homeowner Flood Insurance Affordability Act
(HFIAA) \12\ was enacted, which, among other things, amended the
Biggert-Waters Act requirements regarding the escrow of flood insurance
premiums and fees and created a new exemption from the flood insurance
purchase requirement for certain detached structures. Accordingly, the
Agencies jointly issued a new proposed rule in October 2014 to
implement these HFIAA provisions.\13\ Based on comments received in
response to the private flood insurance provisions of the October 2013
Proposed Rule, and the statutory effective date for the escrow
provisions of HFIAA, the Agencies decided to finalize the Biggert-
Waters Act force-placement insurance provisions and the HFIAA escrow
and detached structure provisions in July 2015 \14\ and to revise and
re-propose the private flood insurance provisions. The Agencies re-
proposed the private flood insurance rule in November 2016 (the
November 2016 Proposed Rule or proposed rule),\15\ and this rulemaking
sets forth the final rule.\16\
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\12\ Public Law 113-89, 128 Stat. 1020 (2014).
\13\ 79 FR 64518 (Oct. 30, 2014).
\14\ 80 FR 43216 (July 21, 2015).
\15\ 81 FR 78063 (November 7, 2016).
\16\ In connection with the issuance of the final rule, the
Agencies have coordinated and consulted with the Federal Financial
Institutions Examination Council (FFIEC), as required by certain
provisions of the Federal flood insurance statutes. See 42 U.S.C.
4012a(b)(1). Four of the five Agencies (OCC, Board, FDIC, and NCUA)
are members of the FFIEC.
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II. Overview of Proposed Rule and Public Comments
The November 2016 Proposed Rule significantly revised the October
2013 Proposed Rule. In addition to provisions requiring regulated
lending institutions to accept policies that meet the statutory
definition of ``private flood insurance'' in the Biggert-Waters Act,
the November 2016 Proposed Rule provided a compliance aid and further
clarifications to assist regulated lending institutions in determining
whether a policy meets the definition of ``private flood insurance.''
The November 2016 Proposed Rule also included a provision to permit
regulated lending institutions to exercise their discretion to accept
flood insurance policies issued by private insurers that do not meet
the statutory definition of ``private flood insurance,'' subject to
certain restrictions, and permitted the acceptance of certain flood
coverage provided by ``mutual aid societies.''
The Agencies received approximately 60 comments on the proposed
rule from a wide range of commenters, including: Financial institutions
(including banks, credit unions, and farm credit institutions); various
trade associations (including bankers' trade associations, credit union
trade associations, a farm credit trade association, and home building
and realtor trade associations); the insurance industry (including
insurance companies, trade associations, and brokers); individuals;
nonprofit organizations; a flood risk management association; a State
non-profit corporation; a State-regulatory organization; a Federal
agency; and a State agency.\17\ The commenters addressed specific
issues, such as: The regulatory definition of ``private flood
insurance;'' the use of a compliance aid or regulatory safe harbor to
facilitate compliance by regulated lending institutions; whether
private flood insurance that does not conform to the statutory
definition of ``private flood insurance'' can be accepted by regulated
lending institutions; whether and what type of alternative criteria for
such non-conforming private flood insurance should be required by the
Agencies; and whether regulated lending institutions should be
permitted to accept certain non-traditional, non-conforming flood
insurance coverage, such as mutual aid society plans. These comments
and the Agencies' responses to them are discussed in the summary and
section-by-section analysis of the final rule that follows.
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\17\ In addition to receiving written comments, the Agencies
conferred with National Association of Insurance Commissioners
(NAIC) staff to obtain further information on State regulation of
insurance companies.
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III. Summary of the Final Rule
The final rule requires regulated lending institutions to accept
``private flood insurance,'' as defined in the Biggert-Waters Act.\18\
As suggested by commenters, the final rule also includes a streamlined
compliance aid provision to help regulated lending institutions
evaluate whether a flood insurance policy meets the definition of
``private flood insurance.'' This compliance aid allows a regulated
lending institution to conclude that a policy meets the definition of
``private flood insurance'' without further review of the policy if the
policy, or an endorsement to the policy, states: ``This policy meets
the definition of private flood insurance contained in 42 U.S.C.
4012a(b)(7) and the corresponding regulation.''
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\18\ See 42 U.S.C. 4012a(b)(7).
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In addition, the final rule permits regulated lending institutions
to choose to accept certain flood insurance policies issued by private
insurers, even if the policies do not meet the statutory and regulatory
definition of ``private flood insurance.'' The proposed rule included
conditions for accepting these policies. In response to commenters, the
Agencies removed some of these conditions from the final rule. The key
[[Page 4955]]
conditions in the final rule are a requirement that the policy provide
sufficient protection for a designated loan,\19\ consistent with
general safety and soundness principles, and a requirement that the
regulated lending institution document its conclusion regarding the
sufficiency of protection in writing. The final rule also allows
regulated lending institutions to exercise their discretion to accept
certain plans providing flood coverage issued by ``mutual aid
societies.''
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\19\ The Agencies' rules define ``designated loan'' to mean ``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.'' 12 CFR 22.2(e) (OCC); 12 CFR 208.25(b)(5)
(Board), 12 CFR 339.2 (FDIC), 12 CFR 614.4925 (FCA), and 12 CFR
760.2 (NCUA).
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IV. Section-by-Section Analysis of the Final Rule
A. Definitions
Mutual aid society. As discussed below, the Agencies proposed, and
are including in the final rule, a provision that would permit
regulated lending institutions to accept, in satisfaction of the flood
insurance purchase requirement, certain plans providing flood coverage
issued by mutual aid societies. In connection with this provision, the
Agencies proposed to add a definition of ``mutual aid society'' to
their rules. Specifically, the proposal defined the term ``mutual aid
society'' as an organization that meets three criteria: (1) The members
must share a common religious, charitable, educational, or fraternal
bond; (2) the organization must cover losses caused by damage to
members' property pursuant to an agreement, including damage caused by
flooding, in accordance with this common bond; and (3) the organization
must have a demonstrated history of fulfilling the terms of agreements
to cover losses to members' property caused by flooding.
Although the Agencies received comments in support of the proposed
mutual aid provisions, several commenters asserted that regulated
lending institutions would find it difficult to determine whether an
organization has ``a demonstrated history of fulfilling the terms of
agreements to cover losses to members' property caused by flooding''
because there is no established source for that information.
The Agencies believe that a demonstrated history requirement is
necessary for reasons of safety and soundness, namely, to ensure that
property securing a loan extended by a regulated lending institution is
adequately protected. Moreover, the Agencies believe that it will be
feasible for regulated lending institutions to obtain sufficient
information regarding an organization's history in covering losses to
members' property caused by flooding. Regulated lending institutions
may make determinations based on factors such as their experiences with
mutual aid societies or examples that the mutual aid society provides
of previously-covered losses. Therefore, the Agencies are retaining
this prong of the definition in the final rule.
One commenter requested that the Agencies add a fourth criterion to
the definition that would require an organization to demonstrate that
it meets a specified exemption under State insurance or licensing rules
allowing mutual aid societies to provide insurance. This commenter
asserted that this additional criterion is needed to prevent the
definition from including unlawful insurers. The Agencies have
considered this suggestion and believe that it is not necessary.
Although this final rule would permit regulated financial institutions
to accept plans providing flood coverage issued by mutual aid
societies, the rule would not interfere with a State's ability to
regulate the provision of such coverage, including a State's ability to
explicitly prohibit such coverage from being issued in a particular
State. Moreover, it is the Agencies' understanding that many States may
not have explicit policies, rules, or laws addressing mutual aid
societies, which may result in mutual aid society coverage being
inadvertently prohibited if organizations are required to demonstrate
that State law affirmatively permits them to provide coverage.
Therefore, the Agencies are not adding the suggested criterion and are
adopting the definition as proposed.
Private flood insurance. The proposed rule included the definition
of ``private flood insurance'' as specified in section 100239 of the
Biggert-Waters Act, which added a new section 102(b)(7) to the
FDPA.\20\ Specifically, the proposed rule defined ``private flood
insurance'' consistent with the statutory definition, with some
clarifying edits, to mean an insurance policy that: (1) Is issued by an
insurance company that is licensed, admitted, or otherwise approved to
engage in the business of insurance in the State or jurisdiction in
which the property to be insured is located, by the insurance regulator
of that State or jurisdiction or, in the case of a policy of difference
in conditions, multiple peril, all risk, or other blanket coverage
insuring nonresidential commercial property, is recognized, or not
disapproved, as a surplus lines insurer by the State insurance
regulator of the State or jurisdiction where the property to be insured
is located; (2) provides flood insurance coverage that is at least as
broad as the coverage provided under a standard flood insurance policy
issued under the NFIP (SFIP), including when considering deductibles,
exclusions, and conditions offered by the insurer; (3) includes a
requirement for the insurer to give written notice 45 days before
cancellation or non-renewal of flood insurance coverage to the insured
and the regulated lending institution, or a servicer acting on the
institution's behalf; (4) includes information about the availability
of flood insurance coverage under the NFIP; (5) includes a mortgage
interest clause similar to the clause contained in an SFIP; (6)
includes a provision requiring an insured to file suit not later than
one year after the date of a written denial for all or part of a claim
under a policy; and (7) contains cancellation provisions that are as
restrictive as the provisions contained in an SFIP.
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\20\ 42 U.S.C. 4012a(b)(7).
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As discussed in more detail below, the proposed rule also contained
criteria that regulated lending institutions would apply to determine
whether a policy's coverage is ``at least as broad as'' SFIP coverage.
The Agencies received both general and specific comments on the
proposed definition of ``private flood insurance.'' Some commenters
stated that, as a general matter, the proposed definition would make it
more difficult for insurers, regulators, and regulated lending
institutions to develop, obtain approval for, and accept flood
insurance policies issued by private insurers. Others stated that the
definition contained in the Biggert-Waters Act, from which the proposed
definition derived, is unworkable and based on outdated FEMA
guidelines. Other commenters stated that the definition should be
broader or that State laws and regulations should dictate flood
insurance requirements. While acknowledging commenters' concerns, the
Agencies note that ``private flood insurance'' is a term defined in the
Biggert-Waters Act, and the Agencies' definition is based on that
statutory definition.
The Agencies received specific comments on the section of the
proposed definition of ``private flood insurance'' relating to the
State licensing of insurers. These commenters expressed concern that
this definition could be interpreted to exclude policies issued by
surplus lines insurers for noncommercial properties. In response
[[Page 4956]]
to these commenters, the Agencies confirm that policies issued by
surplus lines insurers for noncommercial properties already are covered
in the definition of ``private flood insurance'' as policies that are
issued by insurance companies that are ``otherwise approved to engage
in the business of insurance by the insurance regulator of the State or
jurisdiction in which the property to be insured is located.'' \21\
Therefore, the Agencies do not believe it is necessary to amend the
proposed regulatory text to address this issue and adopt this section
of the definition of ``private flood insurance'' as proposed, with
nonsubstantive changes to simplify its wording.
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\21\ During discussion of the Biggert-Waters Act on the Senate
floor, Sen. Crapo noted that surplus lines insurers can provide
coverage for residential properties and asked for clarification
regarding the inclusion of surplus lines coverage in the definition
of ``private flood insurance.'' In his response, Sen. Johnson
stated, ``[T]he definition of `private flood insurance' includes
private flood insurance provided by a surplus lines insurer and is
not intended to limit surplus lines eligibility to nonresidential
properties. While the Senator is correct that surplus lines
insurance is specifically mentioned in that context, overall the
definition accommodates private flood insurance from insurers who
are `licensed, admitted, or otherwise approved' in the State where
the property is located.'' 158 Cong. Rec. S6051 (daily ed. Sept. 10,
2012).
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In addition, the Agencies received specific comments on the section
of the proposed definition of ``private flood insurance'' that states
that the policy must include a requirement for the insurer to give
written notice 45 days before cancellation or non-renewal of flood
insurance coverage. Although one commenter supported the notification
requirement, others stated that NFIP cancellation rules are not
contained in an SFIP and such a notification requirement would generate
confusion about whether ``private flood insurance'' policies must be
broader than an SFIP. The Agencies decline to modify this section
because the statutory definition states that to meet the definition of
``private of flood insurance,'' a policy must include a requirement for
the insurer to give 45 days' written notice of cancellation or non-
renewal of flood insurance coverage to the insured and the regulated
lending institution.\22\ Therefore, the Agencies are adopting this
section of the definition as proposed.
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\22\ 42 U.S.C. 4012a(b)(7)(C)(i).
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The Agencies also received a comment on the section of the proposed
definition that would require a policy to include information about the
availability of flood insurance coverage under the NFIP. This commenter
stated that private flood insurance policies do not contain NFIP
information and such information is unnecessary because the customer
already receives such information with the Notice of Special Flood
Hazards. The Agencies cannot modify this section because the statutory
definition states that the policy must include ``information about the
availability of flood insurance coverage under the [NFIP].'' \23\
Accordingly, the Agencies are adopting this part of the definition as
proposed.
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\23\ 42 U.S.C. 4012a(b)(7)(C)(ii).
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The Agencies received a variety of comments on the section of the
proposed definition that would require a policy to contain a mortgage
interest clause similar to the clause contained in an SFIP. The
mortgage interest clause in an SFIP typically covers the borrower and
the regulated lending institution. One commenter supported the
provision, but others stated that requiring a policy to have a mortgage
interest clause would be incompatible with condominium and planned
community policies that provide coverage for multiple properties
without explicitly naming the borrower's regulated lending institution
as a loss payee. The Agencies note that this provision is part of the
statutory definition and, therefore, are adopting it in the final rule
consistent with the statute.
Commenters asserted that the section of the proposed definition
stating that a policy must require an insured to file suit not later
than one year after the date of a written denial of all or part of a
claim under the policy would disqualify private policies with different
or no statutes of limitations. However, this provision also is part of
the statutory definition,\24\ and, therefore, the Agencies are
retaining it in the final rule.
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\24\ 42 U.S.C. 4012a(b)(7)(C)(iv).
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``At least as broad as.'' Many commenters on the October 2013
Proposed Rule stated that it would be difficult for regulated lending
institutions to determine whether private flood insurance coverage is
``at least as broad as'' the coverage provided under the SFIP, as
required by statute. In response to these comments, the Agencies
proposed to clarify the meaning of this phrase. Specifically, the
proposed definition of ``private flood insurance'' provided that a
policy is ``at least as broad as'' the coverage provided under an SFIP
if the policy, at a minimum: (1) Defines the term ``flood'' to include
the events defined as a ``flood'' in an SFIP; (2) covers both the
mortgagor(s) and the mortgagee(s) as loss payees; (3) contains the
coverage and provisions specified in an SFIP, including those relating
to building property coverage; personal property coverage, if purchased
by the insured mortgagor(s); other coverages; and the increased cost of
compliance; (4) contains deductibles no higher than the specified NFIP
maximum for the same type of property, and includes similar non-
applicability provisions as under an SFIP, for any total policy
coverage amount up to the maximum available under the NFIP at the time
the policy is provided to the regulated lending institution; (5)
provides coverage for direct physical loss caused by a flood and may
exclude other causes of loss identified in an SFIP (any additional or
different exclusions than those in an SFIP may only pertain to coverage
that is in addition to the amount and type of coverage that could be
provided by an SFIP); and (6) does not contain conditions that narrow
the coverage that would be provided in an SFIP.
Although some commenters supported the proposed definition of ``at
least as broad as,'' others generally criticized the definition of this
phrase as overly technical, too narrow, insufficiently detailed, too
subjective, and unnecessarily burdensome. The Agencies also received
specific comments on the proposed individual requirements defining this
phrase, as discussed below.
Several commenters addressed the requirement that the private flood
insurance policy cover both the mortgagor(s) and the mortgagee(s) as
loss payees. Similar to comments raised about the mortgage interest
clause in the definition of ``private flood insurance,'' discussed
previously, several commenters noted concerns for condominium buildings
and planned unit developments that use policies that provide coverage
for multiple properties without explicitly naming the mortgagor or
mortgagee as loss payees. After reviewing this provision, the Agencies
are removing the proposed requirement here because it is unnecessary
given the statutory requirement for a policy to include a mortgage
interest clause similar to that contained in an SFIP, which, in
general, provides for coverage of the mortgagor and mortgagee.\25\
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\25\ The SFIP currently includes the following language, in
section Q, Mortgage Clause: ``Any loss payable under Coverage A--
Building Property will be paid to any mortgagee of whom we have
actual notice, as well as any other mortgagee or loss payee
determined to exist at the time of loss, and you, as interests
appear. If more than one mortgagee is named, the order of payment
will be the same as the order of precedence of the mortgages.''
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Several commenters criticized the proposed criteria that the policy
must
[[Page 4957]]
contain the coverage specified in an SFIP, including building property
coverage; personal property coverage, if purchased by the insured
mortgagor(s); other coverages; and increased cost of compliance
coverage. Generally, commenters supported requiring increased cost of
compliance coverage, which assists mortgagors whose property is damaged
by a flood to meet certain local ordinances or regulatory requirements
relating to the reduction of future flood damage before the mortgagor
can repair or rebuild the property. One commenter stated that overall,
the provision could be interpreted as a requirement that private flood
insurance policies exactly replicate the SFIP. The Agencies note that
the enumerated minimum coverage requirements in this provision mirror
those in an SFIP and implement the statutory requirement that private
flood insurance be ``at least as broad as'' an SFIP policy. For this
reason, the Agencies are adopting this provision as proposed. The
Agencies also note that under this provision, as proposed and as
adopted, the coverage specified in an SFIP is only a minimum
requirement.
A few commenters addressed the proposed requirement that a policy
must contain deductibles no higher than the specified maximum for the
same type of property, and include similar non-applicability
provisions, as in an SFIP, for any total policy coverage amount up to
the maximum available under the NFIP at the time the policy is provided
to the regulated lending institution. The commenters noted that in
certain cases, reasonable deductibles may not match those contained in
the SFIP and that there is no equivalent coverage for comparison for
policies with coverage exceeding that available under the NFIP.
In response to this concern, the Agencies clarify that for purposes
of the mandatory acceptance requirement, deductibles must be ``at least
as broad as'' an SFIP. For policies with coverage exceeding that
available under the NFIP, the policy must only meet the deductible for
the amount of coverage available in an SFIP. For example, a regulated
lending institution cannot make a designated loan unless the policy is
at least equal to the lesser of the outstanding balance of the loan or
the maximum limit of coverage available for the particular type of
property under the NFIP. If a private policy for a commercial structure
provided coverage of $1,000,000, in excess of the NFIP maximum of
$500,000 for that type of structure, then the policy only would need to
match the SFIP deductible for the first $500,000. It would be
acceptable for that policy to have deductibles higher than the maximum
deductible for a policy available under the NFIP for the coverage over
$500,000. Therefore, the Agencies do not believe they need to modify
this provision to address these commenters' concern.
However, the Agencies are making one technical change to this
provision. As proposed, this provision provides that the deductibles in
the policy must be compared to the SFIP deductibles for the same type
of property. Because the phrase ``for the same type of property''
applies to other factors necessary to be considered ``at least as broad
as,'' the Agencies have moved this phrase to the introductory text of
this provision.
One commenter addressed the proposed requirement that ``additional
or different exclusions than those in an SFIP may pertain only to
coverage that is in addition to the amount and type of coverage that
could be provided by an SFIP.'' The commenter noted that this criterion
could generate confusion because ``different exclusions'' may actually
have the effect of providing broader coverage. This is contrary to the
Agencies' intention in specifying when coverage is ``at least as broad
as'' an SFIP. Therefore, the final rule provides that regulated lending
institutions need not accept policies with additional exclusions unless
the exclusions have the effect of providing broader coverage to the
policyholder.
Other commenters asked the Agencies to clarify whether a policy
with an anti-concurrent causation clause can qualify as a policy that
is ``at least as broad as an SFIP.'' These clauses provide that if a
loss is caused by two perils, one of which is excluded and one of which
is covered, the loss is not covered. The SFIP includes a provision
regarding concurrent perils, which is effectively an anti-concurrent
clause. As long as the private policy's anti-concurrent causation
clause excludes losses to no greater degree than an SFIP, the policy
will be ``at least as broad as'' an SFIP.
The Agencies also received many comments stating that various
aspects of the definitions of ``private flood insurance'' and ``at
least as broad as'' would interfere with existing State law. These
comments are discussed in more detail in the mandatory acceptance
requirement section that follows.
In addition to these changes, the Agencies have made nonsubstantive
technical changes to the proposed definitions of ``private flood
insurance'' and ``at least as broad as'' in the final rule.
``SFIP.'' The proposed rule defined ``SFIP'' to mean a standard
flood insurance policy issued under the NFIP in effect as of the date
the private policy is provided to a regulated lending institution. The
Agencies requested comment on whether this is the correct time-frame
for determining what version of the SFIP a regulated lending
institution should use to evaluate private policies.
One commenter on the proposed definition of ``SFIP'' expressed
concern that the definition would require FEMA to give adequate advance
notice of changes it makes to the Federal flood policies. Another
commenter suggested that regulated lending institutions be given a
reasonable period of time to update systems and change processes to
accommodate material changes to the SFIP forms. Other commenters
supported the proposed definition. Given the infrequency of SFIP
changes, the Agencies expect that the burden of changing systems to
compare against new versions of the SFIP will be minimal. Therefore,
the Agencies are adopting the definition as proposed, with one
technical change. Instead of defining SFIP with reference to the date a
``private policy'' is provided to a regulated lending institution, the
definition references the date private flood insurance is provided to
the institution.
Commenters also asked the Agencies to clarify which version of an
SFIP a regulated lending institution should use for comparison with a
private flood insurance policy. As stated in the Supplementary
Information section of the proposed rule, when determining whether
coverage is at least as broad as coverage provided under an SFIP,
regulated lending institutions should compare like policies (e.g., a
policy covering a 1-4 family residence or a single family dwelling unit
in a condominium to an SFIP dwelling policy, a policy covering all
other buildings except residential condominium buildings to an SFIP
general property policy, or a policy covering a residential condominium
building to an SFIP Residential Condominium Building Association
Policy). As noted previously, the ``at least as broad as'' provision in
the final rule now includes language requiring a comparison with an
SFIP for the same type of property.
B. Requirement To Purchase Flood Insurance
The Agencies' existing rules implement the statutory flood
insurance purchase requirement and provide that a regulated lending
institution shall not make, increase, extend, or renew any
[[Page 4958]]
designated loan \26\ unless the building or mobile home and any
personal property securing the loan is covered by flood insurance for
the term of the loan. Furthermore, the coverage amount 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 Federal flood insurance statutes.
The rules also provide that flood insurance coverage under the Federal
flood insurance statutes is limited to the building or mobile home and
any personal property that secures a loan and not the land itself.
---------------------------------------------------------------------------
\26\ Supra footnote 19 defining ``designated loan.''
---------------------------------------------------------------------------
The Agencies proposed to amend this section of their rules to
implement section 102(b)(1)(B) of the FDPA, as added by section
100239(a)(1) of the Biggert-Waters Act, which requires that all
regulated lending institutions accept ``private flood insurance,'' as
defined in the statute, in satisfaction of the flood insurance purchase
requirement if the policy meets the requirements for coverage under the
flood insurance purchase requirement.\27\ Meeting the ``requirements
for coverage'' means that the policy must cover the building or mobile
home and any personal property securing the loan in an amount at least
equal to the outstanding principal balance of the loan or the maximum
limit of coverage made available under the Federal flood insurance
statutes with respect to the particular type of property, whichever is
less.
---------------------------------------------------------------------------
\27\ 42 U.S.C. 4012a(b)(1)(B).
---------------------------------------------------------------------------
Although some commenters supported the proposed mandatory
acceptance requirement, several commenters expressed concern that the
proposed requirement would not permit regulated lending institutions to
reject policies for reasons of safety and soundness. In response to
these concerns, the Agencies note that the private flood insurance
definition already contains criteria that address safety and soundness,
such as the requirement for the insurance company to be licensed,
admitted, or otherwise approved to engage in the business of insurance
by a State regulator.
Other commenters asserted that regulated lending institutions would
be unable to comply with the proposed mandatory acceptance requirement
because they would not have timely access to the necessary documents.
These commenters stated that regulated lending institutions typically
only receive a declarations page and often do not receive copies of the
full policies or only receive them after considerable time has passed.
One commenter was unsure how the mandatory acceptance requirement would
affect preexisting force placement requirements \28\ that provide for
the release of a force placed policy following the presentation of a
declarations page by the borrower evidencing the borrower's purchase of
flood insurance. Another commenter asked whether regulated lending
institutions are expected to force place insurance if the full policy
is not available.
---------------------------------------------------------------------------
\28\ See 12 CFR 22.7(b)(2) (OCC); 12 CFR 208.25(g)(2)(ii)
(Board); 12 CFR 339.7(b)(2) (FDIC); 12 CFR 760.7(b)(2) (NCUA); 12
CFR 614.4945(b)(2) (FCA).
---------------------------------------------------------------------------
The Agencies acknowledge that under existing force placement
requirements, a declarations page is sufficient to evidence a
borrower's purchase of flood insurance. However, a declarations page
may be insufficient for a regulated lending institution to make a
determination that the institution must accept a private flood
insurance policy in satisfaction of the flood insurance purchase
requirement if the declarations page does not provide enough
information for the institution to determine that the policy meets the
statutory definition of ``private flood insurance.'' In these
circumstances, the regulated lending institution should request
additional information about the policy to aid it in making its
determination.
Several commenters requested that the Agencies provide flexibility
for private flood insurance that exceeds the coverage required by the
flood insurance purchase requirement. The Agencies believe that there
is no need for such additional flexibility because the mandatory
acceptance requirement applies only to private flood insurance provided
in satisfaction of the flood insurance purchase requirement. Regulated
lending institutions can exercise their discretion to accept any policy
provided by a private insurer offering additional coverage beyond the
flood insurance purchase requirement.
As previously mentioned, some commenters raised concerns that the
mandatory acceptance requirement would conflict with existing State
laws. Some of the examples commenters cited involved the
restrictiveness of cancellation provisions, the 45-day cancellation
notice, the one-year maximum for filing suit from date of a claim
denial, and the inclusion of information on the availability of NFIP
policies. The Agencies recognize that there may be conflicts between
the definition of ``private flood insurance'' and State laws, and that
the laws of certain States may prevent flood insurance policies issued
by companies regulated by these States from meeting the definition of
``private flood insurance.'' In such cases, regulated lending
institutions are not required to accept policies that comply with State
laws and conflict with the definition of ``private flood insurance.''
However, as discussed in greater detail below, regulated lending
institutions may still exercise their discretion to accept certain
policies issued by private flood insurers, even if the policies do not
conform to the definition of ``private flood insurance.''
For the reasons stated previously, and because the Biggert-Waters
Act specifically mandates that regulated lending institutions accept
``private flood insurance'' as defined in the statute, the Agencies are
adopting the mandatory acceptance requirement as proposed, with
nonsubstantive changes to simplify the provision's wording and to add a
cross-reference citation for the flood insurance purchase requirement.
C. Compliance Aid for Mandatory Acceptance
The Agencies were concerned that many regulated lending
institutions, especially small institutions with a lack of technical
expertise regarding flood insurance policies, would have difficulty
evaluating whether a flood insurance policy meets the definition of
``private flood insurance.'' For this reason, the proposed rule
included a compliance aid that provided a policy would be deemed to
meet the definition of ``private flood insurance'' if the following
three criteria were met: (1) The policy includes, or is accompanied by,
a written summary that demonstrates how the policy meets the definition
of ``private flood insurance'' by identifying the provisions of the
policy that meet each criterion in the definition, and confirms that
the insurer is regulated in accordance with that definition; (2) the
regulated lending institution verifies in writing that the policy
includes the provisions identified by the insurer in its summary and
that these provisions satisfy the criteria included in the definition;
and (3) the policy includes the following statement within the policy
or as an endorsement to the policy: ``This policy meets the definition
of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the
corresponding regulation.''
The Agencies received numerous comments on the proposed compliance
aid. Although there was broad support for the inclusion of a compliance
aid to facilitate regulated lending institutions'
[[Page 4959]]
determinations, commenters largely reacted negatively to the specific
proposed criteria and contended that the proposed compliance aid would
not be helpful. Moreover, commenters stated that the proposed
compliance aid would not cause insurance providers to alter their
policies to include all of the requirements in the compliance aid
simply to demonstrate that their policies meet the definition of
``private flood insurance.'' A number of commenters suggested that it
would be more useful to include a safe harbor to shield regulated
lending institutions.
With respect to the first criterion, commenters stated that
permitting a policy to be deemed to meet the definition of ``private
flood insurance,'' only if it includes or is accompanied by a written
summary that, among other requirements, demonstrates how the policy
meets the definition of ``private flood insurance,'' would be
unworkable and unnecessarily burdensome for insurance companies and
therefore prevent the compliance aid from becoming widely adopted.
These commenters further indicated that insurers would be reluctant to
take on the additional liability potentially associated with a summary,
especially because regulated lending institutions would be required to
accept a policy that meets the definition of ``private flood
insurance'' even if the policy were not accompanied by a summary. Some
commenters stated that a summary would provide assurance and recourse
for regulated lending institutions, but others stated that the summary
may lead to increased confusion about the breadth of coverage.
In response to the second criterion, commenters contended that
requiring a regulated lending institution to provide written
verification that the policy includes the provisions identified by the
insurer in its summary would be unnecessarily burdensome for regulated
lending institutions, especially those that do not immediately receive
all of the documentation associated with the insurance policy in a
timely manner or that do not have relevant insurance expertise. Some
commenters noted that this criterion would require regulated lending
institutions to duplicate the insurance company's work under the first
and third criteria and still not relieve institutions of liability for
their determinations. Others noted that this criterion would cause
delays for borrowers. One commenter proposed only requiring regulated
lending institutions to verify effective dates, coverage amounts, and
names of insurers for the purpose of the compliance aid.
With respect to the third criterion, some commenters suggested that
insurers would be unwilling to provide the proposed statement because
it could lead to unwanted liability for the insurance company. Other
commenters stated that the statement would be unnecessarily burdensome
for the insurance industry because insurers would need to compare their
policies to the SFIP and possibly consult with State regulators for
review or approval. Another commenter stated that many private flood
insurance policies already contain assurance clauses. Several
commenters stated that the proposed statement would provide regulated
lending institutions and policyholders with adequate recourse in cases
where the coverage does not actually meet the definition of ``private
flood insurance.'' Other commenters requested that the Agencies modify
the mandatory acceptance requirement to permit or require regulated
lending institutions to reject policies that are not accompanied by the
statement.
Many commenters suggested alternative approaches to make it easier
for regulated lending institutions to apply the mandatory criteria and
to relieve regulated lending institutions of liability for their
determinations. One commenter suggested a safe harbor based on State
regulatory approval. Two other commenters requested that the Agencies
provide a template or model language for a compliance aid that could be
used in insurance policies. Several commenters supported a safe harbor
that would permit regulated lending institutions to rely on insurer
certifications. Some commenters contended that this type of safe harbor
would remove burden and delays, reduce risk and uncertainty, improve
consistency across the market, and promote the acceptance of private
flood insurance. One commenter stated that permitting regulated lending
institutions to rely on insurer certifications would align flood
insurance with the larger hazard insurance market. Another commenter
stated that regulated lending institutions should be permitted to rely
on any type of assurance that is legally enforceable against the
insurer, rather than only allowing the statement as a provision of, or
endorsement to, a private flood insurance policy.
In response to commenter concerns, the Agencies have simplified the
compliance aid in the final rule by removing the first two criteria--
the insurer's written summary demonstrating how the policy meets the
definition of ``private flood insurance'' and the regulated lending
institution's written verification of the accuracy of this summary.
Furthermore, the Agencies have revised the third proposed criterion to
clarify that a regulated lending institution may determine that a
policy meets the definition of ``private flood insurance'' without
further review of the policy if the following statement is included
within the policy or as an endorsement to the policy: ``This policy
meets the definition of private flood insurance contained in 42 U.S.C.
4012a(b)(7) and the corresponding regulation.'' To clarify, if a policy
includes this statement, the regulated lending institution may rely on
the statement and would not need to review the policy to determine
whether it meets the definition of ``private flood insurance.''
However, the institution could choose not to rely on this statement and
instead make its own determination.
The Agencies do not generally regulate insurers and cannot require
an insurance policy to include this compliance aid statement. However,
if insurers choose to include this statement in their policies, it will
facilitate the ability of regulated lending institutions, as well as
consumers, to recognize policies that meet the definition of ``private
flood insurance'' and promote the consistent acceptance of policies
that meet this definition across the market. In this way, the
compliance aid is intended to leverage the expertise of insurers to
assist regulated lending institutions. Additionally, a policy that
includes this statement may provide policyholders and regulated lending
institutions with recourse against insurance companies that fail to
abide by the terms included in the definition of ``private flood
insurance,'' consistent with relevant State law. The Agencies note,
however, that this provision does not relieve a regulated lending
institution of the requirement to accept a policy that both meets the
definition of ``private flood insurance'' and fulfills the flood
insurance coverage requirement, even if the policy does not include the
statement. In other words, this provision does not permit regulated
lending institutions to reject policies solely because they are not
accompanied by the statement.
D. Discretionary Acceptance
As noted in the Supplementary Information section of the proposed
rule, although section 102(b)(1)(B) of the FDPA \29\ (as added by
section 100239(a)(1) of the Biggert-Waters Act) requires a regulated
lending institution
[[Page 4960]]
to accept ``private flood insurance,'' as that term is defined by
statute, in satisfaction of the flood insurance purchase requirement,
the Biggert-Waters Act is silent about whether a regulated lending
institution may accept a flood insurance policy issued by a private
insurer that does not meet the statutory definition of ``private flood
insurance.'' Furthermore, the Agencies observe that the Biggert-Waters
Act did not disturb the ``flood insurance'' purchase requirement in
section 102(b) of the FDPA and that the term ``flood insurance'' in the
FDPA remains undefined after the passage of the Biggert-Waters Act.
Accordingly, consistent with the Congressional intent of the Biggert-
Waters Act to stimulate the private flood insurance market,\30\ the
Agencies are construing the term ``flood insurance'' in the flood
insurance purchase requirement in section 102(b) of the FDPA to
continue to permit regulated lending institutions to exercise their
discretion to accept certain policies issued by private insurers that
do not contain all of the criteria in the statutory definition of
``private flood insurance.''
---------------------------------------------------------------------------
\29\ 42 U.S.C. 4012a(b)(1)(B).
\30\ The Biggert-Waters Act's reforms were designed to improve
the NFIP's financial integrity and stability as well as to
``increase the role of private markets in the management of flood
insurance risk.'' H. Rep. No. 112-102, at 1 (2011); see also 158
Cong. Rec. H4622 (daily ed. June 29, 2012) (statement of Rep.
Biggert).
---------------------------------------------------------------------------
To this end, the proposed rule provided that regulated lending
institutions could accept, on a discretionary basis, a flood insurance
policy issued by a private insurer if the policy meets the amount and
term requirements specified in the flood insurance purchase
requirement, and: (1) Is issued by an insurer that is licensed,
admitted, or otherwise approved to engage in the business of insurance
in the State or jurisdiction in which the property to be insured is
located by the insurance regulator of that State; or in the case of a
policy of difference in conditions, multiple peril, all risk, or other
blanket coverage insuring nonresidential commercial property, is issued
by a surplus lines insurer recognized, or not disapproved, by the
insurance regulator of the State where the property to be insured is
located; (2) covers both the mortgagor and mortgagee as loss payees;
(3) provides for cancellation following reasonable notice to the
borrower only for reasons permitted by FEMA for an SFIP on the Flood
Insurance Cancellation Request/Nullification Form, in any case of non-
payment, or when cancellation is mandated pursuant to State law; and
(4) is either ``at least as broad'' as the coverage provided under an
SFIP or provides coverage that is ``similar'' to coverage provided
under an SFIP, including when considering deductibles, exclusions, and
conditions offered by the insurer.\31\
---------------------------------------------------------------------------
\31\ The Agencies included this proposed provision pursuant to
their authority under the FDPA to issue regulations directing
regulated lending institutions not to make, increase, extend, or
renew any loan secured by property located in an SFHA unless the
property is covered by ``flood insurance.'' See 42 U.S.C. 4012a(b).
---------------------------------------------------------------------------
The proposed rule stated that to determine whether the coverage
``is similar'' to coverage provided under an SFIP, a regulated lending
institution would have to: (1) Compare the private policy with an SFIP
to determine the differences between the private policy and an SFIP;
(2) reasonably determine that the private policy provides sufficient
protection of the loan secured by the property located in an SFHA; and
(3) document its findings.
The Agencies received numerous comments on this provision. Although
a few commenters were critical of allowing the discretionary acceptance
of private flood insurance, the majority of commenters expressly
supported having some type of discretionary acceptance provision in the
regulation. One commenter critical of this provision stated that
private flood insurance that does not meet the statutory minimum
standards is likely to lead to abuse of homeowners, and that to protect
consumers, the Agencies should eliminate the discretionary acceptance
of private polices that do not meet the minimum statutory requirements.
Another commenter stated that permitting discretionary acceptance would
leave room for errors and increased risks of liability.
In response to these concerns, the Agencies note the important role
that State insurance laws and regulators play regarding the oversight
of insurance activities in each State. This role is acknowledged in the
discretionary acceptance provision, which provides that a regulated
lending institution may only accept a flood insurance policy issued by
a private insurer, including a policy for residential property issued
by a surplus lines insurer, that is licensed, admitted, or otherwise
approved to engage in the business of insurance by a State insurance
regulator. In the case of a policy insuring nonresidential commercial
property issued by a surplus lines insurer, the insurer must be
recognized, or not disapproved, by a State insurance regulator.
A third commenter disagreed with the interpretation in the proposed
rule that the statute is silent about whether a regulated lending
institution may accept a flood insurance policy issued by a private
insurer that does not meet the statutory definition of ``private flood
insurance'' in the Biggert-Waters Act. However, as discussed
previously, section 100239 of the Biggert-Waters Act, which requires
the acceptance of policies that meet the definition of ``private flood
insurance,'' did not disturb the ``flood insurance'' purchase
requirement in section 102(b) of the FDPA. Furthermore, the term
``flood insurance'' as used in section 102(b) of the FDPA remains
undefined after the passage of the Biggert-Waters Act. Therefore, the
Agencies find that the statute may be interpreted, consistent with the
Congressional intent of the Biggert-Waters Act, to permit regulated
lending institutions to accept certain flood insurance policies issued
by private insurers that may not contain all of the criteria in the
statutory definition of ``private flood insurance.''
Those commenters in favor of this provision stated that
discretionary acceptance is consistent with Congressional intent, and
that current law and regulations permit regulated lending institutions
to accept private flood insurance. However, most of these commenters
criticized the criteria for discretionary acceptance in the proposed
rule as overly burdensome and restrictive.
The Agencies received many general comments indicating that the
proposed criteria would not provide regulated lending institutions with
the flexibility or certainty needed to encourage the acceptance of
flood insurance policies issued by private insurers. Two of these
comments stated that the proposed discretionary acceptance criteria
were too similar to the mandatory acceptance criteria and would prevent
the development of an alternative private flood insurance market. One
commenter noted that the proposed criteria would result in the
rejection of many private policies that are widely accepted by
regulated lending institutions today.
Commenters also addressed the difficulty for regulated lending
institutions in applying the criteria. Some commenters noted that the
analysis required by the proposed provision would be overly burdensome
for regulated lending institutions and that institutions would struggle
to apply all of the criteria because they do not have the insurance
expertise required for the necessary determinations. One commenter
stated that the criteria were insufficiently detailed, which would
result in inconsistent application of the rule. Some commenters
asserted that
[[Page 4961]]
regulated lending institutions would be unwilling to perform the
analysis required by the proposed provision due to the potential
liability associated with discretionary acceptance. These commenters
maintained that lenders would be concerned that they would be held
liable if they approve a private flood policy later found not to have
met the definition of ``private flood insurance.'' Commenters also
stated that these criteria would be difficult for regulated lending
institutions to apply, and therefore would create delays in mortgage
loan closings.
Two commenters suggested adopting the ``mutual aid society''
criteria for all discretionary acceptance, which would involve applying
a standard based on whether a policy provides sufficient protection of
the loan consistent with general safety and soundness principles. Other
commenters advocated for leaving the discretion to accept private
policies with the regulated lending institution. Several commenters
maintained that discretionary acceptance should rely on the State
insurance regulatory system.
Another commenter requested the Agencies to make clear that the
requirements in the Agencies' private flood insurance rule are in
addition to requirements related to private flood insurance imposed by
secondary market investors (such as Fannie Mae and Freddie Mac) that
apply if the mortgage loan is sold to these investors.
With respect to specific aspects of the provision, some commenters
noted that the cancellation requirement would not conform to State
insurance laws. Two commenters noted that State laws generally provide
for the circumstances under which cancellation of a policy is
permitted, but they may not require a policy to be cancelled if such
circumstances occur, as provided for in the proposed rule. One
commenter stated that private policies are unlikely to conform to SFIP
time frames and supported having ``reasonable'' cancellation notices.
Two commenters supported having a mandatory 45-day notice of
cancellation to protect consumers.
Many commenters were opposed to a requirement that policies be ``at
least as broad as'' an SFIP for the purposes of discretionary
acceptance and raised similar issues to those raised about this
standard in the mandatory acceptance requirement, described previously.
Several commenters requested further clarification of the ``similar''
standard, especially regarding deductibles that do not align with the
SFIP. One commenter supported replacing ``similar'' with ``comparable''
to prevent a rigid feature-by-feature approach, while another commenter
stated that regulated lending institutions only should be permitted to
accept ``at least as broad as'' policies because ``similar'' policies
would endanger consumers. Another commenter suggested that instead of
the ``similar'' standard, regulated lending institutions should be
permitted to accept policies that provide sufficient protection of the
loan consistent with general safety and soundness principles, noting
that this standard would reduce ambiguity, complexity, and inconsistent
application of the discretionary standard and that institutions already
have processes to assess the safety and soundness of insurance
policies. Another commenter stated that a private policy may offer
equal or better overall protection even though it has provisions that
are not entirely equivalent to those of an SFIP. One commenter
suggested allowing consumers to determine the amount and extent of
personal property coverage, rather than requiring the policy to match
the coverage specified in an SFIP.
Several commenters noted that the proposal's requirement that
regulated lending institutions compare a private policy to an SFIP to
determine the differences between the two policies would be burdensome
for institutions. One commenter specifically stated that this provision
would require an unnecessarily detailed comparison with the SFIP and
that regulated lending institutions instead should be permitted to
accept (without conducting further analysis) any policy that provides
sufficient protection of the loan, meets the other discretionary
acceptance criteria, and has similar deductibles, exclusions, and
conditions. Another commenter asserted that this requirement is
redundant given the requirement that regulated lending institutions
evaluate how a private policy's coverage compares to an SFIP.
Several commenters also requested the Agencies to clarify the
phrase ``sufficient protection of the loan.'' One commenter recommended
focusing on safety and soundness similar to the standard for the
proposed mutual aid societies provision. Another commenter suggested
that current due diligence practices would be sufficient to meet this
standard. One commenter stated that ``sufficient protection of the
loan'' is adequately clear.
Some commenters opposed the requirement that regulated lending
institutions document both their findings relating to the comparison of
the policy to an SFIP, and the determination that the policy provides
sufficient protection of the loan. One commenter stated that regulated
lending institutions will avoid accepting private policies because they
will be unwilling to undergo the work necessary to document decisions.
Another commenter supported allowing regulated lending institutions to
use existing practices and a basic checklist instead of the more
burdensome process required by the proposal.
Several commenters stated that regulated lending institutions
should have the discretion to accept private flood insurance for
residential properties, in addition to nonresidential properties,
issued by surplus lines insurers. Several of these commenters noted
that State insurance regulators impose requirements on surplus lines
insurers and that surplus lines insurance constitutes a substantial
portion of the private flood insurance market.
Several commenters expressed support for a separate approach under
discretionary acceptance for nonresidential flood insurance policies.
These commenters noted that owners of such properties are often more
sophisticated than owners of residential properties. They also noted
that private commercial policies are frequently very different from
SFIPs in that they cover multiple perils, have higher deductibles, and
may cover multiple properties located in different States, and
therefore, would not meet the discretionary acceptance criteria. One
commenter stated that the rule would impose unnecessary burdens on
nonresidential and commercial property owners and that regulated
lending institutions should have more discretion to accept flood
insurance policies related to commercial properties. Some commenters
also stated that regulated lending institutions do not have the
expertise to conduct the review of complex commercial and multifamily
policies necessary to apply the criteria. One commenter advocated for
allowing regulated lending institutions to accept a nonresidential
policy based on a determination that the policy provides sufficient
protection of the loan consistent with safety and soundness.
As with the proposed definition of ``private flood insurance,''
commenters also raised concerns with respect to the application of the
proposed discretionary criteria to condominium mortgage loans or mixed-
use community associations. Some commenters specifically requested an
exception for policies covering condominiums from the proposed
requirement that the policy must cover both the mortgagor(s) and the
mortgagee(s) as loss payees because regulated lending institutions are
often
[[Page 4962]]
not listed as loss payees in policies that cover loans for individual
condominium units. These commenters stated that a regulated lending
institution would not be permitted to accept a policy issued to a
homeowners' association for a condominium building or planned unit
development in satisfaction of the flood insurance purchase requirement
because policies, such as a Residential Condominium Building
Association Policy (RCBAP), are purchased by homeowners' associations
for the benefit of the association and its unit owners, and typically
do not include as beneficiary each regulated lending institution that
provides mortgage loans to individual unit owners.
Several commenters requested a compliance aid, as provided for the
proposed mandatory acceptance requirement, to assist regulated lending
institutions in performing the discretionary acceptance analysis. One
commenter suggested that a compliance aid could take the form of a
model disclosure form.
After reviewing the comment letters, the Agencies have concluded
that the final rule should include a discretionary acceptance
provision, but that the provision should be less burdensome and
restrictive than that included in the proposed rule, and more closely
reflect the current policy of the Agencies with respect to both private
flood insurance and hazard insurance. Therefore, the discretionary
acceptance provision in the final rule no longer includes some of the
proposed criteria, including the requirement that a policy include a
specific cancellation clause, and the requirement that coverage in a
flood insurance policy issued by a private insurer be ``at least as
broad as'' or ``similar to an SFIP.'' By eliminating the cancellation
provision and the ``at least as broad as'' and ``similar to an SFIP''
criteria, the final rule addresses commenters' concerns that the
proposed criteria would be difficult to apply to commercial policies.
Thus, the Agencies have concluded that a separate provision
specifically applicable to commercial policies is not necessary.
Furthermore, the Agencies believe that the simplification of the
discretionary acceptance provision negates the need for a compliance
aid provision for discretionary acceptance as some commenters
advocated.
The Agencies also have modified the mortgage interest clause
provision to address commenters' concerns related to condominium
properties. The final rule now provides that to be accepted under the
discretionary acceptance provision, the policy must cover both the
mortgagor(s) and the mortgagee(s) as loss payees, except in the case of
a policy that is provided by a condominium association, cooperative,
homeowners association, or other applicable group and for which the
premium is paid by the condominium association, cooperative, homeowners
association or other applicable group as a common expense. This
exception is identical to the exception provided for the requirement to
escrow flood premiums currently contained in the Agencies' flood
insurance rules.\32\
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\32\ 12 CFR 22.5(a)(2)(iii) (OCC), 12 CFR 208.25(e)(1)(ii)(C)
(Board), 12 CFR 339.5(a)(2)(iii) (FDIC), 12 CFR 614.4935(a)(2)(iii)
(FCA), and 12 CFR 760.5(a)(2)(iii) (NCUA).
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Finally, the Agencies have made a number of technical amendments to
the discretionary acceptance provision in the final rule. First, the
proposed rule provided that the policy must meet the ``amount and term
requirements'' of the flood insurance purchase requirement. As
indicated previously, these requirements provide that the property
securing a designated loan must be covered by flood insurance for the
term of the loan and that the amount of insurance coverage 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 Federal flood insurance statutes.
However, the requirement that the property be covered for the term of
the loan applies to the regulated lending institution, and is not a
provision that must be included in the flood insurance policy.
Therefore, the final rule removes the reference to the term
requirement. The Agencies also have moved the amount requirement from
the introductory text to a separate prong of the provision to more
clearly delineate it as a criterion of acceptance.
Second, the agencies have replaced the phrase ``loan secured by the
property located in a special flood hazard area'' each time it appears
with the more accurate defined term ``designated loan.'' Third, the
Agencies have added ``jurisdiction'' each time ``State'' is referenced
to correct inconsistencies in the proposed rule. Finally, the Agencies
have made nonsubstantive changes to simplify wording.
Accordingly, the final rule permits regulated lending institutions
to accept flood insurance policies issued by private insurers that do
not meet the statutory and regulatory definition of ``private flood
insurance'' if four criteria are met.\33\
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\33\ The Agencies note that regulated lending institutions
intending to sell mortgages into the secondary market also should
review the requirements of such secondary market investors regarding
acceptable private flood insurance.
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First, the policy must provide coverage in the amount required by
the flood insurance purchase requirement.
Second, the policy must be issued by an insurer that is licensed,
admitted, or otherwise approved to engage in the business of insurance
by the insurance regulator of the State or jurisdiction in which the
property to be insured is located; or in the case of a policy of
difference in conditions, multiple peril, all risk, or other blanket
coverage insuring nonresidential commercial property, is issued by a
surplus lines insurer recognized, or not disapproved, by the insurance
regulator of the State or jurisdiction where the property to be insured
is located. As indicated in the proposed rule, this criterion is
included in the definition of ``private flood insurance'' in the
Biggert-Waters Act, and the Agencies find that it is appropriate to
include it as a criterion for discretionary acceptance in the final
rule as well. As noted previously in the discussion of mandatory
acceptance, the Agencies believe that surplus lines insurers for
noncommercial properties are covered as insurance companies that are
``otherwise approved to engage in the business of insurance by the
insurance regulator of the State or jurisdiction in which the property
to be insured is located.''
Third, the policy must cover both the mortgagor(s) and the
mortgagee(s) as loss payees, except in the case of a policy that is
provided by a condominium association, cooperative, homeowners
association, or other applicable group and for which the premium is
paid by the condominium association, cooperative, homeowners
association, or other applicable group as a common expense.
Fourth, the policy must provide sufficient protection of the
designated loan, consistent with general safety and soundness
principles, and the regulated lending institution must document its
conclusion regarding sufficiency of the protection of the loan in
writing.
Basing the discretionary acceptance provision on loan protection
appropriately focuses the ability of a regulated lending institution to
accept a flood insurance policy issued by a private insurer on a key
purpose of the Agencies' flood insurance rules. It also simplifies this
provision, thereby facilitating the ability of regulated lending
institutions, especially community financial institutions, to accept
flood insurance policies issued by private insurers that do not satisfy
the definition of ``private flood
[[Page 4963]]
insurance'' in the Biggert-Waters Act. Furthermore, the addition of a
safety and soundness criterion makes the final rule's standard for
discretionary acceptance similar to the standard included in both the
proposed and final ``mutual aid society'' provision, and reflects
suggestions made by public commenters.
The Agencies note that some factors, among others, that a regulated
lending institution could consider in determining whether a flood
insurance policy provides sufficient protection of a loan include:
Whether the flood insurance policy's deductibles are reasonable based
on the borrower's financial condition; whether the insurer provides
adequate notice of cancellation to the mortgagor and mortgagee to
ensure timely force placement of flood insurance, if necessary; whether
the terms and conditions of the flood insurance policy with respect to
payment per occurrence or per loss and aggregate limits are adequate to
protect the regulated lending institution's interest in the collateral;
whether the flood insurance policy complies with applicable State
insurance laws; and whether the private insurance company has the
financial solvency, strength, and ability to satisfy claims.
E. Mutual Aid Societies
The proposed rule permitted regulated lending institutions to
accept certain flood coverage provided by mutual aid societies, which
by their nature do not meet all of the requirements for discretionary
acceptance in the proposed rule. As indicated previously, the final
rule defines ``mutual aid society'' as an organization: (1) Whose
members share a common religious, charitable, educational, or fraternal
bond; (2) that covers losses caused by damage to members' property
pursuant to an agreement, including damage caused by flooding, in
accordance with this common bond; and (3) that has a demonstrated
history of fulfilling the terms of agreements to cover losses to
members' property caused by flooding. Under the proposed rule, a
regulated lending institution could accept a private policy issued by a
``mutual aid society'' in satisfaction of the flood insurance purchase
requirement provided four criteria are met: (1) The institution's
primary supervisory agency has determined that such types of policies
qualify as flood insurance for purposes of the Federal flood insurance
statutes; (2) the policy meets the amount of coverage for losses and
term requirements specified in the flood insurance purchase
requirement; (3) the policy covers both the mortgagor(s) and the
mortgagee(s) as loss payees; and (4) the regulated lending institution
has determined that the policy provides sufficient protection of the
loan secured by the property located in an SFHA. The proposed rule
required that in meeting this last criterion, the institution would
need to verify that the policy is consistent with general safety and
soundness principles, such as whether deductibles are reasonable based
on the borrower's financial condition; consider the policy provider's
ability to satisfy claims, such as whether the policy provider has a
demonstrated record of covering losses; and document its conclusions.
The Agencies included this mutual aid societies provision in the
proposal in response to several commenters on the October 2013 Proposed
Rule that supported adding provisions permitting regulated lending
institutions to accept certain non-traditional coverage, such as
certain Amish Aid Plans.
Most commenters were generally supportive of this mutual aid
societies provision. One commenter noted that having the ability to
accept coverage issued by mutual aid societies would better meet the
needs of certain communities and the regulated lending institutions
that serve them by keeping down costs and respecting the borrower's
religious or other beliefs. Another commenter noted that the Agencies'
proposed provision for mutual aid societies contained requirements that
more closely reflect the manner in which regulated lending institutions
actually evaluate private policies today. One commenter in particular
noted that the provision for mutual aid societies would be very useful
for Farm Credit System institutions.
A few commenters questioned the scope of the mutual aid societies
provision. One commenter recommended that loans secured by commercial
and multifamily properties should be exempted from a provision that
permits the acceptance of coverage provided by mutual aid societies
because mutual aid societies would be unable to repair large commercial
and multifamily buildings.
The Agencies believe there is no need to limit the mutual aid
societies provision in this fashion as the final rule does not require
regulated lending institutions to accept coverage issued by mutual aid
societies. The mutual aid societies provision only makes it possible
for regulated lending institutions to exercise their discretion to
accept coverage issued by mutual aid societies in satisfaction of the
flood insurance purchase requirement, provided the coverage meets the
criteria adopted by the Agencies. Furthermore, such coverage only can
be accepted if the institution determines that the coverage provides
sufficient protection of the loan consistent with general safety and
soundness principles.
A few commenters encouraged the Agencies to expand the mutual aid
societies provision to include other variations of traditional private
flood insurance, including self-insurance and captive insurance
companies, which employ risk shifting and distribution mechanisms or
otherwise mitigate risks by partnering with unrelated insurance
companies. The Agencies note that other forms of insurance, including
captive insurance, self-insurance, and other types of alternative
insurance policies, are permissible if they meet the requirements of
discretionary acceptance and otherwise comply with applicable laws.
Therefore, the Agencies decline to expand the mutual aid societies
provision in this manner.
One commenter stated that the proposed rule did not address how to
comply with the escrow requirement for mutual aid society agreements.
The Agencies note that the escrow requirement only applies if the
borrower is paying a premium for the flood coverage. If there is no
premium collected for flood coverage provided by mutual aid societies,
the escrow requirement would not apply.
The Agencies also received comments on the specific criteria for
accepting mutual aid society coverage included in the proposed rule.
One commenter requested clarification with respect to the first
criterion, which required the regulated lending institution's primary
supervisory agency to have determined that mutual aid society policies
qualify as flood insurance. This commenter requested that the Agencies
provide clarifying guidance as to how the Agencies will determine that
policies issued by mutual aid societies will be acceptable. This
commenter also suggested that the Agencies provide an approved list of
acceptable mutual aid societies. As noted in the proposed rule, the OCC
and FCA will conduct their own evaluations of mutual aid societies
using the criteria that regulated lending institutions are expected to
consider under 12 CFR 22.3(c)(4) or 12 CFR 614.4930(c)(4),
respectively. Based on their current practices regarding non-
traditional flood insurance, the Board, FDIC, and NCUA expect that
cases in which they approve policies issued by mutual aid societies
will be rare and limited.
[[Page 4964]]
Another commenter criticized the proposed rule for permitting the
Agencies to adopt different approaches to accepting mutual aid society
coverage. Specifically, this commenter opined that mutual aid society
coverage should be treated similarly by each Agency, and that
inconsistent acceptance will create unnecessary confusion and barriers
for borrowers who may already be limited in their banking options due
to the rural location of many communities, and who would be further
limited if only certain banks are able to accept mutual aid society
policies. However, the Agencies believe that this provision maintains
the status quo for how the Agencies currently regulate their
institutions and, therefore, should not create additional difficulties
for borrowers or regulated lending institutions.\34\ The Agencies,
therefore, adopt this first criterion as proposed, with technical
changes. The Agencies have replaced the word ``policy'' with ``plan''
in this criterion, as well as throughout the mutual aid societies
provision, to more accurately describe the type of agreement issued by
mutual aid societies. The Agencies also have removed the superfluous
phrase ``types of'' in this criterion.
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\34\ The OCC notes that it currently permits national banks and
Federal savings associations to accept mutual aid society plans,
such as plans issued by the Amish, in satisfaction of the flood
insurance purchase requirement. The FCA also permits its System
institutions to accept this coverage. Such plans are written
agreements issued by members of a community who share a common
religious bond and have a demonstrated history of covering losses to
members' property caused by flooding in accordance with this common
bond, either by paying to cover the cost of damaged structures or by
repairing or rebuilding the structures. Accordingly, the OCC and FCA
believe that such plans provide sufficient protection of a loan
secured by the property, protect the institution as well as the
borrower, and are issued by an organization that meets the
definition of ``mutual aid society'' included in the final rule.
Therefore, the final rule maintains the status quo by continuing to
allow national banks, Federal savings associations, and Farm Credit
System institutions to accept flood coverage issued by mutual aid
societies, such as Amish Aid Plans.
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One commenter requested that the Agencies clarify their
expectations for the requirements in the mutual aid societies
provision, particularly with respect to ``the amount of coverage for
losses and term requirements'' and identification of ``loss payees,''
as included in the second and third criteria, respectively. This
commenter maintained that strict compliance with these expectations
would prohibit a regulated lending institution from offering a mortgage
secured by property located in an SFHA to a member of a mutual aid
society because the written agreements provided by mutual aid societies
do not necessarily include such specific details, do not state the
insurable value of a property, and do not name the regulated lending
institution as a loss payee. Instead, this commenter continued, these
agreements are simply assurances by the community to rebuild a
structure in the event that it is damaged or destroyed by a flood.
The Agencies understand that coverage provided by mutual aid
societies may not contain all of the same information included in
private flood insurance policies issued by regulated insurance
companies. However, mutual aid society plans reviewed by the Agencies
to date have contained clauses that name the regulated lending
institution and the borrower as loss payees and have stated the
insurable amount. Therefore, the Agencies are adopting the second and
third criteria as proposed, with one technical change to the second
criterion. The Agencies have removed the reference to term
requirements, because this reference, as noted in the discretionary
acceptance discussion, is the separate responsibility of the lender,
and not a provision that must be included in the policy. Instead, as
with the discretionary acceptance provision, the final rule provides
that the mutual aid society plan must provide coverage in the amount
required by the flood insurance purchase requirement, i.e., the amount
of coverage must be at least equal to the lesser of the outstanding
principal balance of the loan or the maximum limit of coverage
available for the particular type of property under the Federal flood
insurance statutes.
As indicated previously, the fourth criterion in the proposed rule
provided that, to accept flood coverage from a mutual aid society, a
regulated lending institution would need to determine that the coverage
provides sufficient protection of the loan secured by the property
located in an SFHA. In meeting this criterion, the regulated lending
institution would need to: (1) Verify that the policy is consistent
with general safety and soundness principles, such as whether
deductibles are reasonable based on the borrower's financial condition;
(2) consider the policy provider's ability to satisfy claims, such as
whether the policy provider has a demonstrated record of covering
losses; and (3) document its conclusions.
Several commenters stated that the ``demonstrated record of
covering losses'' provision in this criterion would create a major
impediment to accepting mutual aid society policies because regulated
lending institutions would struggle to determine and document the
policy provider's demonstrated record of covering losses. As previously
explained in the discussion of the analogous term ``demonstrated
history'' in the definition of ``mutual aid society,'' the Agencies
view this criterion as necessary for preventing abuse and believe
regulated lending institutions will be able to obtain the information
they need to document their determinations.
However, after further review, the Agencies are simplifying and
streamlining this criterion in the final rule. Because the definition
of ``mutual aid society'' already requires that the entity ``has a
demonstrated history of fulfilling the terms of agreements to cover
losses to members' property caused by flooding,'' the proposed
requirement that the regulated lending institution consider the policy
provider's ability to satisfy claims, such as whether the policy
provider has a demonstrated record of covering losses, is duplicative
and unnecessary. Therefore, the Agencies have removed this ``ability to
satisfy claims'' language, and have included a specific cross-reference
to the definition in the introductory text of this provision. The
Agencies also have removed the reference to deductibles in this
criterion so that it is similar to the language included in the revised
discretionary acceptance provision, which does not specifically list
factors that a regulated lending institution could consider when
determining whether a private insurance policy is consistent with
safety and soundness. However, as previously indicated in the
discretionary acceptance provision discussion, regulated lending
institutions can still consider the reasonableness of deductibles when
determining whether the mutual aid society coverage provides sufficient
protection of a loan.
Accordingly, the final rule provides that a regulated lending
institution may accept a plan issued by a mutual aid society in
satisfaction of the flood insurance purchase requirement provided that
the following four criteria are met:
First, the regulated lending institution's primary Federal
supervisory agency has determined that such plans qualify as flood
insurance for purposes of this Act;
Second, the plan must provide coverage in the amount required by
the flood insurance purchase requirement;
Third, the plan must cover both the mortgagor(s) and the
mortgagee(s) as loss payees; and
Fourth, the plan must provide sufficient protection of the
designated
[[Page 4965]]
loan, consistent with general safety and soundness principles, and the
regulated lending institution must document its conclusion regarding
sufficiency of the protection of the loan in writing.
F. Effective Date
The Agencies received comments regarding the amount of time
regulated lending institutions would need to implement a final rule on
the private flood insurance provisions of the Biggert-Waters Act. Some
commenters requested that the Agencies provide at least one year to
implement the final rule. One commenter stated that the Agencies should
provide at least 180 days from the time the final rule is published in
the Federal Register to implement the rule.
The Agencies are adopting an effective date of July 1, 2019. The
Agencies believe this date affords regulated lending institutions
sufficient time to make necessary changes to their policies and
procedures as well as operating systems, and to train staff on such
changes to ensure compliance with the final rule, without unnecessarily
delaying the implementation of the rule. Moreover, this date complies
with requirements in the Administrative Procedure Act (APA) and section
302(b) of the Riegle Community Development and Regulatory Improvement
Act of 1994 (RCDRIA), as discussed in the Regulatory Analysis section
below regarding the Effective Date. In addition, the Agencies note that
section 302(b)(2) of the RCDRIA provides that a person may comply with
the regulation before the effective date of the regulation.\35\
Therefore, those regulated lending institutions that are able to and
would like to comply with the final rule prior to July 1, 2019, may do
so. The Agencies note that until July 1, 2019, regulated lending
institutions may continue to accept flood insurance policies issued by
private insurers and coverage provided by mutual aid societies as
currently permitted by each Agency.
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\35\ 12 U.S.C. 4802(b)(2).
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V. Regulatory Analysis
A. Regulatory Flexibility Act
OCC: Pursuant to the Regulatory Flexibility Act (RFA), an agency
must prepare a regulatory flexibility analysis for all proposed and
final rules that describes the impact of the rule on small
entities.\36\ Under section 605(b) of the RFA, this analysis is not
required if the head of the agency certifies that the rule will not
have a significant economic impact on a substantial number of small
entities and publishes its certification and a short explanatory
statement in the Federal Register along with its rule.
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\36\ See 5 U.S.C. 601 et seq.
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The OCC currently supervises 1,246 banks (national banks, Federal
savings associations, and branches or agencies of foreign banks). The
OCC finds that 1,094 OCC-supervised banks may be affected by the
rule,\37\ of which approximately 774 are small entities.\38\ Thus, the
OCC assumes the rule impacts a substantial number of small banks.
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\37\ To estimate the number of banks that may be affected by the
final rule the OCC determined the number of banks that (a) self-
identify by reporting mortgage servicing assets, reporting loans
secured by real estate, or as originating 1-4 family residential
mortgage loans on a Call Report submitted for any quarter in
calendar year 2017 or one of the first three quarters of 2018 or (b)
are identified by OCC examiners as originating residential mortgage
loans or as Home Mortgage Disclosure Act (HMDA) filers.
\38\ The OCC bases its estimate of the number of small entities
on the SBA's size thresholds for commercial banks and savings
institutions, and trust companies, which are $550 million and $38.5
million, respectively. Consistent with the General Principles of
Affiliation 13 CFR 121.103(a), the OCC counts the assets of
affiliated financial institutions when determining whether to
classify an OCC-supervised institution as a small entity. The OCC
uses December 31, 2017, to determine size because a ``financial
institution's assets are determined by averaging the assets reported
on its four quarterly financial statements for the preceding year.''
See footnote 8 of the U.S. Small Business Administration's Table of
Size Standards.
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Because a limited number of borrowers are required to have flood
insurance, part of the OCC cost estimate is based on the reported
number of flood insurance policies in place for designated loans in
July 2018, which is 3,226,416.\39\ Assuming that no more than 10
percent \40\ of these policies (per year) could be issued by private
insurance companies going forward, the OCC's estimated compliance cost
related to the acceptance of private flood insurance policies is
approximately $40.31 million.\41\
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\39\ The reported numbers are found at Policy & Claim Statistics
for Flood Insurance. The OCC's cost estimate may be overstated
because the estimate does not exclude loans serviced by institutions
for which another agency is the primary Federal regulator.
\40\ The RFA discussion in the proposed rule also specified a 10
percent increase in private flood insurance policies as a result of
this rulemaking. The OCC did not receive any comments on this
number.
\41\ This amount is based on an estimated per policy cost of
$117 applied to 10 percent of the policies (322,642 policies x $117
per policy = $37.75 million), plus the cost to update policies and
procedures of approximately $2.56 million. The time required to
comply with the final rule is based on an estimate of approximately
1 hour per policy. The time required to update policies and
procedures to address the final rule is based on an estimate of 20
hours per bank. To estimate compensation costs associated with the
rule, the OCC uses $117 per hour, which is based on the average of
the 90th percentile for seven occupations adjusted for inflation,
plus an additional 34.2 percent to cover private sector benefits,
based on our review of data from May 2017 for wages (by industry and
occupation) from the U.S. Bureau of Labor Statistics (BLS) for
depository credit intermediation (NAICS 522100).
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The OCC classifies the economic impact of total costs on a bank as
significant if the total costs in a single year are greater than 5
percent of total salaries and benefits, or greater than 2.5 percent of
total non-interest expense. The OCC estimates that the average cost per
small bank is approximately $12,900 per year,\42\ which is a
combination of per policy costs ($10,544) \43\ and costs associated
with modifying existing policies and procedures ($2,340).\44\ Using
this cost estimate, the OCC believes the final rule will have a
significant economic impact on two small banks, which is not a
substantial number. Therefore, the OCC certifies that this final rule
will not have a significant economic impact on a substantial number of
small entities supervised by the OCC. Accordingly, a regulatory
flexibility analysis is not required.
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\42\ Because the OCC assumes that the 20 banks that reported
mortgage servicing assets in excess of $100 million will bear more
of the costs than the average bank, the OCC allocates 70 percent of
the per policy costs to these 20 banks.
\43\ This number is derived as follows: 322,642 policies x $117
per policy x .30 (percent of policies allocated to banks that did
not report mortgage servicing assets in excess of $100 million) /
1,074 banks (1,094 total banks minus the 20 banks that reported
mortgage servicing assets in excess of $100 million). The estimated
cost per bank to modify policies and procedures is $2,340.
\44\ Twenty hours x $117 per hour.
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Board: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires an agency to perform an assessment of the impact a rule is
expected to have on small entities. Based on its analysis, and for the
reasons stated below, the Board believes this final rule will not have
a significant economic impact on a substantial number of small
entities.
1. Statement of the need for, and objectives of, the final rule.
The Board is adopting revisions to Regulation H to implement the
private flood insurance provisions of the Biggert-Waters Act.
Consistent with the Biggert-Waters Act, the final rule would require
regulated lending institutions to accept any private insurance policy
that meets the Biggert-Waters Act's definition of ``private flood
insurance'' in satisfaction of the flood insurance purchase
requirement. The final rule would also include a compliance aid that
would permit a regulated lending institution to conclude that a policy
meets the Biggert-Waters Act definition of ``private flood insurance''
without further review of the policy if the policy, or an endorsement
to the policy, states: ``This policy meets the definition of private
flood insurance contained in 42 U.S.C.
[[Page 4966]]
4012a(b)(7) and the corresponding regulation.'' The final rule would
also permit lenders to accept, at their discretion, flood insurance
policies issued by private insurers, and plans issued by mutual aid
societies, that do not meet the definition of ``private flood
insurance,'' provided they meet certain conditions.
2. Summary of issues raised by comments in response to the initial
regulatory flexibility analysis. The Board did not receive any comments
on the initial regulatory flexibility analysis.
3. Small entities affected by the final rule. All state member
banks that are subject to the Federal flood insurance statutes and the
flood insurance provisions of Regulation H would be subject to the
final rule. As of January 2, 2019, there were 794 State member banks.
Under regulations issued by the Small Business Administration (SBA),
banks and other depository institutions with total assets of $550
million or less are considered small. Approximately 528 State member
banks would be considered small entities by the SBA.
4. Recordkeeping, reporting and compliance requirements. The Board
believes the final rule will not have a significant impact on small
entities. First, the Board believes, based on comments received by the
Agencies in response to the October 2013 and November 2016 Proposed
Rules, that most existing flood insurance policies issued by private
insurers would not meet the definition of ``private flood insurance''
under the Biggert-Waters Act and that insurers would likely request
that lenders accept the policies under the more flexible discretionary
acceptance provisions. The provisions on discretionary acceptance,
including acceptance of plans issued by mutual aid societies, do not
impose affirmative obligations upon lenders. Accordingly, regulated
lending institutions may choose not to accept policies under those
provisions and therefore would have no associated compliance burden.
Second, with respect to flood insurance policies that a private
insurer would seek to have a lender accept under the mandatory
acceptance provisions, the Board notes that those regulated lending
institutions, including those that are considered small entities,
accepting flood insurance policies issued by private insurers today
already have experience evaluating policies with the criteria in the
Biggert-Waters Act definition of ``private flood insurance.'' The
Biggert-Waters Act criteria are almost identical to the criteria
referenced in guidance that currently governs the acceptance of private
policies by Federal Reserve-supervised institutions. Third, as
discussed in the SUPPLEMENTARY INFORMATION, the Board believes the
final rule would alleviate the burden on regulated lending
institutions, including those that are considered small entities, of
evaluating whether a flood insurance policy issued by a private insurer
meets the definition of ``private flood insurance'' under the mandatory
acceptance provisions with the addition of a compliance aid that
leverages the expertise of the insurer issuing the policy.
Although the final rule could impact a substantial number of small
entities, the Board estimates that the costs to these entities will not
be significant. The Board estimates that the cost for each covered
small entity will be approximately $7,630 during the first year the
proposal goes into effect. This estimate includes first year compliance
costs \45\ and ongoing costs \46\ and assumes that the usage of private
flood insurance policies by borrower, as defined by the final rule, is
distributed consistently across small entities. The actual ongoing cost
estimate may be lower than stated because the estimate assumes that all
of the policies for properties in High Risk Areas will cover loans held
by Federal Reserve-supervised institutions when some of these loans may
be held by institutions supervised by other Agencies.
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\45\ Fixed compliance costs are estimated assuming each small
entity requires one full-time employee working 20 hours at a rate of
$117 an hour. The total fixed cost of compliance for all 794 covered
entities is approximately $1.858 million, or $2,340 for each small
entity in the first year.
\46\ Ongoing compliance costs are estimated based upon available
data. According to FEMA's Policy and Claim Statistics for Flood
Insurance there are approximately 5,080,300 flood insurance policies
nationally as of October 2018. Only 3,182,833 of these policies are
located in ``High Risk Areas'' and would therefore require flood
insurance. The Board estimated the future adoption rate of private
flood insurance will be approximately 10 percent of the total of
flood insurance policies in any given year. Further, small entities
hold approximately 7.5 percent of all loans secured by real estate
held in portfolio by all Federal Reserve-supervised banks as of
September 30, 2018. The Board therefore assumed that small entities
will have to review a similar share of annual private flood
insurance policies. Ongoing policy review costs are estimated to be
approximately $5,290 per year for each small entity, assuming one
labor hour per year, per policy, at $117 per hour.
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5. Significant alternatives to the final revisions. The Board has
not identified any significant alternatives that would reduce the
regulatory burden associated with this final rule on small entities.
FDIC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
generally requires an agency, in connection with a final rule, to
prepare and make available a final regulatory flexibility analysis that
describes the impact of a final rule on small entities.\47\ However, a
regulatory flexibility analysis is not required if the agency certifies
that the rule will not have a significant economic impact on a
substantial number of small entities. The Small Business Administration
(SBA) has defined ``small entities'' to include banking organizations
with total assets of less than or equal to $550 million.\48\
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\47\ 5 U.S.C. 601 et seq.
\48\ The SBA defines a small banking organization as having $550
million or less in assets, where ``a financial institution's assets
are determined by averaging the assets reported on its four
quarterly financial statements for the preceding year.'' See 13 CFR
121.201 (as amended, effective December 2, 2014). ``SBA counts the
receipts, employees, or other measure of size of the concern whose
size is at issue and all of its domestic and foreign affiliates.''
See 13 CFR 121.103. Following these regulations, the FDIC uses a
covered entity's affiliated and acquired assets, averaged over the
preceding four quarters, to determine whether the covered entity is
``small'' for the purposes of RFA.
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Description of Need and Policy Objectives
The objective of this rule is to enact the private flood insurance
provisions of the Biggert-Waters Flood Insurance Reform Act of 2012
(Biggert-Waters). Existing regulations require lending institutions to
ensure that loans secured by properties located in Special Flood Hazard
Areas (SFHAs) are covered by flood insurance that provides sufficient
protection for the loan. This rule requires lenders to accept private
flood insurance policies in order to meet flood insurance requirements,
if the private policies meet the statutory definition of ``private
flood insurance'' as defined in Biggert-Waters. The rule also provides
lending institutions with broad discretion to accept private flood
insurance that does not meet the Biggert-Waters definition of ``private
flood insurance'' provided that the policies meet minimum criteria such
as providing sufficient protection for the lender and borrower and
meeting existing flood insurance requirements.
Description of the Final Rule
A description of the rule is presented in Section III: Summary of
the Final Rule. Please refer to it for further information.
Other Federal Rules
The FDIC has not identified any likely duplication, overlap, and/or
potential conflicts between the final rule and any other Federal rule.
Response to Comments Regarding the Regulatory Flexibility Act
The FDIC did not receive any public comments on the supporting
information it presented in the RFA
[[Page 4967]]
section of the Notice of Proposed Rulemaking.
The Agencies did receive public comments on the proposed
rulemaking. A summary of those comments, and the Agencies'
consideration of them, is presented in Section II. Many commenters
stated that small institutions would be heavily burdened by the need to
review private flood insurance policies to determine if the policies
met the criteria for discretionary acceptance in the proposed rule. The
Agencies have simplified the criteria for discretionary acceptance in
the final rule so as to create less regulatory burden for lenders in
general and for small institutions in particular.
Economic Impacts on Small Entities
The FDIC supervises 3,533 depository institutions, of which 2,726
are defined as small banking entities by the terms of the RFA.\49\ This
rule potentially affects all small entities that make loans secured by
real estate. There are 2,716 FDIC-supervised small entities that hold
some volume of loans secured by real estate and would therefore be
affected by this rule,\50\ so the rule potentially affects a
substantial number of small entities. However, the FDIC does not
believe the economic impact of the rule will be significant.
---------------------------------------------------------------------------
\49\ Call Report data, September 2018.
\50\ Ibid.
---------------------------------------------------------------------------
Banks do not report the number of loans issued that are secured by
properties located in Special Flood Hazard Areas (SFHAs). However, FEMA
reports that as of October 2018 there were 5,080,300 total flood
insurance policies in force in the United States, and that 3,182,833
cover properties located in High Risk Areas and would therefore require
flood insurance under existing regulations.\51\ We assume that between
one and ten percent, or 31,828 to 318,283 flood insurance policies,
would be covered by private flood insurance as a result of adopting
this rule.\52\ This estimate does not count the number of existing
private flood insurance policies; however, the FDIC believes that any
such policies are likely included in the estimated range of flood
insurance policies covered by private flood insurance.
---------------------------------------------------------------------------
\51\ Federal Emergency Management Agency (FEMA). Policy & Claim
Statistics for Flood Insurance. Accessed December 20, 2018. https://www.fema.gov/policy-claim-statistics-flood-insurance.
\52\ A 2018 study estimated that private flood insurance
accounts for 3.5 to 4.5 percent of primary residential flood
insurance policies. This rule applies to both residential and
commercial properties, so for this exercise we use an estimated
maximum of 10 percent in order to arrive at a conservative estimate
of the number of flood insurance policies covered by private flood
insurance and to account for the fact that the prevalence of private
flood insurance is likely to increase in the future. See Kousky,
Carolyn, Howard Kunreuther, Brett Lingle, and Leonard Shabman, The
Emerging Private Residential Flood Insurance Market in the United
States, Wharton Risk Management and Decision Process Center: July
2018.
---------------------------------------------------------------------------
The Federal Reserve estimates the total outstanding value of
mortgage debt in the United States as of September 2018 at
$15,269,457,000,000 and reports that $4,897,585,000,000 (32.07 percent)
of mortgage debt is held by depository institutions.\53\ Assuming that
FDIC-insured institutions hold the same percentage of all flood
insurance policies in SFHAs as they do of total outstanding mortgage
debt, then FDIC-insured depository institutions hold a total of
1,020,735 loans in SFHAs covered by flood insurance policies,\54\ of
which 10,207 to 102,073 are assumed to be covered by private flood
insurance.
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\53\ Board of Governors of the Federal Reserve System. Mortgage
Debt Outstanding. Accessed December 20, 2018. https://www.federalreserve.gov/data/mortoutstand/current.htm.
\54\ 3,182,833 x .3207 = 1,020,735.
---------------------------------------------------------------------------
Using Call Report data \55\ and assuming that all FDIC-insured
institutions hold the same percentage of total loans covered by flood
insurance policies in SFHAs as they do of all mortgage debt, the FDIC
calculates that depository institutions supervised by the FDIC hold
between 2,971 and 29,707 loans covered by private flood insurance
policies for properties located in SFHAs, and FDIC-supervised small
entities hold between 535 and 5,350 loans covered by private flood
insurance policies for properties located in SFHAs.
---------------------------------------------------------------------------
\55\ Call Report data for September 2018 data show a total value
of mortgage debt at depository institutions of $4,874,383,173,000
which is sufficiently close to the Federal Reserve's estimate to
provide confidence that Call Report data and Federal Reserve data
can be used together for this analysis.
---------------------------------------------------------------------------
We assume that institutions will spend 45 minutes reviewing each
private flood insurance policy and an additional 15 minutes documenting
their conclusions (1 hour total) as a result of this rule. Under that
assumption, and assuming an hourly cost of $112.32,\56\ no small
entities will incur costs resulting from this rule that exceed 2.5
percent of annual noninterest expense or 5 percent of annual salary
expense.
---------------------------------------------------------------------------
\56\ The estimate includes the May 2017 75th percentile hourly
wage rate for Lawyers ($99.89) and Compliance Officers ($40.55)
reported by the Bureau of Labor Statistics, National Industry-
Specific Occupational Employment, and Wage Estimates. These wage
rates have been adjusted for changes in the Consumer Price Index for
all Urban Consumers between May 2017 and June 2018 (2.85 percent)
and grossed up by 55.5 percent to account for non-monetary
compensation as reported by the June 2018 Employer Costs for
Employee Compensation Data. The calculation assumes that Lawyers and
Compliance Officers would each complete 50 percent of the task of
reviewing private flood insurance policies. The hourly cost estimate
is calculated as (.50 * $159.77 + .50 * $64.86 = $112.32).
---------------------------------------------------------------------------
Based on the information presented above, the FDIC certifies that
this rule will not have a significant economic impact on a substantial
number of small entities.
Alternatives Considered
This final rule differs from the proposal by simplifying the
criteria that a private flood insurance policy must meet in order for
lenders to accept the policy so as to comply with existing flood
insurance requirements. The Agencies retained some criteria that
private flood insurance policies must meet in order for an institution
to accept them.
The Agencies considered not including any discretionary acceptance
criteria in the final rule, which would allow institutions to accept
any private flood insurance policy and would potentially be less
burdensome for small institutions. The Agencies included minimum
criteria in order to ensure that flood insurance, whether from a public
or private insurer, sufficiently protects lenders and borrowers. The
Agencies also understand that many institutions are reluctant to accept
private flood insurance at all since existing regulations are unclear
about what they can and cannot accept. This final rule outlines minimum
criteria for discretionary acceptance in order to clarify the
regulatory treatment of private flood insurance policies for loans in
SFHAs.
FCA: Pursuant to section 605(b) of the Regulatory Flexibility Act
(5 U.S.C. 601 et seq.), FCA hereby certifies that the final rule will
not have a significant economic impact on a substantial number of small
entities. Each of the banks in the System, considered together with its
affiliated associations, has assets and annual income more than the
amounts that would qualify them as small entities. Therefore, System
institutions are not ``small entities'' as defined in the Regulatory
Flexibility Act.
NCUA: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq.,
requires the NCUA to prepare an analysis to describe any significant
economic impact a regulation may have on a substantial number of small
entities.\57\ Under section 605(b) of the RFA, this analysis is not
required if an agency certifies that
[[Page 4968]]
the rule would not have a significant economic impact on a substantial
number of small entities and publishes its certification and a short
explanatory statement in the Federal Register along with its rule.\58\
For purposes of this analysis, the NCUA considers small credit unions
to be those having under $100 million in assets.\59\ As of September
30, 2018, there are 3,862 small, Federally insured credit unions, and
only about 2,593 of these credit unions would be affected by the final
rule.
---------------------------------------------------------------------------
\57\ 5 U.S.C. 603(a).
\58\ 5 U.S.C. 605(b).
\59\ 80 FR 57512 (September 24, 2015).
---------------------------------------------------------------------------
NCUA classifies the economic impact of total costs on a credit
union as significant if the total costs in a single year are greater
than 5 percent of total salaries and benefits, or greater than 2.5
percent of total non-interest expense. NCUA estimates that the average
cost per small credit union is approximately $2,409 per year. Using
this cost estimate, NCUA believes the final rule will have a
significant economic impact on 62 small credit unions, which is not a
substantial number. Therefore, NCUA certifies that this final rule will
not have a significant economic impact on a substantial number of small
entities.
B. Unfunded Mandates Reform Act of 1995
The OCC has analyzed the final rule under the factors in the
Unfunded Mandates Reform Act of 1995 (UMRA).\60\ Under this analysis,
the OCC considered whether the final rule 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 (adjusted annually for inflation). The
UMRA does not apply to regulations that incorporate requirements
specifically set forth in law.
---------------------------------------------------------------------------
\60\ Public Law 104-4, 109 Stat. 48 (1995), codified at 2 U.S.C.
1501 et seq.
---------------------------------------------------------------------------
The OCC's estimated annual UMRA cost is approximately $37.75
million.\61\ This number is based on the cost of compliance with the
final rule described in the OCC's RFA analysis of this final rule,
minus the cost of updating policies and procedures, which is not
mandated by the rule. Therefore, the OCC finds that the final rule does
not trigger the UMRA cost threshold. Accordingly, the OCC has not
prepared the written statement described in section 202 of the UMRA.
---------------------------------------------------------------------------
\61\ This is a conservative estimate because, although not
required by UMRA, it includes the statutory mandate that banks
accept policies that meet the definition of ``private flood
insurance.''
---------------------------------------------------------------------------
C. Paperwork Reduction Act of 1995
The OCC, Board, FDIC, and NCUA (the Agencies) \62\ have determined
that this final rule involves a collection of information pursuant to
the provisions of the Paperwork Reduction Act of 1995 (the PRA) (44
U.S.C. 3501 et seq.).
---------------------------------------------------------------------------
\62\ Farm Credit System institutions are Federally chartered
instrumentalities of the United States and instrumentalities of the
United States are specifically excepted from the definition of
``collection of information'' contained in 44 U.S.C. 3502(3).
---------------------------------------------------------------------------
The OCC, FDIC, and NCUA each made a submission to OMB in connection
with the proposed rule under the PRA. OMB instructed the OCC, FDIC, and
NCUA to examine public comment in response to the proposed rule and
include in the supporting statement of their submissions in connection
with the final rule, a description of how they have responded to any
public comments on the information collection, including comments on
maximizing the practical utility of the collection and minimizing the
burden. No comments were received regarding the information collection.
In accordance with the PRA (44 U.S.C. 3506; 5 CFR 1320 Appendix
A.1), the Board reviewed the final rule under the authority delegated
to the Board by the Office of Management and Budget (OMB).
The collection of information that is subject to the PRA by this
final rule is found in 12 CFR 22.3, 208.25(c), 339.3, and 760.3.
The Agencies may not conduct or sponsor, and an organization is not
required to respond to, this information collection unless the
information collection displays a currently valid OMB control number.
The OMB control numbers are 1557-0326 (OCC), 7100-0280 (Board), 3064-
0120 (FDIC), and 3133-0190 (NCUA).
Under Sec. Sec. 22.3(c)(3), 208.25(c)(3)(iii), 339.3(c)(3), and
760.3(c)(3), institutions have the discretion to accept a flood
insurance policy issued by a private insurer that does not meet the
definition of ``private flood insurance'' if, among other things, the
policy provides sufficient protection of the designated loan,
consistent with general safety and soundness principles, and the
institution has documented its conclusion regarding sufficiency of the
protection of the loan in writing.
Under Sec. Sec. 22.3(c)(4), 208.25(c)(3)(iv), 339.3(c)(4), and
760.3(c)(4), institutions may accept a private policy issued by a
mutual aid society if, among other things, the coverage provides
sufficient protection of the designated loan, consistent with general
safety and soundness principles, and the institution has documented its
conclusion regarding sufficiency of the protection of the loan in
writing.
Burden Estimates
OCC
Number of respondents: 56,469 responses from 1,094 respondents.
Estimated average hours per response: 0.25 hours.
Proposed revisions estimated annual burden hours: 14,118 hours.
Board
Number of respondents: 15,904 responses from 791 respondents.
Estimated average hours per response: 0.25 hours.
Proposed revisions estimated annual burden hours: 3,976 hours.
FDIC
Number of respondents: 29,711 responses from 3,509 respondents.
Estimated average hours per response: 0.25 hours.
Proposed revisions estimated annual burden hours: 7,428 hours.
NCUA
Number of respondents: 10,990 responses from 4,164 respondents.
Estimated average hours per response: 0.25 hours.
Proposed revisions estimated annual burden hours: 2,705 hours.
These collections are available to the public at www.reginfo.gov.
Comments are invited on:
(a) Whether the information collections are necessary for the
proper performance of the Agencies' functions, including whether the
information has practical utility;
(b) The accuracy of the Agencies' estimates of the burden of the
information collections, including the validity of the methodology and
assumptions used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
D. Effective Date
The APA \63\ requires that a substantive rule must be published not
less than 30 days before its effective date, unless,
[[Page 4969]]
among other things, the rule grants or recognizes an exemption or
relieves a restriction.\64\ Section 302(b) of the Riegle Community
Development and Regulatory Improvement Act of 1994 (RCDRIA) requires
that regulations issued by a Federal banking agency \65\ imposing
additional reporting, disclosure, or other requirements on insured
depository institutions take effect on the first day of a calendar
quarter that begins on or after the date of publication of the final
rule, unless, among other things, the agency determines for good cause
that the regulations should become effective before such time.\66\ The
July 1, 2019 effective date of this final rule meets both the APA and
RCDRIA effective date requirements, as it will take effect at least 30
days after its publication date of February 20, 2019 and on the first
day of a calendar quarter following publication, July 1, 2019.
---------------------------------------------------------------------------
\63\ Codified at 5 U.S.C. 551 et seq.
\64\ 5 U.S.C. 553(d).
\65\ For purposes of RCDRIA, ``Federal banking agency'' means
the OCC, FDIC, and Board. See 12 U.S.C. 4801.
\66\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------
E. Riegle Community Development and Regulatory Improvement Act of 1994
Section 302(a) of the RCDRIA requires that each Federal banking
agency,\67\ in determining the effective date and administrative
compliance requirements for new regulations that impose additional
reporting, disclosure, or other requirements on insured depository
institutions, consider, consistent with principles of safety and
soundness and the public interest, any administrative burdens that such
regulations would place on depository institutions, including small
depository institutions, and customers of depository institutions, as
well as the benefits of such regulations.\68\
---------------------------------------------------------------------------
\67\ Supra, footnote 50.
\68\ 12 U.S.C. 4802(a).
---------------------------------------------------------------------------
With respect to the effective date, the Federal banking agencies
have considered the changes made by this final rule and believe that
the effective date of July 1, 2019 should provide regulated lending
institutions with adequate time to make appropriate adjustments to
their review and closing process for designated loans to comply with
these changes. With respect to administrative compliance requirements,
the Federal banking agencies have considered the administrative burdens
and the benefits of this final rule, and addressed them by modifying
the proposed provision regarding the compliance aid for mandatory
acceptance and the discretionary acceptance provision to make them
simpler and less burdensome for regulated lending institutions. Further
discussion of the Federal banking agencies' consideration of these
provisions is found in other sections of this SUPPLEMENTARY INFORMATION
section.
List of Subjects
12 CFR Part 22
Flood insurance, Mortgages, National banks, Reporting and
recordkeeping requirements, Savings associations.
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, Savings
associations.
12 CFR Part 614
Agriculture, Banks, banking, Flood insurance, Foreign trade,
Reporting and recordkeeping requirements, Rural areas.
12 CFR Part 760
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 and under the
authority of 12 U.S.C. 93a, 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
0
1. The authority citation for part 22 continues to read as follows:
Authority: 12 U.S.C. 93a, 1462a, 1463, 1464, and 5412(b)(2)(B);
42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.
0
2. Section 22.2 is amended by:
0
a. Redesignating paragraphs (l) and (m) as (o) and (p), paragraphs (j)
and (k) as (l) and (m), and paragraphs (h) and (i) as paragraphs (i)
and (j); and
0
b. Adding new paragraphs (h) and (k) and paragraph (n).
The additions read as follows:
Sec. 22.2 Definitions.
* * * * *
(h) Mutual aid society means an organization--
(1) Whose members share a common religious, charitable,
educational, or fraternal bond;
(2) That covers losses caused by damage to members' property
pursuant to an agreement, including damage caused by flooding, in
accordance with this common bond; and
(3) That has a demonstrated history of fulfilling the terms of
agreements to cover losses to members' property caused by flooding.
* * * * *
(k) Private flood insurance means an insurance policy that:
(1) Is issued by an insurance company that is:
(i) Licensed, admitted, or otherwise approved to engage in the
business of insurance by the insurance regulator of the State or
jurisdiction in which the property to be insured is located; or
(ii) Recognized, or not disapproved, as a surplus lines insurer by
the insurance regulator of the State or jurisdiction in which the
property to be insured is located in the case of a policy of difference
in conditions, multiple peril, all risk, or other blanket coverage
insuring nonresidential commercial property;
(2) Provides flood insurance coverage that is at least as broad as
the coverage provided under an SFIP for the same type of property,
including when considering deductibles, exclusions, and conditions
offered by the insurer. To be at least as broad as the coverage
provided under an SFIP, the policy must, at a minimum:
(i) Define the term ``flood'' to include the events defined as a
``flood'' in an SFIP;
(ii) Contain the coverage specified in an SFIP, including that
relating to building property coverage; personal property coverage, if
purchased by the insured mortgagor(s); other coverages; and increased
cost of compliance coverage;
(iii) Contain deductibles no higher than the specified maximum, and
include similar non-applicability provisions, as under an SFIP, for any
total policy coverage amount up to the maximum available under the NFIP
at the time the policy is provided to the lender;
(iv) Provide coverage for direct physical loss caused by a flood
and may only exclude other causes of loss that are excluded in an SFIP.
Any exclusions other than those in an SFIP may pertain only to coverage
that is in addition to the amount and type of coverage that could be
provided by an SFIP or have the effect of providing broader coverage to
the policyholder; and
[[Page 4970]]
(v) Not contain conditions that narrow the coverage provided in an
SFIP;
(3) Includes all of the following:
(i) A requirement for the insurer to give written notice 45 days
before cancellation or non-renewal of flood insurance coverage to:
(A) The insured; and
(B) The national bank or Federal savings association that made the
designated loan secured by the property covered by the flood insurance,
or the servicer acting on its behalf;
(ii) Information about the availability of flood insurance coverage
under the NFIP;
(iii) A mortgage interest clause similar to the clause contained in
an SFIP; and
(iv) A provision requiring an insured to file suit not later than
one year after the date of a written denial of all or part of a claim
under the policy; and
(4) Contains cancellation provisions that are as restrictive as the
provisions contained in an SFIP.
* * * * *
(n) SFIP means, for purposes of Sec. Sec. 22.2(k), a standard
flood insurance policy issued under the NFIP in effect as of the date
private flood insurance is provided to a national bank or Federal
savings association.
* * * * *
0
3. Section 22.3 is amended by adding paragraph (c) to read as follows:
Sec. 22.3 Requirement to purchase flood insurance where available.
* * * * *
(c) Private flood insurance--(1) Mandatory acceptance. A national
bank or Federal savings association must accept private flood
insurance, as defined in Sec. 22.2(k), in satisfaction of the flood
insurance purchase requirement in paragraph (a) of this section if the
policy meets the requirements for coverage in paragraph (a) of this
section.
(2) Compliance aid for mandatory acceptance. A national bank or
Federal savings association may determine that a policy meets the
definition of private flood insurance in Sec. 22.2(k), without further
review of the policy, if the following statement is included within the
policy or as an endorsement to the policy: ``This policy meets the
definition of private flood insurance contained in 42 U.S.C.
4012a(b)(7) and the corresponding regulation.''
(3) Discretionary acceptance. A national bank or Federal savings
association may accept a flood insurance policy issued by a private
insurer that is not issued under the NFIP and that does not meet the
definition of private flood insurance in Sec. 22.2(k) in satisfaction
of the flood insurance purchase requirement in paragraph (a) of this
section if the policy:
(i) Provides coverage in the amount required by paragraph (a) of
this section;
(ii) Is issued by an insurer that is licensed, admitted, or
otherwise approved to engage in the business of insurance by the
insurance regulator of the State or jurisdiction in which the property
to be insured is located; or in the case of a policy of difference in
conditions, multiple peril, all risk, or other blanket coverage
insuring nonresidential commercial property, is issued by a surplus
lines insurer recognized, or not disapproved, by the insurance
regulator of the State or jurisdiction where the property to be insured
is located;
(iii) Covers both the mortgagor(s) and the mortgagee(s) as loss
payees, except in the case of a policy that is provided by a
condominium association, cooperative, homeowners association, or other
applicable group and for which the premium is paid by the condominium
association, cooperative, homeowners association, or other applicable
group as a common expense; and
(iv) Provides sufficient protection of the designated loan,
consistent with general safety and soundness principles, and the
national bank or Federal savings association documents its conclusion
regarding sufficiency of the protection of the loan in writing.
(4) Mutual aid societies. Notwithstanding the requirements of
paragraph (c)(3) of this section, a national bank or Federal savings
association may accept a plan issued by a mutual aid society, as
defined in Sec. 22.2(h), in satisfaction of the flood insurance
purchase requirement in paragraph (a) of this section if:
(i) The OCC has determined that such plans qualify as flood
insurance for purposes of the Act;
(ii) The plan provides coverage in the amount required by paragraph
(a) of this section;
(iii) The plan covers both the mortgagor(s) and the mortgagee(s) as
loss payees; and
(iv) The plan provides sufficient protection of the designated
loan, consistent with general safety and soundness principles, and the
national bank or Federal savings association documents its conclusion
regarding sufficiency of the protection of the loan in writing.
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 revised as
set forth below:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
0
4. The authority citation for part 208 continues 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), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 5318; 42 U.S.C.
4012a, 4104a, 4104b, 4106, and 4128.
0
5. Amend Sec. 208.25 by revising paragraphs (b)(7) through (11) and
adding paragraphs (b)(12) through (14) and (c)(3) to read as follows:
Sec. 208.25 Loans in areas having special flood hazards.
* * * * *
(b) * * *
(7) Mutual aid society means an organization--
(i) Whose members share a common religious, charitable,
educational, or fraternal bond;
(ii) That covers losses caused by damage to members' property
pursuant to an agreement, including damage caused by flooding, in
accordance with this common bond; and
(iii) That has a demonstrated history of fulfilling the terms of
agreements to cover losses to members' property caused by flooding.
(8) NFIP means the National Flood Insurance Program authorized
under the Act.
(9) Private flood insurance means an insurance policy that:
(i) Is issued by an insurance company that is:
(A) Licensed, admitted, or otherwise approved to engage in the
business of insurance by the insurance regulator of the State or
jurisdiction in which the property to be insured is located; or
(B) Recognized, or not disapproved, as a surplus lines insurer by
the insurance regulator of the State or jurisdiction in which the
property to be insured is located in the case of a policy of difference
in conditions, multiple peril, all risk, or other blanket coverage
insuring nonresidential commercial property;
(ii) Provides flood insurance coverage that is at least as broad as
the coverage
[[Page 4971]]
provided under an SFIP for the same type of property, including when
considering deductibles, exclusions, and conditions offered by the
insurer. To be at least as broad as the coverage provided under an
SFIP, the policy must, at a minimum:
(A) Define the term ``flood'' to include the events defined as a
``flood'' in an SFIP;
(B) Contain the coverage specified in an SFIP, including that
relating to building property coverage; personal property coverage, if
purchased by the insured mortgagor(s); other coverages; and increased
cost of compliance coverage;
(C) Contain deductibles no higher than the specified maximum, and
include similar non-applicability provisions, as under an SFIP, for any
total policy coverage amount up to the maximum available under the NFIP
at the time the policy is provided to the lender;
(D) Provide coverage for direct physical loss caused by a flood and
may only exclude other causes of loss that are excluded in an SFIP. Any
exclusions other than those in an SFIP may pertain only to coverage
that is in addition to the amount and type of coverage that could be
provided by an SFIP or have the effect of providing broader coverage to
the policyholder; and
(E) Not contain conditions that narrow the coverage provided in an
SFIP;
(iii) Includes all of the following:
(A) A requirement for the insurer to give written notice 45 days
before cancellation or non-renewal of flood insurance coverage to:
(1) The insured; and
(2) The member bank that made the designated loan secured by the
property covered by the flood insurance, or the servicer acting on its
behalf;
(B) Information about the availability of flood insurance coverage
under the NFIP;
(C) A mortgage interest clause similar to the clause contained in
an SFIP; and
(D) A provision requiring an insured to file suit not later than
one year after the date of a written denial of all or part of a claim
under the policy; and
(iv) Contains cancellation provisions that are as restrictive as
the provisions contained in an SFIP.
(10) Residential improved real estate means real estate upon which
a home or other residential building is located or to be located.
(11) 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
(ii) 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.
(12) SFIP means, for purposes of paragraph (b)(9) of this section,
a standard flood insurance policy issued under the NFIP in effect as of
the date private flood insurance is provided to a member bank.
(13) 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 Administrator of FEMA.
(14) 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.
(c) * * *
(3) Private flood insurance--(i) Mandatory acceptance. A member
bank must accept private flood insurance, as defined in paragraph
(b)(9) of this section, in satisfaction of the flood insurance purchase
requirement in paragraph (c)(1) of this section if the policy meets the
requirements for coverage in paragraph (c)(1) of this section.
(ii) Compliance aid for mandatory acceptance. A member bank may
determine that a policy meets the definition of private flood insurance
in paragraph (b)(9) of this section, without further review of the
policy, if the following statement is included within the policy or as
an endorsement to the policy: ``This policy meets the definition of
private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the
corresponding regulation.''
(iii) Discretionary acceptance. A member bank may accept a flood
insurance policy issued by a private insurer that is not issued under
the NFIP and that does not meet the definition of private flood
insurance in paragraph (b)(9) of this section in satisfaction of the
flood insurance purchase requirement in paragraph (c)(1) of this
section if the policy:
(A) Provides coverage in the amount required by paragraph (c)(1) of
this section;
(B) Is issued by an insurer that is licensed, admitted, or
otherwise approved to engage in the business of insurance by the
insurance regulator of the State or jurisdiction in which the property
to be insured is located; or in the case of a policy of difference in
conditions, multiple peril, all risk, or other blanket coverage
insuring nonresidential commercial property, is issued by a surplus
lines insurer recognized, or not disapproved, by the insurance
regulator of the State or jurisdiction where the property to be insured
is located;
(C) Covers both the mortgagor(s) and the mortgagee(s) as loss
payees, except in the case of a policy that is provided by a
condominium association, cooperative, homeowners association, or other
applicable group and for which the premium is paid by the condominium
association, cooperative, homeowners association, or other applicable
group as a common expense; and
(D) Provides sufficient protection of the designated loan,
consistent with general safety and soundness principles, and the member
bank documents its conclusion regarding sufficiency of the protection
of the loan in writing.
(iv) Mutual aid societies. Notwithstanding the requirements of
paragraph (c)(3)(iii) of this section, a member bank may accept a plan
issued by a mutual aid society, as defined in paragraph (b)(7) of this
section, in satisfaction of the flood insurance purchase requirement in
paragraph (c)(1) of this section if:
(A) The Board has determined that such plans qualify as flood
insurance for purposes of the Act.
(B) The plan provides coverage in the amount required by paragraph
(c)(1) of this section;
(C) The plan covers both the mortgagor(s) and the mortgagee(s) as
loss payees; and
(D) The plan provides sufficient protection of the designated loan,
consistent with general safety and soundness principles, and the member
bank documents its conclusion regarding sufficiency of the protection
of the loan in writing.
* * * * *
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the joint preamble, part 339 of
chapter III of title 12 of the Code of Federal Regulations is revised
to read as follows:
PART 339--LOANS IN AREAS HAVING SPECIAL FLOOD HAZARDS
0
6. The authority citation for part 339 continues to read as follows:
Authority: 12 U.S.C. 1462a, 1463, 1464, 1819 (Tenth),
5412(b)(2)(C) and 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.
[[Page 4972]]
0
7. Section 339.2 is amended by adding definitions for ``Mutual aid
society'', ``Private flood insurance'', and ``SFIP'' in alphabetical
order to read as follows:
Sec. 339.2 Definitions.
* * * * *
Mutual aid society means an organization--
(1) Whose members share a common religious, charitable,
educational, or fraternal bond;
(2) That covers losses caused by damage to members' property
pursuant to an agreement, including damage caused by flooding, in
accordance with this common bond; and
(3) That has a demonstrated history of fulfilling the terms of
agreements to cover losses to members' property caused by flooding.
* * * * *
Private flood insurance means an insurance policy that:
(1) Is issued by an insurance company that is:
(i) Licensed, admitted, or otherwise approved to engage in the
business of insurance by the insurance regulator of the State or
jurisdiction in which the property to be insured is located; or
(ii) Recognized, or not disapproved, as a surplus lines insurer by
the insurance regulator of the State or jurisdiction in which the
property to be insured is located in the case of a policy of difference
in conditions, multiple peril, all risk, or other blanket coverage
insuring nonresidential commercial property;
(2) Provides flood insurance coverage that is at least as broad as
the coverage provided under an SFIP for the same type of property,
including when considering deductibles, exclusions, and conditions
offered by the insurer. To be at least as broad as the coverage
provided under an SFIP, the policy must, at a minimum:
(i) Define the term ``flood'' to include the events defined as a
``flood'' in an SFIP;
(ii) Contain the coverage specified in an SFIP, including that
relating to building property coverage; personal property coverage, if
purchased by the insured mortgagor(s); other coverages; and increased
cost of compliance coverage;
(iii) Contain deductibles no higher than the specified maximum, and
include similar non-applicability provisions, as under an SFIP, for any
total policy coverage amount up to the maximum available under the NFIP
at the time the policy is provided to the lender;
(iv) Provide coverage for direct physical loss caused by a flood
and may only exclude other causes of loss that are excluded in an SFIP.
Any exclusions other than those in an SFIP may pertain only to coverage
that is in addition to the amount and type of coverage that could be
provided by an SFIP or have the effect of providing broader coverage to
the policyholder; and
(v) Not contain conditions that narrow the coverage provided in an
SFIP;
(3) Includes all of the following:
(i) A requirement for the insurer to give written notice 45 days
before cancellation or non-renewal of flood insurance coverage to:
(A) The insured; and
(B) The FDIC-supervised institution that made the designated loan
secured by the property covered by the flood insurance, or the servicer
acting on its behalf;
(ii) Information about the availability of flood insurance coverage
under the NFIP;
(iii) A mortgage interest clause similar to the clause contained in
an SFIP; and
(iv) A provision requiring an insured to file suit not later than
one year after the date of a written denial of all or part of a claim
under the policy; and
(4) Contains cancellation provisions that are as restrictive as the
provisions contained in an SFIP.
* * * * *
SFIP means, for purposes of Sec. Sec. 339.2, a standard flood
insurance policy issued under the NFIP in effect as of the date private
flood insurance is provided to an FDIC-supervised institution.
* * * * *
0
8. Section 339.3 is amended by adding paragraph (c) to read as follows:
Sec. 339.3 Requirement to purchase flood insurance where available.
* * * * *
(c) Private flood insurance--(1) Mandatory acceptance. An FDIC-
supervised institution must accept private flood insurance, as defined
in Sec. 339.2, in satisfaction of the flood insurance purchase
requirement in paragraph (a) of this section if the policy meets the
requirements for coverage in paragraph (a) of this section.
(2) Compliance aid for mandatory acceptance. An FDIC-supervised
institution may determine that a policy meets the definition of private
flood insurance in Sec. 339.2, without further review of the policy,
if the following statement is included within the policy or as an
endorsement to the policy: ``This policy meets the definition of
private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the
corresponding regulation.''
(3) Discretionary acceptance. An FDIC-supervised institution may
accept a flood insurance policy issued by a private insurer that is not
issued under the NFIP and that does not meet the definition of private
flood insurance in Sec. 339.2 in satisfaction of the flood insurance
purchase requirement in paragraph (a) of this section if the policy:
(i) Provides coverage in the amount required by paragraph (a) of
this section;
(ii) Is issued by an insurer that is licensed, admitted, or
otherwise approved to engage in the business of insurance by the
insurance regulator of the State or jurisdiction in which the property
to be insured is located; or in the case of a policy of difference in
conditions, multiple peril, all risk, or other blanket coverage
insuring nonresidential commercial property, is issued by a surplus
lines insurer recognized, or not disapproved, by the insurance
regulator of the State or jurisdiction where the property to be insured
is located;
(iii) Covers both the mortgagor(s) and the mortgagee(s) as loss
payees, except in the case of a policy that is provided by a
condominium association, cooperative, homeowners association, or other
applicable group and for which the premium is paid by the condominium
association, cooperative, homeowners association, or other applicable
group as a common expense; and
(iv) Provides sufficient protection of the designated loan,
consistent with general safety and soundness principles, and the FDIC-
supervised institution documents its conclusion regarding sufficiency
of the protection of the loan in writing.
(4) Mutual aid societies. Notwithstanding the requirements of
paragraph (c)(3) of this section, an FDIC-supervised institution may
accept a plan issued by a mutual aid society, as defined in Sec.
339.2, in satisfaction of the flood insurance purchase requirement in
paragraph (a) of this section if:
(i) The FDIC has determined that such plans qualify as flood
insurance for purposes of the Act;
(ii) The plan provides coverage in the amount required by paragraph
(a) of this section;
(iii) The plan covers both the mortgagor(s) and the mortgagee(s) as
loss payees; and
(iv) The plan provides sufficient protection of the designated
loan, consistent with general safety and soundness principles, and the
FDIC-supervised institution documents its conclusion regarding
sufficiency of the protection of the loan in writing.
[[Page 4973]]
FARM CREDIT ADMINISTRATION
12 CFR Chapter IV
Authority and Issuance
For the reasons set forth in the joint preamble, part 614, subpart
S of chapter VI of title 12 of the Code of Federal Regulations, is
revised as set forth below:
PART 614--LOANS IN AREAS HAVING SPECIAL FLOOD HAZARDS
0
9. The authority citation for part 614 continues to read as follows:
Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs.
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13,
2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12,4.12A, 4.13,
4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.19, 4.36, 4.37,
5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8, 7.12, 7.13, 8.0, 8.5 of
Pub. L. 92-181, 85 Stat. 583 (12 U.S.C. 2011, 2013, 2014, 2015,
2017, 2018, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2096, 2121,
2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184, 2199, 2201,
2202, 2202a, 2202c, 2202d, 2202e, 2206, 2207, 2219a, 2219b, 2243,
2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2, 2279f, 2279f-1,
2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101 Stat. 1568,
1639.
0
10. Amend Section 614.4925 by adding definitions for ``Mutual aid
society'', ``Private flood insurance'', and ``SFIP'' in alphabetical
order to read as follows:
Sec. 614.4925 Definitions.
* * * * *
Mutual aid society means an organization--
(1) Whose members share a common religious, charitable,
educational, or fraternal bond;
(2) That covers losses caused by damage to members' property
pursuant to an agreement, including damage caused by flooding, in
accordance with this common bond; and
(3) That has a demonstrated history of fulfilling the terms of
agreements to cover losses to members' property caused by flooding.
* * * * *
Private flood insurance means an insurance policy that:
(1) Is issued by an insurance company that is:
(i) Licensed, admitted, or otherwise approved to engage in the
business of insurance by the insurance regulator of the State or
jurisdiction in which the property to be insured is located; or
(ii) Recognized, or not disapproved, as a surplus lines insurer by
the insurance regulator of the State or jurisdiction in which the
property to be insured is located in the case of a policy of difference
in conditions, multiple peril, all risk, or other blanket coverage
insuring nonresidential commercial property;
(2) Provides flood insurance coverage that is at least as broad as
the coverage provided under an SFIP for the same type of property,
including when considering deductibles, exclusions, and conditions
offered by the insurer. To be at least as broad as the coverage
provided under an SFIP, the policy must, at a minimum:
(i) Define the term ``flood'' to include the events defined as a
``flood'' in an SFIP;
(ii) Contain the coverage specified in an SFIP, including that
relating to building property coverage; personal property coverage, if
purchased by the insured mortgagor(s); other coverages; and increased
cost of compliance coverage;
(iii) Contain deductibles no higher than the specified maximum, and
include similar non-applicability provisions, as under an SFIP, for any
total policy coverage amount up to the maximum available under the NFIP
at the time the policy is provided to the lender;
(iv) Provide coverage for direct physical loss caused by a flood
and may only exclude other causes of loss that are excluded in an SFIP.
Any exclusions other than those in an SFIP may pertain only to coverage
that is in addition to the amount and type of coverage that could be
provided by an SFIP or have the effect of providing broader coverage to
the policyholder; and
(v) Not contain conditions that narrow the coverage provided in an
SFIP;
(3) Includes all of the following:
(i) A requirement for the insurer to give written notice 45 days
before cancellation or non-renewal of flood insurance coverage to:
(A) The insured; and
(B) The System institution that made the designated loan secured by
the property covered by the flood insurance, or the servicer acting on
its behalf;
(ii) Information about the availability of flood insurance coverage
under the NFIP;
(iii) A mortgage interest clause similar to the clause contained in
an SFIP; and
(iv) A provision requiring an insured to file suit not later than
one year after the date of a written denial of all or part of a claim
under the policy; and
(4) Contains cancellation provisions that are as restrictive as the
provisions contained in an SFIP.
* * * * *
SFIP means, for purposes of Sec. 614.4925, a standard flood
insurance policy issued under the NFIP in effect as of the date private
flood insurance is provided to a System institution.
* * * * *
0
11. Section 614.4930 is amended by adding paragraph (c) to read as
follows:
Sec. 614.4930 Requirement to purchase flood insurance where
available.
* * * * *
(c) Private flood insurance.--(1) Mandatory acceptance. A System
institution must accept private flood insurance, as defined in Sec.
614.4925, in satisfaction of the flood insurance purchase requirement
in paragraph (a) of this section if the policy meets the requirements
for coverage in paragraph (a) of this section.
(2) Compliance aid for mandatory acceptance. A System institution
may determine that a policy meets the definition of private flood
insurance in Sec. 614.4925, without further review of the policy, if
the following statement is included within the policy or as an
endorsement to the policy: ``This policy meets the definition of
private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the
corresponding regulation.''
(3) Discretionary acceptance. A System institution may accept a
flood insurance policy issued by a private insurer that is not issued
under the NFIP and that does not meet the definition of private flood
insurance in Sec. 614.4925 in satisfaction of the flood insurance
purchase requirement of this section if the policy:
(i) Provides coverage in the amount required by paragraph (a) of
this section;
(ii) Is issued by an insurer that is licensed, admitted, or
otherwise approved to engage in the business of insurance by the
insurance regulator of the State or jurisdiction in which the property
to be insured is located; or in the case of a policy of difference in
conditions, multiple peril, all risk, or other blanket coverage
insuring nonresidential commercial property, is issued by a surplus
lines insurer recognized, or not disapproved, by the insurance
regulator of the State or jurisdiction where the property to be insured
is located;
(iii) Covers both the mortgagor(s) and the mortgagee(s) as loss
payees, except in the case of a policy that is provided by a
condominium association, cooperative, homeowners association, or other
applicable group and for which the premium is paid by the condominium
association, cooperative, homeowners association, or other applicable
group as a common expense; and
(iv) Provides sufficient protection of the designated loan,
consistent with
[[Page 4974]]
general safety and soundness principles, and the System institution
documents its conclusion regarding sufficiency of the protection of the
loan in writing.
(4) Mutual aid societies. Notwithstanding the requirements of
paragraph (c)(3) of this section, a System institution may accept a
plan issued by a mutual aid society, as defined in Sec. 614.4925, in
satisfaction of the flood insurance purchase requirement of this
section if:
(i) The FCA has determined that such plans qualify as flood
insurance for purposes of the Act;
(ii) The plan provides coverage in the amount required by paragraph
(a) of this section;
(iii) The plan covers both the mortgagor(s) and the mortgagee(s) as
loss payees; and
(iv) The plan provides sufficient protection of the designated
loan, consistent with general safety and soundness principles, and the
System institution documents its conclusion regarding sufficiency of
the protection of the loan in writing.
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Chapter VII
Authority and Issuance
For the reasons set forth in the joint preamble, the NCUA Board
amends part 760 of chapter VII of title 12 of the Code of Federal
Regulations to read as follows:
PART 760--LOANS IN AREAS HAVING SPECIAL FLOOD HAZARDS
0
12. The authority citation for part 760 continues to read as follows:
Authority: 12 U.S.C. 1757, 1784(e), 1789; 42 U.S.C. 4012a,
4104a, 4104b, 4106, and 4128.
0
13. Section 760.2 is amended by adding definitions for ``Mutual aid
society'', ``Private flood insurance'', and ``SFIP'' in alphabetical
order to read as follows:
Sec. 760.2 Definitions.
* * * * *
Mutual aid society means an organization--
(1) Whose members share a common religious, charitable,
educational, or fraternal bond;
(2) That covers losses caused by damage to members' property
pursuant to an agreement, including damage caused by flooding, in
accordance with this common bond; and
(3) That has a demonstrated history of fulfilling the terms of
agreements to cover losses to members' property caused by flooding.
* * * * *
Private flood insurance means an insurance policy that:
(1) Is issued by an insurance company that is:
(i) Licensed, admitted, or otherwise approved to engage in the
business of insurance by the insurance regulator of the State or
jurisdiction in which the property to be insured is located; or
(ii) Recognized, or not disapproved, as a surplus lines insurer by
the insurance regulator of the State or jurisdiction in which the
property to be insured is located in the case of a policy of difference
in conditions, multiple peril, all risk, or other blanket coverage
insuring nonresidential commercial property;
(2) Provides flood insurance coverage that is at least as broad as
the coverage provided under an SFIP for the same type of property,
including when considering deductibles, exclusions, and conditions
offered by the insurer. To be at least as broad as the coverage
provided under an SFIP, the policy must, at a minimum:
(i) Define the term ``flood'' to include the events defined as a
``flood'' in an SFIP;
(ii) Contain the coverage specified in an SFIP, including that
relating to building property coverage; personal property coverage, if
purchased by the insured mortgagor(s); other coverages; and increased
cost of compliance coverage;
(iii) Contain deductibles no higher than the specified maximum, and
include similar non-applicability provisions, as under an SFIP, for any
total policy coverage amount up to the maximum available under the NFIP
at the time the policy is provided to the lender;
(iv) Provide coverage for direct physical loss caused by a flood
and may only exclude other causes of loss that are excluded in an SFIP.
Any exclusions other than those in an SFIP may pertain only to coverage
that is in addition to the amount and type of coverage that could be
provided by an SFIP or have the effect of providing broader coverage to
the policyholder; and
(v) Not contain conditions that narrow the coverage provided in an
SFIP;
(3) Includes all of the following:
(i) A requirement for the insurer to give written notice 45 days
before cancellation or non-renewal of flood insurance coverage to:
(A) The insured; and
(B) The credit union that made the designated loan secured by the
property covered by the flood insurance, or the servicer acting on its
behalf;
(ii) Information about the availability of flood insurance coverage
under the NFIP;
(iii) A mortgage interest clause similar to the clause contained in
an SFIP; and
(iv) A provision requiring an insured to file suit not later than
one year after the date of a written denial of all or part of a claim
under the policy; and
(4) Contains cancellation provisions that are as restrictive as the
provisions contained in an SFIP.
* * * * *
SFIP means, for purposes of Sec. 760.2, a standard flood insurance
policy issued under the NFIP in effect as of the date private flood
insurance is provided to a credit union.
* * * * *
0
14. Section 760.3 is amended by adding paragraph (c) to read as
follows:
Sec. 760.3 Requirement to purchase flood insurance where available.
* * * * *
(c) Private flood insurance--(1) Mandatory acceptance. A credit
union must accept private flood insurance, as defined in Sec. 760.2,
in satisfaction of the flood insurance purchase requirement in
paragraph (a) of this section if the policy meets the requirements for
coverage in paragraph (a) of this section.
(2) Compliance aid for mandatory acceptance. A credit union may
determine that a policy meets the definition of private flood insurance
in Sec. 760.2, without further review of the policy, if the following
statement is included within the policy or as an endorsement to the
policy: ``This policy meets the definition of private flood insurance
contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.''
(3) Discretionary acceptance. A credit union may accept a flood
insurance policy issued by a private insurer that is not issued under
the NFIP and that does not meet the definition of private flood
insurance in Sec. 760.2 in satisfaction of the flood insurance
purchase requirement in paragraph (a) of this section if the policy:
(i) Provides coverage in the amount required by paragraph (a) of
this section;
(ii) Is issued by an insurer that is licensed, admitted, or
otherwise approved to engage in the business of insurance by the
insurance regulator of the State or jurisdiction in which the property
to be insured is located; or in the case of a policy of difference in
conditions, multiple peril, all risk, or other blanket coverage
insuring nonresidential commercial property, is
[[Page 4975]]
issued by a surplus lines insurer recognized, or not disapproved, by
the insurance regulator of the State or jurisdiction where the property
to be insured is located;
(iii) Covers both the mortgagor(s) and the mortgagee(s) as loss
payees, except in the case of a policy that is provided by a
condominium association, cooperative, homeowners association, or other
applicable group and for which the premium is paid by the condominium
association, cooperative, homeowners association, or other applicable
group as a common expense; and
(iv) Provides sufficient protection of the designated loan,
consistent with general safety and soundness principles, and the credit
union documents its conclusion regarding sufficiency of the protection
of the loan in writing.
(4) Mutual aid societies. Notwithstanding the requirements of
paragraph (c)(3) of this section, a credit union may accept a plan
issued by a mutual aid society, as defined in Sec. 760.2, in
satisfaction of the flood insurance purchase requirement in paragraph
(a) of this section if:
(i) The NCUA has determined that such plans qualify as flood
insurance for purposes of the Act;
(ii) The plan provides coverage in the amount required by paragraph
(a) of this section;
(iii) The plan covers both the mortgagor(s) and the mortgagee(s) as
loss payees; and
(iv) The plan provides sufficient protection of the designated
loan, consistent with general safety and soundness principles, and the
credit union documents its conclusion regarding sufficiency of the
protection of the loan in writing.
Dated: January 24, 2019
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, February 7, 2019.
Ann E. Misback,
Secretary of the Board.
By order of the Board of Directors of the Federal Deposit
Insurance Corporation.
Dated at Washington, DC, on 25th day of January, 2019.
Valerie J. Best,
Assistant Executive Secretary.
By order of the Board of the Farm Credit Administration.
Dated at McLean, VA, this 5th day of February 2019
Dale L. Aultman,
Secretary.
By order of the Board of the National Credit Union
Administration.
Dated at Alexandria, VA, this 31st day of January, 2019.
Gerard S. Poliquin,
Secretary of the Board.
[FR Doc. 2019-02650 Filed 2-19-19; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 7535-01-P
