[Federal Register Volume 61, Number 169 (Thursday, August 29, 1996)]
[Rules and Regulations]
[Pages 45684-45716]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21860]



[[Page 45683]]


_______________________________________________________________________

Part IV

Department of the Treasury
Office of the Comptroller of the Currency



12 CFR Part 22

Federal Reserve System



12 CFR Part 208

Federal Deposit Insurance Corporation



12 CFR Part 339

Department of the Treasury
Office of Thrift Supervision



12 CFR Parts 563 and 572

Farm Credit Administration



12 CFR Part 614



_______________________________________________________________________



Loans in Areas Having Special Flood Hazards; Final Rule

  Federal Register / Vol. 61, No. 169 / Thursday, August 29, 1996 / 
Rules and Regulations  

[[Page 45684]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 22

[Docket No. 96-20]
RIN 1557-AB47

FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Regulation H, Docket No. R-0897]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 339

RIN 3064-AB66

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 563 and 572

[No. 96-82]
RIN 1550-AA82

FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052-AB57

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 760


Loans in Areas Having Special Flood Hazards

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of 
Governors of the Federal Reserve System; Federal Deposit Insurance 
Corporation; Office of Thrift Supervision, Treasury; Farm Credit 
Administration; National Credit Union Administration.

ACTION: Joint final rule.

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SUMMARY: The Comptroller of the Currency (OCC), Board of Governors of 
the Federal Reserve System (Board), Federal Deposit Insurance 
Corporation (FDIC), Office of Thrift Supervision (OTS), and National 
Credit Union Administration (NCUA) are amending their regulations, and 
the Farm Credit Administration (FCA) is issuing new regulations, 
regarding loans in areas having special flood hazards. This action is 
required by statute to implement the provisions of the National Flood 
Insurance Reform Act of 1994. This joint final rule establishes new 
escrow requirements for flood insurance premiums, adds references to 
the statutory authority and the requirement for lenders and servicers 
to ``force place'' flood insurance under certain circumstances, 
enhances flood hazard notice requirements, sets forth new authority for 
lenders to charge fees for determining whether a property is located in 
a special flood hazard area, and contains various other provisions 
necessary to implement the National Flood Insurance Reform Act of 1994.

EFFECTIVE DATES: October 1, 1996; except for subpart S of part 614, 
which will be effective October 4, 1996, and part 760, which will be 
effective November 1, 1996.

FOR FURTHER INFORMATION CONTACT:

    OCC: Carol Workman, Compliance Specialist (202/874-4858), 
Compliance Management; Margaret Hesse, Senior Attorney, Community and 
Consumer Law Division (202/874-5750), or Jacqueline Lussier, Senior 
Attorney, Legislative and Regulatory Activities Division (202/874-
5090), Office of Chief Counsel, Office of the Comptroller of the 
Currency, 250 E Street, SW., Washington, DC 20219.
    Board: Diane Jackins, Senior Review Examiner, (202/452-3946), 
Division of Consumer and Community Affairs; Lawranne Stewart, Senior 
Attorney (202/452-3513), or Rick Heyke, Attorney (202/452-3688), Legal 
Division, Board of Governors of the Federal Reserve System, 20th Street 
and Constitution Avenue, NW., Washington, DC 20551. For the hearing 
impaired only, Telecommunication Device for the Deaf (TDD), Earnestine 
Hill or Dorothea Thompson (202/452-3544).
    FDIC: Mark Mellon, Counsel, Regulation and Legislation Section 
(202/898-3854), Legal Division, or Ken Baebel, Senior Review Examiner 
(202/942-3086), Division of Compliance and Consumer Affairs, Federal 
Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 
20429.
    OTS: Larry Clark, Senior Manager, Compliance and Trust Programs 
(202/906-5628), or Ronald Dice, Program Analyst (202/906-5633), 
Compliance Policy; Catherine Shepard, Senior Attorney, Regulations and 
Legislation Division (202/906-7275), Office of Chief Counsel, Office of 
Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.
    FCA: Robert G. Magnuson, Policy Analyst, Regulation Development 
(703/883-4498), Office of Examination; or William L. Larsen, Senior 
Attorney, Legal Counsel Division (703/883-4020), Office of General 
Counsel, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 
22102-5090. For the hearing impaired only, TDD (703/883-4444).
    NCUA: Kimberly Iverson, Program Officer (703/518-6375), Office of 
Examination and Insurance; or Jeffrey Mooney, Staff Attorney (703/518-
6563), Office of General Counsel, National Credit Union Administration, 
1775 Duke Street, Alexandria, VA 22314-3428.

SUPPLEMENTARY INFORMATION:

I. Background

    The National Flood Insurance Program (NFIP) is administered 
primarily under two statutes: the National Flood Insurance Act of 1968 
(1968 Act) and the Flood Disaster Protection Act of 1973 (1973 
Act).1 The 1968 Act made Federally subsidized flood insurance 
available to owners of improved real estate or mobile homes located in 
special flood hazard areas if their community participates in the NFIP. 
A special flood hazard area (SFHA) is an area within a flood plain 
having a one percent or greater chance of flood occurrence in any given 
year. SFHAs are delineated on maps issued by FEMA for individual 
communities. A community establishes its eligibility to participate in 
the NFIP by adopting and enforcing floodplain management measures to 
regulate new construction and by making substantial improvements within 
its SFHAs to eliminate or minimize future flood damage.
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    \1\ These statutes are codified at 42 U.S.C. 4001-4129. The 
Federal Emergency Management Agency (FEMA) administers the NFIP; its 
regulations implementing the NFIP appear at 44 CFR parts 59-77.
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    The 1973 Act amended the NFIP by requiring the OCC, Board, FDIC, 
OTS, and NCUA to issue regulations governing the lending institutions 
they supervise (regulated lending institutions or regulated lenders). 
These agencies' regulations directed lenders to require flood insurance 
on improved real estate or mobile homes serving as collateral for a 
loan (security property) if the security property was located, or was 
to be located, in a SFHA in a participating community. To implement 
statutory amendments enacted in 1974, the regulations required lenders 
to notify borrowers that their security property is located in a SFHA 
and of the availability of Federal disaster assistance with respect to 
the property in the event of a flood.
    Title V of the Riegle Community Development and Regulatory 
Improvement Act of 1994 2 (CDRI Act),

[[Page 45685]]

which is called the National Flood Insurance Reform Act of 1994 (Reform 
Act), comprehensively revised the Federal flood insurance 
statutes.3 The Reform Act is intended to increase compliance with 
flood insurance requirements and participation in the NFIP in order to 
provide additional income to the National Flood Insurance Fund and to 
decrease the financial burden of flooding on the Federal government, 
taxpayers, and flood victims.4 The Reform Act requires the OCC, 
Board, FDIC, OTS, and NCUA to revise their current flood insurance 
regulations and requires the FCA to promulgate flood insurance 
regulations for the first time. In order to fulfill these statutory 
requirements, the six agencies published a joint NPRM in the fall of 
1995. See 60 FR 53962 (October 18, 1995).5 The agencies now 
complete the rulemaking process by issuing this joint final rule.
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    \2\ Pub. L. 103-325, tit. V, 108 Stat. 2160, 2255-87 (September 
23, 1994).
    \3\ A more detailed description of the pertinent provisions of 
the CDRI Act appears in the preamble to the agencies' joint notice 
of proposed rulemaking (proposal or NPRM). See 60 FR 53962, 53963-65 
(October 18, 1995). This preamble refers to the 1968 Act, the 1973 
Act, and the Reform Act collectively as the Federal flood insurance 
statutes.
    \4\ H.R. Conf. Rep. No. 652, 103d Cong., 2d Sess. 195 (1994) 
(Conference Report).
    \5\ In conducting this rulemaking, all six of the agencies have 
coordinated and consulted with the Federal Financial Institutions 
Examination Council (FFIEC), as required by certain of the CDRI Act 
provisions. The heads of five of the six agencies (OCC, Board, FDIC, 
OTS, and NCUA) comprise the membership of the FFIEC.
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    Four of the agencies--the OCC, Board, FDIC, and OTS--are required 
by section 303 of the CDRI Act 6 to review their regulations in 
order to streamline and modify the regulations to improve efficiency, 
reduce unnecessary costs, and eliminate unwarranted constraints on 
credit availability. This joint final rule satisfies the regulation 
review requirement that section 303 applies to these four agencies. The 
OCC's portion of the joint final rule is part of its Regulation Review 
Program. Similarly, this joint final rule is part of the programs 
initiated by the Board, FDIC, OTS, NCUA, and FCA to reduce unnecessary 
regulatory burden and to simplify and clarify their regulations.
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    \6\ 12 U.S.C. 4873.
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    Section 303 also requires the OCC, Board, FDIC, and OTS to work 
jointly to make uniform all regulations and guidelines implementing 
common statutory or supervisory policies. This joint final rule also 
satisfies this portion of section 303. All six of the agencies have 
reviewed their flood insurance regulations with these purposes in mind. 
The agencies believe that the joint final rule provides the 
institutions they regulate with significant flexibility, and minimize 
the regulatory burden imposed upon regulated lending institutions and 
loan servicers acting on their behalf, consistent with the requirements 
of the statute, thus reducing the costs of compliance to those entities 
and enabling them to operate more efficiently.

II. Overview of Comments Received

    The agencies received 138 comment letters on the joint NPRM. The 
commenters included 12 national banks, two national bank subsidiaries, 
six state member banks, 15 state nonmember banks, nine savings 
associations, four Farm Credit organizations, 20 credit unions, 22 
financial services holding companies, three State and local government 
agencies, eight Federal Reserve Banks, 21 trade associations, three 
flood determination firms, and one insurance agency. In addition, the 
agencies received comments from five law firms, four mortgage 
companies, and two consulting services. FEMA also submitted comments.
    Thirty-nine commenters expressed general support for the joint 
NPRM. The majority of these commenters provided specific suggestions 
for improvement and clarification of the proposal. Twenty-two 
commenters responded unfavorably to the proposal, characterizing it as 
overly burdensome or unnecessary. In addition, as discussed later, many 
commenters sought clarification on specific issues covering a wide 
spectrum of the proposal's provisions.
    The joint final rule is similar to the agencies' proposal in many 
respects. The agencies, however, have carefully considered the comment 
letters and have made a number of changes in response to commenters' 
suggestions and in order to reduce regulatory burden. The topic-by-
topic discussion identifies and discusses the significant comments 
received, describes the provisions of the joint final rule, and 
highlights changes made by the agencies. Each agency's portion of the 
joint final rule is substantively consistent, although the format of 
the regulatory text varies to accommodate the format used at each 
agency.

III. Description of the Joint Final Rule

A. Need for Supplemental Guidance

    The purpose of the Reform Act is to strengthen and enhance the 
NFIP, and the primary focus of the agencies' joint final rule 
implementing the Reform Act is to carry out the purpose of the Reform 
Act. Depending on the location and activities of a regulated lending 
institution, adequate flood insurance coverage may be important from a 
safety and soundness perspective as a component of prudent underwriting 
and as a means of protecting the lender's ongoing interest in its 
collateral. Accordingly, the preamble to the proposal noted issues that 
could raise safety and soundness concerns in some circumstances and 
invited comment on these issues so that the agencies could consider 
whether to provide informal guidance, separate from the joint final 
rule, that addresses safe and sound banking concerns presented by 
regulated lenders' flood insurance programs. In particular, the 
agencies requested comment on the need for guidance related to 
purchased loans and institutions with significant exposure to flood 
hazards.
    Commenters sought guidance from the agencies on a wide range of 
topics including the applicability of the flood insurance rules with 
respect to condominiums, cooperatives, agricultural buildings, 
subordinate liens, manufactured homes, home equity lines of credit, 
fixtures, residential and commercial construction loans, FEMA's appeal 
process for contested flood hazard determinations, and the standard 
flood hazard determination form. Eighteen commenters stated that 
general guidance on safety and soundness issues would be useful, with 
most preferring informal guidance. Other commenters, primarily credit 
unions, requested more detailed guidance on compliance with the joint 
final rule.
    A number of commenters stated that additional guidance is not 
necessary or appropriate, emphasizing that standard financial 
institution practices are sufficient to protect an institution's 
interest in its collateral. These commenters stated that the risk 
profiles of institutions differ, and that the individual institution is 
in the best position to identify and control major forms of financial 
risks. A few commenters indicated that each institution should develop 
and implement risk management procedures to address issues such as 
geographic lending concentrations and portfolio concentrations.
    The joint final rule addresses certain of these concerns, 
including, for example, agricultural buildings, manufactured homes, the 
FEMA appeals process, and the standard flood hazard determination form. 
However, given the number, level of detail, and diversity of subject 
matter of the requests for additional information, the agencies have 
concluded that informal staff guidance addressing the more technical 
compliance issues would be helpful and

[[Page 45686]]

appropriate. Consequently, the agencies intend to issue informal 
guidance to address these technical issues subsequent to the 
promulgation of the joint final rule.

B. Topic-by-Topic Discussion

Authority, Purpose, and Scope
    The OCC, Board, FDIC, and OTS proposed in the joint NPRM to expand 
this section to add detailed statements of authority, purpose, and 
scope. The FCA proposed language similar to that of the other agencies. 
The NCUA proposed to replace the question and answer format of its 
flood insurance regulations with standard regulation text so that its 
flood insurance regulations are consistent with the other agencies. No 
comments were received on this section and the agencies adopt it as 
proposed.
Loan Servicers
    The agencies proposed to apply their regulations implementing the 
escrow, forced placement, and flood hazard determination fee provisions 
of the Reform Act to regulated lending institutions and to loan 
servicers acting on behalf of regulated lending institutions. As 
indicated in the preamble to the proposal, the agencies do not 
interpret the NFIP to impose obligations on a loan servicer independent 
from the obligations it imposes on the owner of a loan. The agencies 
concluded that loan servicers were covered by certain provisions of the 
Reform Act primarily to ensure that they could perform for the lender 
the administrative tasks related to the forced placement of flood 
insurance--including providing the requisite notices to borrowers, 
arranging for the insurance, and collecting and transmitting insurance 
premiums--without fear of liability to the borrower for the imposition 
of unauthorized charges.7
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    \7\ The agencies also noted that section 102(f) of the 1973 Act 
as added by the Reform Act, 42 U.S.C. 4012a(f), does not authorize 
them to seek civil money penalties against loan servicers that are 
not regulated lending institutions. The statute's failure to impose 
liability on servicers independent of lenders reinforces the 
conclusion that a servicer's obligation to comply with NFIP 
requirements arises from its contractual relationship with a lender.
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    The proposal indicated that a regulated lender could fulfill its 
responsibilities under the NFIP by ensuring that its loan servicing 
contracts obligated its servicers to perform the duties required by the 
Federal flood insurance statutes. The agencies also stated that, where 
there were deficiencies in existing arrangements, lenders should ensure 
that their loan servicing agreements were revised to provide for the 
loan servicer to fulfill Federal flood insurance requirements.
    The agencies received 21 comments on this issue. Several commenters 
addressed the relationship between regulated lender and loan servicer 
with respect to fulfillment of Federal flood insurance requirements and 
requested detailed additions to the regulatory language to clarify how 
this relationship is intended to function. One commenter requested that 
the final rule provide that the lender may rely upon the servicer to 
fulfill such requirements so long as the lender performs reasonable 
audits. Another requested that the final rule provide that an 
originating lender may transfer liability for flood insurance 
requirements to a servicer, but a third requested clarification that 
the lender's responsibilities are non-delegable despite its 
relationship with its servicer. Another commenter requested 
clarification of the responsibilities of a regulated lender acting as a 
servicer as opposed to a non-regulated servicer.
    In response to these comments, the agencies emphasize that the 
obligation of a loan servicer to fulfill administrative duties with 
respect to Federal flood insurance requirements arises from the 
contractual relationship between the loan servicer and the lender or 
from other commonly accepted standards for performance of servicing 
obligations. The lender remains ultimately liable for fulfillment of 
those responsibilities, and must take adequate steps to ensure that the 
loan servicer will maintain compliance with the flood insurance 
requirements. The agencies also wish to emphasize that there is no 
distinction between a regulated lending institution as servicer and a 
non-regulated servicer with respect to flood insurance requirements, 
since either entity acting as servicer will be doing so under the terms 
of a loan servicing contract. The provisions in the joint final rule 
with respect to escrow requirements, forced placement, and flood hazard 
determination fees therefore provide--as in the proposal--that these 
requirements may be fulfilled either by a regulated lender or a 
servicer acting on its behalf.
Definitions
    The proposal added or revised several definitions, including 
definitions of the terms building, designated loan, mobile home, and 
servicer, and also added several other definitions to streamline the 
agencies' flood insurance regulations, including definitions of the 
term Director, residential improved real estate, and special flood 
hazard area.
    The agencies received 20 comments on these definitions. Ten 
commenters requested clarification on the definition of mobile home. 
For purposes of the appendix to 44 CFR part 61, which sets forth FEMA's 
standard flood insurance policy, ``mobile home'' (the term used in the 
Federal flood insurance statutes) is defined to have the same meaning 
as ``manufactured home.'' 8 The text of the proposal is modified 
to reflect that the two terms have the same meaning. In order to ensure 
consistency with the term as used in the Reform Act and avoid 
conflicting interpretations, the agencies believe it is appropriate to 
defer to FEMA's interpretations with respect to what is a ``properly 
secured'' mobile home for flood insurance purposes.
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    \8\ See 44 CFR 59.1 (defining manufactured home), 44 CFR 61.13 
and Appendix A to 44 CFR part 61 (FEMA's standard flood insurance 
policy defining mobile home as meaning manufactured home); 58 FR 
62420 (Nov. 26, 1993). FEMA recently amended 44 CFR part 65, which 
sets forth the procedures to be followed for the review by FEMA of a 
contested flood hazard determination, to substitute the term 
``manufactured home'' for ``mobile home.'' FEMA explained that it 
made this change because the former term is now the preferred term 
in the industry. See 60 FR 62213 (Dec. 5, 1995).
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    Two commenters requested a definition of the phrase ``making, 
increasing, extending, or renewing a loan.'' The agencies believe that 
Congress intended the flood insurance purchase requirements to be 
applicable at origination, or at any time thereafter during the life of 
the loan when the institution determines that the security property is 
located in an area having special flood hazards.9 The specific 
issues that arise in connection with this phrase are discussed later in 
this preamble in ``Loan Purchase as Equivalent to Making a Loan,'' 
``Loan Acquisitions Involving Table Funding Arrangements,'' and ``Use 
of Standard Flood Hazard Determination Form.''
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    \9\ Conference Report at 197.
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    Two commenters suggested revisions of the definition of residential 
improved real estate. These comments are discussed later in this 
preamble in ``Escrow of Flood Insurance Payments.''
Flood Insurance Requirement
    The proposal did not amend substantively the existing regulatory 
provision that implements the statutory requirement that flood 
insurance must be purchased for the term of a loan when the security 
property is located in a SFHA in a community that participates in the 
NFIP. The proposal also did not amend substantively the existing 
regulatory provision with respect to the minimum amount of insurance 
required by statute for such

[[Page 45687]]

property. The Reform Act made no changes to these statutory 
requirements.
    The agencies received 28 comments on this issue. Five commenters 
requested that the final rule provide that the amount of flood 
insurance may be limited to the overall value of the property minus the 
value of the land. When flood insurance is required, the policy must 
cover the outstanding principal balance of the loan or the maximum 
amount available under the NFIP, whichever is less. The flood insurance 
statutes are intended to provide coverage to the improvements. As 
suggested by the commenters who addressed this point, the joint final 
rule provides that, in addition to the statutorily prescribed dollar 
limits, flood insurance coverage under the NFIP is limited to the 
overall value of the property less than the value of the land.
    Five commenters requested that the final rule provide that Federal 
flood insurance requirements do not apply to loans where a security 
interest in improved real property is only taken ``out of an abundance 
of caution.'' Section 102(b)(1) of the 1973 Act, as amended by the 
Reform Act,\10\ provides that a regulated lending institution may not 
make, increase, extend, or renew any loan secured by improved real 
property that is located in a special flood hazard area unless the 
improved real property is covered by the minimum amount of flood 
insurance required by statute. The requested exception is not available 
under the 1973 Act.
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    \10\ See 42 U.S.C. 4012a(b)(1).
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    One commenter inquired whether flood insurance coverage could be 
purchased for ``developed lots,'' that is, land that secures a loan to 
improve the property by streets, sewers, and utilities (but no ``above-
ground'' improvements such as buildings) so it may then be sold to 
homebuilders who may construct residential housing on the developed 
lots. As previously noted in this section, flood insurance generally is 
available only with respect to a structure or mobile home and not with 
respect to the land on which the structure or mobile home sits. Flood 
insurance therefore would not be available under the NFIP for property 
used to secure a development loan of the type described in this 
paragraph.
    One commenter asked whether the requirement to maintain flood 
insurance coverage for the term of the loan continues if a regulated 
lender sells the loan to a non-regulated lender while retaining 
servicing rights. The commenter wanted to ascertain whether the 
servicer in such a situation would have the authority to force place 
insurance and whether the servicer would be subject to criticism upon 
examination if the non-regulated lender instructed the servicer not to 
force place.
    As noted in the discussion on ``Loan Servicers,'' the agencies 
believe that the obligation of a loan servicer to fulfill Federal flood 
insurance requirements arises from the contractual relationship between 
the loan servicer and the regulated lender or other commonly accepted 
standards for performance. The duties of a regulated lender with 
respect to Federal flood insurance requirements for a particular loan 
cease upon the sale of the loan unless the seller agrees to retain 
responsibility for such requirements under a loan servicing agreement 
with the transferee owner. When a loan servicer force places flood 
insurance, it does so on behalf of the lender in accordance with the 
loan servicing agreement. If a lender instructs a loan servicer not to 
force place flood insurance, the responsibility for that instruction, 
and for any deficiency in compliance, remains with the lender.
    One commenter requested that the final rule state that a regulated 
lender has no duty to change the amount of insurance coverage on a loan 
unless the loan is increased, extended or renewed. The agencies note in 
response that a lender may have to increase the amount of coverage on a 
loan in instances other than the increase, extension, or renewal of a 
loan, such as when the amount of insurance available under the 1968 Act 
has been increased and the lender determines that the borrower does not 
have adequate coverage.
    One commenter stated that the proposal did not address the 
requirements for ``contents coverage'' for loans secured by personal 
property within a structure located in a SFHA. The agencies agree with 
the commenter that contents coverage is not required unless, as 
specified in section 102(b) of the 1973 Act,\11\ personal property 
secures the loan in addition to improved real property. The proposal 
included language requiring flood insurance for any personal property 
securing a loan that is also secured by real property. The agencies 
believe that this language adequately addresses this point.
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    \11\ 42 U.S.C. 4012a(b)(1).
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    One commenter requested that the final rule state that a lender may 
refuse to make a loan in a SFHA when Federal flood insurance is not 
available, such as in communities that do not participate in the NFIP. 
The agencies' flood insurance regulations in effect before the 
effective date of this joint final rule state that the requirement to 
obtain flood insurance for security property applies only to those 
areas where flood insurance has been made available under the 1968 Act. 
The proposal stated that the requirement applies only to a designated 
loan, a term defined to mean a loan secured by a building or mobile 
home located or to be located in a SFHA where flood insurance is 
available under the 1968 Act. The effect of these two provisions is the 
same, namely, that a lender may exercise discretion and decline to make 
a loan in a SFHA where Federal flood insurance is not available. The 
agencies therefore believe that the requested change is not necessary.
    The same commenter requested that the final rule expressly state 
that a lender may require flood insurance on any loan, even when not 
required by the final rule. A requirement for flood insurance on 
security property that is not subject to the Federal flood insurance 
statutes is a matter of contract between the lender and borrower. 
Consistent with the agencies' view that the joint final rule should 
include only those provisions necessary to implement the flood 
insurance statutes, the agencies have not included this provision in 
the joint final rule.
Loan Purchase as Equivalent to Making a Loan
    The proposal noted that the agencies' regulations in effect until 
the effective date of this joint final rule differ as to whether a loan 
purchase constitutes the ``making'' of a loan that would trigger an 
obligation to make a flood hazard determination. The OCC and the Board 
have taken the position that a loan purchase does not trigger such an 
obligation. The OTS has treated a loan purchase as the equivalent of 
``making'' a loan, and the NCUA has taken the position that if flood 
insurance is required for a Federal credit union (FCU) to make a loan, 
then flood insurance is necessary for an FCU to purchase a loan. The 
FDIC has not previously taken a position.
    The proposal highlighted the agencies' desire for regulatory 
uniformity. Accordingly, the OTS proposed to remove loan purchases from 
its flood insurance regulations; the FDIC proposed to adopt the 
position of the OCC and the Board; and the NCUA invited comment on 
whether it should maintain its position.
    The agencies received 44 letters on this issue. The overwhelming 
majority agreed that a loan purchase should not require a flood hazard 
determination. Three commenters, including FEMA,

[[Page 45688]]

believed that a loan purchase should be considered the ``making'' of a 
loan.
    As noted in the preamble to the proposal, the 1973 Act identifies 
the events that trigger a lender's obligation to review the adequacy of 
flood insurance coverage on an affected loan (e.g., the making, 
increasing, extending, or renewing of a loan). The Reform Act does not 
include a loan purchase in this list of specified tripwires. As a 
practical matter, a loan purchaser may always require, as a condition 
of purchase, that the seller determine whether the property securing 
the loan is located in a SFHA.
    The preamble further noted that, with respect to loans sold in the 
secondary mortgage market, the inclusion of a loan purchase as a 
tripwire event may be unnecessary because of the expansion of the scope 
of the NFIP's coverage with regard to Fannie Mae and Freddie Mac (the 
largest volume purchasers of residential mortgage loans).12 
Finally, the preamble to the proposal noted that including a loan 
purchase as a regulatory tripwire could result in the imposition of 
duplicative and potentially inconsistent requirements on the seller and 
the purchaser of a resential mortgage loan sold in the secondary 
market.
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    \12\ The agencies note that both Fannie Mae and Freddie Mac 
require their respective sellers and servicers to be in full 
compliance with the flood insurance statutes. See Fannie Mae 
Announcement No. 95-10 (June 8, 1995), Freddie Mac Bulletin No. 94-
18 (December 8, 1994).
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    For these reasons, and to promote consistent treatment for all 
regulated lending institutions, the OTS and FDIC are hereby adopting 
the position of the OCC and the Board that a loan purchase is not an 
event that triggers the obligation to make a flood hazard 
determination. While the authority of Farm Credit System institutions 
is limited with regard to loan purchases, the FCA also concurs with the 
position of the OCC and the Board on this issue.
    The NCUA requested comment on its position that a borrower must 
obtain adequate flood insurance before an FCU can purchase the 
borrower's loan if flood insurance coverage would have been required 
for the FCU to have made the loan initially. Two commenters agreed with 
the NCUA and 14 commenters suggested that the NCUA adopt the other 
agencies' position. Ten of the commenters that disagreed with the NCUA 
stated that the agencies should be consistent on this issue. Seven 
commenters suggested that the NCUA's position treats loan purchasing as 
a triggering event and requires credit unions to unnecessarily 
duplicate the original lenders' flood insurance determinations. Two 
commenters suggested that credit unions should be able to check the 
flood status of a loan before purchasing it.
    The NCUA agrees that a loan purchase does not trigger a flood 
hazard determination and that requiring a determination when an FCU 
purchases a loan could be duplicative. However, the NCUA's regulation 
governing loan purchases provides additional requirements for 
FCUs.13 Section 701.23(b)(1)(i) only permits an FCU to purchase 
its members' loans if the FCU could grant the loan or if the FCU 
refinances the loan within 60 days. Accordingly, before an FCU 
purchases a member's loan to hold in its portfolio, the FCU must 
determine whether the improved real property securing the loan has 
adequate flood insurance coverage. This may be accomplished by 
reviewing the loan documentation or by making a new determination. The 
FCU avoids these additional requirements when the FCU originates real-
estate-secured loans on an ongoing basis and purchases loans to package 
and sell in the secondary mortgage market.14
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    \13\ 12 CFR 701.23.
    \14\ 12 CFR 701.23(b)(1)(i).
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    Finally, the NCUA notes that while the agency's flood insurance 
regulations, 12 CFR part 760, apply to all Federally-insured credit 
unions, Sec. 701.23 applies only to FCUs. A Federally-insured State-
chartered credit union should follow the loan purchasing guidelines of 
its state regulator.
Loan Acquisitions Involving Table Funding Arrangements
    The agencies invited comment on whether a regulated lender that 
provides table funding to close a loan originated by a mortgage broker 
or mobile home dealer should be deemed to be ``making'' or 
``purchasing'' the loan for purposes of the flood insurance 
requirements. In the typical table funding situation, the party 
providing the funding reviews and approves the credit standing of the 
borrower and issues a commitment to the broker or dealer to purchase 
the loan at the time the loan is originated. Frequently, all loan 
documentation and other statutorily mandated notices are supplied by 
the party providing the funding, rather than the broker or dealer. The 
funding party provides the original funding ``at the table'' when the 
broker or dealer and the borrower close the loan. Concurrent with the 
loan closing, the funding party acquires the loan from the broker or 
dealer. While the transaction is, in substance, a loan made by the 
funding party, it is structured as the purchase of a loan. The preamble 
to the proposal indicated that the agencies were inclined to treat 
table funded loans like loans made, rather than purchased, by the 
funding party.
    The preamble to the proposal outlined guidance provided by the 
regulations of the Department of Housing and Urban Development (HUD) 
implementing the Real Estate Settlement Procedures Act of 1974 (RESPA), 
12 U.S.C. 2601-2616,15 and the Financial Accounting Standards 
Board (FASB) 16 for distinguishing between making and purchasing 
loans.
---------------------------------------------------------------------------

    \15\ See 24 CFR 3500.2, 3500.5(b)(7).
    \16\ See FASB, Emerging Issues Task Force (EITF) Abstracts, EITF 
Issue No. 92-10, ``Loan Acquisitions Involving Table Funding 
Arrangements,'' 1993 (interpreting FASB Statement of Financial 
Accounting Standards No. 65, ``Accounting for Certain Mortgage 
Banking Activities'') (FASB Statement No. 65). This EITF table 
funding interpretation elaborated on guidance that has been 
superseded. See FASB, Statement of Financial Accounting Standards 
No. 122, ``Accounting for Mortgage Servicing Rights,'' May 1995 
(superseding FASB Statement No. 65).
---------------------------------------------------------------------------

    The agencies invited comment on: (1) their position that a table 
funded transaction is more like the making of a loan by the provider of 
funds than a purchase of a loan in the secondary market; and (2) 
whether the RESPA or FASB standard is a more appropriate guideline for 
defining a table funded transaction as either the making or the 
purchase of a loan.
    The agencies received 40 letters on this issue. Twenty commenters 
agreed with the agencies that a table funded transaction is more like 
making a loan, eight believed the transaction is more like a loan 
purchase, and seven expressed some other view. Some commenters 
addressed only whether the RESPA or FASB standards provided more 
appropriate guidance. Fourteen commenters supported the RESPA standard 
while thirteen supported the FASB standard.
    The commenters who favored the RESPA standard asserted that RESPA 
provides a better model for determining the appropriate treatment of 
table funded transactions because it reflects the realities of the 
market place and focuses on the structure of the transaction. Some 
commenters also noted that it would be less confusing and burdensome 
for lenders, and less likely to result in errors by lenders, to treat 
the same transaction in a consistent manner for purposes of both RESPA 
and the Reform Act.
    The commenters who supported the FASB standard asserted that it is 
clearer and more workable. Some stated that the broker or dealer 
originating the transaction is usually responsible for the

[[Page 45689]]

flood hazard determination. If the transaction is not treated as a loan 
purchase, the acquiring regulated lender would have to perform a 
duplicative flood hazard determination--and the duplicative costs would 
have to be absorbed by the lender or borrower.
    The joint final rule reflects the agencies' position that, for 
flood hazard determination purposes, the substance of the table funded 
transaction should control and that the typical table funded 
transaction should be considered a loan made, rather than purchased, by 
the entity that actually supplies the funds. Regulated lenders who 
provide table funding to close loans originated by a mortgage broker or 
mobile home dealer will be considered to be ``making'' a loan for 
purposes of the flood insurance requirements. The agencies believe that 
this treatment most closely reflects the realities of such 
transactions, which are purchases only in a technical sense. The 
presence of a mortgage broker or a mobile home dealer in the 
transaction should not obscure the fact that the entity supplying the 
funds is actually primarily responsible for the credit decision and 
will bear any risk inherent in the loan upon completion of the 
transaction.
    The agencies have also concluded that it is appropriate to use the 
RESPA standard to define when a table funded loan will be treated as 
the making of a loan. Under the current RESPA regulations, table 
funding is defined as a settlement at which a loan is funded by a 
contemporaneous advance of loan funds and an assignment of the loan to 
the person advancing the funds. This RESPA definition is used to 
determine whether a transaction will be treated as a loan or as a 
secondary market transaction. The funding entity is responsible for 
meeting the disclosure requirements of RESPA if the transaction is a 
loan; the funding entity generally would have no responsibilities under 
RESPA if the transaction is a secondary market transaction. The purpose 
for which the RESPA standard was developed is therefore similar to the 
purpose for which the standard would be used in connection with the 
flood insurance regulations.
    The FASB standard referenced in the proposal, on the other hand, 
was intended to provide guidance to lenders on the proper accounting 
treatment for mortgage servicing rights and loan origination costs, and 
focused on factors such as which entity is the first titled owner of 
the loan, whether the broker is independent of the lender and sells 
loans to more than one lender, and whether the broker has been 
indemnified by the lender for the market and credit risks connected 
with the loan. Based on these criteria, the FASB guidance permitted 
transactions to be treated as purchased loans even where the lender had 
a significant level of involvement in the underwriting process.
    In order to ensure that lenders are aware of the treatment of table 
funded transactions, the joint final rule includes a definition of 
table funding that is identical to the current RESPA definition. The 
joint final rule also states that a lender that acquires a loan from a 
mortgage broker or other entity through table funding will be 
considered to be making a loan for the purposes of the joint final 
rule.
    The agencies also note that treating table funded loans as loans 
made by the funding entity need not result in duplication of flood 
hazard determinations and borrower notices, a possibility that 
concerned several commenters. The funding entity may delegate to the 
broker or dealer originating the transaction the responsibility for 
fulfilling the flood insurance requirements or may otherwise divide the 
responsibilities with the broker or dealer, as is currently done with 
respect to the RESPA requirements.
Applicability of Federal Flood Insurance Requirements to Subsidiaries
    In the preamble to the proposal, each of the agencies briefly 
discussed the applicability of its flood insurance rules to the 
subsidiaries of the institutions it regulates. The OCC noted that a 
national bank's operating subsidiary is subject to the rules applicable 
to the operations of its parent bank as provided under 12 CFR 5.34. 
Similarly, the Board noted that a state member bank's operating 
subsidiary is subject to the rules applicable to the operations of its 
parent bank, and the OTS said that a savings association's operating 
subsidiary is subject to the rules applicable to its parent thrift. The 
FDIC stated that its authority to regulate insured nonmember banks 
extends to activities that such institutions may conduct through a 
subsidiary. The FCA indicated that a Farm Credit System service 
corporation does not have the authority to extend credit. The NCUA 
indicated that a credit union's subsidiary organization, called a 
credit union service organization (CUSO), is not a ``regulated lending 
institution'' subject to the Reform Act, but as a practical matter, a 
CUSO must adhere to the flood insurance requirements. The agencies also 
indicated that the question of whether the Federal flood insurance 
statutes apply to a mortgage banking subsidiary of a regulated lending 
institution is mooted to some extent by the Reform Act's amendment 
requiring Fannie Mae and Freddie Mac to ensure that flood insurance 
requirements are met for the loans they purchase.
    The OTS also noted in the proposal that its current regulations did 
not apply to service corporations but that the OTS interpreted the 
Reform Act's new definition of ``regulated lending institution,'' 
including the phrase ``similar institution subject to the supervision 
of a Federal entity for lending regulation,'' to include subsidiaries 
of thrift institutions that are service corporations. The OTS proposed 
to apply its flood insurance regulations to service corporations that 
engage in mortgage lending. The OTS believed that this position was 
consistent with the Reform Act's statutory language and Congressional 
intent, and would ensure uniform and consistent treatment for regulated 
financial institutions.
    The FDIC invited comment on its proposed interpretation to require 
subsidiaries of insured nonmember banks that engage in lending secured 
by real estate to comply with the flood insurance requirements.
    The agencies received eight comment letters on this issue. Seven 
supported the OTS's and FDIC's positions. One, a thrift trade 
association, opposed extending flood insurance regulations to service 
corporations because of the unfair burden that would be placed on bank 
and thrift subsidiaries relative to mortgage bankers. The agencies 
received one comment letter that supported the NCUA's position.
    Based on the commenters' responses and the desire for regulatory 
consistency, the OTS's portion of the joint final rule applies to 
service corporations. The OTS believes that the purpose of the Federal 
flood insurance statutes is best served by treating loans made by 
service corporations in the same way as loans made elsewhere in the 
corporate structure by the thrift institution or its operating 
subsidiaries. The FDIC's portion of the joint final rule makes 
subsidiaries of insured nonmember banks subject to Federal flood 
insurance requirements by defining the term ``bank'' to include a 
subsidiary of such institutions. The positions of the other agencies, 
as reflected in their statements in the preamble to the proposal, are 
unchanged.
Exemptions
    The proposal retained the exemption from the basic flood insurance 
requirement for State-owned property that is self-insured in a manner

[[Page 45690]]

satisfactory to the Director of FEMA, and added the Reform Act's new 
exemption for loans with an original principal balance of $5,000 or 
less and a repayment term of one year or less. The agencies received 19 
comment letters on this issue. Fifteen commenters requested expansion 
of the statutory exemption for loans in the amount of $5,000 or less 
with a term of one year or less. Because the exemption has been 
established by statute (see 42 U.S.C. 4012a(c)(2)), it may only be 
expanded by a legislative amendment. The joint final rule therefore 
adopts the language as proposed.
Escrow of Flood Insurance Payments
    Definition of residential improved real estate. As required by the 
Reform Act, the proposal stated that a regulated lender must require 
the escrow of flood insurance premiums for loans secured by residential 
improved real estate if the lender requires the escrow of other funds 
to cover other charges associated with the loan, such as taxes, 
premiums for hazard or fire insurance, or any other fees. The proposal 
also cautioned that, depending on the type of loan, the escrow account 
for flood insurance premiums may be subject to section 10 of RESPA, 12 
U.S.C. 2609,17 which generally limits the amount that may be 
maintained in escrow accounts for consumer mortgage loans, and requires 
notices containing escrow account statements for those accounts.
---------------------------------------------------------------------------

    \17\ The regulations of HUD implementing section 10 appear at 24 
CFR 3500.17 (1995); see also 60 FR 8812 (Feb. 15, 1995), 60 FR 24734 
(May 9, 1995), 61 FR 13232 (Mar. 26, 1996) and 61 FR 29238 (June 7, 
1996) (revising Sec. 3500.17).
---------------------------------------------------------------------------

    There are differences between the scope of the Reform Act's 
coverage and the scope of RESPA's coverage that raise a question about 
how the two laws should be applied together. The Reform Act's escrow 
provision applies to loans secured by ``residential improved real 
estate,'' a term defined in the Reform Act as improved real estate for 
which the improvement is a residential building.18 This definition 
does not distinguish between mortgage loans secured by one to four 
family residential buildings and commercial loans secured by 
residential buildings. Under the language of the proposal, therefore, 
the Reform Act's escrow provision applied to both home mortgage loans 
and commercial loans--including, for example, mortgages on apartment 
buildings or construction loans secured by residential buildings--but, 
only if the lender requires the escrow of other charges for those 
loans.
---------------------------------------------------------------------------

    \18\ 42 U.S.C. 4012a(d)(4). The proposal defined the term as 
real estate upon which a home or other residential building is 
located or to be located.
---------------------------------------------------------------------------

    RESPA, on the other hand, applies to a ``federally related mortgage 
loan,'' which is defined as a loan secured by a first or subordinate 
lien on residential real property designed principally for the 
occupancy of from one to four families.19 Further, by regulation 
HUD has determined that RESPA does not cover construction financing, 
loans primarily for business, commercial, or agricultural purposes, 
loans secured by 25 acres or more of real estate, whether residential 
or commercial, and loans on vacant or undeveloped property not 
developed within two years.20 Similarly, the limits on amounts 
escrowed and the escrow account statement requirements prescribed by 
RESPA section 10, which is the only RESPA section that the Reform Act 
makes applicable to flood insurance premiums, apply only to consumer 
mortgage loans.
---------------------------------------------------------------------------

    \19\ 19 12 U.S.C. 2602(1)(A).
    \20\ See 24 CFR 3500.5(b).
---------------------------------------------------------------------------

    In the proposal, the agencies resolved the differences between the 
scope of coverage of the two statutes by applying RESPA section 10 only 
to flood insurance escrow accounts for loans that are already subject 
to RESPA generally, i.e., escrows for consumer mortgage loans. The 
agencies took the position that (1) the escrow of flood insurance 
premiums is required whenever the lender escrows other charges 
associated with the loan, but (2) the detailed requirements of RESPA 
section 10 do not apply unless the loan itself is subject to RESPA.
    The agencies received 20 comments on the scope of the escrow 
requirement. Five commenters generally agreed with the proposal, while 
15 requested additional clarification on specific matters. Five 
commenters said that the term residential improved real estate as 
defined in the proposal could be interpreted to include loans on multi-
family properties, which are mortgage loans secured by five or more 
family residential units typically processed as commercial loans made 
for a business purpose. These commenters recommended that the agencies 
limit the Reform Act's escrow requirement only to those loans that are 
subject to RESPA. Some commenters requested that the final rule 
distinguish between mortgage loans secured by one to four family 
residential units and mortgage loans secured by multi-family units, and 
asked that the definition be modified so that it applies only to the 
former type of mortgage loans. They stated that if this change were 
made, lenders would not have to escrow for flood insurance on mortgage 
loans secured by five or more family units, thereby easing their 
administrative burdens. They also pointed out that this would take 
advantage of a well-understood approach to distinguishing between loans 
on residential and other property, and thereby minimize confusion and 
increase compliance.
    Industry commenters also pointed out that loans on commercial 
property are processed quite differently from consumer loans and often 
are subject to extensive negotiation of terms. Escrows on such loans 
may reflect required property maintenance expenditures or compensating 
balances as a pricing term rather than the types of payments covered by 
escrows on consumer mortgage loans. On the other hand, FEMA, although 
observing that the Reform Act neither required nor authorized the 
agencies to require escrows on commercial properties, recommended that 
the agencies impose a similar escrow requirement on commercial property 
loans as well.
    The escrow provisions of the Reform Act are designed to improve 
compliance with flood insurance requirements by ensuring that 
homeowners located in special flood hazard areas obtain and maintain 
flood insurance for the life of the loan. The Conference Report stated 
that a major reason for the lack of compliance with the NFIP is that 
many homeowners stop paying premiums on their flood insurance 
policies.21 However, the Reform Act itself simply does not 
restrict the flood insurance escrow requirement to consumer mortgage 
loans. The determinative factor in the coverage of the escrow 
requirement is not the purpose of the loan, but the purpose of the 
building--whether it is primarily used for residential purposes.
---------------------------------------------------------------------------

    \21\ Conference Report at 198.
---------------------------------------------------------------------------

    Section 10 of RESPA, the only RESPA provision that the Reform Act 
makes applicable to flood insurance escrow accounts, limits the amounts 
that lenders and servicers may legally require borrowers to deposit in 
escrow accounts.22 In 1994, HUD amended its RESPA regulations 
23 to interpret section 10 of RESPA by establishing a nationwide 
standard escrow accounting method known as aggregate accounting and 
giving lenders and servicers specific guidance on the requirements of 
section 10. The final rule required lenders and servicers to use the 
aggregate accounting method for escrow accounts involving

[[Page 45691]]

consumer mortgage loans, instead of the method known as single-item 
analysis accounting, and provided a phase-in period for existing escrow 
accounts to convert to the aggregate accounting method.24 This 
change was intended to reduce the cost of home ownership, by ensuring 
that funds would not be held in escrow accounts in excess of the 
amounts necessary to protect lenders' interests in preserving loan 
collateral.25 It appears that Congress intended to apply the same 
section 10 limits to the new flood insurance escrow accounts required 
under the Reform Act. Because of the differences between the scope of 
coverage of the Reform Act and RESPA, however, the agencies do not 
believe that the Reform Act is intended to impose the particular 
requirements of section 10 on loans that are not subject to RESPA 
generally, for example, commercial loans secured by residential 
buildings. There is nothing in the legislative history of the Reform 
Act suggesting that Congress meant to extend the scope of section 10 of 
RESPA in this way through the enactment of the Reform Act, and absent 
specific direction from Congress, the agencies did not believe that 
they had the authority to expand RESPA's section 10 coverage to loans 
that are not otherwise subject to RESPA.
---------------------------------------------------------------------------

    \22\ 12 U.S.C. 2609.
    \23\ HUD, Final Rule on Escrow Accounting Procedures, 59 FR 
53890 (Oct. 26, 1994) (adding 24 CFR 3500.17).
    \24\ 59 FR at 53890. The rule also established formats and 
procedures for initial and annual escrow account statements.
    \25\ Id. at 53890-91.
---------------------------------------------------------------------------

    In addition, RESPA only applies to mobile home loans if they are 
also secured by real estate, whereas the Reform Act applies to mobile 
home loans whether or not secured by real estate. RESPA also exempts 
all loans secured by 25 acres or more of real estate, whether 
residential, commercial, or agricultural, whereas the Reform Act 
applies to all such loans if secured by structures primarily used for 
residential purposes. While RESPA and the Reform Act cover 
refinancings,26 the Reform Act also covers increases, extensions, 
and renewals.
---------------------------------------------------------------------------

    \26\ See Conference Report at 197.
---------------------------------------------------------------------------

    In the joint final rule, the text of the agencies' definition of 
residential improved real estate is the same as was proposed. It 
primarily covers loans that are otherwise subject to RESPA. But, 
because the Reform Act defines ``residential improved real estate'' as 
``improved real estate for which the improvement is a residential 
building,'' multi-family properties containing five or more residential 
units are covered under the Reform Act's escrow provisions, as are 
single family dwellings (including mobile homes) and two to four family 
dwellings. A construction loan, loan secured by 25 acres or more of 
real estate, or commercial loan is subject to the escrow requirements 
if the loan is secured by improved real estate primarily used for 
residential purposes and an escrow account is required in connection 
with the loan for taxes, insurance premiums, fees, and other charges. 
Finally, except for escrows on consumer mortgage loans, the escrow 
accounts established for these loans need not comply with the 
requirements of section 10 of RESPA. The agencies have also made minor 
conforming changes to the text of the escrow provision.
    Types of escrow accounts covered. Six commenters asked for 
clarification of what constitutes a ``required'' escrow. The commenters 
were divided on whether a ``voluntary'' escrow account (where the 
borrower requests the lender to establish an escrow account) should 
trigger a flood insurance escrow requirement. The Reform Act mandates a 
flood insurance escrow only when a regulated lending institution 
requires an escrow account for taxes, insurance, fees, or other 
charges. Although exclusion of voluntary escrows could lead to the 
possibility of evasion and difficulties in examining for compliance, 
the agencies do not believe that the Reform Act mandates escrow of 
flood insurance premiums in connection with escrow accounts 
specifically requested by the borrower. However, where a lender is 
escrowing for hazard insurance premiums or taxes without also escrowing 
for flood insurance premiums, the lender will have the burden of 
demonstrating that the escrow arrangement is truly voluntary.
    In determining whether an escrow account arrangement is voluntary, 
the agencies believe it is appropriate to look to the loan policies of 
the regulated lender and the contractual agreement underlying the loan. 
If the loan documentation permits the lender to require an escrow 
account, and the lender's loan policies normally would require an 
escrow account for a loan with particular characteristics, an escrow 
account in connection with such a loan generally would not be 
considered to be voluntary. An escrow arrangement generally would be 
viewed as voluntary, however, if the policies of the lender do not 
require the establishment of an escrow account in connection with the 
particular type of loan, even though the loan documentation may permit 
a lender to require the establishment of an escrow account.
    Additionally not all accounts established in connection with a loan 
secured by residential improved real estate are considered to be escrow 
accounts that would trigger the requirement for the escrow of flood 
insurance premiums. For example, accounts established in connection 
with commercial loans for such items as interest or maintenance 
reserves or compensating balances are not considered to be escrow 
accounts for the purposes of this provision. As a general matter, 
accounts established in connection with the underlying agreement 
between the buyer and seller or that relate to the commercial venture 
itself, rather than to the protection of the property, would not be 
considered to trigger the escrow requirements for flood insurance 
premiums.
    Several commenters asked if the requirement to escrow flood 
insurance premiums would be triggered only if other escrows were 
required on the particular loan in question, rather than if the 
institution generally required escrows on other loans of similar type. 
The agencies agree that the final rule should be applied on a loan-by-
loan basis within similar types of loans.
    Several commenters asked whether voluntary payments for credit life 
insurance would trigger a flood insurance escrow. The agencies note, as 
did some of these commenters, that HUD takes the position that 
voluntary payments for credit life insurance do not constitute escrows 
for purposes of RESPA,27 and, accordingly, believe that payments 
under credit life insurance and similar types of contracts should not 
trigger the escrow of flood insurance premiums. Escrows for hazard 
insurance such as fire, storm, wind, or earthquake are the types of 
insurance that trigger the requirement to escrow flood insurance 
premiums if such insurance is required on the loan.
---------------------------------------------------------------------------

    \27\ See 60 FR 24733 (May 9, 1995) (revising 24 CFR 3500.17).
---------------------------------------------------------------------------

    Various commenters opposed flood insurance escrows in general or 
thought that insurance companies or municipalities would be the logical 
entities to enforce the purchase and maintenance of flood insurance. 
However, the agencies note that the requirement is mandated by the 
Reform Act. Other commenters pointed out that their institutions lack 
the capability for escrows, either in general or with respect to mobile 
homes. Both the statute and this joint final rule specify that escrow 
of flood hazard insurance payments is required only when other payments 
also are escrowed.

[[Page 45692]]

Forced Placement
    The proposal set forth the requirement imposed by the Reform Act on 
a regulated lender or a servicer acting on its behalf to purchase or 
``force place'' flood insurance for the borrower if the lender or the 
servicer determines that adequate coverage is lacking. The agencies 
received 31 comments on this issue.
    Four commenters asked if a loan could be made without flood 
insurance in place provided the lender gave notice to the borrower at 
closing that flood insurance must be obtained by the borrower within 45 
days from the date of closing and that the lender would force place 
insurance if the borrower had not complied by the end of that period. 
Section 102(e)(2) of the 1973 Act, as amended, 42 U.S.C. 4012a(e)(2), 
provides for forced placement of flood insurance 45 days after the 
borrower is notified of deficient flood insurance coverage. The 
agencies do not interpret this provision of the Reform Act as granting 
a borrower 45 days from loan closing to arrange for flood insurance on 
the security property.
    The agencies believe that the addition of the forced placement 
authority does not lessen the need for flood insurance to be in place 
at the time a loan is made. Section 102(e) of the 1973 Act provides 
that the agencies must require a regulated lending institution not to 
make, increase, extend, or renew any loan secured by improved real 
property located in a SFHA unless the security property is covered by 
the minimum amount of flood insurance required by the statute. The 
agencies interpret this provision to mean that the flood insurance 
regulations must require that such insurance be in place at the time a 
lender makes a loan that is secured by improved real property located 
in a SFHA.
    The agencies believe that the forced placement provision of the 
Reform Act is designed to complement the other statutory tripwires for 
ensuring that security property located in a SFHA is adequately covered 
by flood insurance. As a practical matter, forced placement should not 
be necessary at the time of making, increasing, extending, or renewing 
a loan, when the lender is obligated to require that flood insurance be 
in place. Rather, forced placement authority is designed to be used if, 
over the term of the loan, the lender or its servicer determines that 
flood insurance coverage on the security property is deficient under 
section 102(e) of the 1973 Act.
    To further emphasize this point, the agencies are removing the 
phrase ``at the time of origination or'' from the final version of the 
forced placement regulation. The agencies realize that this phrase 
tracks the statutory language set forth in section 102(e)(1) of the 
1973 Act. The agencies believe, however, that the removal of this 
phrase will not substantively alter the requirements of the rule since 
this joint final rule still provides, in accordance with the statute, 
that a lender or servicer acting on its behalf is under a duty during 
the term of a designated loan to force place insurance if the lender or 
servicer acting on the lender's behalf determines that the security 
property is not adequately insured. The removal of this phrase 
clarifies (1) that flood insurance coverage must be in effect at the 
time of closing of a designated loan, and (2) the duties of a lender or 
its servicer with respect to forced placement of flood insurance.
    One commenter requested clarification as to the precise amount of 
flood insurance a lender or servicer acting on its behalf is required 
to force place. Section 102(b)(1) of the 1973 Act, as amended, 42 
U.S.C. 4012a(b)(1), states that security property located in a SFHA 
must be covered for the term of the loan by flood insurance in an 
amount at least equal to the outstanding principal balance of the loan 
or the maximum limit of coverage available under Federal flood 
insurance statutes, whichever is less. A regulated lender must 
therefore initiate procedures to force place flood insurance whenever 
the amount of coverage in place is not equal to the lesser of the 
outstanding principal balance of the loan or the maximum stipulated by 
statute for the particular category of property securing the loan. The 
amount that must be force placed is equal to the difference between the 
present amount of coverage and the lesser of the outstanding principal 
balance or the maximum coverage limit.
    One commenter suggested that forced placement should be at the 
lender's discretion while another commented that the final rule should 
state that lenders have both the legal authority and obligation to 
force place flood insurance. The agencies wish to make it plain that 
under section 102(e) of the 1973 Act lenders are both authorized and 
obligated to force place flood insurance if necessary. The joint final 
rule therefore provides that a lender, or servicer acting on the 
lender's behalf, upon discovering that security property is not covered 
by an adequate amount of flood insurance, must, after providing notice 
and an opportunity for the borrower to obtain the necessary amount of 
flood insurance, purchase flood insurance in the appropriate amount on 
the borrower's behalf.
Portfolio Review
    The preamble to the proposal indicated that neither the Reform Act 
nor the proposed rule required a regulated lending institution or 
servicer acting on the lender's behalf to conduct a review of all loans 
in portfolio as of September 23, 1994, that is, a retroactive portfolio 
review. The Reform Act does not revise the list of events that trigger 
a determination (the making, increasing, renewing, or extension of a 
loan, sometimes referred to as the statutory tripwires). The proposal 
also indicated that a requirement for retroactive portfolio review 
would impose a costly and unnecessary burden on regulated lending 
institutions.
    Similarly, the agencies did not propose to require a regulated 
lending institution or servicer acting on its behalf to conduct 
portfolio reviews on a prospective basis. The preamble noted that the 
1968 and 1973 Acts, as amended by the Reform Act, do not prescribe 
portfolio review as the means that a lender or servicer acting on its 
behalf must use to determine whether security property is adequately 
covered by flood insurance. The flood statutes do not require that 
determinations be made at any particular time, other than in connection 
with making, increasing, extending, or renewing a loan. Nonetheless, 
the preamble indicated that a regulated lending institution and 
servicer acting on its behalf should develop policies and procedures to 
ensure that, when a determination has been made that property securing 
a loan is located in a SFHA, they satisfy the requirements of the 
Reform Act's forced placement provision.
    The proposal also noted that it might be appropriate as a matter of 
safety and soundness for the agencies to ensure that institutions that 
are significantly exposed to the risks for which flood insurance is 
designed to compensate determine the adequacy of flood insurance 
coverage by (1) periodic reviews, or (2) reviews triggered by remapping 
of areas represented in a regulated lending institution's loan 
portfolio.
    The agencies invited comment on the advisability of issuing 
guidance in this area and on how the guidance should differentiate 
among regulated lending institutions based on their levels of exposure 
to flood risk. In particular, the agencies invited comment on the 
methods that regulated lending institutions already use or are 
considering for determining the adequacy of flood insurance coverage;

[[Page 45693]]

the cost (or other burden) associated with portfolio reviews; and on 
whether the additional loans for which flood insurance would be 
required as a result of portfolio reviews would be significant in 
relation to a regulated lending institution's or its servicer's 
portfolio.
    The agencies received 76 comment letters on this issue, the most 
letters received on one topic. Forty-four commenters agreed with the 
agencies' view that the Reform Act does not require retroactive or 
prospective portfolio review. The same number agreed with the agencies' 
view that the final rule should not impose a requirement for 
retroactive or prospective portfolio reviews. Eleven commenters urged 
the agencies not to issue additional guidance as a safety and soundness 
matter for institutions that are significantly exposed to the risks for 
which flood insurance is designed to compensate. However, fourteen 
commenters recommended that the agencies issue informal guidance 
addressing, for example, when an institution is ``significantly 
exposed.''
    Twenty commenters stated that the decision whether to engage in 
portfolio review should be left to the lender. Six recommended that the 
decision should be determined as a result of examinations, and not 
dictated in advance by regulations or agency guidance. Some of these 
commenters stated that the agencies should impose a portfolio review 
burden only on those individual institutions found in examinations to 
have inadequate systems in place. Others recommended that safety and 
soundness issues with respect to the adequacy of flood insurance should 
be handled on a case-by-case basis through the examination process.
    An issue that generated significant comment is whether the Reform 
Act's forced placement provision implicitly imposes on lenders an 
affirmative obligation to monitor loans for FEMA map changes for the 
life of the loan. Ten commenters requested the agencies to address this 
uncertainty in the final rule.
    Nine commenters questioned whether the agencies' position on 
portfolio review is consistent with the forced placement language of 
the Reform Act. These commenters stated that the forced placement 
provision appears to require some action on the lender's part in 
response to remappings, as a lender will not know whether to force 
place flood insurance unless it is apprised of changes in the flood 
zone status of the property. These commenters indicated that the 
preamble's statement that prospective portfolio review is not required 
implies that a lender is not required to monitor for map changes 
subsequent to origination. Another commenter also pointed out that in 
order to comply with the forced placement provision, a lender may be 
obliged to conduct a retroactive portfolio review to determine whether 
it is required to force place insurance on any loans in its portfolio.
    Fourteen commenters, however, stated that prospective monitoring is 
not required because the Reform Act did not group map changes with the 
statutory tripwires listed in the basic purchase provision of the 
Reform Act. In their view, a lender does not have a duty to track for 
map changes. Seven commenters recommended that the final rule 
explicitly state that there is no duty to track for map changes or that 
ongoing monitoring is not required. Others pointed out that a 
requirement to make flood determinations upon remapping alone, without 
an intervening tripwire event, would impose costly and unnecessary 
burdens on lenders.
    One commenter urged that the final rule provide that the lender's 
flood determination obligation after loan origination is limited only 
to the tripwire events, unless the lender, for its own portfolio risk 
management reasons, wishes to adopt a different approach. Fourteen 
commenters suggested that life of loan monitoring is one less expensive 
method lenders could use, pointing out that the cost for ongoing 
tracking of loans for flood map changes would be lower than the cost of 
performing periodic reviews or entire portfolio reviews triggered by 
remappings. Five commenters stated that the additional loans for which 
flood insurance would be required as a result of portfolio reviews 
would be insignificant in relation to the lender's or its servicer's 
portfolio.
    The agencies reiterate their view that the Reform Act does not 
require lenders to engage in retroactive or prospective portfolio 
reviews or any other specific method for carrying out their 
responsibilities under the Federal flood insurance statutes. The Reform 
Act clearly requires lenders to check the status of security property 
for loans when triggered by the statutory tripwires. The Reform Act did 
not add remappings to the list of statutory tripwires. The Reform Act 
does not require lenders to monitor for map changes, and the agencies 
will not impose such a requirement by regulation. The joint final rule 
does not require that determinations be made at any time other than 
when a loan is made, increased, extended, or renewed. If, however, at 
any time during the life of the loan, the lender, or servicer acting on 
the lender's behalf, determines that required flood insurance is 
lacking, the Reform Act requires the lender, or servicer acting on the 
lender's behalf, to initiate forced placement procedures. A lender, or 
servicer acting on the lender's behalf, continues to be responsible for 
ensuring that where flood insurance was required at origination, the 
borrower renews the flood insurance policy and continues to renew it 
for as long as flood insurance is required for the security property. 
If a borrower allows a policy to lapse when insurance is required, the 
lender, or servicer acting on its behalf, is required to commence 
forced placement procedures.\28\
---------------------------------------------------------------------------

    \28\ The insurance provider routinely notifies the lender, or 
servicer acting on behalf of the lender, along with the borrower 
when the insurance contract is due for renewal. The insurance 
provider also routinely notifies the lender or its servicer as well 
as the borrower if the insurance provider has not received the 
policy renewal.
---------------------------------------------------------------------------

    The preamble to the proposal stated that depending on the location 
and activities of a lender, adequate flood insurance coverage may be 
important from a safety and soundness perspective as a component of 
prudent underwriting and as a means of protecting the lender's ongoing 
interest in its collateral. The agencies believe that each lender is in 
the best position to tailor its flood insurance policies and procedures 
to suit its business. Lenders should evaluate and, when necessary, 
modify their flood insurance programs to comport with both the 
requirements of Federal flood insurance statutes and regulations and 
principles of safe and sound banking. The agencies believe that more 
experience should be gained before a decision is made that further 
guidance is necessary for institutions in areas that have significant 
exposure to flood hazards. The agencies caution, however, that an 
institution with a lending area that includes communities that are 
subject to significant flood hazards, but that do not participate in 
the NFIP, presents special problems that may not be adequately 
addressed by the procedures generally used to limit flood risks, such 
as monitoring of remappings and other procedures.
Penalties
    The proposal noted that the penalty provisions of the Reform Act 
are self-executing and do not require the agencies to develop 
regulations to implement them. Thus, the agencies did not propose 
regulations on the penalty provisions. The agencies received six 
comment letters on this issue. Two recommended that the final rule set 
out the statutory provisions contained in

[[Page 45694]]

section 102(f) and (g) of the 1973 Act, as amended by the Reform Act, 
42 U.S.C. 4012a(f) and (g). Two others requested that the final rule 
provide guidance on how the agencies intend to implement the broad 
enforcement authority given to them to take remedial action under 
section 102(g) of the 1973 Act. One asked the agencies to provide 
guidance on how the phrase ``pattern or practice'' of noncompliance 
will be construed, expressing the concern that interpretations should 
be uniform and not left completely to the discretion of individual 
examiners. The agencies have determined not to repeat the provisions of 
the statute in the joint final rule.
    One commenter suggested that the final rule refer to the procedural 
rules that apply to such enforcement actions. The uniform rules of 
practice and procedure for agency administrative enforcement actions 
developed by the OCC, Board, FDIC, OTS, and NCUA (Uniform Rules) apply 
to such actions. Those rules were amended recently to apply the Uniform 
Rules to the civil money penalty provisions and the remedial actions 
described in section 102(f) and (g) of the 1973 Act.\29\
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    \29\ See 61 FR 28021 (June 4, 1996) and 61 FR 20330-20356 (May 
6, 1996). The FCA expects to make similar amendments to its rules of 
practice. See 12 CFR part 662.
---------------------------------------------------------------------------

Determination Fees
    General. The proposed rule included a provision that set forth the 
authorization conferred by the Reform Act on a lender, or servicer 
acting on the lender's behalf, to charge a reasonable fee for the costs 
of making a flood hazard determination under specified circumstances: 
if the borrower initiates the transaction (making, increasing, 
extending, or renewing a loan) that triggers a flood hazard 
determination; if the determination reflects FEMA's revision of flood 
maps; or if the determination results in the purchase of flood 
insurance by the lender, or servicer acting on behalf of the lender, 
under the forced placement provision.
    The agencies received 43 comment letters on this issue. Fifteen 
commenters requested that the final rule clarify that the authority to 
charge a reasonable fee for the costs of making a flood hazard 
determination covers a ``life-of-loan'' charge to the borrower that 
would pay for monitoring of the flood hazard status of the security 
property for the term of the loan. The agencies believe that the 
statutory authority to charge a borrower a reasonable fee for a flood 
hazard determination does extend to a fee for life-of-loan monitoring 
by either the lender, or servicer acting on behalf of the lender, or by 
a third party, such as a flood hazard determination company.
    While the Reform Act specifies the circumstances that may give rise 
to the charging of a determination fee, the Act does not expressly 
provide what may be included in the determination fee nor does the 
joint final rule adopt a rigid definition. However, the agencies agree 
that a determination fee may include, among other things, reasonable 
fees for the costs of an initial flood hazard determination, as well as 
reasonable fees for a lender, servicer, or third party to monitor the 
flood hazard status of a security property during the life of a loan 
for purposes of making determinations on an ongoing basis. 
Consequently, the joint final rule has been clarified to provide that a 
determination fee may include, but is not limited to, a life-of-loan 
monitoring fee. Because the authority to charge a life-of-loan 
monitoring fee is based on the authority to charge a determination fee, 
the monitoring fee may be charged only if one of the specified events 
in the statute occurs.
    A commenter asked whether the authority to charge a reasonable 
determination fee extended to a situation where there has been a 
remapping, but the security property was found not to be in a SFHA. 
Section 102(h) of the 1973 Act, 42 U.S.C. 4012a(h), does not 
distinguish between positive and negative flood hazard determinations 
in its authorization to charge a reasonable fee for that service in the 
event of a remapping. Consequently, the agencies believe that a lender, 
or servicer acting on the lender's behalf, may charge a fee in either 
situation.
    One commenter inquired whether authority to charge determination 
fees extended only to determinations by third parties. Section 102(h) 
of the 1973 Act does not distinguish between determinations done in-
house by a lender or servicer acting on its behalf and those performed 
by another entity. The agencies believe that a lender, or servicer 
acting on its behalf, may charge a determination fee if either of the 
entities performs this service itself or if the lender or its servicer 
arranges to have a third party perform the determination.
    One commenter requested that the final rule provide that a lender 
may include out of pocket costs, internal costs, and profit as part of 
a reasonable flood hazard determination fee. Another suggested that a 
reasonable fee should cover the costs of notification, obtaining flood 
insurance, and adding flood insurance premiums to the loan balance. The 
agencies decline, however, to list all of the components of a 
reasonable flood hazard determination fee (which may include a life-of-
loan monitoring fee) in the joint final rule because that determination 
may vary depending upon circumstances and is best determined on a case-
by-case basis by the regulated lending institution.
    Truth in Lending Act Issues. Seven commenters raised issues 
concerning the interaction between the rules concerning flood insurance 
and rules under the Truth in Lending Act, 15 U.S.C. 1601 et seq., 
particularly with respect to the treatment of determination fees 
charged at consummation that include life-of-loan coverage and fees 
charged subsequent to closing.
    Some commenters argued that Regulation Z \30\ should not require 
the portion of a life-of-loan monitoring fee that is not related to the 
initial determination to be included as part of the finance charge. One 
commenter stated that, in its experience, the addition of a portion of 
the life-of-loan monitoring fee to the finance charge did not have a 
significant impact on the finance charge disclosed, although the costs 
involved in breaking down charges for the purposes of Regulation Z 
impose a burden on lenders.
---------------------------------------------------------------------------

    \30\ The Board's Regulation Z, 12 CFR part 226, implements the 
Truth in Lending Act.
---------------------------------------------------------------------------

    The official staff commentary to Regulation Z (12 CFR part 226 
(Supplement I)) explains the proper treatment of life-of-loan fees. The 
commentary states that fees for services that will be performed 
periodically during the loan term, including fees for determinations as 
to whether security property is in a SFHA, may not be excluded from the 
finance charge, regardless of when the fee is charged. The commentary 
further indicates that any portion of a fee that does not relate to the 
initial decision to grant credit must be included in the finance 
charge.\31\ If creditors are uncertain about what portion of a fee is 
related to the initial decision to grant credit, the entire fee may be 
treated as a finance charge. Further consideration of this issue would 
be beyond the scope of this rulemaking.
---------------------------------------------------------------------------

    \31\ See 12 CFR part 226, Supplement I--Official Staff 
Interpretations, 12 CFR Sec. 226.4, comment 4(c)(7)-3 (1996).
---------------------------------------------------------------------------

    Several commenters indicated that determination fees assessed after 
consummation, such as fees for a new determination following a 
remapping, should not be included as part of the finance charge 
disclosures under Regulation Z. These commenters argued

[[Page 45695]]

that whether or not a new determination will be necessary and a fee 
imposed during the loan term is unknown at the time disclosure is 
provided. Regulation Z and the commentary state that, generally, if a 
disclosure provided at or before consummation becomes inaccurate 
because of a subsequent event, the inaccuracy does not result in a 
violation. Accordingly, no additional clarification is needed.
Notice Requirements
    Borrower. The proposed rule closely tracked the specific notice 
requirements of section 1364 of the 1968 Act, as amended by the Reform 
Act, 42 U.S.C. 4104a. Moreover, like the statute, the proposal 
contained a provision authorizing regulated lending institutions to use 
an alternate form of notice in certain situations. The alternate notice 
provision allows the lender to rely on assurances from a seller or 
lessor that the seller or lessor has provided the requisite notice to 
the purchaser or lessee of the property who is the ultimate recipient, 
or borrower, of the lender's funds. The need for this alternate form of 
notice would arise, for example, in a situation where the lender is 
providing financing through a developer for the purchase of condominium 
units by multiple borrowers. The lender may not deal directly with the 
individual condominium unit purchaser and, in such a case, need not 
provide notice to each purchaser but may instead rely on the developer/
seller's assurances that the developer/seller has given the necessary 
notice. The same may be true for a cooperative conversion, in which 
case the sponsor of the conversion may be providing the required notice 
to the purchasers of the cooperative shares. A purchaser of shares in a 
cooperative may be considered to be a ``lessee'' rather than a 
purchaser with respect to the underlying real property. For the reasons 
explained later, the agencies are adopting the notice requirements 
provision essentially as it was proposed with minor revisions to 
clarify the text.
    Twenty-two commenters expressed broad support for the continued use 
of the term ``borrower'' in the notice requirement rather than the 
phrase ``purchaser or lessee'' used in the statute. The joint final 
rule retains the term ``borrower,'' except that the alternate notice 
provision has been revised to clarify that the recipient of the notice 
to the borrower in cases where the alternate method applies will be the 
purchaser or lessee of the property.
    Twenty commenters, citing increasingly compressed time frames for 
loan approval and closing in certain circumstances, requested specific 
guidance on what is meant by the ``reasonable time'' standard for 
notice delivery established by section 1364 of the 1968 Act, and 
followed by the agencies in the proposed rule. Other commenters noted 
that the ``Use of Prescribed Form of Notice'' provision of the proposed 
rule appeared to establish a conflicting standard of reasonable time--
ten days--for notice purposes. These commenters asked which standard 
controlled. The agencies believe that the statutory standard of 
providing written notification of special flood hazards within a 
reasonable period before completion of the transaction offers regulated 
lending institutions sufficient flexibility to meet the statutory goal 
of providing adequate notice to borrowers and servicers, while 
accommodating the need in appropriate circumstances for an abbreviated 
notice period.
    What constitutes ``reasonable'' notice will necessarily vary 
according to the circumstances of particular transactions. Regulated 
lending institutions should bear in mind, however, that a borrower 
should receive notice timely enough to ensure that (1) The borrower has 
the opportunity to become aware of the borrower's responsibilities 
under the NFIP; and (2) where applicable, the borrower can purchase 
flood insurance before completion of the loan transaction. In light of 
these considerations, the joint final rule does not establish a fixed 
time period during which a lender provides notice to the borrower. To 
avoid any confusion regarding application of the ``reasonableness'' 
standard to notice delivery, the proposed rule authorizing use of the 
sample form of notice provided in appendix A of the rule has been 
revised to provide that delivery of notice based on the sample form of 
notice must take place within a reasonable time before the completion 
of the transaction. The agencies generally continue to regard ten days 
as a ``reasonable'' time interval.
    Two commenters also raised questions regarding the alternate method 
of notice provision in the proposed rule. One commenter questioned 
whether the seller or lessor of the property--as opposed to the 
lender--is supposed to make the determination regarding the flood 
status of a security property pursuant to this provision. Another 
commenter questioned whether the seller or lessor must use the sample 
form of notice set forth in appendix A to the final rule.
    In response, the agencies note that this section of the joint final 
rule does not shift the burden of determining flood status from the 
lender to the seller or lessor. Rather, it implements the provision of 
section 1364(a)(1) of the 1968 Act that permits borrower notice 
delivered by a seller or lessor to substitute for lender notice so long 
as the lender receives satisfactory assurances that the notice has been 
delivered to the borrower. The prescribed contents of the notice do not 
change when the seller or lessor provides notice to the borrower. 
Before relying on the alternate form of notice, a lender must have a 
written assurance that the notice provided by the seller or lessor 
contained all the elements required by section 1364 of the 1968 Act. 
The alternate notice provision in the joint final rule is not intended 
to set a lower notification standard. The seller or lessor notice is 
subject to the same content requirement as notice by the lender, but a 
seller or lessor need not use the sample form of notice provided in 
appendix A to the final rule in order for a lender to rely on the 
notice.
    The agencies received three comments concerning the effect of the 
proposed notice provisions on lenders that finance the purchase of 
mobile homes. These commenters noted that, in some mobile home lending 
transactions, the lender may not know where the mobile home is to be 
located until just prior to the time of loan closing. In other so-
called ``home only'' transactions, the purchaser of the mobile home 
buys and finances the home separately from the land on which it 
ultimately will be located. These commenters asserted that they would 
be unable to comply with the notice requirements until they learn where 
the mobile home will be located and can thus determine whether the 
mobile home will be located in a SFHA.
    Consistent with the previous discussion in this section of the 
reasonable notice standard, the agencies believe that the notice 
requirements of the 1968 Act, as amended, can be met by lenders in 
mobile home loan transactions if notice is provided to the borrower as 
soon as practicable after determination that the mobile home is or will 
be located in a SFHA and before completion of the loan transaction. 
Particularly in those circumstances where time constraints can be 
anticipated, regulated lenders should use their best efforts to provide 
adequate notification of flood hazards to borrowers at the earliest 
practicable time.
    Moreover, the agencies will not apply the borrower notice 
requirements to those ``home only'' mobile home transactions that close 
before the permanent location for the mobile home

[[Page 45696]]

is known. Clearly, a lender cannot determine whether flood insurance is 
required before the location of the mobile home has been fixed. When 
the lender learns the location of the mobile home, the lender must 
determine whether the mobile home is in a SFHA, notify the borrower and 
require the purchase of any required flood insurance. The agencies 
recommend that lenders consider notifying borrowers in ``home only'' 
mobile home transactions, at the time the loan closes, that they will 
be required to have and pay for flood insurance if the mobile home they 
purchase is eventually located in a SFHA in a participating community. 
The joint final rule does not require this type of notice because the 
statute does not require it. The agencies' recommendation reflects 
their view that it would be prudent practice for lenders to avoid 
imposing unanticipated obligations and costs on borrowers if and when 
flood insurance becomes necessary.
    Servicer. The Reform Act added loan servicers to the entities that 
must be notified of special flood hazards, and the proposal requested 
comment on the appropriate timing of notice to the servicer. Thirty 
commenters felt that notification to the servicer in advance of the 
closing would not be possible or would serve no purpose. Commenters 
also pointed out that transfer to a servicer can take up to four months 
and that in many cases the servicer's identity will not be known until 
well after the closing. A number of alternative schedules were 
suggested, including a requirement that the notice of special flood 
hazards be transmitted to the servicer along with the other data on 
hazard insurance and taxes required to service a loan with an escrow, 
so that the servicer can escrow for flood insurance payments along with 
other escrowing for hazard insurance and taxes. In recognition that the 
servicer is often not identified prior to closing, the joint final rule 
requires notice to the servicer as promptly as practicable after the 
lender provides notice to the borrower, and provides that notice to the 
servicer must be given no later than at the time the lender transmits 
to the servicer other loan data concerning hazard insurance and taxes.
    Six commenters recommended that the final rule state that a copy of 
the notice to the borrower would suffice to fulfill the notice 
requirement to the servicer. The proposal permitted the lender to use 
the same notice for both the borrower and servicer. That provision is 
adopted without change in the joint final rule. The proposed rule also 
has been revised to explicitly state that delivery of a copy of the 
borrower's notice to the servicer suffices as notice to the servicer.
    Several commenters recommended that a separate notice to a servicer 
affiliated with the lender not be required. The agencies do not agree 
with this recommendation. The statute requires the lender to notify the 
servicer of special flood hazards, and the joint final rule reflects 
this requirement. Moreover, even in the case of servicing by an 
affiliate, the lender would ordinarily transmit a file to the servicer, 
either in writing or electronically, to enable the servicer to collect 
and disburse payments, and the notice of special flood hazards can be 
transmitted as part of that process without imposing an undue 
regulatory burden.
    The proposed rule has been revised to indicate that the notice to 
the servicer may be transmitted in written or electronic form.
    FEMA or FEMA's Designee. The joint final rule also implements the 
statutory requirement that, in connection with making, increasing, 
extending, renewing, selling, or transferring a loan secured by 
improved real estate or a mobile home located in a SFHA, regulated 
lenders notify the Director of FEMA or the Director's designee of the 
identity of the loan servicer and of any change in the servicer. Notice 
of the identity of the servicer will enable FEMA to provide notice to 
the servicer of a loan 45 days before the expiration of a flood 
insurance contract, as required by section 1364(c) of the 1968 Act, as 
amended. FEMA has designated the insurance provider as its designee to 
receive notice of the servicer's identity and of any change therein, 
and at FEMA's request this designation is stated in the joint final 
rule.
    Six commenters requested a model form of notice to the Director of 
FEMA or the Director's designee, or guidance on the information to be 
included in the notice. Some commenters suggested that, in the case of 
a loan subject to RESPA where a Notice of Transfer of servicing to the 
borrower is required, sending to the Director or the Director's 
designee a copy of such Notice of Transfer should suffice. The agencies 
believe that delivery of a copy of the Notice of Transfer, which 
includes the name, address, and other information concerning the 
servicer, may be sufficient if the sender includes enough information 
on or with the notice to enable the Director or the Director's designee 
to identify the loan and the security property. Other forms of notice 
also are sufficient if the notice provides information that enables the 
Director or the Director's designee to identify the loan, the security 
property, the servicer, and the servicer's address.
    Several commenters inquired about electronic transmission of the 
notice, and one inquired about the possibility of batch transmission. 
As in the case of notice to the servicer, the joint final rule permits 
electronic transmission of the notice to the Director or the Director's 
designee. The agencies also note that nothing in the joint final rule 
prohibits a timely batch transmission.
    Several commenters questioned the need to notify the Director or 
the Director's designee if the lender or an affiliate of the lender is 
the loan servicer. The agencies believe that the statute requires 
notice by the lender to the Director or designee of the initial 
servicer, and the joint final rule reflects this requirement. However, 
since the Director has chosen the insurance provider as his designee, 
the agencies believe that the regulatory burden of notification is 
minor because there is ordinarily an exchange of information between 
the lender and the insurance provider at the time a loan is made. 
Therefore, the agencies have not adopted this suggestion.
    Three commenters objected to notifying FEMA when a loan is sold on 
a ``service released'' basis, where the servicing is sold along with 
the loan. Failure to provide such notice would defeat the purpose of 
the requirement, however, as FEMA will have no record of the identity 
of either the owner or servicer of the loan. The joint final rule is 
therefore unchanged in this regard.
    Three commenters expressed confusion over a lender's obligation in 
the event of a subsequent transfer of servicing by a transferee 
servicer, on the grounds that the lender would not necessarily be aware 
of the transfer. The agencies note that under section 1364(b)(1) of the 
1968 Act, as amended, the duty to provide notice to FEMA follows the 
servicing, and the joint final rule reflects this. Accordingly, the 
obligation to notify the Director or designee of subsequent changes is 
transferred to the new servicer along with a transfer of servicing.
    Two commenters wanted to limit notice to the ``making'' of a loan 
and any transfer of servicing, on the grounds that notices in 
connection with increasing, extending, renewing, selling, or 
transferring a loan will be redundant. The statute, however, requires 
notice in all such cases. Moreover, in the case of a loan made before 
the effective date of the joint final rule, a notice on an increase, 
extension, renewal, sale, or transfer of the loan will be the first 
legally required notice to the Director or the Director's designee. 
Therefore, the

[[Page 45697]]

agencies have not adopted this suggestion.
    Five commenters argued that it is an unnecessary regulatory burden 
to notify FEMA when the servicing is transferred or the loan is paid 
off. The statute requires notice to the Director or the Director's 
designee when servicing is transferred, but neither the statute nor the 
joint final rule requires notice when a loan is paid off.
Appendix A--Sample Form of Notice
    The agencies received 22 comments on the sample form of notice set 
forth in appendix A of the proposed regulation. Five commenters asked 
whether use of the sample form of notice is mandatory. The agencies 
stress that use of the sample form of notice is not mandatory. A 
regulated lender may choose to use the sample form as presented in 
appendix A of the joint final rule to comply with the notice 
requirements of section 1364 of the 1968 Act. In addition, lenders may 
personalize, change the format of, and add information to the sample 
form if they wish to do so. The agencies stress that the sample form 
merely provides an example of an acceptable form that notice may take. 
However, to ensure compliance with the notice requirements contained in 
the joint final rule, a lender-revised notice form must provide the 
borrower at a minimum with the information in the sample form of 
notice.
    The agencies made several changes to the sample form in response to 
suggestions from commenters. To streamline the sample form, the 
agencies combined the introductory paragraphs of the sample notice. The 
agencies adopted a language change suggested by FEMA regarding the 
statistical risk of flooding in a SFHA. To increase borrower 
recognition of their flood insurance responsibilities under the NFIP, 
the agencies added a reference to the authority and obligation of a 
regulated lender to force place flood insurance under the 1973 Act. 
Finally, to clarify that flood insurance is not available for land, the 
agencies added a sentence that with respect to the amount of flood 
insurance coverage allowable under the NFIP, the value of the land 
should be deducted from the overall value of the security property.
Use of Standard Flood Hazard Determination Form
    The proposed rule required a regulated lender to use the standard 
flood hazard determination form (SFHD form) developed by FEMA 32 
to determine whether the building or mobile home offered as security 
property is or will be located in a SFHA in which flood insurance is 
available under the 1968 Act. The proposed rule allowed the lender to 
use the form in a printed, computerized or electronic form. The 
proposed rule required the lender to retain a copy of the completed 
form, in either hard copy or electronic form, for the period of time 
the lender owns the loan.
---------------------------------------------------------------------------

    \32\ See 60 FR 35276 (July 6, 1995) (codified at 44 CFR 65.16 
and Appendix A to part 65).
---------------------------------------------------------------------------

    The agencies received 22 comments regarding use of the SFHD form. 
Four commenters raised issues dealing with the format of the form. For 
example, two commenters requested clarification about how an 
electronically maintained form could be used and whether it must be in 
the same format as the hard-copy form. FEMA addressed the format of an 
electronically maintained form in the preamble of its final rule 
adopting the SFHD form.33 FEMA stated that if an electronic format 
is used, the format and exact layout of the SFHD form is not required, 
but the fields and elements listed on the form are required. Any 
electronic format used by lenders must contain all mandatory fields 
indicated on the SFHD form.
---------------------------------------------------------------------------

    \33\ The agencies required regulated lending institutions to use 
the FEMA-devised SFHD form by means of a joint final rule issued 
without notice and comment prior to the issuance of the proposal to 
implement the other Reform Act amendments. The agencies' proposal 
incorporated that provision. See 60 FR 35286 (July 6, 1995).
---------------------------------------------------------------------------

    One commenter asked whether FEMA and the agencies could work 
together to combine the SFHD form, the notice of flood hazards to the 
borrower and servicer, and notice commencing the forced placement 
procedure. The agencies have not adopted this suggestion because the 
three documents have different purposes. The SFHD form must be used in 
connection with all loans to determine whether the security property is 
or will be located in an area having special flood hazards. On the 
other hand, the notice to the borrower and the servicer must be 
provided to the borrower and servicer only when the security property 
is located in a SFHA. The Reform Act does not require the agencies to 
develop a specific form of notice to borrowers for use in connection 
with the forced placement procedures. For example, a lender, or 
servicer acting on the lender's behalf, may choose to send the notice 
directly. Others may decide to use the insurance company that issues 
the forced placement policy to send the notice. FEMA has developed the 
Mortgage Portfolio Protection Program (MPPP) to assist lenders in 
connection with forced placement procedures. For information concerning 
the contents of the notification letters used under the MPPP, lenders 
should consult FEMA's MPPP Notice.34
---------------------------------------------------------------------------

    \34\ Notice by FEMA, 60 FR 44881 (August 29, 1995).
---------------------------------------------------------------------------

    Thirteen commenters addressed the topics of the guarantee of 
information provided by a third party and reliance on a previous 
determination under section 1365(d) and (e) of the 1968 Act. The 
agencies' proposed rule did not specifically address these issues, but 
the preamble discussed them. The preamble explained that the Reform Act 
permits lenders to rely on third-party flood hazard determinations only 
if the third party guarantees the accuracy of the information provided 
to the lender. The Reform Act also permits a lender to rely on a 
previous determination whether or not the security property is located 
in a SFHA. A lender is exempt from liability for errors in the previous 
determination if the previous determination is not more than seven 
years old and the basis for it was recorded on the SFHD form mandated 
by the Reform Act. There are, however, two circumstances in which a 
lender may not rely on a previous determination: (1) if FEMA's map 
revisions or updates show that the security property is now located in 
a SFHA, or (2) if the lender contacts FEMA and discovers that map 
revisions or updates affecting the security property have been made 
after the date of the previous determination.
    Several commenters requested clarification about the statutory 
provision that a regulated lender may not rely on a previous 
determination unless the determination was made on FEMA's SFHD form. 
The agencies believe that this is the correct reading of the statutory 
provision. Section 1365 of the 1968 Act, as amended by the Reform Act, 
42 U.S.C. 4104b, states that a person increasing, extending, renewing, 
or purchasing a loan secured by improved real estate or a mobile home 
may rely on a previous determination if the basis for the previous 
determination was set forth on FEMA's SFHD form.
    Two commenters pointed out that pursuant to section 1365 of the 
1968 Act, a lender cannot rely on a previous determination set forth on 
a SFHD form when it makes a loan, only when it increases, extends, 
renews or purchases a loan. The agencies agree with this interpretation 
of section 1365 of the 1968 Act but note that subsequent transactions 
by the same lender with respect to the same property will be

[[Page 45698]]

treated as renewals and will require no new determination.
    The agencies adopt this provision as proposed.
Recordkeeping Requirements
    The proposed rule included two recordkeeping requirements: (1) 
retention of a copy of the completed SFHD form, in either hard copy or 
electronic form, for the period of time the regulated lender owns the 
loan; and (2) retention of the record of the receipt of notice to the 
borrower and the servicer for the period of time the regulated lender 
owns the loan. In addition, the agencies asked for comment on whether 
the final rule should require the lender to retain in its files a copy 
of each notice to FEMA of the identity of the servicer and/or a copy of 
each mandatory notice to borrowers and servicers. The agencies received 
58 comment letters addressing these and other issues pertaining to 
recordkeeping.
    Of the 25 comment letters addressing whether the final regulation 
should require the lender to retain in its files a copy of the notice 
to FEMA of the identity of the servicer, 19 commenters believed that 
such a requirement is unnecessary. Like the proposed rule, the joint 
final rule does not require that the lender retain in its loan files a 
copy of the notice to FEMA of the identity of the loan servicer. The 
joint final rule continues to implement the statutory requirement that 
lenders must notify FEMA in writing of the identity of the loan 
servicer and/or of a transfer in servicing rights.
    Commenters were mixed in their views whether a regulated lender 
should be required to maintain a copy in its loan files of the notice 
to the borrower and the servicer. The joint final rule does not require 
that a copy of these notices be maintained in the loan files because 
the Reform Act does not require it.
    Like section 1364 of the 1968 Act, as amended, and the proposed 
rule, the joint final rule requires lenders to retain a record of the 
receipt of the notices by the borrower and the servicer for the period 
of time the lender owns the loan. A number of commenters requested 
clarification about what constitutes a ``record of receipt.'' The joint 
final rule does not prescribe a particular form for the record of 
receipt. However, the agencies believe that the record of receipt 
should contain a statement from the borrower indicating that the 
borrower has received the notification. Examples of records of receipt 
may include a borrower's signed acknowledgment on a copy of the notice, 
a borrower-initialed list of documents and disclosures that the lender 
provided the borrower, or a scanned electronic image of a receipt or 
other document signed by the borrower. A lender may keep the record of 
receipt provided by the borrower and the servicer in the form that best 
suits the lender's business practices.
    Two commenters supported the requirement that lenders must retain a 
copy of the completed SFHD form, in either hard-copy or electronic 
form, for the period of time the lender owns the loan. One commenter 
stated that a copy of the completed form should be retained in the 
appropriate loan file; the other commenter stated that it need not 
necessarily be kept in the loan file. The agencies have adopted the 
SFHD form retention requirement of the proposed rule unchanged. The 
joint final rule does not specify the location where the copy must be 
kept. A lender may, but is not required to, retain the copy in the 
relevant loan file.
    Seven commenters stressed that lenders should be able to retain 
both the record of the receipt of the notices by the borrower and the 
servicer and the SFHD form in electronic form. As discussed earlier, 
lenders may retain these records electronically. Lenders are expected, 
however, to be able to retrieve these electronic records within a 
reasonable time pursuant to a document request from their Federal 
supervisory agency.
Agricultural Lending Considerations
    Six commenters responded to the discussion in the preamble to the 
proposal on agricultural lending considerations. The comments generally 
related to the characteristics that make agricultural lending different 
from other types of commercial and residential mortgage lending for 
purposes of flood insurance. Unlike residential lending, where most of 
the value of the loan collateral is in the residence, in agricultural 
lending the value of the collateral is concentrated not only in the 
land, but also in multiple farm buildings. The commenters asserted that 
it will be difficult to value agricultural buildings for flood 
insurance purposes. Some agricultural buildings have valuable utility 
to farm operations but are of relatively nominal market value. Other 
buildings may have a higher market value but comprise a relatively low 
percentage of the total loan collateral. Commenters also opined that 
many agricultural structures would suffer little damage in a flood. To 
the extent that NFIP flood insurance pricing does not recognize 
differences in the market value and susceptibility to flood damage of 
various agricultural structures, commenters asserted that borrowers of 
regulated agricultural lenders will be forced to pay the same rates for 
flood insurance as are applicable to other types of commercial 
structures. Thus, these commenters maintained that participation in the 
NFIP may be disproportionately expensive for regulated agricultural 
lenders and their borrowers.
    To address these issues, one commenter requested reconsideration of 
the appropriateness of the proposed regulation for agricultural 
lending. Another commenter suggested that the agencies create a 
separate definition for agricultural buildings that would make it 
possible to treat agricultural structures on a collateral property as a 
group for flood insurance purposes.
    While recognizing that agricultural lenders and their borrowers may 
be in a different position from others affected by the requirements of 
the NFIP, the agencies have concluded that Congress did not intend to 
differentiate agricultural from other types of lenders in the Federal 
flood insurance legislation. Agricultural lending by commercial banks, 
thrifts, and credit unions has been covered by the flood insurance 
statutes since the passage of the 1973 Act. The Reform Act extended the 
scope of the NFIP to the institutions of the Farm Credit System, which 
lend substantially in the agricultural sector. The Reform Act clearly 
identifies the regulated lending institutions covered by the NFIP and 
offers no leeway for a regulatory exclusion of agricultural lenders. 
Similarly, issues related to pricing of flood insurance, while 
obviously significant to regulated lenders and their borrowers, are not 
within the regulatory purview of the agencies.35
---------------------------------------------------------------------------

    \35\ As regards the treatment of a group of agricultural 
buildings for flood insurance purposes, the preamble to the proposal 
noted that FEMA permits borrowers to insure their nonresidential 
buildings using one policy with a schedule separately listing the 
buildings. However, each building must be covered by flood 
insurance.
---------------------------------------------------------------------------

    As noted in the preamble to the proposal, the FCA encourages Farm 
Credit System institutions, as well as other agricultural lenders, to 
work with FEMA to resolve questions regarding the operation and cost 
structure of the NFIP as it applies to insurance of agricultural 
structures. In its comment letter on the proposed rule FEMA indicated 
that it is studying wet floodproofing techniques to determine whether 
wet floodproofing criteria can be included in the NFIP floodplain 
management regulations.36

[[Page 45699]]

Concurrently, FEMA has indicated that it plans to determine the 
appropriate flood insurance rates for agricultural structures under the 
NFIP. Any proposed changes in the NFIP floodplain management 
regulations will occur through a rulemaking process that provides for 
public notice and comment. The agencies urge agricultural lenders and 
their borrowers to participate in pertinent FEMA proceedings so that 
they may have an opportunity to raise these issues with FEMA. In the 
agencies' view, these issues are subject to FEMA's administrative and 
regulatory jurisdiction as administrator of the NFIP.
---------------------------------------------------------------------------

    \36\ In this connection, one commenter questioned why the 
proposal did not address the effect of section 580 of the Reform 
Act, 42 U.S.C. 4022(a)(2), with respect to agricultural structures. 
Section 580 relates to flood mitigation and floodplain management 
efforts under the NFIP and is not directly relevant to these 
regulations, which implement the Reform Act provisions pertaining to 
regulated lenders. Section 580 does appear pertinent, however, to 
wet floodproofing and other questions relating to coverage of 
certain repeated loss agricultural structures under the NFIP, which 
may be the subject of FEMA rulemaking.
---------------------------------------------------------------------------

FEMA Flood Hazard Determination Appeals
    The proposed rule did not address the process for appealing flood 
hazard determinations to FEMA; however, the agencies received eleven 
letters with comments about various aspects of the process. Many of the 
commenters' concerns are addressed in FEMA's final rule entitled 
``Review of Determinations for Required Purchase of Flood Insurance'' 
and in the preamble to that final rule.37 For example, two 
commenters commented on whether the borrower and the lender must 
jointly submit an appeal, or whether an appeal submitted by one or the 
other would be accepted. In its final rule, FEMA clarified that a 
request must be submitted jointly by the lender and the borrower.
---------------------------------------------------------------------------

    \37\ See 60 FR 62213 (December 5, 1995) (to be codified at 44 
CFR 65.17).
---------------------------------------------------------------------------

    Two commenters recommended that the agencies' final regulation 
include instructions on how to file a flood determination appeal with 
FEMA. The agencies believe it is inappropriate to provide this 
information in the joint final rule because the flood determination 
appeal process is governed by FEMA and delineated in FEMA's 
regulations. The agencies understand that FEMA is currently developing 
a ``sample letter'' with filing instructions for use by lenders and 
borrowers in submitting an appeal to FEMA.
    Three commenters asked which party, the lender or the borrower, 
should pay FEMA's fee for deciding the appeal. While this is a matter 
for the lender and the borrower to determine, the agencies believe that 
the party who requests the appeal of a flood determination generally 
will bear the cost of the appeal. An appeal is typically initiated at 
the request of a borrower who believes the property securing the loan 
is, in fact, not located in an SFHA, despite a flood determination to 
the contrary. The appeal fee is not charged by the lender as an 
incident to or condition of the credit. The official staff commentary 
to Regulation Z provides that charges imposed by someone other than the 
creditor are generally finance charges only if the creditor requires 
the borrower to use the third party's services, or the creditor retains 
the charge.
    Finally, four commenters inquired about the flood insurance 
requirement when a flood determination appeal is in process. FEMA 
responded to similar questions in the preamble to its final rule. 
Generally, under section 102(e)(3) of the 1973 Act, 42 U.S.C. 
4012a(e)(3), the mandatory flood insurance requirement is temporarily 
delayed until FEMA responds to an appeal. If FEMA fails to respond 
before the later of 45 days or the closing of the loan, the mandatory 
flood insurance purchase requirement is delayed until FEMA provides a 
response.
Miscellaneous Issues
    Standards with respect to purchased loans. Five commenters 
requested guidance on minimum standards for loan participations and 
purchased loans. Six other commenters indicated that no guidance on 
purchased loans is necessary because institutions can manage their own 
risks internally. Some of those commenters also noted that additional 
guidance would be tantamount to increased regulatory burden.
    If institutions purchasing loans use underwriting standards that 
address flood insurance, such as requirements for representations from 
the seller that flood insurance has been purchased for security 
property located in a special flood hazard area, the agencies agree 
that no further guidance is necessary. Where an institution's portfolio 
includes more than an insignificant number of purchased loans and its 
underwriting standards do not address flood insurance coverage, 
however, the agencies would expect the institution to have other 
procedures in place to ensure that it does not expose itself to 
significant risks through such purchases.
    Moreover, the agencies believe that the effects of the Reform Act-
mandated standards for flood insurance for loans purchased by Fannie 
Mae and Freddie Mac should be gauged over a period of time before 
determining whether further guidance is necessary for institutions in 
areas that have significant exposure to flood hazards. Institutions 
with significant lending in non-participating communities should have 
procedures to ensure that loans on properties in flood hazard areas 
where flood insurance is not available do not constitute an 
unacceptably large portion of the institution's loan portfolio.
    Subordinate Liens. The agencies received 14 comments concerning 
flood insurance requirements for second mortgages or home equity loans. 
Because a second mortgage or a home equity loan is secured by a 
building or mobile home, these loans are covered by the flood insurance 
requirements, unless one of the statutory exemptions specifically 
applies.
    Effective Date of Flood Insurance Policies. Some commenters asked 
about the applicability in various lending situations of the 30-day 
delay in effectiveness of flood insurance policies as prescribed in 
section 1306 of the 1968 Act, as amended by the Reform Act, 42 U.S.C. 
4013. FEMA addressed this issue in its Policy Issuance 8-95, dated 
December 5, 1995. FEMA determined that the 30-day waiting period 
generally is not applicable to the purchase of flood insurance in 
connection with making, increasing, extending, or renewing a loan.

IV. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act as 
amended, 5 U.S.C. 605(b), the OCC, Board, FDIC, OTS, and NCUA (banking 
agencies) hereby certify that this joint final rule will not have a 
significant economic impact on a substantial number of small entities. 
Moreover, this joint final rule is required by the Reform Act. 
Accordingly, a regulatory flexibility analysis is not required.
    In response to comments received during the public comment period 
(a substantial number representing smaller entities), the banking 
agencies have attempted to minimize regulatory burden by: (1) adding 
and revising definitions to make technically complex flood insurance 
rules more readily understood; (2) determining that the purchase of a 
loan is not the equivalent of the making of a loan for flood insurance 
purposes; and (3) minimizing the recordkeeping and notice requirements 
to include only those matters required by the statute.

[[Page 45700]]

    As a general matter, the joint final rule does not impose standards 
that are in excess of industry standards with respect to flood 
insurance, as those standards are reflected in the underwriting 
standards for Fannie Mae and Freddie Mac. Further, for those lenders 
already covered by existing flood insurance requirements, the joint 
final rule does not represent a significant increase over the burden 
imposed under the current rules. For such lenders, the joint final rule 
would increase burden above that imposed under the current rules in the 
following cases: (1) where residential property securing a loan is 
located in a special flood hazard area and the lender requires escrows 
for other tax and insurance payments, premiums for required flood 
insurance must be escrowed as well; (2) the content of the notices 
currently provided to borrowers is modified to provide additional 
information to the borrower; and (3) notice to FEMA of the servicer of 
the loan secured by property located in a special flood hazard area is 
required to permit FEMA to contact the servicer if the flood insurance 
lapses.38 The banking agencies believe that these increases in 
burden will result only in minor additional expenses for depository 
institutions.
---------------------------------------------------------------------------

    \38\ The provision concerning forced placement of flood 
insurance is self-implementing and is included in the joint final 
rule only to ensure that regulated lenders are aware of the 
authority and requirements of that provision. Including the 
provision in the joint final rule does not impose any additional 
burden on regulated lenders.
---------------------------------------------------------------------------

V. Paperwork Reduction Act of 1995

    The OCC, Board, FDIC, OTS, and NCUA (banking agencies) invite 
comment on:
    (1) Whether the collection of information contained in this joint 
final rule is necessary for the proper performance of each agency's 
functions, including whether the information has practical utility;
    (2) The accuracy of each agency's estimate of the burden of the 
information collection;
    (3) Ways to enhance the quality, utility, and clarity of the 
information to be collected; and
    (4) Ways to minimize the burden of the information collection on 
respondents, including the use of automated collection techniques or 
other forms of information technology.
    The banking agencies asked similar questions in the proposal. 
Several commenters indicated that the banking agencies had 
underestimated the paperwork burden associated with the flood rules. 
For purposes of allocating the paperwork burden for the flood rules, 
FEMA is charged with the hours for completing the SFHD form (FEMA form 
81-93; OMB Control No. 3067-0264), while the banking agencies are 
charged with the recordkeeping burden associated with the SFHD form and 
the notifications and additional recordkeeping required when a property 
is located in a SFHA. The separation of burden responsibility and 
reporting easily could cause the paperwork burden of these rules to 
appear to be understated. When viewed in conjunction with FEMA's 
burden, however, the banking agencies believe that the recordkeeping 
and notification burden estimates associated with these rules are 
reasonable.
    Respondents/recordkeepers are not required to respond to this 
collection of information unless it displays a currently valid OMB 
control number.
    OCC: The collection of information requirements contained in the 
OCC's portion of this joint final rule have been approved by the Office 
of Management and Budget under OMB Control No. 1557-0202 in accordance 
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments 
on the collection of information requirements should be sent to the 
Office of Management and Budget, Paperwork Reduction Project (1557-
0202), Washington, DC 20503, with a copy to the Legislative and 
Regulatory Activities Division (1557-0202), Office of the Comptroller 
of the Currency, 250 E Street, SW., Washington, DC 20219.
    The collection of information requirements relating to the OCC's 
portion of this joint final rule are found in 12 CFR 22.6, 22.7, 22.9, 
and 22.10. This information is required to evidence compliance with the 
requirements of the NFIP with respect to lenders (national banks) and 
borrowers (anyone who applies for a loan secured by improved real 
property or a mobile home which may be located in a SFHA). The likely 
respondents/recordkeepers are national banks.
    Estimated average annual burden hours per respondent/recordkeeper: 
26 hours.
    Estimated number of respondents and/or recordkeepers: 3,000.
    Estimated total annual reporting and recordkeeping burden: 78,000 
hours.
    Start-up costs to respondents: None.
    Records are to be maintained for the period of time the respondent/
recordkeeper owns the loan.
    Board: In accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(i); see also 5 CFR 1320 Appendix A Item 1), the Board 
reviewed its portion of this joint final rule under the authority 
delegated to the Board by the Office of Management and Budget and 
assigned OMB control number 7100-0280. Send comments regarding the 
burden estimate, or any other aspect of this collection of information, 
including suggestions for reducing the burden, to: Secretary, Board of 
Governors of the Federal Reserve System, 20th and C Streets, NW., 
Washington, DC 20551; and to the Office of Management and Budget, 
Paperwork Reduction Project (7100-0280), Washington, DC 20503.
    The collection of information requirements relating to the Board's 
portion of this joint final rule are included in 12 CFR 208.23. This 
information is required to evidence compliance with the requirements of 
the NFIP with respect to lenders (state chartered member banks) and 
borrowers (anyone who applies for a loan secured by improved real 
property or a mobile home which may be located in a SFHA). The 
respondents/recordkeepers are for-profit financial institutions, 
including small businesses.
    It is estimated that there will be 1,042 respondent/recordkeepers 
and a total of 26,800 hours of annual hour paperwork burden. The 
estimated annual hour paperwork burden per respondent/recordkeeper is 
25.7 hours, 1 hour for recordkeeping and a total of 24.7 hours for: (1) 
Notifying the borrower and the servicer; (2) notifying the Director of 
FEMA of initial servicers; and (3) if necessary, notifying the Director 
of FEMA when a loan servicer has changed. Banks likely will add the 
required records to their existing usual and customary loan 
documentation. Thus there is estimated to be no significant annual cost 
burden over the annual hour burden. Additionally, the Board estimates 
that there is no associated capital or start up cost as banks are 
expected to use their current word processing programs to produce the 
notices.
    Records are to be maintained for the period of time the respondent/
recordkeeper owns the loan. Because the records would be maintained at 
state member banks and the notices are not provided to the Board, no 
issue of confidentiality under the Freedom of Information Act arises.
    FDIC: The collections of information contained in the FDIC's 
portion of this joint final rule have been approved by the Office of 
Management and Budget under OMB Control No. 3064-0120 in accordance 
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments 
on the collections of information should be sent to the Office of 
Management and Budget,

[[Page 45701]]

Paperwork Reduction Project (3064-0120), Washington, DC 20503, with 
copies of such comments to be sent to Steven F. Hanft, Office of the 
Executive Secretary, Room F-453, Federal Deposit Insurance Corporation, 
550 17th Street, NW., Washington, DC 20429.
    The collections of information requirements relating to the FDIC's 
portion of this joint final rule are found in 12 CFR 339.6, 339.7, 
339.9, and 339.10. This information is required to evidence compliance 
with the requirements of the NFIP with respect to lenders (state 
chartered nonmember banks) and borrowers (anyone who applies for a loan 
secured by improved real estate or a mobile home which may be located 
in a SFHA).
    The likely respondents/recordkeepers are insured nonmember banks 
and their subsidiaries.
    Estimated number of respondents/recordkeepers: 6,250.
    Estimated average annual burden hours per respondent/recordkeeper: 
26 hours.
    Estimated total annual reporting and recordkeeping burden: 162,500 
hours.
    Start-up costs to respondents: None.
    Records are to be maintained for the period of time the respondent/
recordkeeper owns the loan.
    OTS: The collection of information requirements contained in the 
OTS's portion of this joint final rule have been approved by the Office 
of Management and Budget under OMB Control No. 1550-0088 in accordance 
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments 
on the collection of information should be sent to the Office of 
Management and Budget, Paperwork Reduction Project (1550-0088), 
Washington, DC 20503, with a copy to the OTS, 1700 G Street, NW., 
Washington, DC 20552.
    The collection of information requirements relating to the OTS's 
portion of this joint final rule are found in 12 CFR 572.6, 572.7, 
572.9, and 572.10. This information is required to evidence compliance 
with the requirements of the NFIP with respect to lenders (savings 
associations) and borrowers (anyone who applies for a loan secured by 
improved real property or a mobile home which may be located in a 
SFHA). The likely recordkeepers are OTS-regulated savings associations.
    Estimated number of respondents and/or recordkeepers: 1,500.
    Estimated average annual burden hours per recordkeeper: 26 hours.
    Estimated total annual reporting and recordkeeping burden: 39,000 
hours.
    Start-up costs to respondents: None.
    Records are to be maintained for the period of time respondent/
recordkeeper owns the loan.
    NCUA: The collection of information requirements contained in the 
NCUA's portion of this joint final rule were approved by the Office of 
Management and Budget under OMB Control No. 3133-0143. Written comments 
on the collection of information should be sent to the Office of 
Management and Budget, OMB Reports Management Branch, New Executive 
Office Building, Room 10202, Washington, DC 20503. Attn: Alexander 
Hunt.
    The collection of information requirements relating to the NCUA's 
portion of this joint final rule are found in 12 CFR 760.6, 760.7, 
760.9 and 760.10. This information is required to evidence compliance 
with the requirements of the NFIP with respect to lenders (Federally-
insured credit unions) and borrowers (members that apply for a loan 
secured by improved real estate or a mobile home which may be located 
in a SFHA). The likely recordkeepers are Federally-insured credit 
unions.
    Estimated number of respondents and/or recordkeepers: 700.
    Estimated average annual burden hours per respondent/recordkeeper: 
26 hours.
    Estimated total annual reporting and recordkeeping burden: 16,325 
hours.
    Start-up costs to respondents: None.
    Records are to be maintained for the period of time the respondent/
recordkeeper owns the loan.

VI. Executive Order 12866

    OCC and OTS: The OCC and the OTS each has determined that its 
portion of this joint final rule is not a significant regulatory action 
as defined in Executive Order 12866.

VII. Executive Order 12612

    Executive Order 12612 requires the NCUA to consider the effects of 
its actions on State interests. The NCUA's portion of this joint final 
rule will apply to all Federally-insured credit unions and reduce 
regulatory requirements. The NCUA Board has determined that the NCUA's 
portion of the joint final rule would not have a substantial direct 
effect on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government.

VIII. Unfunded Mandates Reform Act of 1995

    OCC and OTS: Section 202 of the Unfunded Mandates Reform Act of 
1995, Pub. L. 104-4, 109 Stat. 48 (1995) (Unfunded Mandates Act) 
requires that covered agencies prepare a budgetary impact statement 
before promulgating a rule that includes a Federal mandate that may 
result in the expenditure by State, local, and tribal governments, in 
the aggregate, or by the private sector, of $100 million or more in any 
one year. If a budgetary impact statement is required, section 205 of 
the Unfunded Mandates Act also requires covered agencies to identify 
and consider a reasonable number of regulatory alternatives before 
promulgating a rule. As discussed in the preamble, this joint final 
rule revises current OCC and OTS flood insurance regulations as 
prescribed by the Reform Act. The Reform Act specifically requires six 
agencies, including the OCC and OTS, to implement certain of the Reform 
Act's amendments through regulations. Therefore, to the extent that the 
joint final rule imposes new Federal requirements, the requirements are 
statutorily mandated by the Reform Act. Nevertheless, the OCC and OTS 
each has determined that its portion of the joint final rule will not 
result in expenditures by State, local, and tribal governments, or by 
the private sector, of $100 million or more in any one year. 
Accordingly, the OCC and OTS have not prepared budgetary impact 
statements or specifically addressed the regulatory alternatives 
considered.

List of Subjects

    12 CFR Part 22
    Flood insurance, Mortgages, National banks, Reporting and 
recordkeeping requirements.
    12 CFR Part 208
    Accounting, Agriculture, Banks, banking, Confidential business 
information, Crime, Currency, Federal Reserve System, Flood insurance, 
Mortgages, Reporting and recordkeeping requirements, Securities.
    12 CFR Part 339
    Flood insurance, Reporting and recordkeeping requirements.
    12 CFR Part 563
    Accounting, Advertising, Crime, Currency, Flood insurance, 
Investments, Reporting and recordkeeping requirements, Savings 
associations, Securities, Surety bonds.
    12 CFR Part 572
    Flood insurance, Reporting and recordkeeping requirements, Savings 
associations.
    12 CFR Part 614
    Agriculture, Banks, banking, Flood insurance, Foreign trade, 
Reporting and recordkeeping requirements, Rural areas.
    12 CFR Part 760

[[Page 45702]]

    Credit unions, Mortgages, Flood insurance, Reporting and 
recordkeeping requirements.

Office of the Comptroller of the Currency

12 CFR CHAPTER I

Authority and Issuance

    For the reasons set forth in the joint preamble, part 22 of chapter 
I of title 12 of the Code of Federal Regulations is revised to read as 
follows:

PART 22--LOANS IN AREAS HAVING SPECIAL FLOOD HAZARDS

Sec.
22.1  Authority, purpose, and scope.
22.2  Definitions.
22.3  Requirement to purchase flood insurance where available.
22.4  Exemptions.
22.5  Escrow requirement.
22.6  Required use of standard flood hazard determination form.
22.7  Forced placement of flood insurance.
22.8  Determination fees.
22.9  Notice of special flood hazards and availability of Federal 
disaster relief assistance.
22.10  Notice of servicer's identity.

Appendix A to Part 22--Sample Form of Notice of Special Flood Hazards 
and Availability of Federal Disaster Relief Assistance

    Authority: 12 U.S.C. 93a; 42 U.S.C. 4012a, 4104a, 4104b, 4106, 
and 4128.


Sec. 22.1  Authority, purpose, and scope.

    (a) Authority. This part is issued pursuant to 12 U.S.C. 93a and 42 
U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.
    (b) Purpose. The purpose of this part is to implement the 
requirements of the National Flood Insurance Act of 1968 and the Flood 
Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129).
    (c) Scope. This part, except for Secs. 22.6 and 22.8, applies to 
loans secured by buildings or mobile homes located or to be located in 
areas determined by the Director of the Federal Emergency Management 
Agency to have special flood hazards. Sections 22.6 and 22.8 apply to 
loans secured by buildings or mobile homes, regardless of location.


Sec. 22.2  Definitions.

    (a) Act means the National Flood Insurance Act of 1968, as amended 
(42 U.S.C. 4001-4129).
    (b) Bank means a national bank or a bank located in the District of 
Columbia and subject to the supervision of the Comptroller of the 
Currency.
    (c) Building means a walled and roofed structure, other than a gas 
or liquid storage tank, that is principally above ground and affixed to 
a permanent site, and a walled and roofed structure while in the course 
of construction, alteration, or repair.
    (d) Community means a State or a political subdivision of a State 
that has zoning and building code jurisdiction over a particular area 
having special flood hazards.
    (e) Designated loan means a loan secured by a building or mobile 
home that is located or to be located in a special flood hazard area in 
which flood insurance is available under the Act.
    (f) Director of FEMA means the Director of the Federal Emergency 
Management Agency.
    (g) Mobile home means a structure, transportable in one or more 
sections, that is built on a permanent chassis and designed for use 
with or without a permanent foundation when attached to the required 
utilities. The term mobile home does not include a recreational 
vehicle. For purposes of this part, the term mobile home means a mobile 
home on a permanent foundation. The term mobile home includes a 
manufactured home as that term is used in the NFIP.
    (h) NFIP means the National Flood Insurance Program authorized 
under the Act.
    (i) Residential improved real estate means real estate upon which a 
home or other residential building is located or to be located.
    (j) Servicer means the person responsible for:
    (1) Receiving any scheduled, periodic payments from a borrower 
under the terms of a loan, including amounts for taxes, insurance 
premiums, and other charges with respect to the property securing the 
loan; and
    (2) Making payments of principal and interest and any other 
payments from the amounts received from the borrower as may be required 
under the terms of the loan.
    (k) Special flood hazard area means the land in the flood plain 
within a community having at least a one percent chance of flooding in 
any given year, as designated by the Director of FEMA.
    (l) Table funding means a settlement at which a loan is funded by a 
contemporaneous advance of loan funds and an assignment of the loan to 
the person advancing the funds.


Sec. 22.3  Requirement to purchase flood insurance where available.

    (a) In general. A bank shall not make, increase, extend, or renew 
any designated loan unless the building or mobile home and any personal 
property securing the loan is covered by flood insurance for the term 
of the loan. The amount of insurance must be at least equal to the 
lesser of the outstanding principal balance of the designated loan or 
the maximum limit of coverage available for the particular type of 
property under the Act. Flood insurance coverage under the Act is 
limited to the overall value of the property securing the designated 
loan minus the value of the land on which the property is located.
    (b) Table funded loans. A bank that acquires a loan from a mortgage 
broker or other entity through table funding shall be considered to be 
making a loan for the purposes of this part.


Sec. 22.4  Exemptions.

    The flood insurance requirement prescribed by Sec. 22.3 does not 
apply with respect to:
    (a) Any State-owned property covered under a policy of self-
insurance satisfactory to the Director of FEMA, who publishes and 
periodically revises the list of States falling within this exemption; 
or
    (b) Property securing any loan with an original principal balance 
of $5,000 or less and a repayment term of one year or less.


Sec. 22.5  Escrow requirement.

    If a bank requires the escrow of taxes, insurance premiums, fees, 
or any other charges for a loan secured by residential improved real 
estate or a mobile home that is made, increased, extended, or renewed 
on or after October 1, 1996, the bank shall also require the escrow of 
all premiums and fees for any flood insurance required under Sec. 22.3. 
The bank, or a servicer acting on behalf of the bank, shall deposit the 
flood insurance premiums on behalf of the borrower in an escrow 
account. This escrow account will be subject to escrow requirements 
adopted pursuant to section 10 of the Real Estate Settlement Procedures 
Act of 1974 (12 U.S.C. 2609) (RESPA), which generally limits the amount 
that may be maintained in escrow accounts for certain types of loans 
and requires escrow account statements for those accounts, only if the 
loan is otherwise subject to RESPA. Following receipt of a notice from 
the Director of FEMA or other provider of flood insurance that premiums 
are due, the bank, or a servicer acting on behalf of the bank, shall 
pay the amount owed to the insurance provider from the escrow account 
by the date when such premiums are due.


Sec. 22.6  Required use of standard flood hazard determination form.

    (a) Use of form. A bank shall use the standard flood hazard 
determination form developed by the Director of FEMA (as set forth in 
Appendix A of 44

[[Page 45703]]

CFR part 65) when determining whether the building or mobile home 
offered as collateral security for a loan is or will be located in a 
special flood hazard area in which flood insurance is available under 
the Act. The standard flood hazard determination form may be used in a 
printed, computerized, or electronic manner.
    (b) Retention of form. A bank shall retain a copy of the completed 
standard flood hazard determination form, in either hard copy or 
electronic form, for the period of time the bank owns the loan.


Sec. 22.7  Forced placement of flood insurance.

    If a bank, or a servicer acting on behalf of the bank, determines 
at any time during the term of a designated loan that the building or 
mobile home and any personal property securing the designated loan is 
not covered by flood insurance or is covered by flood insurance in an 
amount less than the amount required under Sec. 22.3, then the bank or 
its servicer shall notify the borrower that the borrower should obtain 
flood insurance, at the borrower's expense, in an amount at least equal 
to the amount required under Sec. 22.3, for the remaining term of the 
loan. If the borrower fails to obtain flood insurance within 45 days 
after notification, then the bank or its servicer shall purchase 
insurance on the borrower's behalf. The bank or its servicer may charge 
the borrower for the cost of premiums and fees incurred in purchasing 
the insurance.


Sec. 22.8  Determination fees.

    (a) General. Notwithstanding any Federal or State law other than 
the Flood Disaster Protection Act of 1973 as amended (42 U.S.C. 4001-
4129), any bank, or a servicer acting on behalf of the bank, may charge 
a reasonable fee for determining whether the building or mobile home 
securing the loan is located or will be located in a special flood 
hazard area. A determination fee may also include, but is not limited 
to, a fee for life-of-loan monitoring.
    (b) Borrower fee. The determination fee authorized by paragraph (a) 
of this section may be charged to the borrower if the determination:
    (1) Is made in connection with a making, increasing, extending, or 
renewing of the loan that is initiated by the borrower;
    (2) Reflects the Director of FEMA's revision or updating of 
floodplain areas or flood-risk zones;
    (3) Reflects the Director of FEMA's publication of a notice or 
compendium that:
    (i) Affects the area in which the building or mobile home securing 
the loan is located; or
    (ii) By determination of the Director of FEMA, may reasonably 
require a determination whether the building or mobile home securing 
the loan is located in a special flood hazard area; or
    (4) Results in the purchase of flood insurance coverage by the bank 
or its servicer on behalf of the borrower under Sec. 22.7.
    (c) Purchaser or transferee fee. The determination fee authorized 
by paragraph (a) of this section may be charged to the purchaser or 
transferee of a loan in the case of the sale or transfer of the loan.


Sec. 22.9  Notice of special flood hazards and availability of Federal 
disaster relief assistance.

    (a) Notice requirement. When a bank makes, increases, extends, or 
renews a loan secured by a building or a mobile home located or to be 
located in a special flood hazard area, the bank shall mail or deliver 
a written notice to the borrower and to the servicer in all cases 
whether or not flood insurance is available under the Act for the 
collateral securing the loan.
    (b) Contents of notice. The written notice must include the 
following information:
    (1) A warning, in a form approved by the Director of FEMA, that the 
building or the mobile home is or will be located in a special flood 
hazard area;
    (2) A description of the flood insurance purchase requirements set 
forth in section 102(b) of the Flood Disaster Protection Act of 1973, 
as amended (42 U.S.C. 4012a(b));
    (3) A statement, where applicable, that flood insurance coverage is 
available under the NFIP and may also be available from private 
insurers; and
    (4) A statement whether Federal disaster relief assistance may be 
available in the event of damage to the building or mobile home caused 
by flooding in a Federally declared disaster.
    (c) Timing of notice. The bank shall provide the notice required by 
paragraph (a) of this section to the borrower within a reasonable time 
before the completion of the transaction, and to the servicer as 
promptly as practicable after the bank provides notice to the borrower 
and in any event no later than the time the bank provides other similar 
notices to the servicer concerning hazard insurance and taxes. Notice 
to the servicer may be made electronically or may take the form of a 
copy of the notice to the borrower.
    (d) Record of receipt. The bank shall retain a record of the 
receipt of the notices by the borrower and the servicer for the period 
of time the bank owns the loan.
    (e) Alternate method of notice. Instead of providing the notice to 
the borrower required by paragraph (a) of this section, a bank may 
obtain satisfactory written assurance from a seller or lessor that, 
within a reasonable time before the completion of the sale or lease 
transaction, the seller or lessor has provided such notice to the 
purchaser or lessee. The bank shall retain a record of the written 
assurance from the seller or lessor for the period of time the bank 
owns the loan.
    (f) Use of prescribed form of notice. A bank will be considered to 
be in compliance with the requirement for notice to the borrower of 
this section by providing written notice to the borrower containing the 
language presented in appendix A to this part within a reasonable time 
before the completion of the transaction. The notice presented in 
appendix A to this part satisfies the borrower notice requirements of 
the Act.


Sec. 22.10  Notice of servicer's identity.

    (a) Notice requirement. When a bank makes, increases, extends, 
renews, sells, or transfers a loan secured by a building or mobile home 
located or to be located in a special flood hazard area, the bank shall 
notify the Director of FEMA (or the Director's designee) in writing of 
the identity of the servicer of the loan. The Director of FEMA has 
designated the insurance provider to receive the bank's notice of the 
servicer's identity. This notice may be provided electronically if 
electronic transmission is satisfactory to the Director of FEMA's 
designee.
    (b) Transfer of servicing rights. The bank shall notify the 
Director of FEMA (or the Director's designee) of any change in the 
servicer of a loan described in paragraph (a) of this section within 60 
days after the effective date of the change. This notice may be 
provided electronically if electronic transmission is satisfactory to 
the Director of FEMA's designee. Upon any change in the servicing of a 
loan described in paragraph (a) of this section, the duty to provide 
notice under this paragraph (b) shall transfer to the transferee 
servicer.

Appendix A to Part 22--Sample Form of Notice of Special Flood Hazards 
and Availability of Federal Disaster Relief Assistance

    We are giving you this notice to inform you that:
    The building or mobile home securing the loan for which you have 
applied is or will be located in an area with special flood hazards.

[[Page 45704]]

    The area has been identified by the Director of the Federal 
Emergency Management Agency (FEMA) as a special flood hazard area 
using FEMA's Flood Insurance Rate Map or the Flood Hazard Boundary 
Map for the following community: ________________. This area has at 
least a one percent (1%) chance of a flood equal to or exceeding the 
base flood elevation (a 100-year flood) in any given year. During 
the life of a 30-year mortgage loan, the risk of a 100-year flood in 
a special flood hazard area is 26 percent (26%).
    Federal law allows a lender and borrower jointly to request the 
Director of FEMA to review the determination of whether the property 
securing the loan is located in a special flood hazard area. If you 
would like to make such a request, please contact us for further 
information.
    ______ The community in which the property securing the loan is 
located participates in the National Flood Insurance Program (NFIP). 
Federal law will not allow us to make you the loan that you have 
applied for if you do not purchase flood insurance. The flood 
insurance must be maintained for the life of the loan. If you fail 
to purchase or renew flood insurance on the property, Federal law 
authorizes and requires us to purchase the flood insurance for you 
at your expense.
     Flood insurance coverage under the NFIP may be 
purchased through an insurance agent who will obtain the policy 
either directly through the NFIP or through an insurance company 
that participates in the NFIP. Flood insurance also may be available 
from private insurers that do not participate in the NFIP.
     At a minimum, flood insurance purchased must cover the 
lesser of:
    (1) the outstanding principal balance of the loan; or
    (2) the maximum amount of coverage allowed for the type of 
property under the NFIP.
    Flood insurance coverage under the NFIP is limited to the 
overall value of the property securing the loan minus the value of 
the land on which the property is located.
     Federal disaster relief assistance (usually in the form 
of a low-interest loan) may be available for damages incurred in 
excess of your flood insurance if your community's participation in 
the NFIP is in accordance with NFIP requirements.
    ______ Flood insurance coverage under the NFIP is not available 
for the property securing the loan because the community in which 
the property is located does not participate in the NFIP. In 
addition, if the non-participating community has been identified for 
at least one year as containing a special flood hazard area, 
properties located in the community will not be eligible for Federal 
disaster relief assistance in the event of a Federally-declared 
flood disaster.

    Dated: August 14, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.

Federal Reserve System

12 CFR CHAPTER II

Authority and Issuance

    For the reasons set forth in the joint preamble, part 208 of 
chapter II of title 12 of the Code of Federal Regulations is amended as 
set forth below:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for part 208 is revised to read as 
follows:

    Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 371d, 461, 
481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-1, 3105, 
3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 781(b), 781(g), 
781(i), 781-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 5318; 42 U.S.C. 
4012a, 4104a, 4104b, 4106, and 4128.

    2. In Sec. 208.8, paragraph (e) is removed and reserved, and 
appendix A--Sample Notices following paragraph (k)(6)(iii) is removed.
    3. A new Sec. 208.23 is added at the end of subpart A to read as 
follows:


Sec. 208.23  Loans in areas having special flood hazards.

    (a) Purpose and scope--(1) Purpose. The purpose of this section is 
to implement the requirements of the National Flood Insurance Act of 
1968 and the Flood Disaster Protection Act of 1973, as amended (42 
U.S.C. 4001-4129).
    (2) Scope. This section, except for paragraphs (f) and (h) of this 
section, applies to loans secured by buildings or mobile homes located 
or to be located in areas determined by the Director of the Federal 
Emergency Management Agency to have special flood hazards. Paragraphs 
(f) and (h) of this section apply to loans secured by buildings or 
mobile homes, regardless of location.
    (b) Definitions. (1) Act means the National Flood Insurance Act of 
1968, as amended (42 U.S.C. 4001-4129).
    (2) Building means a walled and roofed structure, other than a gas 
or liquid storage tank, that is principally above ground and affixed to 
a permanent site, and a walled and roofed structure while in the course 
of construction, alteration, or repair.
    (3) Community means a State or a political subdivision of a State 
that has zoning and building code jurisdiction over a particular area 
having special flood hazards.
    (4) Designated loan means a loan secured by a building or mobile 
home that is located or to be located in a special flood hazard area in 
which flood insurance is available under the Act.
    (5) Director of FEMA means the Director of the Federal Emergency 
Management Agency.
    (6) Mobile home means a structure, transportable in one or more 
sections, that is built on a permanent chassis and designed for use 
with or without a permanent foundation when attached to the required 
utilities. The term mobile home does not include a recreational 
vehicle. For purposes of this section, the term mobile home means a 
mobile home on a permanent foundation. The term mobile home includes a 
manufactured home as that term is used in the NFIP.
    (7) NFIP means the National Flood Insurance Program authorized 
under the Act.
    (8) Residential improved real estate means real estate upon which a 
home or other residential building is located or to be located.
    (9) Servicer means the person responsible for:
    (i) Receiving any scheduled, periodic payments from a borrower 
under the terms of a loan, including amounts for taxes, insurance 
premiums, and other charges with respect to the property securing the 
loan; and
    (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.
    (10) Special flood hazard area means the land in the flood plain 
within a community having at least a one percent chance of flooding in 
any given year, as designated by the Director of FEMA.
    (11) 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) Requirement to purchase flood insurance where available--(1) In 
general. A state member bank shall not make, increase, extend, or renew 
any designated loan unless the building or mobile home and any personal 
property securing the loan is covered by flood insurance for the term 
of the loan. The amount of insurance must be at least equal to the 
lesser of the outstanding principal balance of the designated loan or 
the maximum limit of coverage available for the particular type of 
property under the Act. Flood insurance coverage under the Act is 
limited to the overall value of the property securing the designated 
loan minus the value of the land on which the property is located.
    (2) Table funded loans. A state member bank that acquires a loan 
from

[[Page 45705]]

a mortgage broker or other entity through table funding shall be 
considered to be making a loan for the purposes of this section.
    (d) Exemptions. The flood insurance requirement prescribed by 
paragraph (c) of this section does not apply with respect to:
    (1) Any State-owned property covered under a policy of self-
insurance satisfactory to the Director of FEMA, who publishes and 
periodically revises the list of States falling within this exemption; 
or
    (2) Property securing any loan with an original principal balance 
of $5,000 or less and a repayment term of one year or less.
    (e) Escrow requirement. If a state member bank requires the escrow 
of taxes, insurance premiums, fees, or any other charges for a loan 
secured by residential improved real estate or a mobile home that is 
made, increased, extended, or renewed on or after October 1, 1996, the 
state member bank shall also require the escrow of all premiums and 
fees for any flood insurance required under paragraph (c) of this 
section. The state member bank, or a servicer acting on its behalf, 
shall deposit the flood insurance premiums on behalf of the borrower in 
an escrow account. This escrow account will be subject to escrow 
requirements adopted pursuant to section 10 of the Real Estate 
Settlement Procedures Act of 1974 (12 U.S.C. 2609) (RESPA), which 
generally limits the amount that may be maintained in escrow accounts 
for certain types of loans and requires escrow account statements for 
those accounts, only if the loan is otherwise subject to RESPA. 
Following receipt of a notice from the Director of FEMA or other 
provider of flood insurance that premiums are due, the state member 
bank, or a servicer acting on its behalf, shall pay the amount owed to 
the insurance provider from the escrow account by the date when such 
premiums are due.
    (f) Required use of standard flood hazard determination form--(1) 
Use of form. A state member bank shall use the standard flood hazard 
determination form developed by the Director of FEMA (as set forth in 
Appendix A of 44 CFR part 65) when determining whether the building or 
mobile home offered as collateral security for a loan is or will be 
located in a special flood hazard area in which flood insurance is 
available under the Act. The standard flood hazard determination form 
may be used in a printed, computerized, or electronic manner.
    (2) Retention of form. A state member bank shall retain a copy of 
the completed standard flood hazard determination form, in either hard 
copy or electronic form, for the period of time the bank owns the loan.
    (g) Forced placement of flood insurance. If a state member bank, or 
a servicer acting on behalf of the bank, determines at any time during 
the term of a designated loan that the building or mobile home and any 
personal property securing the designated loan is not covered by flood 
insurance or is covered by flood insurance in an amount less than the 
amount required under paragraph (c) of this section, then the bank or 
its servicer shall notify the borrower that the borrower should obtain 
flood insurance, at the borrower's expense, in an amount at least equal 
to the amount required under paragraph (c) of this section, for the 
remaining term of the loan. If the borrower fails to obtain flood 
insurance within 45 days after notification, then the state member bank 
or its servicer shall purchase insurance on the borrower's behalf. The 
state member bank or its servicer may charge the borrower for the cost 
of premiums and fees incurred in purchasing the insurance.
    (h) Determination fees--(1) General. Notwithstanding any Federal or 
State law other than the Flood Disaster Protection Act of 1973, as 
amended (42 U.S.C. 4001-4129), any state member bank, or a servicer 
acting on behalf of the bank, may charge a reasonable fee for 
determining whether the building or mobile home securing the loan is 
located or will be located in a special flood hazard area. A 
determination fee may also include, but is not limited to, a fee for 
life-of-loan monitoring.
    (2) Borrower fee. The determination fee authorized by paragraph 
(h)(1) of this section may be charged to the borrower if the 
determination:
    (i) Is made in connection with a making, increasing, extending, or 
renewing of the loan that is initiated by the borrower;
    (ii) Reflects the Director of FEMA's revision or updating of 
floodplain areas or flood-risk zones;
    (iii) Reflects the Director of FEMA's publication of a notice or 
compendium that:
    (A) Affects the area in which the building or mobile home securing 
the loan is located; or
    (B) By determination of the Director of FEMA, may reasonably 
require a determination whether the building or mobile home securing 
the loan is located in a special flood hazard area; or
    (iv) Results in the purchase of flood insurance coverage by the 
lender or its servicer on behalf of the borrower under paragraph (g) of 
this section.
    (3) Purchaser or transferee fee. The determination fee authorized 
by paragraph (h)(1) of this section may be charged to the purchaser or 
transferee of a loan in the case of the sale or transfer of the loan.
    (i) Notice of special flood hazards and availability of Federal 
disaster relief assistance--(1) Notice requirement. When a state member 
bank makes, increases, extends, or renews a loan secured by a building 
or a mobile home located or to be located in a special flood hazard 
area, the bank shall mail or deliver a written notice to the borrower 
and to the servicer in all cases whether or not flood insurance is 
available under the Act for the collateral securing the loan.
    (2) Contents of notice. The written notice must include the 
following information:
    (i) A warning, in a form approved by the Director of FEMA, that the 
building or the mobile home is or will be located in a special flood 
hazard area;
    (ii) A description of the flood insurance purchase requirements set 
forth in section 102(b) of the Flood Disaster Protection Act of 1973, 
as amended (42 U.S.C. 4012a(b));
    (iii) A statement, where applicable, that flood insurance coverage 
is available under the NFIP and may also be available from private 
insurers; and
    (iv) A statement whether Federal disaster relief assistance may be 
available in the event of damage to the building or mobile home caused 
by flooding in a Federally declared disaster.
    (3) Timing of notice. The state member bank shall provide the 
notice required by paragraph (i)(1) of this section to the borrower 
within a reasonable time before the completion of the transaction, and 
to the servicer as promptly as practicable after the bank provides 
notice to the borrower and in any event no later than the time the bank 
provides other similar notices to the servicer concerning hazard 
insurance and taxes. Notice to the servicer may be made electronically 
or may take the form of a copy of the notice to the borrower.
    (4) Record of receipt. The state member bank shall retain a record 
of the receipt of the notices by the borrower and the servicer for the 
period of time the bank owns the loan.
    (5) Alternate method of notice. Instead of providing the notice to 
the borrower required by paragraph (i)(1) of this section, a state 
member bank may obtain satisfactory written assurance from a seller or 
lessor that, within a reasonable time before the completion of the sale 
or lease transaction, the seller

[[Page 45706]]

or lessor has provided such notice to the purchaser or lessee. The 
state member bank shall retain a record of the written assurance from 
the seller or lessor for the period of time the bank owns the loan.
    (6) Use of prescribed form of notice. A state member bank will be 
considered to be in compliance with the requirement for notice to the 
borrower of this paragraph (i) by providing written notice to the 
borrower containing the language presented in appendix A to this 
section within a reasonable time before the completion of the 
transaction. The notice presented in appendix A to this section 
satisfies the borrower notice requirements of the Act.
    (j) Notice of servicer's identity--(1) Notice requirement. When a 
state member bank makes, increases, extends, renews, sells, or 
transfers a loan secured by a building or mobile home located or to be 
located in a special flood hazard area, the bank shall notify the 
Director of FEMA (or the Director's designee) in writing of the 
identity of the servicer of the loan. The Director of FEMA has 
designated the insurance provider to receive the state member bank's 
notice of the servicer's identity. This notice may be provided 
electronically if electronic transmission is satisfactory to the 
Director of FEMA's designee.
    (2) Transfer of servicing rights. The state member bank shall 
notify the Director of FEMA (or the Director's designee) of any change 
in the servicer of a loan described in paragraph (j)(1) of this section 
within 60 days after the effective date of the change. This notice may 
be provided electronically if electronic transmission is satisfactory 
to the Director of FEMA's designee. Upon any change in the servicing of 
a loan described in paragraph (j)(1) of this section, the duty to 
provide notice under this paragraph (j)(2) shall transfer to the 
transferee servicer.

Appendix A to Sec. 208.23--Sample Form of Notice of Special Flood 
Hazards and Availability of Federal Disaster Relief Assistance

    We are giving you this notice to inform you that:
    The building or mobile home securing the loan for which you have 
applied is or will be located in an area with special flood hazards.
    The area has been identified by the Director of the Federal 
Emergency Management Agency (FEMA) as a special flood hazard area 
using FEMA's Flood Insurance Rate Map or the Flood Hazard Boundary 
Map for the following community: ________________. This area has at 
least a one percent (1%) chance of a flood equal to or exceeding the 
base flood elevation (a 100-year flood) in any given year. During 
the life of a 30-year mortgage loan, the risk of a 100-year flood in 
a special flood hazard area is 26 percent (26%).
    Federal law allows a lender and borrower jointly to request the 
Director of FEMA to review the determination of whether the property 
securing the loan is located in a special flood hazard area. If you 
would like to make such a request, please contact us for further 
information.
    ______The community in which the property securing the loan is 
located participates in the National Flood Insurance Program (NFIP). 
Federal law will not allow us to make you the loan that you have 
applied for if you do not purchase flood insurance. The flood 
insurance must be maintained for the life of the loan. If you fail 
to purchase or renew flood insurance on the property, Federal law 
authorizes and requires us to purchase the flood insurance for you 
at your expense.
     Flood insurance coverage under the NFIP may be 
purchased through an insurance agent who will obtain the policy 
either directly through the NFIP or through an insurance company 
that participates in the NFIP. Flood insurance also may be available 
from private insurers that do not participate in the NFIP.
     At a minimum, flood insurance purchased must cover the 
lesser of:
    (1) the outstanding principal balance of the loan; or
    (2) the maximum amount of coverage allowed for the type of 
property under the NFIP.
    Flood insurance coverage under the NFIP is limited to the 
overall value of the property securing the loan minus the value of 
the land on which the property is located.
     Federal disaster relief assistance (usually in the form 
of a low-interest loan) may be available for damages incurred in 
excess of your flood insurance if your community's participation in 
the NFIP is in accordance with NFIP requirements.
    ______Flood insurance coverage under the NFIP is not available 
for the property securing the loan because the community in which 
the property is located does not participate in the NFIP. In 
addition, if the non-participating community has been identified for 
at least one year as containing a special flood hazard area, 
properties located in the community will not be eligible for Federal 
disaster relief assistance in the event of a Federally-declared 
flood disaster.

    By order of the Board of Governors of the Federal Reserve 
System, August 15, 1996.
Jennifer J. Johnson,
Deputy Secretary of the Board.

Federal Deposit Insurance Corporation

12 CFR CHAPTER III

Authority and Issuance

    For the reasons set forth in the joint preamble, the Board of 
Directors of the FDIC revises part 339 of chapter III of title 12 of 
the Code of Federal Regulations to read as follows:

PART 339--LOANS IN AREAS HAVING SPECIAL FLOOD HAZARDS

Sec.
339.1  Authority, purpose, and scope.
339.2  Definitions.
339.3  Requirement to purchase flood insurance where available.
339.4  Exemptions.
339.5  Escrow requirement.
339.6  Required use of standard flood hazard determination form.
339.7  Forced placement of flood insurance.
339.8  Determination fees.
339.9  Notice of special flood hazards and availability of Federal 
disaster relief assistance.
339.10  Notice of servicer's identity.

Appendix A to Part 339--Sample Form of Notice of Special Flood Hazards 
and Availability of Federal Disaster Relief Assistance

    Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.


Sec. 339.1  Authority, purpose, and scope.

    (a) Authority. This part is issued pursuant to 42 U.S.C. 4012a, 
4104a, 4104b, 4106, and 4128.
    (b) Purpose. The purpose of this part is to implement the 
requirements of the National Flood Insurance Act of 1968 and the Flood 
Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129).
    (c) Scope. This part, except for Secs. 339.6 and 339.8, applies to 
loans secured by buildings or mobile homes located or to be located in 
areas determined by the Director of the Federal Emergency Management 
Agency to have special flood hazards. Sections 339.6 and 339.8 apply to 
loans secured by buildings or mobile homes, regardless of location.


Sec. 339.2  Definitions.

    (a) Act means the National Flood Insurance Act of 1968, as amended 
(42 U.S.C. 4001-4129).
    (b) Bank means an insured state nonmember bank and an insured state 
branch of a foreign bank or any subsidiary of an insured state 
nonmember bank.
    (c) Building means a walled and roofed structure, other than a gas 
or liquid storage tank, that is principally above ground and affixed to 
a permanent site, and a walled and roofed structure while in the course 
of construction, alteration, or repair.
    (d) Community means a State or a political subdivision of a State 
that has zoning and building code jurisdiction over a particular area 
having special flood hazards.
    (e) Designated loan means a loan secured by a building or mobile 
home that is located or to be located in a

[[Page 45707]]

special flood hazard area in which flood insurance is available under 
the Act.
    (f) Director of FEMA means the Director of the Federal Emergency 
Management Agency.
    (g) Mobile home means a structure, transportable in one or more 
sections, that is built on a permanent chassis and designed for use 
with or without a permanent foundation when attached to the required 
utilities. The term mobile home does not include a recreational 
vehicle. For purposes of this part, the term mobile home means a mobile 
home on a permanent foundation. The term mobile home includes a 
manufactured home as that term is used in the NFIP.
    (h) NFIP means the National Flood Insurance Program authorized 
under the Act.
    (i) Residential improved real estate means real estate upon which a 
home or other residential building is located or to be located.
    (j) Servicer means the person responsible for:
    (1) Receiving any scheduled, periodic payments from a borrower 
under the terms of a loan, including amounts for taxes, insurance 
premiums, and other charges with respect to the property securing the 
loan; and
    (2) Making payments of principal and interest and any other 
payments from the amounts received from the borrower as may be required 
under the terms of the loan.
    (k) Special flood hazard area means the land in the flood plain 
within a community having at least a one percent chance of flooding in 
any given year, as designated by the Director of FEMA.
    (l) Table funding means a settlement at which a loan is funded by a 
contemporaneous advance of loan funds and an assignment of the loan to 
the person advancing the funds.


Sec. 339.3  Requirement to purchase flood insurance where available.

    (a) In general. A bank shall not make, increase, extend, or renew 
any designated loan unless the building or mobile home and any personal 
property securing the loan is covered by flood insurance for the term 
of the loan. The amount of insurance must be at least equal to the 
lesser of the outstanding principal balance of the designated loan or 
the maximum limit of coverage available for the particular type of 
property under the Act. Flood insurance coverage under the Act is 
limited to the overall value of the property securing the designated 
loan minus the value of the land on which the property is located.
    (b) Table funded loans. A bank that acquires a loan from a mortgage 
broker or other entity through table funding shall be considered to be 
making a loan for the purposes of this part.


Sec. 339.4  Exemptions.

    The flood insurance requirement prescribed by Sec. 339.3 does not 
apply with respect to:
    (a) Any State-owned property covered under a policy of self-
insurance satisfactory to the Director of FEMA, who publishes and 
periodically revises the list of States falling within this exemption; 
or
    (b) Property securing any loan with an original principal balance 
of $5,000 or less and a repayment term of one year or less.


Sec. 339.5  Escrow requirement.

    If a bank requires the escrow of taxes, insurance premiums, fees, 
or any other charges for a loan secured by residential improved real 
estate or a mobile home that is made, increased, extended, or renewed 
on or after October 1, 1996, the bank shall also require the escrow of 
all premiums and fees for any flood insurance required under 
Sec. 339.3. The bank, or a servicer acting on behalf of the bank, shall 
deposit the flood insurance premiums on behalf of the borrower in an 
escrow account. This escrow account will be subject to escrow 
requirements adopted pursuant to section 10 of the Real Estate 
Settlement Procedures Act of 1974 (12 U.S.C. 2609) (RESPA), which 
generally limits the amount that may be maintained in escrow accounts 
for certain types of loans and requires escrow account statements for 
those accounts, only if the loan is otherwise subject to RESPA. 
Following receipt of a notice from the Director of FEMA or other 
provider of flood insurance that premiums are due, the bank, or a 
servicer acting on behalf of the bank, shall pay the amount owed to the 
insurance provider from the escrow account by the date when such 
premiums are due.


Sec. 339.6  Required use of standard flood hazard determination form.

    (a) Use of form. A bank shall use the standard flood hazard 
determination form developed by the Director of FEMA (as set forth in 
Appendix A of 44 CFR part 65) when determining whether the building or 
mobile home offered as collateral security for a loan is or will be 
located in a special flood hazard area in which flood insurance is 
available under the Act. The standard flood hazard determination form 
may be used in a printed, computerized, or electronic manner.
    (b) Retention of form. A bank shall retain a copy of the completed 
standard flood hazard determination form, in either hard copy or 
electronic form, for the period of time the bank owns the loan.


Sec. 339.7  Forced placement of flood insurance.

    If a bank, or a servicer acting on behalf of the bank, determines, 
at any time during the term of a designated loan, that the building or 
mobile home and any personal property securing the designated loan is 
not covered by flood insurance or is covered by flood insurance in an 
amount less than the amount required under Sec. 339.3, then the bank or 
its servicer shall notify the borrower that the borrower should obtain 
flood insurance, at the borrower's expense, in an amount at least equal 
to the amount required under Sec. 339.3, for the remaining term of the 
loan. If the borrower fails to obtain flood insurance within 45 days 
after notification, then the bank or its servicer shall purchase 
insurance on the borrower's behalf. The bank or its servicer may charge 
the borrower for the cost of premiums and fees incurred in purchasing 
the insurance.


Sec. 339.8  Determination fees.

    (a) General. Notwithstanding any Federal or State law other than 
the Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-
4129), any bank, or a servicer acting on behalf of the bank, may charge 
a reasonable fee for determining whether the building or mobile home 
securing the loan is located or will be located in a special flood 
hazard area. A determination fee may also include, but is not limited 
to, a fee for life-of-loan monitoring.
    (b) Borrower fee. The determination fee authorized by paragraph (a) 
of this section may be charged to the borrower if the determination:
    (1) Is made in connection with a making, increasing, extending, or 
renewing of the loan that is initiated by the borrower;
    (2) Reflects the Director of FEMA's revision or updating of 
floodplain areas or flood-risk zones;
    (3) Reflects the Director of FEMA's publication of a notice or 
compendium that:
    (i) Affects the area in which the building or mobile home securing 
the loan is located; or
    (ii) By determination of the Director of FEMA, may reasonably 
require a determination whether the building or mobile home securing 
the loan is located in a special flood hazard area; or
    (4) Results in the purchase of flood insurance coverage by the 
lender or its servicer on behalf of the borrower under Sec. 339.7.

[[Page 45708]]

    (c) Purchaser or transferee fee. The determination fee authorized 
by paragraph (a) of this section may be charged to the purchaser or 
transferee of a loan in the case of the sale or transfer of the loan.


Sec. 339.9  Notice of special flood hazards and availability of Federal 
disaster relief assistance.

    (a) Notice requirement. When a bank makes, increases, extends, or 
renews a loan secured by a building or a mobile home located or to be 
located in a special flood hazard area, the bank shall mail or deliver 
a written notice to the borrower and to the servicer in all cases 
whether or not flood insurance is available under the Act for the 
collateral securing the loan.
    (b) Contents of notice. The written notice must include the 
following information:
    (1) A warning, in a form approved by the Director of FEMA, that the 
building or the mobile home is or will be located in a special flood 
hazard area;
    (2) A description of the flood insurance purchase requirements set 
forth in section 102(b) of the Flood Disaster Protection Act of 1973, 
as amended (42 U.S.C. 4012a(b));
    (3) A statement, where applicable, that flood insurance coverage is 
available under the NFIP and may also be available from private 
insurers; and
    (4) A statement whether Federal disaster relief assistance may be 
available in the event of damage to the building or mobile home caused 
by flooding in a Federally-declared disaster.
    (c) Timing of notice. The bank shall provide the notice required by 
paragraph (a) of this section to the borrower within a reasonable time 
before the completion of the transaction, and to the servicer as 
promptly as practicable after the bank provides notice to the borrower 
and in any event no later than the time the bank provides other similar 
notices to the servicer concerning hazard insurance and taxes. Notice 
to the servicer may be made electronically or may take the form of a 
copy of the notice to the borrower.
    (d) Record of receipt. The bank shall retain a record of the 
receipt of the notices by the borrower and the servicer for the period 
of time the bank owns the loan.
    (e) Alternate method of notice. Instead of providing the notice to 
the borrower required by paragraph (a) of this section, a bank may 
obtain satisfactory written assurance from a seller or lessor that, 
within a reasonable time before the completion of the sale or lease 
transaction, the seller or lessor has provided such notice to the 
purchaser or lessee. The bank shall retain a record of the written 
assurance from the seller or lessor for the period of time the bank 
owns the loan.
    (f) Use of prescribed form of notice. A bank will be considered to 
be in compliance with the requirement for notice to the borrower of 
this section by providing written notice to the borrower containing the 
language presented in appendix A to this part within a reasonable time 
before the completion of the transaction. The notice presented in 
appendix A to this part satisfies the borrower notice requirements of 
the Act.


Sec. 339.10  Notice of servicer's identity.

    (a) Notice requirement. When a bank makes, increases, extends, 
renews, sells, or transfers a loan secured by a building or mobile home 
located or to be located in a special flood hazard area, the bank shall 
notify the Director of FEMA (or the Director of FEMA's designee) in 
writing of the identity of the servicer of the loan. The Director of 
FEMA has designated the insurance provider to receive the bank's notice 
of the servicer's identity. This notice may be provided electronically 
if electronic transmission is satisfactory to the Director of FEMA's 
designee.
    (b) Transfer of servicing rights. The bank shall notify the 
Director of FEMA (or the Director of FEMA's designee) of any change in 
the servicer of a loan described in paragraph (a) of this section 
within 60 days after the effective date of the change. This notice may 
be provided electronically if electronic transmission is satisfactory 
to the Director of FEMA's designee. Upon any change in the servicing of 
a loan described in paragraph (a) of this section, the duty to provide 
notice under this paragraph (b) shall transfer to the transferee 
servicer.

Appendix A to Part 339--Sample Form of Notice of Special Flood 
Hazards and Availability of Federal Disaster Relief Assistance

    We are giving you this notice to inform you that:
    The building or mobile home securing the loan for which you have 
applied is or will be located in an area with special flood hazards.
    The area has been identified by the Director of the Federal 
Emergency Management Agency (FEMA) as a special flood hazard area 
using FEMA's Flood Insurance Rate Map or the Flood Hazard Boundary 
Map for the following community: ________________. This area has at 
least a one percent (1%) chance of a flood equal to or exceeding the 
base flood elevation (a 100-year flood) in any given year. During 
the life of a 30-year mortgage loan, the risk of a 100-year flood in 
a special flood hazard area is 26 percent (26%).
    Federal law allows a lender and borrower jointly to request the 
Director of FEMA to review the determination of whether the property 
securing the loan is located in a special flood hazard area. If you 
would like to make such a request, please contact us for further 
information.
    ______ The community in which the property securing the loan is 
located participates in the National Flood Insurance Program (NFIP). 
Federal law will not allow us to make you the loan that you have 
applied for if you do not purchase flood insurance. The flood 
insurance must be maintained for the life of the loan. If you fail 
to purchase or renew flood insurance on the property, Federal law 
authorizes and requires us to purchase the flood insurance for you 
at your expense.
     Flood insurance coverage under the NFIP may be 
purchased through an insurance agent who will obtain the policy 
either directly through the NFIP or through an insurance company 
that participates in the NFIP. Flood insurance also may be available 
from private insurers that do not participate in the NFIP.
     At a minimum, flood insurance purchased must cover the 
lesser of:
    (1) the outstanding principal balance of the loan; or
    (2) the maximum amount of coverage allowed for the type of 
property under the NFIP.
    Flood insurance coverage under the NFIP is limited to the 
overall value of the property securing the loan minus the value of 
the land on which the property is located.
     Federal disaster relief assistance (usually in the form 
of a low-interest loan) may be available for damages incurred in 
excess of your flood insurance if your community's participation in 
the NFIP is in accordance with NFIP requirements.
    ______ Flood insurance coverage under the NFIP is not available 
for the property securing the loan because the community in which 
the property is located does not participate in the NFIP. In 
addition, if the non-participating community has been identified for 
at least one year as containing a special flood hazard area, 
properties located in the community will not be eligible for Federal 
disaster relief assistance in the event of a Federally-declared 
flood disaster.

    By order of the Board of Directors.

    Dated at Washington, D.C., this 13th day of August, 1996.

Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.

Office of Thrift Supervision

12 CFR CHAPTER V

Authority and Issuance

    For the reasons set forth in the joint preamble, chapter V of title 
12 of the Code of Federal Regulations is amended as set forth below:

[[Page 45709]]

PART 563--OPERATIONS

    1. The authority citation for part 563 is revised to read as 
follows:

    Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468, 
1817, 1828, 3806.


Sec. 563.48  [Removed]

    2. Section 563.48 is removed.
    3. A new part 572 is added to read as follows:

PART 572--LOANS IN AREAS HAVING SPECIAL FLOOD HAZARDS

Sec.
572.1  Authority, purpose, and scope.
572.2  Definitions.
572.3  Requirement to purchase flood insurance where available.
572.4  Exemptions.
572.5  Escrow requirement.
572.6  Required use of standard flood hazard determination form.
572.7  Forced placement of flood insurance.
572.8  Determination fees.
572.9  Notice of special flood hazards and availability of Federal 
disaster relief assistance.
572.10  Notice of servicer's identity.

Appendix A to Part 572--Sample Form of Notice of Special Flood Hazards 
and Availability of Federal Disaster Relief Assistance

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464; 42 U.S.C. 4012a, 
4104a, 4104b, 4106, and 4128.


Sec. 572.1  Authority, purpose, and scope.

    (a) Authority. This part is issued pursuant to 12 U.S.C. 1462, 
1462a, 1463, 1464 and 42 U.S.C. 4012a, 4104a, 4104b, 4106, 4128.
    (b) Purpose. The purpose of this part is to implement the 
requirements of the National Flood Insurance Act of 1968 and the Flood 
Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129).
    (c) Scope. This part, except for Secs. 572.6 and 572.8, applies to 
loans secured by buildings or mobile homes located or to be located in 
areas determined by the Director of the Federal Emergency Management 
Agency to have special flood hazards. Sections 572.6 and 572.8 of this 
part apply to loans secured by buildings or mobile homes, regardless of 
location.


Sec. 572.2  Definitions.

    (a) Act means the National Flood Insurance Act of 1968, as amended 
(42 U.S.C. 4001-4129).
    (b) Savings association means, for purposes of this part, a savings 
association as that term is defined in 12 U.S.C. 1813(b)(1) and any 
subsidiaries or service corporations thereof.
    (c) Building means a walled and roofed structure, other than a gas 
or liquid storage tank, that is principally above ground and affixed to 
a permanent site, and a walled and roofed structure while in the course 
of construction, alteration, or repair.
    (d) Community means a State or a political subdivision of a State 
that has zoning and building code jurisdiction over a particular area 
having special flood hazards.
    (e) Designated loan means a loan secured by a building or mobile 
home that is located or to be located in a special flood hazard area in 
which flood insurance is available under the Act.
    (f) Director of FEMA means the Director of the Federal Emergency 
Management Agency.
    (g) Mobile home means a structure, transportable in one or more 
sections, that is built on a permanent chassis and designed for use 
with or without a permanent foundation when attached to the required 
utilities. The term mobile home does not include a recreational 
vehicle. For purposes of this part, the term mobile home means a mobile 
home on a permanent foundation. The term mobile home includes a 
manufactured home as that term is used in the NFIP.
    (h) NFIP means the National Flood Insurance Program authorized 
under the Act.
    (i) Residential improved real estate means real estate upon which a 
home or other residential building is located or to be located.
    (j) Servicer means the person responsible for:
    (1) Receiving any scheduled, periodic payments from a borrower 
under the terms of a loan, including amounts for taxes, insurance 
premiums, and other charges with respect to the property securing the 
loan; and
    (2) Making payments of principal and interest and any other 
payments from the amounts received from the borrower as may be required 
under the terms of the loan.
    (k) Special flood hazard area means the land in the flood plain 
within a community having at least a one percent chance of flooding in 
any given year, as designated by the Director of FEMA.
    (l) Table funding means a settlement at which a loan is funded by a 
contemporaneous advance of loan funds and an assignment of the loan to 
the person advancing the funds.


Sec. 572.3  Requirement to purchase flood insurance where available.

    (a) In general. A savings association shall not make, increase, 
extend, or renew any designated loan unless the building or mobile home 
and any personal property securing the loan is covered by flood 
insurance for the term of the loan. The amount of insurance must be at 
least equal to the lesser of the outstanding principal balance of the 
designated loan or the maximum limit of coverage available for the 
particular type of property under the Act. Flood insurance coverage 
under the Act is limited to the overall value of the property securing 
the designated loan minus the value of the land on which the property 
is located.
    (b) Table funded loans. A savings association that acquires a loan 
from a mortgage broker or other entity through table funding shall be 
considered to be making a loan for the purposes of this part.


Sec. 572.4  Exemptions.

    The flood insurance requirement prescribed by Sec. 572.3 does not 
apply with respect to:
    (a) Any State-owned property covered under a policy of self-
insurance satisfactory to the Director of FEMA, who publishes and 
periodically revises the list of States falling within this exemption; 
or
    (b) Property securing any loan with an original principal balance 
of $5,000 or less and a repayment term of one year or less.


Sec. 572.5  Escrow requirement.

    If a savings association requires the escrow of taxes, insurance 
premiums, fees, or any other charges for a loan secured by residential 
improved real estate or a mobile home that is made, increased, 
extended, or renewed on or after October 1, 1996, the savings 
association shall also require the escrow of all premiums and fees for 
any flood insurance required under Sec. 572.3. The savings association, 
or a servicer acting on behalf of the savings association, shall 
deposit the flood insurance premiums on behalf of the borrower in an 
escrow account. This escrow account will be subject to escrow 
requirements adopted pursuant to section 10 of the Real Estate 
Settlement Procedures Act of 1974 (12 U.S.C. 2609) (RESPA), which 
generally limits the amount that may be maintained in escrow accounts 
for certain types of loans and requires escrow account statements for 
those accounts, only if the loan is otherwise subject to RESPA. 
Following receipt of a notice from the Director of FEMA or other 
provider of flood insurance that premiums are due, the savings 
association, or a servicer acting on behalf of the savings association, 
shall pay the amount owed to the insurance provider from the escrow 
account by the date when such premiums are due.

[[Page 45710]]

Sec. 572.6  Required use of standard flood hazard determination form.

    (a) Use of form. A savings association shall use the standard flood 
hazard determination form developed by the Director of FEMA (as set 
forth in Appendix A of 44 CFR part 65) when determining whether the 
building or mobile home offered as collateral security for a loan is or 
will be located in a special flood hazard area in which flood insurance 
is available under the Act. The standard flood hazard determination 
form may be used in a printed, computerized, or electronic manner.
    (b) Retention of form. A savings association shall retain a copy of 
the completed standard flood hazard determination form, in either hard 
copy or electronic form, for the period of time the savings association 
owns the loan.


Sec. 572.7  Forced placement of flood insurance.

    If a savings association, or a servicer acting on behalf of the 
savings association, determines at any time during the term of a 
designated loan that the building or mobile home and any personal 
property securing the designated loan is not covered by flood insurance 
or is covered by flood insurance in an amount less than the amount 
required under Sec. 572.3, then the savings association or its servicer 
shall notify the borrower that the borrower should obtain flood 
insurance, at the borrower's expense, in an amount at least equal to 
the amount required under Sec. 572.3, for the remaining term of the 
loan. If the borrower fails to obtain flood insurance within 45 days 
after notification, then the savings association or its servicer shall 
purchase insurance on the borrower's behalf. The savings association or 
its servicer may charge the borrower for the cost of premiums and fees 
incurred in purchasing the insurance.


Sec. 572.8  Determination fees.

    (a) General. Notwithstanding any Federal or State law other than 
the Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-
4129), any savings association, or a servicer acting on behalf of the 
savings association, may charge a reasonable fee for determining 
whether the building or mobile home securing the loan is located or 
will be located in a special flood hazard area. A determination fee may 
also include, but is not limited to, a fee for life-of-loan monitoring.
    (b) Borrower fee. The determination fee authorized by paragraph (a) 
of this section may be charged to the borrower if the determination:
    (1) Is made in connection with a making, increasing, extending, or 
renewing of the loan that is initiated by the borrower;
    (2) Reflects the Director of FEMA's revision or updating of 
floodplain areas or flood-risk zones;
    (3) Reflects the Director of FEMA's publication of a notice or 
compendium that:
    (i) Affects the area in which the building or mobile home securing 
the loan is located; or
    (ii) By determination of the Director of FEMA, may reasonably 
require a determination whether the building or mobile home securing 
the loan is located in a special flood hazard area; or
    (4) Results in the purchase of flood insurance coverage by the 
lender or its servicer on behalf of the borrower under Sec. 572.7.
    (c) Purchaser or transferee fee. The determination fee authorized 
by paragraph (a) of this section may be charged to the purchaser or 
transferee of a loan in the case of the sale or transfer of the loan.


Sec. 572.9  Notice of special flood hazards and availability of Federal 
disaster relief assistance.

    (a) Notice requirement. When a savings association makes, 
increases, extends, or renews a loan secured by a building or a mobile 
home located or to be located in a special flood hazard area, the 
savings association shall mail or deliver a written notice to the 
borrower and to the servicer in all cases whether or not flood 
insurance is available under the Act for the collateral securing the 
loan.
    (b) Contents of notice. The written notice must include the 
following information:
    (1) A warning, in a form approved by the Director of FEMA, that the 
building or the mobile home is or will be located in a special flood 
hazard area;
    (2) A description of the flood insurance purchase requirements set 
forth in section 102(b) of the Flood Disaster Protection Act of 1973, 
as amended (42 U.S.C. 4012a(b));
    (3) A statement, where applicable, that flood insurance coverage is 
available under the NFIP and may also be available from private 
insurers; and
    (4) A statement whether Federal disaster relief assistance may be 
available in the event of damage to the building or mobile home caused 
by flooding in a Federally-declared disaster.
    (c) Timing of notice. The savings association shall provide the 
notice required by paragraph (a) of this section to the borrower within 
a reasonable time before the completion of the transaction, and to the 
servicer as promptly as practicable after the savings association 
provides notice to the borrower and in any event no later than the 
savings association provides other similar notices to the servicer 
concerning hazard insurance and taxes. Notice to the servicer may be 
made electronically or may take the form of a copy of the notice to the 
borrower.
    (d) Record of receipt. The savings association shall retain a 
record of the receipt of the notices by the borrower and the servicer 
for the period of time the savings association owns the loan.
    (e) Alternate method of notice. Instead of providing the notice to 
the borrower required by paragraph (a) of this section, a savings 
association may obtain satisfactory written assurance from a seller or 
lessor that, within a reasonable time before the completion of the sale 
or lease transaction, the seller or lessor has provided such notice to 
the purchaser or lessee. The savings association shall retain a record 
of the written assurance from the seller or lessor for the period of 
time the savings association owns the loan.
    (f) Use of prescribed form of notice. A savings association will be 
considered to be in compliance with the requirement for notice to the 
borrower of this section by providing written notice to the borrower 
containing the language presented in appendix A to this part within a 
reasonable time before the completion of the transaction. The notice 
presented in appendix A to this part satisfies the borrower notice 
requirements of the Act.


Sec. 572.10  Notice of servicer's identity.

    (a) Notice requirement. When a savings association makes, 
increases, extends, renews, sells, or transfers a loan secured by a 
building or mobile home located or to be located in a special flood 
hazard area, the savings association shall notify the Director of FEMA 
(or the Director's designee) in writing of the identity of the servicer 
of the loan. The Director of FEMA has designated the insurance provider 
to receive the savings association's notice of the servicer's identity. 
This notice may be provided electronically if electronic transmission 
is satisfactory to the Director of FEMA's designee.
    (b) Transfer of servicing rights. The savings association shall 
notify the Director of FEMA (or the Director's designee) of any change 
in the servicer of a loan described in paragraph (a) of this section 
within 60 days after the effective date of the change. This notice may 
be provided electronically if electronic transmission is satisfactory 
to

[[Page 45711]]

the Director of FEMA's designee. Upon any change in the servicing of a 
loan described in paragraph (a) of this section, the duty to provide 
notice under this paragraph (b) shall transfer to the transferee 
servicer.

Appendix A to Part 572--Sample Form of Notice of Special Flood 
Hazards and Availability of Federal Disaster Relief Assistance

    We are giving you this notice to inform you that:
    The building or mobile home securing the loan for which you have 
applied is or will be located in an area with special flood hazards.
    The area has been identified by the Director of the Federal 
Emergency Management Agency (FEMA) as a special flood hazard area 
using FEMA's Flood Insurance Rate Map or the Flood Hazard Boundary 
Map for the following community: ________________. This area has at 
least a one percent (1%) chance of a flood equal to or exceeding the 
base flood elevation (a 100-year flood) in any given year. During 
the life of a 30-year mortgage loan the risk of a 100-year flood in 
a special flood hazard area is 26 percent (26%).
    Federal law allows a lender and borrower jointly to request the 
Director of FEMA to review the determination of whether the property 
securing the loan is located in a special flood hazard area. If you 
would like to make such a request, please contact us for further 
information.
    ______The community in which the property securing the loan is 
located participates in the National Flood Insurance Program (NFIP). 
Federal law will not allow us to make you the loan that you have 
applied for if you do not purchase flood insurance. The flood 
insurance must be maintained for the life of the loan. If you fail 
to purchase or renew flood insurance on the property, Federal law 
authorizes and requires us to purchase the flood insurance for you 
at your expense.
     Flood insurance coverage under the NFIP may be 
purchased through an insurance agent who will obtain the policy 
either directly through the NFIP or through an insurance company 
that participates in the NFIP. Flood insurance also may be available 
from private insurers that do not participate in the NFIP.
     At a minimum, flood insurance purchased must cover the 
lesser of:
    (1) the outstanding principal balance of the loan; or
    (2) the maximum amount of coverage allowed for the type of 
property under the NFIP.
    Flood insurance coverage under the NFIP is limited to the 
overall value of the property securing the loan minus the value of 
the land on which the property is located.
     Federal disaster relief assistance (usually in the form 
of a low-interest loan) may be available for damages incurred in 
excess of your flood insurance if your community's participation in 
the NFIP is in accordance with NFIP requirements.
    ______Flood insurance coverage under the NFIP is not available 
for the property securing the loan because the community in which 
the property is located does not participate in the NFIP. In 
addition, if the non-participating community has been identified for 
at least one year as containing a special flood hazard area, 
properties located in the community will not be eligible for Federal 
disaster relief assistance in the event of a Federally-declared 
flood disaster.

    Dated: August 16, 1996.

    By the Office of Thrift Supervision.
John F. Downey,
Executive Director, Supervision.

Farm Credit Administration

12 CFR CHAPTER VI

Authority and Issuance

    For the reasons stated in the preamble, part 614 of chapter VI, 
title 12 of the Code of Federal Regulations is amended as follows:

PART 614--LOAN POLICIES AND OPERATIONS

    1. 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 
the Farm Credit Act (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.

    2. Part 614 is amended by revising subpart S to read as follows:

Subpart S--Flood Insurance Requirements

Sec.
614.4920  Purpose and scope.
614.4925  Definitions.
614.4930  Requirement to purchase flood insurance where available.
614.4935  Escrow requirement.
614.4940  Required use of standard flood hazard determination form.
614.4945  Forced placement of flood insurance.
614.4950  Determination fees.
614.4955  Notice of special flood hazards and availability of 
Federal disaster relief assistance.
614.4960  Notice of servicer's identity.

Appendix A to Subpart S of Part 614--Sample Form of Notice of Special 
Flood Hazards and Availability of Federal Disaster Relief Assistance

Subpart S--Flood Insurance Requirements


Sec. 614.4920  Purpose and scope.

    (a) Purpose. This subpart implements the requirements of the 
National Flood Insurance Act of 1968 (1968 Act), as amended, and the 
Flood Disaster Protection Act of 1973 (1973 Act), as amended (42 U.S.C. 
4001-4129).
    (b) Scope. This subpart, except for Secs. 614.4940 and 614.4950, 
applies to loans of Farm Credit System (System) institutions that are 
secured by buildings or mobile homes located or to be located in areas 
determined by the Director of the Federal Emergency Management Agency 
to have special flood hazards. Sections 614.4940 and 614.4950 apply to 
loans secured by buildings or mobile homes, regardless of location.


Sec. 614.4925  Definitions.

    (a) Building means a walled and roofed structure, other than a gas 
or liquid storage tank, that is principally above ground and affixed to 
a permanent site, and a walled and roofed structure while in the course 
of construction, alteration, or repair.
    (b) Community means a State or a political subdivision of a State 
that has zoning and building code jurisdiction over a particular area 
having special flood hazards.
    (c) Designated loan means a loan secured by a building or a mobile 
home that is located or to be located in a special flood hazard area in 
which flood insurance is available under the 1968 Act.
    (d) Director of FEMA means the Director of the Federal Emergency 
Management Agency.
    (e) Mobile home means a structure, transportable in one or more 
sections, that is built on a permanent chassis and designed for use 
with or without a permanent foundation when attached to the required 
utilities. The term mobile home does not include a recreational 
vehicle. For purposes of this subpart, the term mobile home means a 
mobile home on a permanent foundation. The term mobile home includes a 
manufactured home as that term is used in the NFIP.
    (f) NFIP means the National Flood Insurance Program authorized 
under the 1968 Act.
    (g) Residential improved real estate means real estate upon which a 
home or other residential building is located or to be located.

[[Page 45712]]

    (h) Servicer means the person responsible for:
    (1) Receiving any scheduled, periodic payments from a borrower 
under the terms of a loan, including amounts for taxes, insurance 
premiums, and other charges with respect to the property securing the 
loan; and
    (2) Making payments of principal and interest and any other 
payments from the amounts received from the borrower as may be required 
under the terms of the loan.
    (i) Special flood hazard area means the land in the flood plain 
within a community having at least a one percent chance of flooding in 
any given year, as designated by the Director of FEMA.
    (j) Table funding means a settlement at which a loan is funded by a 
contemporaneous advance of loan funds and an assignment of the loan to 
the person advancing the funds.


Sec. 614.4930  Requirement to purchase flood insurance where available.

    (a) In general. A System institution shall not make, increase, 
extend or renew any designated loan unless the building or mobile home 
and any personal property securing the loan are covered by flood 
insurance for the term of the loan. The amount of insurance must be at 
least equal to the outstanding principal balance of the designated loan 
or the maximum limit of coverage available for the particular type of 
property under the 1968 Act. Flood insurance coverage under the Act is 
limited to the overall value of the property securing the designated 
loan minus the value of the land on which the property is located.
    (b) Table funded loans. A System institution that acquires a loan 
from a mortgage broker or other entity through table funding shall be 
considered to be making a loan for purposes of this part.
    (c) Exemptions. The flood insurance requirement of paragraph (a) of 
this section does not apply with respect to:
    (1) Any State-owned property covered under a policy of self-
insurance satisfactory to the Director of FEMA, who publishes and 
periodically revises the list of States falling within this exemption; 
or
    (2) Property securing any loan with an original principal balance 
of $5,000 or less and a repayment term of one year or less.


Sec. 614.4935  Escrow requirement.

    If a System institution requires the escrow of taxes, insurance 
premiums, fees, or any other charges for a loan secured by residential 
improved real estate or a mobile home that is made, increased, extended 
or renewed on or after October 4, 1996, the institution shall also 
require the escrow of all premiums and fees for any flood insurance 
required under Sec. 614.4930. The institution, or a servicer acting on 
behalf of the institution, shall deposit the flood insurance premiums 
on behalf of the borrower in an escrow account. This escrow account 
will be subject to escrow requirements adopted pursuant to section 10 
of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2609) 
(RESPA), which generally limits the amount that may be maintained in 
escrow accounts for certain types of loans and requires escrow account 
statements for those accounts, only if the loan is otherwise subject to 
RESPA. Following receipt of a notice from the Director of FEMA or other 
provider of flood insurance that premiums are due, the institution, or 
a servicer acting on behalf of the institution, shall pay the amount 
owed to the insurance provider from the escrow account by the date when 
such premiums are due.


Sec. 614.4940  Required use of standard flood hazard determination 
form.

    (a) Use of form. System institutions shall use the standard flood 
hazard determination form developed by the Director of FEMA (as set 
forth in Appendix A of 44 CFR part 65) when determining whether the 
building or mobile home offered as collateral security for a loan is or 
will be located in a special flood hazard area in which flood insurance 
is available under the 1968 Act. The standard flood hazard 
determination form may be used in a printed, computerized, or 
electronic manner.
    (b) Retention of form. System institutions shall retain a copy of 
the completed standard flood hazard determination form, in either hard 
copy or electronic form, for the period of time the institution owns 
the loan.


Sec. 614.4945  Forced placement of flood insurance.

    If a System institution, or a servicer acting on behalf of the 
institution, determines at any time during the term of a designated 
loan, that the building or mobile home and any personal property 
securing the designated loan are not covered by flood insurance or are 
covered by flood insurance in an amount less than the amount required 
under Sec. 614.4930(a), then the institution or its servicer shall 
notify the borrower that the borrower should obtain flood insurance, at 
the borrower's expense, in an amount at least equal to the amount 
required under Sec. 614.4930(a), for the remaining term of the loan. If 
the borrower fails to obtain flood insurance within 45 days after 
notification, then the institution or its servicer shall purchase 
insurance on the borrower's behalf. The institution or its servicer may 
charge the borrower for the cost of premiums and fees incurred in 
purchasing the insurance.


Sec. 614.4950  Determination fees.

    (a) General. Notwithstanding any Federal or State law other than 
the 1973 Act, any System institution, or a servicer acting on behalf of 
the institution, may charge a reasonable fee for determining whether 
the building or mobile home securing the loan is located or will be 
located in a special flood hazard area. A determination fee may also 
include, but is not limited to, a fee for life-of-loan monitoring.
    (b) Borrower fee. The determination fee authorized by paragraph (a) 
of this section may be charged to the borrower if the determination:
    (1) Is made in connection with a making, increasing, extending, or 
renewing of the loan that is initiated by the borrower;
    (2) Reflects the Director of FEMA's revision or updating of 
floodplain areas or flood-risk zones;
    (3) Reflects the Director of FEMA's publication of a notice or 
compendium that:
    (i) Affects the area in which the building or mobile home securing 
the loan is located; or
    (ii) By determination of the Director of FEMA, may reasonably 
require a determination whether the building or mobile home securing 
the loan is located in a special flood hazard area; or
    (4) Results in the purchase of flood insurance coverage under 
Sec. 614.4945.
    (c) Purchaser or transferee fee. The determination fee authorized 
by paragraph (a) of this section may be charged to the purchaser or 
transferee of a loan in the case of the sale or transfer of the loan.


Sec. 614.4955  Notice of special flood hazards and availability of 
Federal disaster relief assistance.

    (a) Notice requirement. When a System institution makes, increases, 
extends, or renews a loan secured by a building or a mobile home 
located or to be located in a special flood hazard area, the 
institution shall mail or deliver a written notice containing the 
information specified in paragraph (b) of this section to the borrower 
and to the servicer of the loan. Notice is required whether or not 
flood insurance is available under the 1968 Act for the collateral 
securing the loan.

[[Page 45713]]

    (b) Contents of notice. The written notice must include the 
following information:
    (1) A warning, in a form approved by the Director of FEMA, that the 
building or the mobile home is or will be located in a special flood 
hazard area;
    (2) A description of the flood insurance purchase requirements set 
forth in section 102(b) of the 1973 Act (42 U.S.C. 4012a(b));
    (3) A statement, where applicable, that flood insurance coverage is 
available under the NFIP and also may be available from private 
insurers; and
    (4) A statement whether Federal disaster relief assistance may be 
available in the event of damage to the building or the mobile home 
caused by flooding in a Federally declared disaster.
    (c) Timing of notice. The institution shall provide the notice 
required by paragraph (a) of this section to the borrower within a 
reasonable time before the completion of the transaction, and to the 
servicer as promptly as practicable after the institution provides 
notice to the borrower and in any event no later than the time the 
institution provides other similar notices to the servicer concerning 
hazard insurance and taxes. Notice to the servicer may be made 
electronically or may take the form of a copy of the notice to the 
borrower.
    (d) Record of receipt. Each institution shall retain a record of 
the receipt of the notices by the borrower and the servicer for the 
period of time the institution owns the loan.
    (e) Alternate method of notice. Instead of providing the notice to 
the borrower required by paragraph (a) of this section, an institution 
may obtain satisfactory written assurance from a seller or lessor that, 
within a reasonable time before the completion of the sale or lease 
transaction, the seller or lessor has provided such notice to the 
purchaser or lessee. The institution shall retain a record of the 
written assurance from the seller or lessor for the period of time the 
institution owns the loan.
    (f) Use of prescribed form of notice. An institution will be 
considered to be in compliance with the requirements of this section 
for notice to the borrower by providing written notice to the borrower 
containing the language presented in appendix A to this subpart within 
a reasonable time before the completion of the transaction. The notice 
presented in appendix A to this subpart satisfies the borrower notice 
requirements of the 1968 Act.


Sec. 614.4960  Notice of servicer's identity.

    (a) Notice requirement. When a System institution makes, increases, 
extends, renews, sells, or transfers a loan secured by a building or 
mobile home located or to be located in a special flood hazard area, 
the institution shall notify the Director of FEMA (or the Director's 
designee) in writing of the identity of the servicer of the loan. The 
Director of FEMA has designated the insurance provider to receive the 
institution's notice of the servicer's identity. This notice may be 
provided electronically if electronic transmission is satisfactory to 
the Director of FEMA's designee.
    (b) Transfer of servicing rights. The institution shall notify the 
Director of FEMA (or the Director's designee) of any change in the 
servicer of a loan described in paragraph (a) of this section within 60 
days after the effective date of the change. This notice may be 
provided electronically if electronic transmission is satisfactory to 
the Director of FEMA's designee. Upon any change in the servicing of a 
loan described in paragraph (a) of this section, the duty to provide 
notice under this paragraph (b) shall transfer to the transferee 
servicer.

Appendix A to Subpart S of Part 614--Sample Form of Notice of 
Special Flood Hazards and Availability of Federal Disaster Relief 
Assistance

    We are giving you this notice to inform you that:
    The building or mobile home securing the loan for which you have 
applied is or will be located in an area with special flood hazards.
    The area has been identified by the Director of the Federal 
Emergency Management Agency (FEMA) as a special flood hazard area 
using FEMA's Flood Insurance Rate Map or the Flood Hazard Boundary 
Map for the following community: ________________. This area has at 
least a one percent (1%) chance of a flood equal to or exceeding the 
base flood elevation (a 100-year flood) in any given year. During 
the life of a 30-year mortgage loan, the risk of a 100-year flood in 
a special flood hazard area is 26 percent (26%).
    Federal law allows a lender and borrower jointly to request the 
Director of FEMA to review the determination of whether the property 
securing the loan is located in a special flood hazard area. If you 
would like to make such a request, please contact us for further 
information.
    ______ The community in which the property securing the loan is 
located participates in the National Flood Insurance Program (NFIP). 
Federal law will not allow us to make you the loan that you have 
applied for if you do not purchase flood insurance. The flood 
insurance must be maintained for the life of the loan. If you fail 
to purchase or renew flood insurance on the property, Federal law 
authorizes and requires us to purchase the flood insurance for you 
at your expense.
     Flood insurance coverage under the NFIP may be 
purchased through an insurance agent who will obtain the policy 
either directly through the NFIP or through an insurance company 
that participates in the NFIP. Flood insurance also may be available 
from private insurers that do not participate in the NFIP.
     At a minimum, flood insurance purchased must cover the 
lesser of:
    (1) The outstanding principal balance of the loan; or
    (2) The maximum amount of coverage allowed for the type of 
property under the NFIP.
    Flood insurance coverage under the NFIP is limited to the 
overall value of the property securing the loan minus the value of 
the land on which the property is located.
     Federal disaster relief assistance (usually in the form 
of a low-interest loan) may be available for damages incurred in 
excess of your flood insurance if your community's participation in 
the NFIP is in accordance with NFIP requirements.
    ______ Flood insurance coverage under the NFIP is not available 
for the property securing the loan because the community in which 
the property is located does not participate in the NFIP. In 
addition, if the non-participating community has been identified for 
at least one year as containing a special flood hazard area, 
properties located in the community will not be eligible for Federal 
disaster relief assistance in the event of a Federally-declared 
flood disaster.

    Dated: August 8, 1996.
Floyd Fithian,
Secretary, Farm Credit Administration Board.

National Credit Union Administration

12 CFR CHAPTER VII

Authority and Issuance

    For the reasons set forth in the joint preamble, part 760 of 
chapter VII of title 12 of the Code of Federal Regulations is revised 
to read as follows:

PART 760--LOANS IN AREAS HAVING SPECIAL FLOOD HAZARDS

Sec.
760.1  Authority, purpose, and scope.
760.2  Definitions.
760.3  Requirement to purchase flood insurance where available.
760.4  Exemptions.
760.5  Escrow requirement.
760.6  Required use of standard flood hazard determination form.
760.7  Forced placement of flood insurance.
760.8  Determination fees.
760.9  Notice of special flood hazards and availability of Federal 
disaster relief assistance.
760.10  Notice of servicer's identity.

[[Page 45714]]

Appendix to Part 760--Sample Form of Notice of Special Flood Hazards 
and Availability of Federal Disaster Relief Assistance

    Authority: 12 U.S.C. 1757, 1789; 42 U.S.C. 4012a, 4104a, 4104b, 
4106, and 4128.


Sec. 760.1  Authority, purpose, and scope.

    (a) Authority. This part is issued pursuant to 12 U.S.C. 1757, 1789 
and 42 U.S.C. 4012a, 4104a, 4104b, 4106, 4128.
    (b) Purpose. The purpose of this part is to implement the 
requirements of the National Flood Insurance Act of 1968 and the Flood 
Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129).
    (c) Scope. This part, except for Secs. 760.6 and 760.8, applies to 
loans secured by buildings or mobile homes located or to be located in 
areas determined by the Director of the Federal Emergency Management 
Agency to have special flood hazards. Sections 760.6 and 760.8 apply to 
loans secured by buildings or mobile homes, regardless of location.


Sec. 760.2  Definitions.

    (a) Act means the National Flood Insurance Act of 1968, as amended 
(42 U.S.C. 4001-4129).
    (b) Credit union means a Federal or State-chartered credit union 
that is insured by the National Credit Union Share Insurance Fund.
    (c) Building means a walled and roofed structure, other than a gas 
or liquid storage tank, that is principally above ground and affixed to 
a permanent site, and a walled and roofed structure while in the course 
of construction, alteration, or repair.
    (d) Community means a State or a political subdivision of a State 
that has zoning and building code jurisdiction over a particular area 
having special flood hazards.
    (e) Designated loan means a loan secured by a building or mobile 
home that is located or to be located in a special flood hazard area in 
which flood insurance is available under the Act.
    (f) Director of FEMA means the Director of the Federal Emergency 
Management Agency.
    (g) Mobile home means a structure, transportable in one or more 
sections, that is built on a permanent chassis and designed for use 
with or without a permanent foundation when attached to the required 
utilities. The term mobile home does not include a recreational 
vehicle. For purposes of this part, the term mobile home means a mobile 
home on a permanent foundation. The term mobile home means a 
manufactured home as that term is used in the NFIP.
    (h) NFIP means the National Flood Insurance Program authorized 
under the Act.
    (i) Residential improved real estate means real estate upon which a 
home or other residential building is located or to be located.
    (j) Servicer means the person responsible for:
    (1) Receiving any scheduled, periodic payments from a borrower 
under the terms of a loan, including amounts for taxes, insurance 
premiums, and other charges with respect to the property securing the 
loan; and
    (2) Making payments of principal and interest and any other 
payments from the amounts received from the borrower as may be required 
under the terms of the loan.
    (k) Special flood hazard area means the land in the flood plain 
within a community having at least a one percent chance of flooding in 
any given year, as designated by the Director of FEMA.
    (l) Table funding means a settlement at which a loan is funded by a 
contemporaneous advance of loan funds and an assignment of the loan to 
the person advancing the funds.


Sec. 760.3  Requirement to purchase flood insurance where available.

    (a) In general. A credit union shall not make, increase, extend, or 
renew any designated loan unless the building or mobile home and any 
personal property securing the loan is covered by flood insurance for 
the term of the loan. The amount of insurance must be at least equal to 
the lesser of the outstanding principal balance of the designated loan 
or the maximum limit of coverage available for the particular type of 
property under the Act. Flood insurance coverage under the Act is 
limited to the overall value of the property securing the designated 
loan minus the value of the land on which the property is located.
    (b) Table funded loan. A credit union that acquires a loan from a 
mortgage broker or other entity through table funding shall be 
considered to be making a loan for the purposes of this part.


Sec. 760.4  Exemptions.

    The flood insurance requirement prescribed by Sec. 760.3 does not 
apply with respect to:
    (a) Any State-owned property covered under a policy of self-
insurance satisfactory to the Director of FEMA, who publishes and 
periodically revises the list of States falling within this exemption; 
or
    (b) Property securing any loan with an original principal balance 
of $5,000 or less and a repayment term of one year or less.


Sec. 760.5  Escrow requirement.

    If a credit union requires the escrow of taxes, insurance premiums, 
fees, or any other charges for a loan secured by residential improved 
real estate or a mobile home that is made, increased, extended, or 
renewed on or after November 1, 1996, the credit union shall also 
require the escrow of all premiums and fees for any flood insurance 
required under Sec. 760.3. The credit union, or a servicer acting on 
behalf of the credit union, shall deposit the flood insurance premiums 
on behalf of the borrower in an escrow account. This escrow account 
will be subject to escrow requirements adopted pursuant to section 10 
of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2609) 
(RESPA), which generally limits the amount that may be maintained in 
escrow accounts for certain types of loans and requires escrow account 
statements for those accounts, only if the loan is otherwise subject to 
RESPA. Following receipt of a notice from the Director of FEMA or other 
provider of flood insurance that premiums are due, the credit union, or 
a servicer acting on behalf of the credit union, shall pay the amount 
owed to the insurance provider from the escrow account by the date when 
such premiums are due.


Sec. 760.6  Required use of standard flood hazard determination form.

    (a) Use of form. A credit union shall use the standard flood hazard 
determination form developed by the Director (as set forth in Appendix 
A of 44 CFR part 65) when determining whether the building or mobile 
home offered as collateral security for a loan is or will be located in 
a special flood hazard area in which flood insurance is available under 
the Act. The standard flood hazard determination form may be used in a 
printed, computerized, or electronic manner.
    (b) Retention of form. A credit union shall retain a copy of the 
completed standard flood hazard determination form, in either hard copy 
or electronic form, for the period of time the credit union owns the 
loan.


Sec. 760.7  Forced placement of flood insurance.

    If a credit union, or a servicer acting on behalf of the credit 
union, determines, at any time during the term of a designated loan 
that the building or mobile home and any personal property securing the 
designated loan is not covered by flood insurance or is covered

[[Page 45715]]

by flood insurance in an amount less than the amount required under 
Sec. 760.3, then the credit union or its servicer shall notify the 
borrower that the borrower should obtain flood insurance, at the 
borrower's expense, in an amount at least equal to the amount required 
under Sec. 760.3, for the remaining term of the loan. If the borrower 
fails to obtain flood insurance within 45 days after notification, then 
the credit union or its servicer shall purchase insurance on the 
borrower's behalf. The credit union or its servicer may charge the 
borrower for the cost of premiums and fees incurred in purchasing the 
insurance.


Sec. 760.8  Determination fees.

    (a) General. Notwithstanding any Federal or State law other than 
the Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-
4129), any credit union, or a servicer acting on behalf of the credit 
union, may charge a reasonable fee for determining whether the building 
or mobile home securing the loan is located or will be located in a 
special flood hazard area. A determination fee may also include, but is 
not limited to, a fee for life-of-loan monitoring.
    (b) Borrower fee. The determination fee authorized by paragraph (a) 
of this section may be charged to the borrower if the determination:
    (1) Is made in connection with a making, increasing, extending, or 
renewing of the loan that is initiated by the borrower;
    (2) Reflects the Director of FEMA's revision or updating of 
floodplain areas or flood-risk zones;
    (3) Reflects the Director of FEMA's publication of a notice or 
compendium that:
    (i) Affects the area in which the building or mobile home securing 
the loan is located; or
    (ii) By determination of the Director of FEMA, may reasonably 
require a determination whether the building or mobile home securing 
the loan is located in a special flood hazard area; or
    (4) Results in the purchase of flood insurance coverage by the 
credit union or its servicer on behalf of the borrower under 
Sec. 760.7.
    (c) Purchaser or transferee fee. The determination fee authorized 
by paragraph (a) of this section may be charged to the purchaser or 
transferee of a loan in the case of the sale or transfer of the loan.


Sec. 760.9  Notice of special flood hazards and availability of Federal 
disaster relief assistance.

    (a) Notice requirement. When a credit union makes, increases, 
extends, or renews a loan secured by a building or a mobile home 
located or to be located in a special flood hazard area, the credit 
union shall mail or deliver a written notice to the borrower and to the 
servicer in all cases whether or not flood insurance is available under 
the Act for the collateral securing the loan.
    (b) Contents of notice. The written notice must include the 
following information:
    (1) A warning, in a form approved by the Director of FEMA, that the 
building or the mobile home is or will be located in a special flood 
hazard area;
    (2) A description of the flood insurance purchase requirements set 
forth in section 102(b) of the Flood Disaster Protection Act of 1973, 
as amended (42 U.S.C. 4012a(b));
    (3) A statement, where applicable, that flood insurance coverage is 
available under the NFIP and may also be available from private 
insurers; and
    (4) A statement whether Federal disaster relief assistance may be 
available in the event of damage to the building or mobile home caused 
by flooding in a Federally-declared disaster.
    (c) Timing of notice. The credit union shall provide the notice 
required by paragraph (a) of this section to the borrower within a 
reasonable time before the completion of the transaction and to the 
servicer as promptly as practicable after the credit union provides 
notice to the borrower and in any event no later than the time the 
credit union provides other similar notices to the servicer concerning 
hazard insurance and taxes. Notice to the servicer may be made 
electronically or may take the form of a copy of the notice to the 
borrower.
    (d) Record of receipt. The credit union shall retain a record of 
the receipt of the notices by the borrower and the servicer for the 
period of time the credit union owns the loan.
    (e) Alternate method of notice. Instead of providing the notice to 
the borrower required by paragraph (a) of this section, a credit union 
may obtain satisfactory written assurance from a seller or lessor that, 
within a reasonable time before the completion of the sale or lease 
transaction, the seller or lessor has provided such notice to the 
purchaser or lessee. The credit union shall retain a record of the 
written assurance from the seller or lessor for the period of time the 
credit union owns the loan.
    (f) Use of prescribed form of notice. A credit union will be 
considered to be in compliance with the requirement for notice to the 
borrower of this section providing written notice to the borrower 
containing the language presented in the appendix to this part within a 
reasonable time before the completion of the transaction. The notice 
presented in the appendix to this part satisfies the borrower notice 
requirements of the Act.


Sec. 760.10  Notice of servicer's identity.

    (a) Notice requirement. When a credit union makes, increases, 
extends, renews, sells, or transfers a loan secured by a building or 
mobile home located or to be located in a special flood hazard area, 
the credit union shall notify the Director of FEMA (or the Director's 
designee) in writing of the identity of the servicer of the loan. The 
Director of FEMA has designated the insurance provider to receive the 
credit union's notice of the servicer's identity. This notice may be 
provided electronically if electronic transmission is satisfactory to 
the Director of FEMA's designee.
    (b) Transfer of servicing rights. The credit union shall notify the 
Director of FEMA (or the Director's designee) of any change in the 
servicer of a loan described in paragraph (a) of this section within 60 
days after the effective date of the change. This notice may be 
provided electronically if electronic transmission is satisfactory to 
the Director of FEMA's designee. Upon any change in the servicing of a 
loan described in paragraph (a) of this section, the duty to provide 
notice under this paragraph (b) shall transfer to the transferee 
servicer.

Appendix to Part 760--Sample Form of Notice of Special Flood 
Hazards and Availability of Federal Disaster Relief Assistance

    We are giving you this notice to inform you that:
    The building or mobile home securing the loan for which you have 
applied is or will be located in an area with special flood hazards.
    The area has been identified by the Director of the Federal 
Emergency Management Agency (FEMA) as a special flood hazard area 
using FEMA's Flood Insurance Rate Map or the Flood Hazard Boundary 
Map for the following community: ______________. This area has at 
least a one percent (1%) chance of a flood equal to or exceeding the 
base flood elevation (a 100-year flood) in any given year. During 
the life of a 30-year mortgage loan, the risk of a 100-year flood in 
a special flood hazard area is 26 percent (26%).
    Federal law allows a lender and borrower jointly to request the 
Director of FEMA to review the determination of whether the property 
securing the loan is located in a special flood hazard area. If you 
would like to make such a request, please contact us for further 
information.
    ______ The community in which the property securing the loan is 
located

[[Page 45716]]

participates in the National Flood Insurance Program (NFIP). Federal 
law will not allow us to make you the loan that you have applied for 
if you do not purchase flood insurance. The flood insurance must be 
maintained for the life of the loan. If you fail to purchase or 
renew flood insurance on the property, Federal law authorizes and 
requires us to purchase the flood insurance for you at your expense.
     Flood insurance coverage under the NFIP may be 
purchased through an insurance agent who will obtain the policy 
either directly through the NFIP or through an insurance company 
that participates in the NFIP. Flood insurance also may be available 
from private insurers that do not participate in the NFIP.
     At a minimum, flood insurance purchased must cover the 
lesser of:
    (1) the outstanding principal balance of the loan; or
    (2) the maximum amount of coverage allowed for the type of 
property under the NFIP.
    Flood insurance coverage under the NFIP is limited to the 
overall value of the property securing the loan minus the value of 
the land on which the property is located.
     Federal disaster relief assistance (usually in the form 
of a low-interest loan) may be available for damages incurred in 
excess of your flood insurance if your community's participation in 
the NFIP is in accordance with NFIP requirements.
    ______ Flood insurance coverage under the NFIP is not available 
for the property securing the loan because the community in which 
the property is located does not participate in the NFIP. In 
addition, if the non-participating community has been identified for 
at least one year as containing a special flood hazard area, 
properties located in the community will not be eligible for Federal 
disaster relief assistance in the event of a Federally-declared 
flood disaster.

    Dated: August 19, 1996.
Becky Baker,
Secretary of the Board, National Credit Union Administration.
[FR Doc. 96-21860 Filed 8-28-96; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P, 6720-01-P, 6705-01-P, 
7535-01-P