[Federal Register Volume 66, Number 177 (Wednesday, September 12, 2001)]
[Proposed Rules]
[Pages 47563-47566]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-22927]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1773

RIN 2550-AA21


Flood Insurance

Agency Office of Federal Housing Enterprise Oversight, HUD.

Action: Proposed regulation.

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SUMMARY: The Office of Federal Housing Enterprise Oversight (``OFHEO'') 
is proposing a regulation to codify the authority and responsibility of 
OFHEO to oversee and enforce the statutory requirements affecting the 
operations of the Federal National Mortgage Association and the Federal 
Home Loan Mortgage Corporation under the National Flood Insurance 
Reform Act of 1994, and to effect congressionally mandated adjustments 
to the civil money penalties applicable to violations of that law.

DATES: Comments regarding this notice of proposed rulemaking must be 
received in writing on or before October 12, 2001.

ADDRESSES: Send written comments to Alfred M. Pollard, General Counsel, 
Office of General Counsel, Office of Federal Housing Enterprise 
Oversight, 1700 G Street, NW., Fourth Floor, Washington, DC 20552. 
Written comments may also be sent by electronic mail at 
[email protected]. OFHEO requests that written comments submitted 
in hard copy also be accompanied by the electronic version in MS Word 
or in portable document format (pdf) on 3.5" disk.

FOR FURTHER INFORMATION CONTACT: David A. Felt, Associate General 
Counsel, Office of General Counsel, Office of Federal Housing 
Enterprise Oversight, 1700 G Street, NW., Fourth Floor, Washington, DC 
20552, telephone (202) 414-3750 (not a toll-free number). The telephone 
number for the Telecommunications Device for the Deaf is (800) 877-
8339.

SUPPLEMENTARY INFORMATION:

Comments

    OFHEO invites comments on all aspects of the proposed regulation, 
including legal and policy considerations, and will take all comments 
into consideration before issuing the final regulation. Copies of all 
comments will be posted on the OFHEO Internet web site at http://www.ofheo.gov. In addition, copies of all comments received will be 
available for examination by the public at the Office of Federal 
Housing Enterprise Oversight, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552.

I. Statutory Framework

    Title XIII of the Housing and Community Development Act of 1992, 
Pub. L. No. 102-550, entitled the ``Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992'' (the ``Act''),\1\ 
established the Office of Federal Housing Enterprise Oversight 
(``OFHEO'') as an independent office within the Department of Housing 
and Urban Development. OFHEO is the financial safety and soundness 
regulator of the nation's two largest housing-related Government-
sponsored enterprises: the Federal National Mortgage Association 
(``Fannie Mae'') and the Federal Home Loan Mortgage Corporation 
(``Freddie Mac'') (collectively, the ``Enterprises''). In addition to 
establishing OFHEO, the Act made amendments to the Enterprises' 
enabling statutes (collectively, ``the Charter Acts'') \2\ among other 
things, accommodate the restructured regulatory regime under the Act.
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    \1\ 12 U.S.C. 4501 et seq.
    \2\ Federal National Mortgage Association Charter Act (12 U.S.C. 
1716-1723i) and Federal Home Loan Mortgage Corporation Act (12 
U.S.C. 1451-1459).
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    The National Flood Insurance Act of 1968 (``NFIA'') \3\ and the 
Flood Disaster Protection Act of 1973 (``FDPA''),\4\ as amended by the 
National Flood Insurance Reform Act of 1994 (``NFIRA''),\5\ together 
create a comprehensive National Flood Insurance Program (``NFIP'') that 
includes various provisions designed to ensure that structures built in 
flood plains are covered by statutory minimum amounts of flood 
insurance. NFIRA added specific requirements explicitly applicable to 
the Enterprises,\6\ designated OFHEO as the Federal agency responsible 
for determining compliance of the Enterprises' flood insurance 
responsibilities, required OFHEO to report their compliance in the 
agency's 1996, 1998 and 2000 annual reports,\7\ and provided OFHEO with 
the authority to issue any regulations necessary to carry out the 
applicable provisions of NFIRA.\8\ NFIRA also authorized OFHEO to 
impose civil money penalties upon an Enterprise that fails to implement 
procedures reasonably designed to ensure that the loans it purchases 
comply with the mandatory flood insurance purchase requirements.\9\
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    \3\ Codified at 42 U.S.C. 4001 et seq. and other scattered 
sections of 42 U.S.C.
    \4\ Codified at 42 U.S.C. 4002 et seq. and other scattered 
sections of 42 U.S.C.
    \5\ Pub. L. No. 103-325 (Sept. 23, 1994) (codified, as amended, 
at 42 U.S.C. 4001-4129).
    \6\ 42 U.S.C. 4012a(b)(3).
    \7\ 12 U.S.C. 4521(a)(4).
    \8\ 42 U.S.C. 4001 note.
    \9\ 42 U.S.C. 4012a(f)(c).
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    More specifically, NFIRA requires that the Enterprises each 
implement procedures reasonably designed to ensure that any mortgage 
loan that is purchased and is secured by property located in a 
designated flood hazard

[[Page 47564]]

area is covered for the term of the loan by flood insurance in an 
amount at least equal to the lesser of (1) the outstanding principal 
balance of the loan or (2) the maximum limit of coverage made available 
for that type of property under the NFIP. OFHEO is authorized under 
NFIRA to levy a civil money penalty of $350 per violation, not to 
exceed $100,000 per year, against an Enterprise that it finds to have 
engaged in a pattern or practice of purchasing loans in violation of 
the procedures.\10\
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    \10\ 42 U.S.C. 4012a(f)(3),(5).
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II. Background

    The Enterprises have a key role in the implementation of the 
Federal Government's flood insurance program, particularly with regard 
to lenders that are not subject to direct supervision by a Federal 
regulatory agency. The Enterprises use their seller/servicer guidelines 
and other quality control review procedures to ensure that lenders with 
whom they contract comply with the applicable flood insurance laws. The 
Enterprises are required to establish procedures designed to prevent 
their purchase of loans that do not comply with these laws. NFIRA tasks 
OFHEO with reviewing the adequacy of such procedures as well as the 
Enterprises' compliance with them.
    A primary purpose of the proposed regulation is to reiterate the 
relevant statutory provisions specifically applicable to the 
Enterprises and to OFHEO and to codify them in OFHEO's regulations. The 
proposed regulation is intended to provide guidance as to the 
procedures to be applied if an enforcement action were to be required, 
to add statutory civil money penalty amounts for infractions of the 
flood insurance requirements to the schedule of penalties in OFHEO's 
regulations and to adjust such penalty amounts as contemplated by law 
for inflation.
The Inflation Adjustment Act
    The Federal Civil Penalties Inflation Adjustment Act of 1990, as 
amended by the Debt Collection Improvement Act of 1996 (the Inflation 
Adjustment Act),\11\ requires Federal agencies with the authority to 
issue civil money penalties, to adopt regulations to adjust each civil 
money penalty authorized by law that the agency has jurisdiction to 
administer. The purpose of these adjustments is to maintain the 
deterrent effect of civil money penalties and promote compliance with 
the law. The Inflation Adjustment Act requires agencies to make an 
initial adjustment of their civil money penalties upon the statute's 
enactment, and to make additional adjustments on an ongoing basis, at 
least once every four years following the initial adjustment.
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    \11\ 28 U.S.C. 2461 note.
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    Under the Inflation Adjustment Act, the inflation adjustment for 
each applicable civil money penalty is determined by increasing the 
maximum civil money penalty amount by a cost-of-living adjustment. As 
is described in detail below, the Inflation Adjustment Act provides 
that this cost-of-living adjustment is to reflect the percentage 
increase in the Consumer Price Index since the civil money penalties 
were last adjusted or established.
    NFIRA sets forth the procedures under which the Director of OFHEO 
could impose civil money penalties against an Enterprise and the 
amounts of these civil money penalties. In this rulemaking, the amounts 
of these civil money penalties are being adjusted in accordance with 
the requirements of the Inflation Adjustment Act. The increases in 
maximum civil money penalty amounts contained in this proposed rule do 
not mandate the amount of any civil money penalty that OFHEO may seek 
for a particular violation; OFHEO would determine each civil money 
penalty on a case-by-case basis in light of the circumstances of the 
case.
    The Inflation Adjustment Act directs Federal agencies to calculate 
each civil money penalty adjustment as the percentage by which the CPI-
U for June of the calendar year preceding the adjustment exceeds the 
CPI-U for June of the calendar year in which the amount of such civil 
money penalty was last set or adjusted pursuant to law. OFHEO has not 
previously adjusted these CMP amounts, so the base period is 1994, the 
year in which the CMPs were enacted into law by NFIRA. Because OFHEO is 
making these adjustments in calendar year 2001, and NFIRA was enacted 
in 1994, the inflation adjustment amount for each civil money penalty 
was calculated by comparing the CPI-U for June 1994 (148.0) with the 
CPI-U for June 2000 (172.4), resulting in an inflation adjustment of 
16.5 percent. For each civil money penalty, the product of this 
inflation adjustment and the previous maximum penalty amount was then 
rounded in accordance with the specific requirements of the Inflation 
Adjustment Act,\12\ then added to the previous maximum penalty amount 
to determine the new adjusted maximum penalty amount. However, the 
Inflation Adjustment Act further specifies that the first adjustment of 
any CMP pursuant to such Act may not exceed ten percent of the penalty. 
Accordingly, the original civil money penalty maximum of $350 under 
NFIA is increased to $385 for each violation and the civil money 
penalty maximum of $100,000 is increased to $110,000 for the total 
assessed penalties against any Enterprise during any calendar year.
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    \12\ The statute's rounding rules require that each increase be 
rounded to the nearest multiple as follows: $10 in the case of 
penalties less than or equal to $100; $100 in the case of penalties 
greater than $100 but less than or equal to $1,000; $1,000 in the 
case of penalties greater than $1,000 but less than or equal to 
$10,000; $5,000 in the case of penalties greater than $10,000 but 
less than or equal to $100,000; $10,000 in the case of penalties 
greater than $100,000 but less than or equal to $200,000; and $5,000 
in the case of penalties greater than $200,000.
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Section-By-Section Analysis

Section 1773.1  Authority and Scope

    Section 1773.1 sets forth the authority upon which this proposed 
regulation is based, namely the National Flood Insurance Act of 1968 
and the Flood Disaster Protection Act of 1973, as amended by the 
National Flood Insurance Reform Act of 1994. The National Flood 
Insurance Reform Act of 1994 requires OFHEO to examine the Enterprises 
to ascertain their compliance with these statutes and to report to 
Congress on their compliance, and provides OFHEO with the authority to 
issue any regulations necessary to carry out the applicable provisions 
of NFIRA. OFHEO is authorized to impose civil money penalties on an 
Enterprise for violation of procedures established pursuant to the 
National Flood Insurance Act of 1968, as amended, or rules or 
regulations adopted pursuant thereto.\13\
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    \13\ 42 U.S.C. 4012a(f)(3).
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Section 1773.2  Requirements

    Section 1773.2(a) sets forth the requirement that each Enterprise 
is to implement procedures reasonably designed to ensure that the 
properties securing particular loans described in paragraph (a) are 
properly insured in accordance with the National Flood Insurance Act of 
1968 and the Flood Disaster Protection Act of 1973, as amended by the 
National Flood Insurance Reform Act of 1994. This requirement applies 
to any loan purchased by an Enterprise that is secured by improved real 
estate or a mobile home located in an area that has been identified, at 
the time of the origination of the loan or at any time during the term 
of the loan, by the Director of the Federal Emergency Management Agency 
as an area having special flood hazards and in which

[[Page 47565]]

flood insurance is available under the National Flood Insurance 
Program. As explained in paragraph (a), the Enterprise is required to 
ensure that a building or mobile home, and any personal property 
securing such loan are covered for the term of the loan by flood 
insurance in an amount at least equal to the lesser of the outstanding 
principal balance of the loan or the maximum limit of coverage made 
available with respect to the particular type of property under the 
National Flood Insurance Program.
    Section 1773.2(b) proposes that the procedures in paragraph (a) 
need apply only to loans made, increased, extended, or renewed after 
September 22, 1995. It further provides that paragraph (a) does not 
apply to any loan having an original outstanding principal balance of 
$5,000 or less and a repayment term of one year or less.

Section 1773.3  Civil Money Penalties

    Section 1773.3 sets forth procedures under this proposed section 
under which the Director of OFHEO may impose civil money penalties 
against an Enterprise. Section 1773.3(a) sets forth that the Director 
of OFHEO may assess a civil money penalty against an Enterprise 
determined by the Director to have engaged in a pattern or practice of 
purchasing loans in violation of the procedures established pursuant to 
Sec. 1773.2.
    Section 1773.3(b) sets forth notice and hearing requirements prior 
to the imposition of civil money penalties under this section. A civil 
money penalty may be issued only after notice and an opportunity for a 
hearing on the record has been provided under 12 CFR part 1780.
    Section 1773.3(c) sets forth the maximum amount of civil money 
penalties that may be imposed on an Enterprise under this section. A 
civil money penalty under this section may not exceed the adjusted 
statutory amount of $385 for each violation and the total amount of 
penalties assessed under this section against an Enterprise during any 
calendar year may not exceed the adjusted statutory cap of $110,000 for 
such total penalties.
    Section 1773.3(d) sets forth procedures for the deposit of civil 
money penalties. Any civil money penalties collected under this section 
shall be paid into the National Flood Mitigation Fund in accordance 
with 42 U.S.C. 4104d.
    Section 1773.3(e) provides that any civil money penalty under this 
section shall be in addition to any civil remedy or criminal penalty 
otherwise available.
    Section 1773.3(f) provides that no penalty may be imposed under 
this section after the expiration of the four-year period beginning on 
the date of the occurrence of the violation for which the penalty is 
authorized.

Regulatory Impact

Executive Order 12866, Regulatory Planning and Review

    This proposed rule is not deemed to be a significant rule under 
Executive Order 12866 because it will not result in (1) an annual 
effect on the economy of $100 million or more; (2) a major increase in 
costs or prices for consumers, individual industries, Federal, State, 
or local government agencies, or geographic regions; or (3) significant 
adverse effects on competition, employment, investment, productivity, 
innovation or on the ability of United States-based enterprises to 
compete with foreign-based enterprises in domestic or foreign markets. 
Accordingly, no regulatory impact assessment is required and this 
proposed rule has not been submitted to the Office of Management and 
Budget for review.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a rule that has a significant economic impact on a substantial number 
of small entities, small businesses, or small organizations must 
include an initial regulatory flexibility analysis describing the 
regulation's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 605(b). OFHEO has considered the impact of this 
proposed rule under the Regulatory Flexibility Act. The General Counsel 
certifies that this proposed rule will not have a significant economic 
impact on a substantial number of small business entities.

Paperwork Reduction Act

    This proposed rule does not contain any information collection 
requirements that require the approval of the Office of Management and 
Budget under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).

Unfunded Mandates Reform Act of 1995

    This proposed rule does not require the preparation of an 
assessment statement in accordance with the Unfunded Mandates Reform 
Act of 1995, 2 U.S.C. 1531. Assessment statements are not required for 
regulations that incorporate requirements specifically set forth in 
law. As explained in the preamble, this rule implements specific 
statutory requirements. In addition, this rule does not include 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 (adjusted annually for inflation) in any one year.

List of Subjects in 12 CFR Part 1773

    Administrative practice and procedure, Flood insurance, Penalties, 
Reporting and recordkeeping requirements.

    Accordingly, for the reasons stated in the preamble, OFHEO proposes 
to add 12 CFR part 1773 to subchapter C of chapter XVII as follows:

PART 1773--FLOOD INSURANCE

Sec.
1773.1  Authority and scope.
1773.2  Requirements.
1773.3  Civil money penalties.

    Authority: 12 U.S.C. 4521(a)(4); 42 U.S.C. 4001 note; 28 U.S.C. 
2461 note; 42 U.S.C. 4012a(f)(3), (4), (8), (9), (10).


Sec. 1773.1  Authority and scope.

    (a) Authority. The National Flood Insurance Act of 1968, title XII 
of Pub. L. No. 90-448, Aug. 1, 1968, 42 U.S.C. 4002 et seq., and the 
Flood Disaster Protection Act of 1973, 42 U.S.C. 4002 et seq., as 
amended by the National Flood Insurance Reform Act of 1994 (``NFIRA''), 
Pub. L. No. 103-325, Sept. 23, 1994, 42 U.S.C. 4001-4129, together 
create the National Flood Insurance Program (``NFIP'') which 
established specific requirements applicable to the Enterprises. NFIRA 
designates OFHEO as the Federal agency responsible for determining 
compliance by the Enterprises with these statutes and with reporting to 
Congress biannually for six years on the Enterprises' compliance. OFHEO 
with the authority to issue any regulations necessary to carry out the 
applicable provisions of NFIRA. OFHEO is also charged with enforcing 
the requirements of NFIRA as to the Enterprises and provides for the 
assessment of civil money penalties for violations of the procedures 
established by the Enterprises pursuant to the law or implementing 
regulations.
    (b) Scope. This part sets forth the responsibilities of the 
Enterprises under NFIRA and the procedures to be used in any proceeding 
to assess civil money penalties against an Enterprise under NFIRA.


Sec. 1773.2  Requirements.

    (a) Procedures. Each Enterprise shall implement procedures 
reasonably

[[Page 47566]]

designed to ensure for any loan that is secured by improved real estate 
or a mobile home located in an area that has been identified, at the 
time of the origination of the loan or at any time during the term of 
the loan, by the Director of the Federal Emergency Management Agency as 
an area having special flood hazards and in which flood insurance is 
available under the NFIP, and purchased by such entity, the building or 
mobile home and any personal property securing the loan is covered for 
the term of the loan by flood insurance in an amount at least equal to 
the lesser of the outstanding principal balance of the loan or the 
maximum limit of coverage made available with respect to the particular 
type of property under the NFIP.
    (b) Applicability. (1) Paragraph (a) of this section shall apply 
only with respect to any loan made, increased, extended, or renewed 
after September 22, 1995.
    (2) Paragraph (a) of this section shall not apply to any loan 
having an original outstanding balance of $5,000 or less and a 
repayment term of one year or less.


Sec. 1773.3  Civil money penalties.

    (a) In general. If an Enterprise is determined by the Director of 
OFHEO to have engaged in a pattern or practice of purchasing loans in 
violation of the procedures established pursuant to the NFIA, as 
amended, or to Sec. 1773.2, the Director may assess civil money 
penalties against such Enterprise in such amount or amounts as deemed 
to be appropriate under paragraph (c) of this section.
    (b) Notice and hearing. A civil money penalty under this section 
may be assessed only after notice and an opportunity for a hearing on 
the record has been provided under 12 CFR part 1780.
    (c) Amount. A civil money penalty under this section may not exceed 
$385 for each violation. The total amount of penalties assessed under 
this section against an Enterprise during any calendar year may not 
exceed $110,000.
    (d) Deposit of penalties. Any penalties collected under this 
section shall be paid into the National Flood Mitigation Fund in 
accordance with 42 U.S.C. 4104d.
    (e) Additional penalties. Any penalty under this section shall be 
in addition to, and shall not preclude, any civil remedy or criminal 
penalty otherwise available.
    (f) Statute of limitations. No civil money penalty may be imposed 
under this section after the expiration of the four-year period 
beginning on the date of the occurrence of the violation for which the 
penalty is authorized under this section.

    Dated: September 4, 2001.
Armando Falcon, Jr.,
Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. 01-22927 Filed 9-11-01; 8:45 am]
BILLING CODE 4220-01-U