[Federal Register Volume 87, Number 223 (Monday, November 21, 2022)]
[Rules and Regulations]
[Pages 70733-70744]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-25258]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 201, 203, and 206

[Docket No. FR-6084-F-02]
RIN 2502-AJ43


Acceptance of Private Flood Insurance for FHA-Insured Mortgages

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, Department of Housing and Urban Development (HUD).

ACTION: Final rule.

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SUMMARY: This final rule amends Federal Housing Administration (FHA) 
regulations to allow mortgagors the option to purchase private flood 
insurance on FHA-insured mortgages for properties located in Special 
Flood Hazard Areas (SFHAs), in satisfaction of the mandatory purchase 
requirement of the Flood Disaster Protection Act of 1973 (the FDPA). 
The FDPA, as amended, requires the owner of a property mapped in a 
SFHA, and located in a community participating in the National Flood 
Insurance Program, to purchase flood insurance as a condition of 
receiving a mortgage backed by the Government Sponsored Entities 
(GSEs), Department of Veterans Affairs (VA), U.S. Department of 
Agriculture (USDA), or Federal Housing Administration (FHA). In 
consideration of public comments, HUD's experience implementing the 
program, and HUD's goals of aligning with the Biggert-Waters Act while 
mitigating risk and protecting taxpayers' funds, this final rule adopts 
HUD's November 23, 2020, proposed rule with minor changes.

DATES: Effective date: December 21, 2022.

FOR FURTHER INFORMATION CONTACT: Elisa Saunders, Director, Office of 
Single Family Program Development, Office of Housing, Department of 
Housing and Urban Development, 451 7th Street SW, Room 9184, 
Washington, DC 20410-8000; telephone number 202-708-2121 (this is not a 
toll-free number). HUD welcomes and is prepared to receive calls from 
individuals who are deaf or hard of hearing, as well as individuals 
with speech and communication disabilities. To learn more about how to 
make an accessible telephone call, please visit https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs.

SUPPLEMENTARY INFORMATION: 

I. Background

National Flood Insurance Program Statutory Framework and the Biggert-
Waters Act of 2012

    The National Flood Insurance Act of 1968 (the 1968 Act) and the 
FDPA, as amended, govern the National Flood Insurance Program 
(NFIP).\1\ The 1968 Act makes federally backed flood insurance 
available to owners of improved real estate or manufactured

[[Page 70734]]

homes located in special flood hazard areas (SFHAs) if their community 
participates in the NFIP.
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    \1\ See Public Law 90-448 (1968); Public Law 93-234 (1973). 
These statutes are codified at 42 U.S.C. 4001 et seq.
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    Until the adoption of the FDPA in 1973, the purchase of flood 
insurance was voluntary. Section 102 of the FDPA made the purchase of 
flood insurance mandatory. Specifically, it provides that no Federal 
officer or agency may approve any financial assistance for acquisition 
or construction \2\ in any area identified as having SFHAs and in which 
the sale of flood insurance has been made available under the 1968 Act, 
unless the building or mobile home and any personal property is covered 
by flood insurance. The National Flood Insurance Reform Act of 1994 \3\ 
(Reform Act) requires the owner of a property located in a community 
participating in the NFIP, and mapped in a SFHA, to purchase flood 
insurance as a condition of receiving a mortgage backed by the Federal 
National Mortgage Association (Fannie Mae) or the Federal Home Loan 
Mortgage Corporation (Freddie Mac) (collectively, the government-
sponsored enterprises or GSEs), VA, USDA, or FHA.
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    \2\ Defined at 42 U.S.C. 4003(a)(4).
    \3\ Title V of the Riegle Community Development and Regulatory 
Improvement Act of 1994, Public Law 103-325 (1994).
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    The Biggert-Waters Flood Insurance Reform Act of 2012, amended in 
2014, (Biggert-Waters Act) \4\ further amended the Federal flood 
insurance statutes to encourage private-sector participation. However, 
it does not impose requirements on FHA-insured loans. The Biggert-
Waters Act requires the Federal entities for lending regulation (the 
Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation 
(FDIC), the Office of the Comptroller of the Currency (OCC), the 
National Credit Union Administration (NCUA), and the Farm Credit 
Administration (FCA), and collectively, Federal regulators), to direct 
lenders to accept private flood insurance to satisfy the mandatory 
purchase requirement, instead of NFIP insurance, if the private flood 
insurance meets the conditions defined further in the statute at 42 
U.S.C. 4012a(b)(7). In addition, the Biggert-Waters Act also requires 
Federal agency lenders and the GSEs to accept private flood insurance, 
as defined by the statute. The Biggert-Waters Act also mandates that 
federally regulated lenders, Federal agency lenders, and lenders who 
sell to or service loans on behalf of the GSEs must accept private 
flood insurance policies that meet the definition of ``private flood 
insurance'' in the Biggert Waters Act as satisfaction of mandatory 
purchase and flood insurance coverage requirements under the FDPA.\5\ 
On February 20, 2019, the Federal regulators jointly issued a final 
rule, published at 84 FR 4953 in the Federal Register, implementing the 
private flood insurance provisions of the Biggert-Waters Act. For more 
information on the statutory framework for NFIP, see HUD's proposed 
rule published at 85 FR 74630 on November 23, 2020.
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    \4\ Public Law 112-141 (2012).
    \5\ See id.
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HUD's Proposed Rule

    On November 23, 2020 (85 FR 74630), HUD proposed to amend FHA 
regulations at 24 CFR parts 201, 203, and 206, to allow owners the 
option to purchase private flood insurance on FHA-insured mortgages for 
properties located in SFHAs, consistent with the FDPA and in harmony 
with private flood insurance requirements under the Biggert-Waters Act. 
As explained in the proposed rule, mortgagee's acceptance of private 
flood insurance policies would provide borrowers with more flood 
insurance choices, promote consistency with industry standards, reduce 
the regulatory restrictions on flood insurance for FHA-insured loans, 
and harmonize FHA policies with the congressional intent expressed in 
the Biggert-Waters Act to encourage an expanded private flood insurance 
market.
    HUD's proposed rule included a provision with a compliance aid 
designed to help mortgagees evaluate whether a flood insurance policy 
meets HUD's definition of ``private flood insurance.'' HUD's proposal 
provided, however, that a mortgagee may make its own determination and 
choose not to rely on this statement and that the provision would not 
relieve a mortgagee of the requirement to accept a policy that both 
meets the definition of ``private flood insurance'' and fulfills the 
flood insurance coverage requirement, even if the policy does not 
include the compliance aid statement. In other words, this provision 
would not permit mortgagees to reject policies solely because they are 
not accompanied by the compliance aid statement. Mortgagees that are 
regulated lending institutions may seek additional compliance aids on 
the policy.
    HUD's proposed rule also sought public input on specific aspects of 
HUD's proposal. HUD sought public comment on whether FHA regulations 
should state that a mortgagee may accept a qualifying private flood 
insurance policy in lieu of an NFIP policy or that a mortgagee must 
accept a qualifying private flood insurance policy in lieu of an NFIP 
policy. Additionally, HUD sought public feedback on its proposed 
compliance aid. Specifically, HUD sought public comment on the language 
and option for the proposed HUD compliance aid for private flood 
insurance policies to demonstrate compliance with HUD's definition and 
requirements for private flood insurance.
    HUD noted that its proposed rule differed from the Federal 
regulators' rule, published in the Federal Register at 84 FR 4953 on 
February 20, 2019, in several ways. Both rules offer a compliance aid 
to help mortgagees evaluate whether a flood insurance policy meets the 
definition of ``private flood insurance.'' However, as explained in 
HUD's proposed rule, HUD's compliance aid differs from the Federal 
regulators' compliance aid provided in their final rule. HUD explained 
that this is due to differences in authorities governing the Federal 
regulators and FHA. The Federal regulators rely on the governing 
authority of the Biggert-Waters Act, which does not cover FHA. 
Additionally, unlike the Federal regulators' joint rule, HUD did not 
propose to permit Mortgagees to exercise their discretion to accept 
flood insurance policies, provided by private insurers or mutual aid 
societies, that do not meet the definition and requirements for a 
private flood insurance policy as laid out in HUD's proposed rule. As 
stated in HUD's proposed rule, due to the differences between HUD's and 
the Federal regulators' rules, compliance with the Federal regulators' 
final rule should not be interpreted as compliance with HUD's 
requirements.

II. Changes Made at the Final Rule Stage

    In consideration of the public comments, HUD's experience 
implementing the program, and HUD's goals of aligning with the Biggert-
Waters Act while mitigating risk and protecting taxpayers' funds, this 
final rule adopts with minor changes HUD's proposal published on 
November 23, 2020 (85 FR 74630). What follows is a summary of HUD's 
changes to 24 CFR parts 201, 203, and 206 made by this final rule. See 
HUD's proposed rule for more detailed information.

Sec.  201.28 Flood and Hazard Insurance, and Coastal Barriers 
Properties

    HUD revises Sec.  201.28 to better align it with the requirements 
of 42 U.S.C. 4012a(a) and Sec. Sec.  203.16a and 206.45. Specifically, 
the revision adds a reference to the statutory requirements

[[Page 70735]]

for community participation in NFIP and NFIP's availability in that 
community. HUD is adding this language to ensure that prospective 
homeowners seeking homes in communities that do not participate in NFIP 
are aware that they will not be able to obtain a private flood 
insurance policy and still meet FHA insurance requirements. In 
addition, HUD is adding language to clarify that lenders may rely on 
the compliance aid statement as provided in Sec.  203.16a(c).

Sec.  203.16a Mortgagor and Mortgagee Requirement for Maintaining Flood 
Insurance Coverage

    This final rule makes two changes to Sec.  203.16a as proposed. 
Initially, the final rule adds Sec.  203.16a(a)(1)(iii), and addresses 
the applicability of Sec.  203.16a if a mortgage is to cover property 
improvements that are not otherwise covered by the flood insurance 
standard for condominium projects established under Sec.  
203.43b(d)(6)(iii) or (i)(1). HUD makes this technical change for 
clarity given the scope of properties that may constitute a condominium 
project.
    Second, HUD's proposed rule at Sec.  203.16a(d) stated that flood 
insurance must be maintained during such time as the mortgage is 
insured in an amount at least equal to the lowest of three possible 
amounts, consistent with the statutory requirements in Section 102 of 
the FDPA. One option proposed by paragraph (d)(1) of this section was 
to use the statutory language providing for coverage in an amount equal 
to the ``Development or project cost less estimated land cost.'' This 
final rule revises paragraph (d)(1) to clarify the meaning of 
``Development or project cost less estimated land cost''. HUD is now 
providing that paragraph (d)(1) is an amount equal to ``100 percent 
replacement cost of the insurable value of the improvements, which 
consists of the development or project cost less estimated land cost.'' 
This language is codified in HUD's Home Equity Conversion Mortgage 
(HECM) regulations at Sec.  206.45(c)(3)(i). This final rule makes this 
technical change for clarity and consistency and alignment with HECM 
regulations.

Sec.  206.45 HECM Requirements for Private Flood Insurance Coverage

    This final rule makes several minor revisions to Sec.  206.45 as 
proposed. Initially, HUD is adding a restatement of the definition and 
requirements for flood insurance to Sec.  206.45. HUD is also revising 
Sec.  206.45(c)(2) to add for HECM mortgages the loss payee and 
compliance aid language that is in Sec.  203.16a(c). This final rule 
adds paragraph (c)(4) to Sec.  206.45 to restate the definition of 
private flood insurance in Sec.  203.16a(e). HUD is amending Sec.  
206.45 by replacing the cross references to the definition in Sec.  
203.16a with cross references to Sec.  206.45(c)(4). HUD has determined 
that greater clarity can be achieved by keeping private flood insurance 
requirements related to HECM in part 206. Additionally, this increases 
consistency between HECM and forward-facing mortgage regulations and 
affords the same benefits to both HECM and forward-facing mortgage 
mortgagors.
    Second, similar to Sec.  203.16a(a)(1)(iii), this final rule adds a 
paragraph to Sec.  206.45. Under this new paragraph (c)(1)(i)(C), the 
requirements of Sec.  206.45(c) apply if a mortgage is to cover 
property improvements that are not otherwise covered by the flood 
insurance standard for condominium projects established under Sec.  
203.43b(d)(6)(iii) or (i)(1). HUD makes this technical change for 
consistency within HUD's regulations and clarity given the scope of 
properties that may comprise a condominium project.
    Finally, this final rule reorganizes the text of Sec.  206.45(c)(1) 
into new paragraphs (c)(1) and (2) for clarity and structural 
consistency with Sec.  203.16a and adds a header to paragraph (c)(3).

III. The Public Comments

    The public comment period for the November 23, 2020, proposed rule 
closed on January 22, 2021. HUD received 31 (thirty-one) public 
comments in response to the proposed rule from brokers, homeowners, 
mortgagees, insurance agents, first-time home buyers, FHA borrowers, 
non-profit organizations, and other interested parties. This section 
presents the significant issues, questions, and suggestions submitted 
by public commenters, and HUD's responses to these issues, questions, 
and suggestions.

General Support and Benefits of HUD's Proposed Rule

    Many commenters supported HUD's proposal to permit FHA borrowers to 
purchase private flood insurance. Many commenters cited how the 
proposed rule would save homeowners money, increase affordability and 
options for buyers, and offer broader insurance coverage at a lower 
price. Some commenters urged HUD to move forward with a final rule as 
soon as possible for FHA borrowers to realize the intended benefit.
    One commenter noted that COVID-19 has presented obstacles of its 
own and the proposed rule will help families save money during the 
pandemic.
    HUD Response: HUD appreciates the feedback and is publishing this 
rule to align with the intention of the Biggert-Waters Act. This rule 
allows borrowers the option to purchase private flood insurance in lieu 
of an NFIP policy, where flood insurance is required. Private flood 
insurance policies might offer borrowers greater coverage, less 
expensive rates, and lower deductibles.
Comments: Private Insurance Is Less Expensive and Offers More Coverage
    Many commenters stated that Federal flood insurance policies are 
significantly more expensive than private insurance. Moreover, 
commenters stated that private insurance offered more coverage for 
lower premiums. One commenter stated that they considered refinancing 
their home into a conventional loan so they could buy private insurance 
because of the price of Federal flood insurance policies. Another 
commenter quoted the premium they received for Federal flood insurance 
at $5,500 with a $2,000 deductible, compared to the premium for private 
insurance at $1,100 with a $1,000 deductible for the same coverage. One 
commenter stated that even though their home has not had a flood in 
about 70 years the premiums for required insurance are ``still insanely 
high.'' Other commenters stated that each year the cost of Federal 
flood insurance continues to rise significantly. These commenters 
generally agreed that private flood insurance would help low to middle 
income families save money, expand homeownership to first time 
homeowners, and help homeowners stay in their homes rather than having 
to sell because of expensive NFIP flood insurance. Another commenter 
said that because private flood insurance typically provides more 
coverage than an NFIP policy, it is less likely that FHA insurance will 
be required after floods.
    HUD Response: HUD is encouraged that borrowers will be offered 
greater choice in selecting a flood insurance policy, which will reduce 
differences between FHA-insured mortgages and other mortgage options, 
while maintaining fiscal responsibility to FHA borrowers and taxpayers.
    The range of flood insurance rates and deductibles varies greatly 
based on the characteristics of each property. A private flood 
insurance policy might allow some borrowers to obtain a less expensive 
policy.

[[Page 70736]]

Comments: Offering Private Insurance Promotes Affordability and Buying 
Options and May Expand the Flood Insurance Market
    Commenters stated that private flood insurance is more affordable 
and gives more individuals and families the opportunity to own or 
refinance homes, along with the ability to save money. For example, 
allowing private flood insurance for FHA-insured loans will give more 
consumers who do not have ``extra funds to afford the current flood 
insurance premiums'' the opportunity to become homeowners. One 
commenter stated that FHA-insured loans are supposed to represent 
``affordable housing.'' The commenter continued, however by stating 
that borrowers are forced to get Federal flood insurance policies 
through FEMA which are double the cost of private flood insurance and 
which prohibit many prospective homeowners from buying due to costs. 
Another commenter noted that the high rates for Federal flood insurance 
could make a difference in someone being able to buy their dream home. 
Another commenter stated that their ``elderly clients are tired of 
having to sell their homes because their [Federal flood insurance 
policy] rates are so high.''
    Several commenters supported the proposed rule because it could 
give homeowners and buyers financial breathing room and allow people to 
purchase homes without restrictions on purchasing power arising from 
the cost of flood insurance. One commenter noted the difficulty in 
advising clients that they are not eligible for a $500 private flood 
policy and are required to purchase a $3000 policy due to FHA 
requirements. The commenter also stated that in some cases the costs of 
FEMA insurance cause people to not be able to purchase a new home at 
all.
    Another commenter stated that consumers should be allowed to choose 
their flood insurance policy, and that the current rule restricts 
consumer choice, creates inequities between FHA and more conventional 
loan holders, and raises barriers for FHA-insured loan products, which 
sometimes precludes first-time home buyers from closing on a home. One 
commenter stated, from the seller's point of view, that after potential 
buyers with an FHA-insured loan realize that they will be adding ``over 
$100 to their house payment for flood insurance,'' buyers choose not to 
go forward with the sale.
    One commenter emphasized that the rule's proposal to permit private 
flood insurance is significant and critical to consumer choice because 
``about 20 percent of home purchase first liens and about 15 percent of 
refinance transactions on 1-4 family dwelling are FHA-insured.'' The 
commenter stated that every year there are thousands of borrowers who 
are not able to choose private flood insurance that is more affordable.
    One commenter supported the proposed rule explaining that it would 
give homeowners the option to purchase private flood insurance during 
periods where NFIP may lapse. Additionally, one commenter noted that 
the rule would grow the private flood insurance market to complement 
the NFIP and expand consumer flood insurance options.
    HUD Response: Changes to HUD's flood insurance regulations to allow 
acceptance of private flood insurance policies offer access to a 
broader range of flood insurance options. Private flood insurance 
policies could provide potential cost savings to some borrowers 
compared to the cost of NFIP policies.\6\ Additionally, in the event of 
a lapse in appropriations for NFIP, a private insurance option could be 
available to borrowers.
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    \6\ Please see the Regulatory Impact Analysis for the November 
23, 2020, proposed rule for more information, at https://www.regulations.gov/document/HUD-2020-0078-0040.
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Comments: HUD's Proposed Rule Aligns With Industry Standards, Law, and 
Principles of Affordability, Consumer Choice, and Fiscal Responsibility
    Some commenters stated that the proposed rule would more closely 
align HUD regulations with industry standards, statutory law, and 
principles of good governance, consumer choice, affordable housing, and 
fiscal prudence.
    One commenter stated that the proposed rule will achieve HUD's 
stated goal of more closely aligning FHA regulations ``with industry 
standards and reduc[ing] the regulatory restrictions on flood insurance 
for FHA-insured loans.'' The commenter also stated that the proposed 
rule would reduce regulatory restrictions on flood insurance for FHA-
insured loans, provide greater consumer choice, and enhance 
homeownership opportunities for its members.
    Another commenter stated that HUD's rule aligns with the Biggert-
Waters Act's clear direction to all Federal agency regulated mortgagees 
to accept certain private flood insurance. The commenter stated that, 
``[d]rawing a distinction between agencies that `insure' versus `lend' 
is a hyper-technical legal reading of the statute that does not comply 
with the spirit--if not the exact letter--of the law.'' Similarly, the 
commenter stated that laws should be uniformly and consistently applied 
across the Federal Government, and that an ``agency should not exploit 
a technical drafting error to avoid compliance with a statute, 
especially when Congressional intent is clear.'' Finally, the commenter 
said HUD's rule is fiscally prudent because providing for FHA mortgagee 
acceptance of private policies not only bolsters the FHA Fund but also 
protects taxpayers.
    HUD Response: HUD's intention is to align as much as possible with 
other Federal agencies, the intentions of the Biggert-Waters Act, and 
industry standards where appropriate, while issuing distinct 
regulations when necessary.
    HUD is committed to removing barriers to affordable housing, 
supporting affordable housing opportunities, homeownership, and 
facilitating access to credit for borrowers. This rule could increase 
the entry-level housing supply in communities where flood insurance is 
required, while mitigating risk and protecting taxpayers' funds. This 
rule is not expected to have a substantial direct budgetary impact to 
FHA's Mutual Mortgage Insurance (MMI) Fund.

Mandatory Versus Permissive Requirement (Whether HUD's Rule Should 
State That Mortgagees ``May Accept'' or ``Must Accept'' Private Flood 
Insurance Policies That Meet the Definition Under HUD's Rule and the 
Biggert-Waters Flood Insurance Reform Act of 2012 (``Biggert-Waters 
Act''))

Comments: Support for a Permissive Requirement (Mortgagees ``May 
Accept'')
    Some commenters agreed with HUD's decision to make optional 
mortgagees' acceptance of private flood insurance policies that meet 
the definition of private flood insurance under HUD's rule and the 
Biggert-Waters Flood Insurance Reform Act of 2012 (``Biggert-Waters 
Act'') (a mortgagee ``may accept'' a private flood insurance policy).
    One commenter stated that ``it is more appropriate to give 
[mortgagees] discretion to accept private flood policies by saying that 
they `may' accept a private flood policy if it meets all of the 
definitions. While we respect that the borrower has the freedom of 
choice to find a private policy (provided the policy fits all of the 
required definitions/parameters), it is also important that the 
mortgagee has a choice based on past experiences with providers and 
their own risk tolerance levels.''

[[Page 70737]]

    Another commenter noted that mortgagees have greater expertise and 
a shared interest with borrowers in ensuring that the property is 
adequately covered by flood insurance. The commenter stated that 
directing mandatory acceptance could be warranted only in the presence 
of overwhelming policy reasons to do so, which are not present here. 
Another commenter explained that adding a mandatory acceptance 
requirement in HUD's regulations (``must accept'') could create 
additional burdens for those mortgagees and servicers that are not 
subject to the Biggert-Waters Act requirement to accept private flood 
insurance since they may have to develop new procedures and processes 
to review private flood insurance policies. The commenter also noted 
that requiring the acceptance of private flood insurance could mean 
that some mortgagees and servicers would continue not to accept private 
flood insurance which could result in higher costs and limited choices 
for FHA borrowers.
Comments: Support for a Mandatory Requirement (Mortgagees ``Must 
Accept'')
    Some commenters supported a mandatory requirement that mortgagees 
accept private flood insurance policies that meet the definition and 
requirements for a private flood insurance policy under HUD's rule and 
the Biggert-Waters Act. One commenter stated that having consistency 
between HUD's rule and that of the Federal financial regulators is 
beneficial to the consumer because it ``provides consumer choice and 
prevents [mortgagees] from competing on underwriting guidelines.''
    One commenter explained that mandating the acceptance of private 
flood insurance would help further FEMA's ``Moon Shot Initiative'' to 
double the number of properties covered by flood insurance.
    Another commenter stated that mandating private insurance would 
``harmonize FHA policies with Congressional intent to expand the 
private flood insurance market.''
    Another commenter stated that changing the practice of denying 
property owners access to private flood insurance is long overdue and 
that a mortgagee should be required to accept qualifying private flood 
insurance in lieu of an NFIP policy.
    HUD Response: HUD recognizes the value of consistency across the 
housing finance industry with respect to flood insurance and the 
importance of providing borrowers the option to select flood insurance 
coverage that best matches their needs.
    HUD recognizes the importance of allowing mortgagees discretion to 
accept private flood insurance policies that meet HUD's requirements. 
This approach is similar to HUD's policy for accepting hazard 
insurance, where mortgagees have discretion to accept a policy. HUD 
requires the mortgagee to provide evidence of acceptable insurance 
coverage, where required, and does not prescribe which provider the 
mortgagee accepts. Under HUD's regulations for FHA-insured mortgages, 
HUD will not pay a claim to mortgagees for surchargeable damages that 
should have been covered by the required flood or hazard insurance; 
therefore, it is in the mortgagee's financial interest to ensure that 
the borrower has adequate coverage from a responsible insurance 
provider.
    HUD does not anticipate this rule playing a role in furthering 
FEMA's ``Moonshot Initiative'' to increase the number of properties 
with flood insurance. Although FEMA has indicated its desire for more 
properties to carry flood insurance to help protect them against 
potential flood losses, FEMA's initiative seems targeted at homeowners 
who are not currently required to carry flood insurance, such as those 
who have paid off their mortgage. With this rule, HUD is not expanding 
the requirement for which FHA-insured mortgages are required to carry 
flood insurance.

Consideration of Whether HUD's Rule Should Offer a Discretionary Option 
for Mortgagees To Accept Policies That Do Not Meet the Definition of 
Private Flood Insurance Under HUD's Rule and the Biggert-Waters Act

Comments: Opposition to a Discretionary Option
    One commenter applauded HUD for rejecting the ``discretionary 
acceptance'' option that was in the final joint rule published by the 
banking regulators. The Federal regulators' rule has a provision that 
provides that mortgagees may accept flood insurance that does not meet 
the definition of flood insurance in the banking regulator's joint 
final rule. The commenter stated the discretionary acceptance option 
``runs counter to Congressional intent of NFIP reforms'' and that 
``[i]t is quite clear by the definition of private flood insurance in 
Section 100239 of the Biggert-Waters Flood Insurance Reform Act of 
2012, that Congress wanted clear sideboards on what qualified as a 
private flood insurance policy for the purposes of meeting the 
mandatory purchase requirement under the NFIP.'' The commenter found 
the Federal regulators' rule to circumvent ``Congressional sideboards 
by enacting failed legislative proposals from 2016 through 
rulemaking.'' The commenter continued that a discretionary acceptance 
option ``could lead to excessive deductibles'' which would lower 
premiums but increase out-of-pocket ``costs for the mortgagor to then 
ultimately recover when an event occurs.'' The commenter concluded that 
discretionary acceptance does not provide consumer protections and 
would result in taxpayers being forced to cover additional disaster 
losses.
Comments: Support for a Discretionary Option
    Some commenters recommended that HUD provide a discretionary 
acceptance option. Commenters stated that if HUD does not provide FHA 
mortgagees with a discretionary acceptance provision, FHA borrowers 
effectively would be barred from the use of private insurance policies 
that may be available to non-FHA borrowers. This would undermine HUD's 
objectives of helping borrowers and providing more consumer choice in 
options for flood insurance products.
    One commenter stated that following the Federal regulators' current 
framework, which includes a discretionary acceptance provision, will 
best protect the interest of insured borrowers and mortgagees by giving 
borrowers options to less expensive flood policies with the same or 
better coverage, and by giving mortgagees the flexibility to make their 
own determination of the adequacy of such policies.
    Another commenter stated that without a discretionary acceptance 
provision, HUD's proposed rule may not actually afford consumers the 
options it seeks to provide because the proposal would only provide 
credit unions with the ability to accept private flood insurance in 
lieu of a Federal flood insurance policy if all the factors defining 
``private flood insurance'' are present. The commenter stated that 
providing a discretionary acceptance provision would ease operations, 
minimize delays in the homebuying process, and enhance consumer choice. 
For example, without such a provision, credit unions may send private 
flood insurance policies to a specialist for review, if there is no 
expert on staff, to ensure the credit union may accept the policy. This 
may, in turn, lead to longer closing times and borrower frustration 
with the homebuying process.
    One commenter pointed out that HUD's rule does not appear to allow

[[Page 70738]]

mortgagees to accept all residential policies offered by surplus line 
insurers, namely nonresidential commercial policies. The commenter 
explained that restricting acceptance to only commercial surplus lines 
coverage could hinder access to additional choices for residential 
flood insurance products. Surplus lines carriers may also be able to 
offer residential consumers additional coverage features or greater 
limits than the NFIP at a more affordable price.
    Another commenter suggested that HUD ``should allow discretionary 
acceptance of a private flood insurance policy regardless of HUD's 
decision on whether accepting private flood insurance is a mandatory 
requirement or optional under its final regulations.'' The commenter 
explained that this would promote harmony with the Flood Disaster 
Protection Act and consumer choice for FHA borrowers. Most mortgagees 
already ``must'' accept private flood insurance that meets the Biggert-
Waters Act definition, under the Federal regulators' rule. So, if HUD's 
definition is ``the same or substantially similar to the FDPA 
definition,'' from which the Federal regulators' definition derives, 
then ``[HUD's separate rule and definition] would appear to marginally 
help create the consistency and harmony with the FDPA that HUD is 
attempting to do.'' However, if HUD uses a permissive (e.g., ``may 
accept''), then some mortgagees will continue to not accept private 
flood insurance, even if the policy meets the definition. ``This could 
result in higher costs and limited choices for FHA borrowers.'' 
Therefore, HUD should offer a discretionary option in either case to 
permit mortgagees to accept policies that do not strictly conform to 
the statutory, and derivative, definitions.
    The commenter explained that a discretionary option is especially 
crucial if HUD makes it mandatory that mortgagees accept policies that 
meet the definitions. A discretionary option would address elements 
important to institutional risk and consumer protections. The commenter 
stated that the statutory definition of ``private flood insurance'' is 
imprecise or impractical when considering actual insurance contracts, 
existing state law, and state approval processes; and, therefore, the 
final rule ``can provide further detail'' by establishing discretionary 
acceptance criteria.
    HUD Response: HUD has determined that discretionary acceptance of 
policies that do not meet HUD's requirements would not protect 
borrowers or FHA's MMI Fund. HUD appreciates the feedback but believes 
that permitting mortgagees the discretion to accept flood insurance 
policies that do not meet HUD's private flood insurance requirements 
would not sufficiently mitigate risk and protect taxpayers' funds.
    HUD is concerned about the lack of deductible limits for 
discretionary acceptance of flood insurance policies in the Federal 
regulators' rule, which could open borrowers to significant costs. 
There is no requirement that a deductible under these policies be no 
greater than that of a comparable NFIP policy; therefore, a policy that 
seems less expensive may have significantly higher deductibles leading 
to potentially prohibitively costly out-of-pocket expenses for the 
borrower when an event occurs. HUD is concerned that having uncapped 
deductible limits could have a negative impact on the financial 
stability of FHA-insured borrowers, which could lead to higher risk of 
default and foreclosure. Furthermore, HUD does not believe that 
eliminating the option for discretionary acceptance will significantly 
reduce choice for most FHA-insured borrowers.
    HUD appreciates the commenters' desire for uniformity and HUD has 
strived to align with other agencies' requirements where appropriate. 
While HUD aims to align with the Biggert-Waters Act, allowing 
mortgagees to permit a discretionary acceptance option does not align 
with the best interests of HUD's borrowers or the MMI Fund.
Comments Suggested Criteria for a Discretionary Option
    Some commenters that recommended HUD add a discretionary acceptance 
option also contended that HUD should include provisions outlining 
discretionary acceptance criteria identical or similar to the Federal 
agencies' final regulation. One commenter offered suggested revisions 
to the regulatory text.
    One commenter stated that HUD should allow mortgagees, specifically 
credit unions, ``to accept private flood insurance policies in lieu of 
NFIP policies on FHA-insured mortgages, if the compliance aid is 
present, if the policy meets the mandatory acceptance criteria under 
the definition of `private flood insurance' or if the policy meets the 
discretionary acceptance criteria outlined in the [Federal regulators'] 
Interagency Rule.''
    Commenters recommended that the regulations permit FHA mortgagees 
to accept private flood insurance policies that meet discretionary 
acceptance criteria, even where those policies may not necessarily 
satisfy the technical definition of ``private flood insurance'' in the 
Biggert-Waters Act. One commenter pointed to the Federal regulators' 
regulations, which ``require at least four criteria that must be 
satisfied before a mortgagee can exercise its discretion to accept [a] 
private flood insurance policy.'' \7\ The commenter reasoned that the 
Biggert-Waters Act was meant to create a floor for policies that must 
be accepted or could not be rejected, and that it remains the province 
of the states to determine what constitutes acceptable insurance. This 
commenter also stated that a discretionary provision can be drafted in 
a manner that provides consumer choice while maintaining the safety and 
integrity of the Mutual Mortgage Insurance Fund, similar to the way 
that the Federal regulators' rule protects the associated Federal 
insurance programs.
---------------------------------------------------------------------------

    \7\ See the four criteria explained at 84 FR 4953, 4962.
---------------------------------------------------------------------------

    Commenters provided an example of how these principles should 
inform HUD's addition of a discretionary acceptance option: Under the 
discretionary acceptance provision of the Federal regulators' final 
rules and, where permitted by state insurance law, a mortgagee has the 
discretion to accept a private flood insurance policy that contains a 
30-day notice provision rather than a 45-day notice provision as 
required under the Biggert-Waters Act. Commenters recommended HUD use 
this example to help guide its creation of discretionary option 
criteria.
    One commenter emphasized that it is important for mortgagees to 
understand whether a private policy requires a separate or included 
disclosure with a statement of the availability of Federal flood 
insurance policies. The commenter said that ``[Flood Disaster 
Protection Act] criteria require that a private policy must include a 
statement of the availability of flood insurance under the NFIP. In 
current practice this statement (when provided) is being provided by 
private carriers as a separate disclosure rather than embedded language 
in the actual policy contract. Discretionary acceptance criteria from 
FHA could exclude this as a required element or could clarify that this 
separate disclosure is satisfactory and meets the intent of the FDPA.''
    HUD Response: HUD appreciates the specific feedback provided. 
However, HUD believes it is in the best interest of borrowers and HUD's 
fiduciary responsibility to the Mutual Mortgage Insurance Fund to not 
offer a discretionary option and to require all private flood insurance 
policies to meet

[[Page 70739]]

the definition of private flood insurance under this rule.

Consideration of Whether HUD Should Align Its Compliance Aid With the 
Federal Regulators' Compliance Aid

Comments: Support for HUD's Proposed Compliance Aid
    Some commenters supported HUD's compliance aid or the inclusion of 
a compliance aid generally. Commenters supported HUD's compliance aid 
because it would assist mortgagees with the review of private flood 
insurance policies to ensure they are compliant with FHA's regulations, 
assist mortgagees in determining whether a policy meets the definition 
of ``private flood insurance'' without further review of the policy, 
and prove particularly helpful to smaller mortgagees that may lack 
resources or technical expertise to adequately review flood insurance 
policies.
Comments: Support for Making HUD's Compliance Aid Similar or Identical 
to the Federal Regulators'
    Some commenters generally supported the addition of a compliance 
aid, but strongly recommended that HUD's compliance aid statement be 
identical or made more similar to Federal regulators' compliance aid 
language. Commenters wrote that this would ensure ``the policy meets 
the definition of `private flood insurance' and fulfills the 
requirements of both the Federal regulators and HUD.'' Further, this 
would enable FHA borrowers to immediately benefit from work done by the 
industry on the Federal regulators' compliance aid since February 2019. 
The commenter explained, ``At this point, the specific language of the 
Federal regulators' compliance aid has already been incorporated into 
the state insurance legislative and regulatory infrastructure.'' The 
commenter provided an example from a state that enacted a new private 
flood insurance act in September 2020 that requires that a private 
flood policy must state that it meets the private flood insurance 
requirements specified in 42 U.S.C. 4012a(b) and may not contain 
provisions that, when taken as a whole, are not in compliance with that 
statutory provision. The commenter also explained that the Federal 
regulators' compliance aid language has been incorporated into 
legislation being developed by the National Council of Insurance 
Legislators (NCOIL), titled the Private Primary Residential Flood 
Insurance Model Act.\8\
---------------------------------------------------------------------------

    \8\ NCOIL Adopts Private Primary Residential Flood Insurance 
Model Act, Nat'l Council of Insurance Legislators, Sept. 24, 2020, 
https://ncoil.org/2020/09/24/ncoil-adopts-private-primary-residential-flood-insurance-model-act/.
---------------------------------------------------------------------------

    Commenters stated that making HUD's compliance aid more similar or 
identical to the Federal regulators' will relieve compliance burden on 
FHA/HUD mortgagees and provide ``certainty'' and prevent confusion for 
both mortgagees and consumers that private flood insurance policies 
meet requirements and will or should be accepted ``without further 
analysis.''
    One commenter suggested that HUD clarify ``at least as broad as'' 
when it comes to deductibles and coverages, ``specifically cautioning 
against excessive deductibles and ensuring the policy has an equivalent 
to Increased Cost of Coverage (ICC) that is found in an NFIP policy.'' 
The commenter explained their concern that the private sector's 
equivalent to ICC is ``often optional rather than mandatory as with 
NFIP policies.''
    Some commenters pointed out that some insurers may choose not to 
include both HUD's and the Federal regulators' compliance aid 
statements, which would ``narrow the pool of available private flood 
insurance coverage the [proposed rule] is intended to provide to FHA 
borrowers.'' Even if insurers did include both compliance aid 
statements, commenters explained that the experience of implementing 
the Federal regulators' compliance aid demonstrates that including two 
sets of compliance aid language would not be a simple process. Using 
different language for an FHA compliance aid would require insurers and 
mortgagees to use different sets of insurance policies and other 
documentation for FHA-insured loans. Another commenter suggested that 
an ``FHA specific compliance aid is superfluous and will add an 
unnecessary cost to an already costly transaction.'' Similarly, another 
commenter explained that changes and procedures were put in place 
following the Federal regulators' 2019 rule and a second process for 
HUD's compliance aid would impose further burden.
    One commenter recommended that if HUD does not adopt the Federal 
regulators' compliance aid, then HUD should clarify language in its 
compliance aid regarding the scope of coverage. This language should 
highlight limited utility in that the compliance aid only ensures 
compliance with HUD's regulations and not with the interagency rule. 
Placing this additional language into the compliance aid will provide 
clarity and put mortgagees on notice that, notwithstanding inclusion of 
HUD's compliance aid, if a separate compliance aid that conforms to the 
Federal regulators' rule is not present, they will have to review the 
private flood insurance policy to determine its compliance with the 
Federal regulators' rule.
    HUD Response: HUD appreciates the feedback regarding the compliance 
aid. The intention of the compliance aid is to assist mortgagees in 
understanding when an insurance policy coverage meets the definition of 
private flood insurance. The compliance aid is a voluntary option that 
private flood insurance companies may choose to provide.
    HUD believes providing a compliance aid is important to assist 
mortgagees to understand when a private flood insurance policy meets 
HUD's requirements. This will facilitate the closing process by 
allowing the mortgagee to rely on the compliance aid instead of the 
mortgagee taking the time and developing the technical expertise to 
review the details of each private insurance policy. This aid also 
ensures that lack of technical expertise regarding flood insurance does 
not becomes an obstacle to the implementation of this policy.
    HUD recognizes the value of consistency across the housing finance 
industry with respect to flood insurance. However, HUD's legal 
authority and requirements are distinct from that of the Federal 
regulators. The Biggert Waters Act does not require HUD to provide a 
private flood insurance option; therefore, HUD cannot rely on the 
authority of the Biggert-Waters Act referenced in the Federal 
regulators' compliance aid and must rely on its own authority. 
Furthermore, this rule is distinct from the Federal regulators' rule 
regarding the ``may accept'' versus ``must accept'' requirement, the 
discretionary acceptance option, and mutual aid associations. 
Therefore, a different compliance aid is necessary to highlight this 
distinction; HUD's compliance aid will specify compliance with HUD's 
requirements.
    HUD believes it is in the best interest of borrowers and HUD's 
fiduciary responsibility to protect taxpayers' funds to have a distinct 
compliance aid to help ensure the requirements in this rule are met.

Additional Concerns Related to Aligning HUD's Proposed Rule With the 
Federal Regulators' Rule

    While generally in support of the proposed rule, some commenters 
offered recommendations to improve the proposed rule. These commenters

[[Page 70740]]

agreed that the proposed rule would substantially benefit FHA 
borrowers, but suggested HUD more closely align its regulations with 
the Federal regulators' rule.
Comments: Support for Permitting Mortgagees To Accept Coverage Provided 
by Mutual Aid Societies
    Some commenters recommended HUD, like the Federal regulators, 
permit mortgagees to accept coverage provided by mutual aid societies 
consistent with the Biggert-Waters Act. Commenters wrote that if such 
provisions are excluded, ``individuals and families, whose religious 
beliefs, or other strictures conflict with the purchase of traditional 
NFIP or private flood insurance policies'' would be excluded from being 
able to take advantage of private flood insurance which was intended to 
benefit all Americans. One commenter recommended using a provision 
comparable to the Federal regulators' mutual aid society provision. 
This commenter cited 12 CFR 22.3(3), which was amended by the Federal 
regulators' joint interim rule and suggested HUD adopt similar 
language. The changes would conform HUD's proposed rule to the Federal 
regulators' joint rule and permit acceptance of coverage by mutual aid 
societies.
    HUD Response: HUD appreciates the comments and recognizes the value 
of consistency across the housing finance industry and has strived to 
balance those interests as appropriate. Unlike the requirements for 
NFIP and other private flood insurance providers, mutual aid 
associations are not required to be licensed, admitted, or otherwise 
approved to engage in the business of insurance by the insurance 
regulator of the State or jurisdiction in which the property to be 
insured is located. FHA does not have the expertise or authority to 
evaluate the ability of mutual aid associations to fulfill their 
obligations with regards to their insurance policies or their 
demonstrated history of fulfilling the terms of agreements to cover 
losses to members' property caused by flooding. Without specific 
guidance from FHA, mortgagees would be forced to evaluate the financial 
soundness of mutual aid associations which might be interpreted 
differently, causing confusion as well as an undue burden to 
mortgagees.
    Given that mutual aid associations, as defined in the Federal 
regulators' rule, are not regulated by a State Insurance Regulator and 
that HUD's role is not to regulate financial institutions, HUD has 
determined that accepting flood insurance policies provided by mutual 
aid associations could create a financial risk to borrowers and the MMI 
Fund.
Comments: Aligning HUD's Rule With the Federal Regulators' Rule Will 
Create Better Consistency in the Industry and Promote Correct 
Application of Regulations
    One commenter noted that aligning HUD's rule with the Federal 
regulators' rule would allow borrowers and mortgagees to draw on the 
policies, documentation, and practices that mortgagees, flood insurance 
companies, and others have already adopted under the Federal 
regulators' requirements--which would reduce the risk of mortgagees 
misapplying FHA regulations. Other commenters recommended consistency 
throughout the lending process and within industry standards to 
maintain discretionary acceptance criteria.
    Some commenters supported HUD's proposed definition of private 
flood insurance. However, one commenter recommended HUD better align 
its definition with the Federal regulators' definition in their joint 
final rule. The commenter reasoned that while some differences between 
the specific language in the two regulations are necessary and 
appropriate (e.g., using ``FHA'' rather than ``regulated lending 
institution''), other differences create risk that a reader could make 
an incorrect inference that differences are intended to have 
substantive impact, which appears not to be the case.
    Another commenter explained that ``[a]dopting identical language in 
[HUD's] regulation would be consistent with HUD's proposed approach to 
the acceptance of private flood insurance.'' Then the commenter 
referred to the definition of ``private flood insurance'' in the 
proposed FHA regulation and the Federal regulators' final regulations 
and explained that both explicitly incorporate the definition at 42 
U.S.C. 4012a(b)(7). The commenter stated that HUD's proposed definition 
of ``private flood insurance'' is not materially different from the 
definitions of ``private flood insurance'' in the Federal agencies' 
final regulations, and HUD's proposed regulation could fairly be 
characterized as a ``corresponding regulation.''
    One commenter stated it is critical that HUD implement regulations 
consistent with the Federal flood insurance regulations regarding the 
definition of ``private flood insurance,'' language used in the 
compliance aid statement, and a mortgagee's discretionary acceptance of 
a private flood insurance policy that is sufficient protection for the 
loan.
    HUD Response: HUD appreciates the comments and recognizes the value 
of consistency across the housing finance industry and has strived to 
align with the other agency's requirements where possible and 
appropriate. The discretionary acceptance provision under the Federal 
regulators' rule creates financial risk for FHA borrowers and the MMI 
Fund.

Other Issues Raised by Commenters

Comments: Concerns About Continuous Coverage
    One commenter expressed a concern for the loss of continuous 
coverage since private flood insurance is not seen as continuous 
coverage by the NFIP, meaning borrowers will lose subsidies they have 
with NFIP if they decide to go back after switching to private flood 
insurance. For example, homeowners who seek FHA mortgages may already 
be financially constrained and should they need to return to NFIP for 
flood insurance it could result in them having higher premiums. 
Additionally, even if the homeowner is informed of this risk, it may 
not prevent someone who is focused on cost savings from deciding to 
switch, putting them in a detrimental position that is long-term and 
may affect the sale of their property.
    The commenter pointed out legislation that has already been 
introduced and seeks to ``amend the definition of continuous coverage 
to include the provision of private flood insurance.'' \9\ The 
commenter expects this legislation to pass into law soon and to become 
a part of the comprehensive reform of the NFIP. The commenter stated 
that for these reasons, the rule is premature and should be postponed 
until legislation is adopted that will protect homeowners who choose to 
switch back to NFIP. The new legislation will ensure homeowners can 
have previous subsidized rates after having continuous coverage either 
through NFIP or private flood insurance.
---------------------------------------------------------------------------

    \9\ See H.R. 2874, 115th Cong. (2017); H.R. 1666, 116th Cong. 
(2019); S. 1313, 115th Cong. (2017).
---------------------------------------------------------------------------

    HUD Response: HUD appreciates the comment and the commentator's 
desire to protect homeowners from increased prices under private flood 
insurance policies. HUD notes and appreciates commenters' concerns 
about proposed legislation. HUD is publishing this rule to align with 
the intention of the Biggert-Waters Act. HUD only has authority to act 
on current law; legislation cited by commenters was not signed into 
law. Other agencies' forthcoming rules may consider not only borrowers 
but all homeowners with federally backed mortgages who

[[Page 70741]]

have the option to purchase a private flood insurance policy in lieu of 
an NFIP policy, where one is required.
Comments: HUD's Regulatory Burden Analysis Is Flawed
    One commenter stated that the regulatory burden analysis claims 
that most private flood insurance is sold on the surplus lines market 
as opposed to the admitted market and dominated by large international 
insurers. The commenter stated this is ``a complete misunderstanding of 
the surplus lines market and refuted in a closer reading of the report 
cited as the source of the information.'' \10\
---------------------------------------------------------------------------

    \10\ The commenter cited Carolyn Kousky, et al., The Emerging 
Private Residential Flood Insurance Market in the United States, 
Risk Management and Decision Processes Center, Wharton, University 
of Pennsylvania (2018). The commenter stated that the report 
explains that, ```large surplus lines carriers `E&S companies work 
with wholesalers known as managing general agencies (MGAs) or 
managing general underwriters (MGUs). An MGA/MGU works on behalf of 
the insurer and organizes and manages its book of business. The MGA/
MGU will employ the underwriters, develop premium-setting practices, 
issue policies on the insurer's behalf, and manage claims payments. 
They get a fee or share of premiums for these services. An MGU, as 
opposed to an MGA, also undertakes the underwriting. MGAs vary 
significantly in their size and scope. Some offer a wide range of 
E&S products; others focus on only a specific category of coverage 
or just one product. Some operate nationally; others work only in a 
given region or locality (Hull 2002).' ''
---------------------------------------------------------------------------

    HUD Response: HUD appreciates the feedback and concern regarding 
data sourcing. As stated, there is limited data regarding flood 
insurance companies. HUD utilized a peer reviewed study published in 
professional risk industry journals, which is considered a reliable 
source of data.
    This data was taken from Kousky et al. (2018). The authors' paper 
is among the limited existing studies on residential private flood 
insurance. The authors stated that ``more policies are written by 
surplus lines carriers than by admitted carriers. . . . This is 
unsurprising, since surplus lines firms tend to cover new or 
catastrophic risks for which consumers may have trouble finding 
coverage in the admitted market.'' \11\ In addition, ``the largest US 
homeowners insurance companies have generally been hesitant to enter 
the flood [insurance] market, although a few have begun to enter 
through subsidiaries.'' \12\
---------------------------------------------------------------------------

    \11\ Id. at 2.
    \12\ Id.
---------------------------------------------------------------------------

    HUD expects that more private insurers--either admitted carriers or 
surplus lines carriers, and of any company size--will be offering flood 
insurance soon or have already started offering flood insurance, 
especially after the Federal regulators passed their rule on the 
acceptance of private flood insurance. ``As insurers' familiarity with 
flood catastrophe models grows, as underwriting experience develops, 
and as state regulatory structures evolve, the number of private flood 
policies in force could continue to grow, including among admitted 
carriers.'' \13\
---------------------------------------------------------------------------

    \13\ Id.
---------------------------------------------------------------------------

Comments: HUD's Rule Would Address Issues Raised in a Recent HUD OIG 
Report
    Some commenters stated that the proposed rule would help address an 
issue raised by HUD's Office of Inspector General (OIG) in a report 
issued January 5, 2021.\14\ The recent report found that at least 3,870 
FHA-insured loans totaling $940 million ``had private flood insurance 
coverage instead of the required national flood insurance program 
coverage, coverage that did not meet the minimum required amount, or no 
coverage at the time the loan was closed and endorsed.'' \15\ Every 
other Federal lending authority now allows, and in many cases requires, 
the acceptance of private flood insurance, leaving FHA mortgagees with 
an untenable choice: follow their regulator's private flood insurance 
requirement and risk the FHA insurance down the road, or walk away from 
FHA loan products entirely. The commenters stated that this is an 
unacceptable situation.
---------------------------------------------------------------------------

    \14\ Office of Inspector Gen., U.S. Dep't of Hous. & Urban Dev., 
Audit Rep. No. 2021-KC-0002 (2021), https://www.hudoig.gov/sites/default/files/2021-01/2021-KC-0002.pdf (``Audit Rep. No. 2021-KC-
0002'').
    \15\ FHA Insured $940 Million in Loans for Properties in Flood 
Zones Without the Required Flood Insurance, HudOig.Gov. Jan. 5, 
2021, https://www.hudoig.gov/reports-publications/report/fha-insured-940-million-loans-properties-flood-zones-without-required.
---------------------------------------------------------------------------

    HUD Response: HUD agrees that this rule should help reduce 
confusion for borrowers and mortgagees, who may not have realized that 
HUD did not previously accept private flood insurance policies in lieu 
of NFIP policies, although other Federal agencies did. This issue was 
identified in a recent HUD OIG audit.\16\ This rule should remove that 
source of confusion and non-compliance by allowing FHA borrowers to 
purchase a flood insurance policy that meets HUD's requirements.
---------------------------------------------------------------------------

    \16\ See Audit Rep. No. 2021-KC-0002, supra note 8.
---------------------------------------------------------------------------

IV. Findings and Certifications

Executive Order 12866 and Executive Order 13563

    Under Executive Order 12866 (Regulatory Planning and Review), a 
determination must be made whether a regulatory action is significant 
and therefore, subject to review by the Office of Management and Budget 
(OMB) in accordance with the requirements of the order. Executive Order 
13563 (Improving Regulations and Regulatory Review) directs executive 
agencies to analyze regulations that are ``outmoded, ineffective, 
insufficient, or excessively burdensome, and to modify, streamline, 
expand, or repeal them in accordance with what has been learned.'' 
Executive Order 13563 also directs that, where relevant, feasible, and 
consistent with regulatory objectives, and to the extent permitted by 
law, agencies are to identify and consider regulatory approaches that 
reduce burdens and maintain flexibility and freedom of choice for the 
public.
    This rule was determined to be a ``significant regulatory action'' 
under section 3(f) of Executive Order 12866 (but not an economically 
significant action under section 3(f)(1) of the Executive order).

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements, unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
As explained in HUD's November 23, 2020, proposed rule, supervised 
mortgagees are among FHA-approved lenders. These mortgagees are 
supervised by the Federal regulators. Based on the analysis developed 
by the Federal regulators and published as part of their final rule 
(see 84 FR 4953), the Federal regulators determined that allowing 
private flood insurance in mortgage transactions conducted by these 
mortgagees would not have a significant economic impact on a 
substantial number of small entities they supervised. This finding is 
also true for the share of regulated lending institutions supervised by 
the Federal regulators that are FHA-approved lenders.
    Small entities also include small businesses, small not-for-profit 
organizations, and small governmental jurisdictions. This rule, 
however, offers a benefit to all FHA-approved mortgagees regardless of 
the size of the firm. Allowing private insurers to compete provides 
business opportunities to those private insurers. The rule provides a 
compliance aid which will allow all mortgagees, including small 
mortgagees that may

[[Page 70742]]

lack technical expertise regarding flood insurance policies, to 
conclude that a policy meets the definition of ``private flood 
insurance'' without further review of the policy if the policy, or an 
endorsement to the policy, states: ``This policy meets the definition 
of private flood insurance contained in 24 CFR 203.16a(e) for FHA-
insured mortgages.'' This proposed rule would also reduce the burden to 
all mortgagees, including those small entities, by aligning FHA's 
regulations with those issued by the Federal regulators.
    For flood insurance companies, there is less data. However, 
existing analysis by Kousky et al. (2018) \17\ on private insurers that 
are currently providing flood insurance shows that these private 
insurance companies are mostly surplus line carriers that operate 
globally. This finding implies that such carriers cannot be considered 
as small entities. Taking advantage of the business opportunities is 
more difficult for small firms because large firms are inherently 
favored by their ability to spread flood risk. However, as the private 
flood insurance market expands, it is expected to become less 
concentrated, to the benefit of small entities. Overall, HUD believes 
that this rule will not have a significant impact on a substantial 
number of small entities, and the impact of the rule on those small 
entities impacted will be beneficial rather than adverse. Therefore, 
HUD certifies that this rule is not expected to have a significant 
economic impact on small entities.
---------------------------------------------------------------------------

    \17\ Kousky, C., H. Kunreuther, B. Lingle, and L. Shabman 
(2018). The Emerging Private Residential Flood Insurance Market in 
the United States, Risk Management and Decision Processes Center, 
Wharton, University of Pennsylvania, July.
---------------------------------------------------------------------------

Environmental Impact

    A Finding of No Significant Impact (FONSI) with respect to the 
environment was made at the proposed rule stage in accordance with HUD 
regulations at 24 CFR part 50, which implement section 102(2)(C) of the 
National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). The 
FONSI remains applicable and is available for public inspection on 
www.regulations.gov.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either (i) imposes substantial direct compliance costs on state and 
local governments and is not required by statute, or (ii) preempts 
state law, unless the agency meets the consultation and funding 
requirements of section 6 of the Executive order. This rule does not 
have federalism implications and would not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for Federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments, and on the private sector. This rule does not 
impose any Federal mandates on any state, local, or tribal governments, 
or on the private sector, within the meaning of the UMRA.

List of Subjects

24 CFR Part 201

    Claims, Health facilities, Historic preservation, Home improvement, 
Loan programs-housing and community development, Manufactured homes, 
Mortgage insurance, Reporting and recordkeeping requirements.

24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians-lands, Loan programs-
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.

24 CFR Part 206

    Aged, Condominiums, Loan programs-housing and community 
development, Mortgage insurance, Reporting and recordkeeping 
requirements.

    For the reasons discussed in the preamble, HUD amends 24 CFR parts 
201, 203, and 206 as follows:

PART 201--TITLE I PROPERTY IMPROVEMENT AND MANUFACTURED HOME LOANS

0
1. The authority citation for part 201 continues to read as follows:

    Authority:  12 U.S.C. 1703; 15 U.S.C. 1639c; 42 U.S.C. 3535(d).


0
2. In Sec.  201.28, revise paragraph (a) to read as follows:


Sec.  201.28  Flood and hazard insurance, and Coastal Barriers 
properties.

    (a) Flood insurance. No property improvement loan or manufactured 
home loan shall be eligible for insurance under this part if the 
property securing repayment of the loan is located in a special flood 
hazard area identified by the Federal Emergency Management Agency 
(FEMA), unless the community in which the area is situated is 
participating in the National Flood Insurance Program, flood insurance 
under the National Flood Insurance Program (NFIP) is available with 
respect to such property improvements, and flood insurance on the 
property is obtained by the borrower in compliance with section 102 of 
the Flood Disaster Protection Act of 1973 (42 U.S.C. 4012a). Such 
insurance shall be in the form of the standard policy issued under the 
National Flood Insurance Program (NFIP) or private flood insurance, as 
defined in 24 CFR 203.16a. Such insurance shall be obtained at any time 
during the term of the loan that the lender determines that the secured 
property is located in a special flood hazard area identified by FEMA 
and shall be maintained by the borrower for the remaining term of the 
loan, or until the lender determines that the property is no longer in 
a special flood hazard area, or until the property is repossessed or 
foreclosed upon by the lender. The amount of such insurance shall be at 
least equal to the unpaid balance of the Title I loan, and the lender 
shall be named as the loss payee for flood insurance benefits. A lender 
may determine that a private flood insurance policy meets the 
definition of private flood insurance, as defined in 24 CFR 203.16a, 
without further review of the policy, if the compliance aid statement 
provided in 24 CFR 203.16a(c) is included within the policy or as an 
endorsement to the policy.
* * * * *

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
3. The authority citation for part 203 continues to read as follows:

    Authority:  12 U.S.C. 1707, 1709, 1710, 1715b, 1715z-16, 1715u, 
and 1715z-21; 15 U.S.C. 1639c; 42 U.S.C. 3535(d).


0
4. Revise Sec.  203.16a to read as follows:


Sec.  203.16a  Mortgagor and mortgagee requirement for maintaining 
flood insurance coverage.

    (a) In general. (1) The requirements of this section apply if a 
mortgage is to cover property improvements that:
    (i) Are located in an area designated by the Federal Emergency 
Management Agency (FEMA) as a floodplain area having special flood 
hazards;
    (ii) Are otherwise determined by the Commissioner to be subject to 
flood hazard; or
    (iii) Are not otherwise covered by the flood insurance standard for 
condominium projects established under Sec.  203.43b(d)(6)(iii) or 
(i)(1).

[[Page 70743]]

    (2) No mortgage may be insured that covers property improvements 
located in an area that has been identified by FEMA as an area having 
special flood hazards unless the community in which the area is 
situated is participating in the National Flood Insurance Program and 
flood insurance under the National Flood Insurance Program (NFIP) is 
available with respect to such property improvements. Such requirement 
for flood insurance shall be effective one year after the date of 
notification by FEMA to the chief executive officer of a flood prone 
community that such community has been identified as having special 
flood hazards.
    (3) For purposes of this section, property improvement means a 
dwelling and related structures/equipment essential to the value of the 
property and subject to flood damage.
    (b) Flood insurance obligation. The mortgagor and mortgagee shall 
be obligated, by a special condition to be included in the mortgage 
commitment, to obtain and maintain either NFIP flood insurance or 
private flood insurance coverage on the property improvements.
    (c) Insurance policy. A mortgagee may accept a flood insurance 
policy in the form of the standard policy issued under the NFIP or a 
private flood insurance policy as defined in this section, and the 
mortgagee shall be named as the loss payee for flood insurance 
benefits. A mortgagee may determine that a private flood insurance 
policy meets the definition of private flood insurance in this section, 
without further review of the policy, if the following statement is 
included within the policy or as an endorsement to the policy: ``This 
policy meets the definition of private flood insurance contained in 24 
CFR 203.16a(e) for FHA-insured mortgages.''
    (d) Duration and amount of coverage. The flood insurance must be 
maintained during such time as the mortgage is insured in an amount at 
least equal to the lowest of the following:
    (1) 100 percent replacement cost of the insurable value of the 
improvements, which consists of the development or project cost less 
estimated land cost; or
    (2) The maximum amount of NFIP insurance available with respect to 
the particular type of property; or
    (3) The outstanding principal balance of the loan.
    (e) Private flood insurance defined. The term ``private flood 
insurance'' means an insurance policy that:
    (1) Is issued by an insurance company that is:
    (i) Licensed, admitted, or otherwise approved to engage in the 
business of insurance in the State or jurisdiction in which the insured 
building is located, by the insurance regulator of that State or 
jurisdiction; or
    (ii) In the case of a policy of difference in conditions, multiple 
peril, all risk, or other blanket coverage insuring nonresidential 
commercial property, is recognized, or not disapproved, as a surplus 
lines insurer by the insurance regulator of the State or jurisdiction 
where the property to be insured is located;
    (2) Provides flood insurance coverage that is at least as broad as 
the coverage provided under a standard flood insurance policy under the 
National Flood Insurance Program for the same type of property, 
including when considering deductibles, exclusions, and conditions 
offered by the insurer. To be at least as broad as the coverage 
provided under a standard flood insurance policy under the National 
Flood Insurance Program, the policy must, at a minimum:
    (i) Define the term ``flood'' to include the events defined as a 
``flood'' in a standard flood insurance policy under the National Flood 
Insurance Program;
    (ii) Contain the coverage specified in a standard flood insurance 
policy under the National Flood Insurance Program, including that 
relating to building property coverage; personal property coverage, if 
purchased by the insured mortgagor(s); other coverages; and increased 
cost of compliance coverage;
    (iii) Contain deductibles no higher than the specified maximum, and 
include similar non-applicability provisions, as under a standard flood 
insurance policy under the National Flood Insurance Program, for any 
total policy coverage amount up to the maximum available under the NFIP 
at the time the policy is provided to the lender;
    (iv) Provide coverage for direct physical loss caused by a flood 
and may only exclude other causes of loss that are excluded in a 
standard flood insurance policy under the National Flood Insurance 
Program. Any exclusions other than those in a standard flood insurance 
policy under the National Flood Insurance Program may pertain only to 
coverage that is in addition to the amount and type of coverage that 
could be provided by a standard flood insurance policy under the 
National Flood Insurance Program or have the effect of providing 
broader coverage to the policyholder; and
    (v) Not contain conditions that narrow the coverage provided in a 
standard flood insurance policy under the National Flood Insurance 
Program;
    (3) Includes all of the following:
    (i) A requirement for the insurer to give 45 days' written notice 
of cancellation or non-renewal of flood insurance coverage to:
    (A) The insured;
    (B) The mortgagee, if any; and
    (C) Federal Housing Administration (FHA), in cases where the 
mortgagee has assigned the loan to FHA in exchange for claim payment;
    (ii) Information about the availability of flood insurance coverage 
under the National Flood Insurance Program;
    (iii) A mortgage interest clause similar to the clause contained in 
a standard flood insurance policy under the National Flood Insurance 
Program; and
    (iv) A provision requiring an insured to file suit not later than 1 
year after the date of a written denial of all or part of a claim under 
the policy; and
    (4) Contains cancellation provisions that are as restrictive as the 
provisions contained in a standard flood insurance policy under the 
National Flood Insurance Program.

0
5. In Sec.  203.343, revise paragraph (b)(3) to read as follows:


Sec.  203.343  Partial release, addition or substitution of security.

* * * * *
    (b) * * *
    (3) The property to which the dwelling is removed is in an area 
known to be reasonably free from natural hazards or, if in a flood 
zone, the mortgagor will insure or reinsure under the National Flood 
Insurance Program or obtain equivalent private flood insurance coverage 
as defined in Sec.  203.16a.
* * * * *

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

0
6. The authority citation for part 206 continues to read as follows:

    Authority:  12 U.S.C. 1715b, 1715z-20; 42 U.S.C. 3535(d).


0
7. In Sec.  206.45, revise paragraph (c) to read as follows:


Sec.  206.45  Eligible properties.

* * * * *
    (c) Borrower and mortgagee requirement for maintaining flood 
insurance coverage--(1) In general. (i) The requirements of this 
paragraph (c) apply if a mortgage is to cover property improvements 
that:
    (A) Are located in an area designated by the Federal Emergency 
Management Agency (FEMA) as a floodplain area having special flood 
hazards;

[[Page 70744]]

    (B) Are otherwise determined by the Commissioner to be subject to a 
flood hazard; or
    (C) Are not otherwise covered by the flood insurance standard for 
condominium projects established under 24 CFR 203.43b(d)(6)(iii) or 
(i)(1).
    (ii) No mortgage may be insured that covers property improvements 
located in an area that has been identified by FEMA as an area having 
special flood hazards, unless the community in which the area is 
situated is participating in the National Flood Insurance Program 
(NFIP) and flood insurance is obtained by the borrower. Such flood 
insurance shall be in the form of the standard policy issued under the 
NFIP or private flood insurance as defined in paragraph (c)(6) of this 
section. Such requirement for flood insurance shall be effective one 
year after the date of notification by FEMA to the chief executive 
officer of a flood prone community that such community has been 
identified as having special flood hazards.
    (iii) For purposes of this section, property improvement means a 
dwelling and related structures/equipment essential to the value of the 
property and subject to flood damage.
    (2) Flood insurance obligation. During such time as the mortgage is 
insured, the borrower and mortgagee shall be obligated, by a special 
condition to be included in the mortgage commitment, to obtain and to 
maintain flood insurance coverage under either the NFIP or equivalent 
private flood insurance coverage as defined in paragraph (c)(6) of this 
section on the property improvements. The mortgagee shall be named as 
the loss payee for flood insurance benefits. A mortgagee may determine 
that a private flood insurance policy meets the definition of private 
flood insurance in this section, without further review of the policy, 
if the compliance aid statement provided in 24 CFR 203.16a(c) is 
included within the policy or as an endorsement to the policy.
    (3) Duration and amount of coverage. The flood insurance must be 
maintained during such time as the mortgage is insured in an amount at 
least equal to the lowest of the following:
    (i) 100 percent replacement cost of the insurable value of the 
improvements, which consists of the development or project cost less 
estimated land cost; or
    (ii) The maximum amount of the NFIP insurance available with 
respect to the particular type of the property; or
    (iii) The outstanding principal balance of the loan.
    (4) Private flood insurance defined. The term ``private flood 
insurance'' means an insurance policy that:
    (i) Is issued by an insurance company that is:
    (A) Licensed, admitted, or otherwise approved to engage in the 
business of insurance in the State or jurisdiction in which the insured 
building is located, by the insurance regulator of that State or 
jurisdiction; or
    (B) In the case of a policy of difference in conditions, multiple 
peril, all risk, or other blanket coverage insuring nonresidential 
commercial property, is recognized, or not disapproved, as a surplus 
lines insurer by the insurance regulator of the State or jurisdiction 
where the property to be insured is located;
    (ii) Provides flood insurance coverage that is at least as broad as 
the coverage provided under a standard flood insurance policy under the 
National Flood Insurance Program for the same type of property, 
including when considering deductibles, exclusions, and conditions 
offered by the insurer. To be at least as broad as the coverage 
provided under a standard flood insurance policy under the National 
Flood Insurance Program, the policy must, at a minimum:
    (A) Define the term ``flood'' to include the events defined as a 
``flood'' in a standard flood insurance policy under the National Flood 
Insurance Program;
    (B) Contain the coverage specified in a standard flood insurance 
policy under the National Flood Insurance Program, including that 
relating to building property coverage; personal property coverage, if 
purchased by the insured mortgagor(s); other coverages; and increased 
cost of compliance coverage;
    (C) Contain deductibles no higher than the specified maximum, and 
include similar non-applicability provisions, as under a standard flood 
insurance policy under the National Flood Insurance Program, for any 
total policy coverage amount up to the maximum available under the NFIP 
at the time the policy is provided to the lender;
    (D) Provide coverage for direct physical loss caused by a flood and 
may only exclude other causes of loss that are excluded in a standard 
flood insurance policy under the National Flood Insurance Program. Any 
exclusions other than those in a standard flood insurance policy under 
the National Flood Insurance Program may pertain only to coverage that 
is in addition to the amount and type of coverage that could be 
provided by a standard flood insurance policy under the National Flood 
Insurance Program or have the effect of providing broader coverage to 
the policyholder; and
    (E) Not contain conditions that narrow the coverage provided in a 
standard flood insurance policy under the National Flood Insurance 
Program;
    (iii) Includes all of the following:
    (A) A requirement for the insurer to give 45 days' written notice 
of cancellation or non-renewal of flood insurance coverage to:
    (1) The insured;
    (2) The mortgagee, if any; and
    (3) Federal Housing Administration (FHA), in cases where the 
mortgagee has assigned the loan to FHA in exchange for claim payment;
    (B) Information about the availability of flood insurance coverage 
under the National Flood Insurance Program;
    (C) A mortgage interest clause similar to the clause contained in a 
standard flood insurance policy under the National Flood Insurance 
Program; and
    (D) A provision requiring an insured to file suit not later than 1 
year after the date of a written denial of all or part of a claim under 
the policy; and
    (iv) Contains cancellation provisions that are as restrictive as 
the provisions contained in a standard flood insurance policy under the 
National Flood Insurance Program.
* * * * *


Sec.  206.134  [Amended]

0
8. In Sec.  206.134, amend paragraph (b)(3) by adding the phrase ``or 
obtain equivalent private flood insurance coverage, as defined in Sec.  
203.16a of this chapter'' after ``National Flood Insurance Program''.

Julia R. Gordon,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 2022-25258 Filed 11-18-22; 8:45 am]
BILLING CODE 4210-67-P