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Acceptance of Private Flood Insurance for FHA-Insured Mortgages rule (2022)

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The Acceptance of Private Flood Insurance for FHA-Insured Mortgages rule is a significant rule issued by the Office of the Assistant Secretary for Housing—Federal Housing Commissioner, U.S. Department of Housing and Urban Development (HUD) effective December 21, 2022, that allowed mortgagers to purchase private flood insurance for FHA-insured mortgages on properties in Special Flood Hazard Areas (SFHAs), pursuant to the Flood Disaster Protection Act of 1973.[1]

HIGHLIGHTS
  • Name: Acceptance of Private Flood Insurance for FHA-Insured Mortgages
  • Code of Federal Regulations: 24 CFR 201, 203, and 206
  • Agency: Office of the Assistant Secretary for Housing—Federal Housing Commissioner, U.S. Department of Housing and Urban Development (HUD)
  • Action: Final rule
  • Type of significant rule: Other significant rule

    • Timeline

    The following timeline details key rulemaking activity:

    Background

    The Flood Disaster Protection Act of 1973 (FDPA) provided that only if a property in a special flood hazard area has flood insurance may a federal agency provide financial assistance. The National Flood Insurance Reform Act of 1994 required property owners in areas participating in the National Flood Insurance Program (NFIP) to purchase flood insurance to receive a federally-backed mortgage. The 2012 Biggert-Waters Act, as amended in 2014, sought to incorporate private insurers into the NFIP by requiring federal agencies to accept private flood insurance if it met certain requirements. HUD issued this final rule to satisfy the requirements outlined in the FDPA.[1]

    Summary of the rule

    The following is a summary of the rule from the rule's entry in the Federal Register:

    “ 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.[1][2] ”

    Summary of provisions

    The following is a summary of the provisions from the rule's entry in the Federal Register:[1]

    “

    § 201.28 Flood and Hazard Insurance, and Coastal Barriers Properties

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

    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 § 203.16a(c).

    § 203.16a Mortgagor and Mortgagee Requirement for Maintaining Flood Insurance Coverage

    This final rule makes two changes to § 203.16a as proposed. Initially, the final rule adds § 203.16a(a)(1)(iii), and addresses the applicability of § 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 § 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 § 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 § 206.45(c)(3)(i). This final rule makes this technical change for clarity and consistency and alignment with HECM regulations.

    § 206.45 HECM Requirements for Private Flood Insurance Coverage

    This final rule makes several minor revisions to § 206.45 as proposed. Initially, HUD is adding a restatement of the definition and requirements for flood insurance to § 206.45. HUD is also revising § 206.45(c)(2) to add for HECM mortgages the loss payee and compliance aid language that is in § 203.16a(c). This final rule adds paragraph (c)(4) to § 206.45 to restate the definition of private flood insurance in § 203.16a(e). HUD is amending § 206.45 by replacing the cross references to the definition in § 203.16a with cross references to § 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 § 203.16a(a)(1)(iii), this final rule adds a paragraph to § 206.45. Under this new paragraph (c)(1)(i)(C), the requirements of § 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 § 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 § 206.45(c)(1) into new paragraphs (c)(1) and (2) for clarity and structural consistency with § 203.16a and adds a header to paragraph (c)(3).[2]

    		”

    Significant impact

    See also: Significant regulatory action

    Executive Order 12866, issued by President Bill Clinton (D) in 1993, directed the Office of Management and Budget (OMB) to determine which agency rules qualify as significant rules and thus are subject to OMB review.

    Significant rules have had or might have a large impact on the economy, environment, public health, or state or local governments. These actions may also conflict with other rules or presidential priorities. Executive Order 12866 further defined an economically significant rule as a significant rule with an associated economic impact of $100 million or more. Executive Order 14094, issued by President Joe Biden (D) on April 6, 2023, made changes to Executive Order 12866, including referring to economically significant rules as section 3(f)(1) significant rules and raising the monetary threshold for economic significance to $200 million or more.[1]


    The text of the Acceptance of Private Flood Insurance for FHA-Insured Mortgages rule states that OMB deemed this rule significant, but not economically significant:

    “ 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).[2] ”

    Text of the rule

    The full text of the rule is available below:[1]

    See also

    External links

    References

    1. ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 Federal Register, "Acceptance of Private Flood Insurance for FHA-Insured Mortgages," January 10, 2024.
    2. ↑ 2.0 2.1 2.2 Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
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