The Department of Housing and Urban Development published a final rule today that gives homeowners who are applying for a government-insured loan, including a Home Equity Conversion Mortgage, on properties located in a Special Flood Hazard Area the option to purchase private flood insurance.
The final rule takes effect on December 21, 2022 and impacts mortgages backed by the Federal Housing Administration, Government Sponsored Entities (i.e., Fannie Mae/Freddie Mac), Department of Veterans Affairs and Department of Agriculture.
NRMLA submitted comments to HUD on January 29, 2021 that supported the proposed change, noting that private flood insurance is often more affordable and more comprehensive than National Flood Insurance Program (NFIP) policies. “Permitting FHA borrowers to pursue private flood insurance will help engender a more robust private market and better provide consumers with greater choice and access to flood insurance across the United States,” NRMLA said at the time.
The final rule amends 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 government-backed mortgage.
Final Rule Summary
NRMLA’s outside counsel has summarized key portions of HUD’s changes to the Code of Federal Regulations, Section 24, Parts 201, 203, and 206 (HECM regulations) made by this final rule.
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).