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HUD is proposing to amend 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 in satisfaction of the mandatory purchase requirement under the National Flood Insurance Act of 1968 (42 U.S.C. 4001 et seq.).  Acceptance of private flood insurance would benefit borrowers who want FHA-insured mortgages by providing them consumer choice, including the opportunity to obtain private flood insurance policies that may be more affordable than NFIP policies. Current FHA regulations do not allow private flood insurance as an option and require mortgagors to obtain and maintain NFIP flood insurance for the duration of the mortgage, to the extent NFIP is available. Overall, this proposed rule would reduce the regulatory restrictions on flood insurance for FHA-insured loans. 

Statement of Need:

The rule is needed to promote consistency between HUD regulations and statutory and industry standards, and reduce regulatory restrictions on flood insurance for FHA-insured mortgages for properties located in SFHAs. This proposed rule would generally conform to the same rules governing the GSEs and other federal agency lenders for private flood insurance; ensuring that all homebuyers with federally backed loans have similar flood insurance options. In the event of a lapse in the NFIP, the option of private flood insurance may reduce the likelihood of delays in the processing of new originations.

Summary of the Legal Basis:

Executive Order 13771 requires that agencies issue two deregulatory actions for each regulatory action. In addition, the Executive Order requires agencies to identify a cap on incremental costs of regulations for the fiscal year. This rule is a deregulatory action under the Executive Order, and a cost-saving rule that will reduce HUD’s incremental regulatory costs for the fiscal year.

Alternatives:

None.

Anticipated Costs and Benefits:

Executive Order 12866, as amended, requires the agency to provide its best estimate of the combined aggregate costs and benefits of all regulations included in the agency's Regulatory Plan that will be pursued in FY 2021. HUD expects that the neither the total economic costs nor the total efficiency gains will exceed $100 million. Generally, HUD expects that the availability of private insurance will lower premium costs for some homebuyers and reduce housing costs to homebuyers associated with delay in home sale closings if there is a lapse in NFIP authorization. While there may be some minor administrative costs involved in allowing for private flood insurance, they would be small and insignificant.

Risks:

The fee that is collected from NFIP insurance (the Federal Policy Fee or FPF) is used to fund floodplain mapping and management programs. If many homeowners choose private flood insurance, this could reduce the funds available for floodplain mapping and management programs.