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July 9, 2002

Nancy M. Stiles, P.C.
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005-3934

Dear Ms. Stiles:

This is in response to your letter dated February 28, 2002, and related correspondence on behalf of [BHC], requesting an opinion as to whether certain flood zone determination activities that [BHC] proposes to conduct through [Company A], a joint venture,1 would be within the scope of activities related to extending credit as defined in section 225.28(b)(2) of the Board's Regulation Y (12 C.F.R. 225.28(b)(2)). [BHC] proposes to engage, through [Company A], in a variety of lending-related activities, including providing real estate appraisals and flood zone determinations.

The Board has determined, in section 225.28(b)(2) of Regulation Y, that it is permissible for bank holding companies to engage in "[a]ny activity usual in connection with making, acquiring, brokering, or servicing loans or other extensions of credit, as determined by the Board."2 12 C.F.R. 225.28(b)(2). The Board also has determined by regulation that performing real estate appraisals is an activity that is usual in connection with making, acquiring, brokering, or servicing loans or other extensions of credit. 12 C.F.R. 225.28(b)(2)(i). The Board has not specifically addressed whether providing flood zone determinations is an activity that is usual in connection with lending activities.

The flood zone determination services proposed to be provided by [Company A], which are described in more detail below, are a necessary aspect of mortgage lending in the United States. Federal law prohibits a Federally regulated lender from making, increasing, extending, or renewing a loan that is secured by improved real estate or a mobile home located in an area designated by the Federal Emergency Management Agency ("FEMA") as a special flood hazard area unless the borrower obtains flood insurance. See, e.g., 12 C.F.R. 208.25(c). Federal law also provides that if a Federally regulated lender determines, at any time during the life of a loan, that the improved real estate or mobile home securing the loan is located in a special flood hazard area and is not covered by flood insurance, the lender must instruct the borrower to obtain flood insurance and must purchase flood insurance on the borrower's behalf if the borrower fails promptly to purchase the required insurance. See, e.g., 12 C.F.R. 208.25(g).

In addition, Federal law requires the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association (the "GSEs") to have procedures reasonably designed to ensure that flood insurance is in place where required at the initiation of, and during the lives of, the mortgage loans they purchase. 12 U.S.C. 4012a(b). The GSEs meet this requirement by requiring lenders that sell loans to the GSEs, and companies that service loans for the GSEs, to monitor on an ongoing basis the flood zone status of any loans sold to, or serviced for, the GSEs. In order to comply with the requirements of Federal law and the GSEs, mortgage lenders must obtain an initial flood zone determination prior to the origination of each mortgage loan and must take steps to monitor, throughout the life of the loan, the flood zone status of any improved real estate or mobile home collateral securing the loan.3

[Company A] proposes both to provide initial flood zone determinations to mortgage lenders and to provide mortgage lenders with ongoing flood zone tracking services with respect to their mortgage loans. [Company A]'s activities in this regard would be limited to making determinations as to whether particular parcels of real estate are in designated flood zones, preparing the FEMA standard flood zone determination form, and communicating flood zone determinations to customers. [Company A] would not be involved in placing, underwriting, or issuing flood insurance or in the collection of flood insurance premiums. [Company A] proposes to provide flood zone determinations both in connection with providing real estate appraisals and as a separate service. In addition to providing customary flood zone determination and tracking services, [Company A] may assist customers who wish to request that FEMA amend its flood maps to remove a property from a designated special flood hazard area.

The proposed flood zone determination services are an essential part of mortgage lending, are designed to assist mortgage lenders in complying with the requirements of Federal law and the GSEs, and generally would be provided by [Company A] to mortgage lenders. Consequently, the proposed flood zone determination services are usual in connection with making mortgage loans.4 In light of all the facts of record, we believe that the proposed flood zone determination services described in this letter are within the scope of permissible activities related to extending credit under section 225.28(b)(2) of Regulation Y (12 C.F.R. 225.28(b)(2)).5

This opinion is limited solely to the proposed flood zone determination activities described above, and does not address the permissibility of any other activities or authorize [BHC] or [Company A] to engage in any other activities. Any material change in the proposed activities may require this opinion to be reconsidered and should be communicated immediately to Board staff.

Sincerely,

(signed) Scott G. Alvarez

Scott G. Alvarez

Associate General Counsel

cc: Federal Reserve Bank of Cleveland


Footnote

1. [BHC] would own 50 percent of the equity of [Company A]. [ ] a nonprofit trade organization [ ] would own the remaining 50 percent of the equity of [Company A]. Return to text

2. The Gramm-Leach-Bliley Act ("GLB Act") amended the Bank Holding Company Act to limit bank holding companies that are not financial holding companies to engaging only in "activities which had been determined by the Board by regulation or order under this paragraph as of the day before the date of the enactment of the Gramm-Leach-Bliley Act [November 12, 1999], to be so closely related to banking as to be a proper incident thereto (subject to such terms and conditions contained in such regulation or order, unless modified by the Board)." 12 U.S.C. 1843(c)(8). Prior to November 12, 1999, the Board had determined that "[a]ny activity usual in connection with making, acquiring, brokering, or servicing loans or other extensions of credit, as determined by the Board" was closely related to banking. Accordingly, the Board retains authority after the GLB Act to define the scope of this section 4(c)(8) activity and to modify the terms and conditions that apply to the activity. Return to text

3. Federal law specifically permits lenders to charge a reasonable fee to borrowers for flood zone determinations and life-of-the-loan tracking. See, e.g., 12 C.F.R. 208.25(h). Return to text

4. We understand that [Company A] occasionally may provide flood zone determination services to nonlenders, such as an employee relocation service or other individual seeking to determine whether a particular parcel of real estate is located in a special flood hazard area. You have represented, however, that [Company A] will market its services only to mortgage lenders and would rarely provide services to nonlenders. Return to text

5. We note that the Office of the Comptroller of the Currency has authorized an operating subsidiary of a national bank to provide flood zone determinations for affiliated and unaffiliated mortgage lenders (both initial determinations and life-of-the-loan tracking activities). See OCC Corporate Decision No. 97-79, July 11, 1997. Return to text

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