By: Bill Elliott, CRCM, Senior Consultant and Manager of Compliance
As you are no doubt aware, the issue of flood insurance has been unsettled for the last 18 months, and the formal FEMA flood program is only approved until the fall. But, after a long wait, the regulators have published additional regulation for private flood insurance – which does not rely on Congress to do anything, and makes the presence or absence of the FEMA program less problematic for lenders.
The Biggert-Waters Act (2012) amended federal flood insurance legislation to require the agencies to issue a rule directing regulated lending institutions to accept “private flood insurance,” as defined by the act. In response to subsequent legislation and comments received regarding the private flood insurance provisions of the first proposed rule (2013), and the second proposed rule (November 2016), all prudential regulatory agencies finally issued the rule, effective July 1, 2019.
It remains to be seen how effective and efficient this will be, as it is a “work in process.” But some have told me that some of their customers have found lower flood insurance rates privately (meaning these policies may become more popular). Others have told me that they have had customers declined for private flood insurance based on the riskiness of the property location.
Summary of the Rule
The rule requires regulated lending institutions to accept “private flood insurance” defined in accordance with the Biggert-Waters Act. There are essentially three categories of private flood insurance.
Category One – Private Flood Insurance with “Compliance Aid” Language
If the following language appears on the flood policy, the lender may accept the policy without any further review:
“This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”
Although it remains to be seen how well this will work, we hope that most insurance companies will include this language, which will make it quite easy for lenders, as no additional effort will be required.
Category Two – Private Flood Insurance without “Compliance Aid” Language
The rule permits regulated lending institutions to exercise discretion to accept flood insurance policies issued by private insurers that do not meet the statutory and regulatory definition of private flood insurance. The conditions for acceptance include a requirement that the policy must provide sufficient protection of a designated loan, consistent with general safety and soundness principles, and the regulated lending institution must document its conclusion regarding sufficiency of the protection of the loan in writing.
The difficulty for lenders will be to determine whether these policies really meet these (and other) requirements. And although the regulation says “discretionary,” it does not appear that the regulators will just allow lenders to summarily reject these policies.
Category Three – Mutual Aid Societies
The agencies will now allow the acceptance of plans providing flood coverage issued by mutual aid societies. The rule defines “mutual aid society” as an organization:
(1) whose members share a common religious, charitable, educational, or fraternal bond;
(2) that covers losses caused by damage to members’ property pursuant to an agreement, including damage caused by flooding, in accordance with this common bond; and
(3) that has a demonstrated history of fulfilling the terms of agreements to cover losses to members’ property caused by flooding.
A regulated lending institution may accept a plan issued by a mutual aid society, as defined above, if the regulated lending institution’s primary federal supervisory agency has determined that such plans qualify as flood insurance for purposes of the act.
Requirement to Purchase Flood Insurance
There is nothing in the rule that changes the amounts of insurance required, or anything else. This simply allows more options and hopefully, over time, will make everyone’s life – lenders and borrowers – easier.
If you need any assistance in this area, especially private flood policies without the “compliance aid” language, please give us a call at 330.422.3450 or send an email to firstname.lastname@example.org. We are always happy to help.