• Greggory B. Oberg, Esq.

The Private Flood Rule (In Less Words)

Big News: One of the great things about SCA is the range of issues we get to see, and the wealth of knowledge we get to tap into while working with dozens of clients on a monthly basis. Today, we'll share some important news about the new private flood rule.

By: Gregg Oberg

Effective July 1, 2019, regulated lending institutions must accept Private Flood Insurance (PFI) policies which meet statutory requirements confirming the PFI policy meets the Biggert-Waters definition of PFI by virtue of being “at least as broad as” the Standard Flood Insurance Policy (SFIP) offered at the time through the National Flood Insurance Program (NFIP).

I. Executive Summary

The Final Rule provides a Compliance Aid under which regulated lending institutions may accept a PFI policy as meeting the SFIP requirements based solely on the insurers statement of compliance. However, lenders are not prohibited from completing additional due diligence, and cannot reject a PFI merely because it does not contain the compliance statement.

Regulated lending instructions are further permitted to accept non-conforming PFI and PFI offered by Mutual Aid Societies at its discretion, subject to certain criteria described herein.

Although these rules seem straightforward in theory, practical concerns exist as to whether the insurance industry will voluntarily implement the compliance statement—at the cost of additional risk and liability to the insurer—in a reasonable timeframe.

Until such point as insurers are including the compliance statement widely as a matter of practice, regulated lending institutions should be prepared to evaluate whether a PFI meets the definition under Biggert-Waters without reliance on statements by insurers.

Finally, it is important to note that the Final Rule does not modify any requirements to obtain flood insurance on properties in a Special Flood Hazard Area (SFHA).

II. Background

A. Flood Insurance Statutes

The National Flood Insurance Act of 1968 (68 Act) and Flood Disaster Protection Act of 1973 (FDPA) govern the National Flood Insurance Program (NFIP).

Collectively, these laws provided subsidized flood insurance for improved real estate or mobile homes in Participating Communities, and requires the purchase of such insurance when the security is located in a special flood hazard area (SFHA) in which flood insurance is available under the NFIP.

Typically, the prudential regulators issue Joint Guidance or rulemaking to maintain uniformity across regulated entities of different types.

The Biggert-Waters Act amends the NFIP regime to include provisions on borrower notification and disclosure of fees, escrow, force place requirements, and private flood insurance eligibility. This latter item is the core modifications in this Final Rule.

B. Regulatory History

Rulemaking first addressed the escrow, force placement, and private flood insurance in a 2013 Proposed Rule. Due to the overwhelming majority of comments referencing the private flood insurance issue—as well as the passage of the 2014 Home Flood Insurance Affordability Act (HFIAA)—the agencies finalized the force place and escrow requirements; leaving private flood regulations to this Final Rule.

III. Overview of Proposed Rule and Public Comments

This Final Rule implements the November 2016 Proposed Rule; which significantly varies from the 2013 Proposed Rule. Specifically, the 2016 Proposed Rule would require acceptance of policies that meet the Biggert-Waters definition of Private Flood Insurance. The 2016 Proposed Rule added a compliance aid provision to assist lenders in determining whether private coverage meets the statutory definition; and thus, must be accepted. The 2016 Proposed Rule also permitted the optional acceptance of other private flood insurance policies not meeting the Biggert-Waters Act definition.

Sixty comments were received from industry, largely resulting in minor or technical modification to the Final Rule as compared to the 2016 Proposed Rule.

IV. Summary of the Final Rule

Under the Final Rule, lenders must accept Private Flood Insurance as a substitute for SFIP coverage offered through the NFIP. The Final Rule includes a compliance aid provision which allows lenders to “conclude that a policy meets the definition … without further review if the policy, or an endorsement to the policy states: ‘This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.’”

The Final Rule also allows lenders to accept other policies when sufficient protection for the loan is provided consistent with general safety and soundness principles.

Finally, lenders may exercise discretion to accept certain plans providing flood coverage issued by “mutual aid societies.”

DISCLAIMER: This document summarizes the Final Rule issued jointly by the Agencies with regard to mandatory acceptance by lenders of Private Flood Insurance policies. This is NOT legal advice or a substitute for legal advice, and language is heavily paraphrased for purposes of conveying a succinct understanding of the Final Rule. It is assumed that readers already have a functioning understanding of Pre-2019 Flood Insurance rules and regulations. The opinions express herein are my own, and not necessarily representative of my employer or any client(s). Trust but verify.

Spillane Consulting Associates has served the residential mortgage lending business since 1991. We have specialized in mortgage banking consulting services and provided quality control reviews, risk management and process consulting and employee training to credit unions, community banks and non-depository institutions. We are a thought leader on the strategic growth of residential mortgage lending. You can learn more by visiting our website, or scheduling a meeting with me or one of my colleagues.

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