Flood Insurance Rule Redux: Feds Reissue Proposed Guidance to Lenders on Accepting Private Flood Insurance
On Monday, a Joint Notice of Proposed Rulemaking was issued by five federal banking agencies seeking comment on new proposed rules addressing how regulated lending institutions should evaluateprivate flood insurance policies for loans secured by property within special flood hazard areas.
The draft rules are intended to implement the Biggert-Waters Flood Insurance Reform Act of 2012, and they replace an initial set of draft rules promulgated July 2015 and published in the Federal Register (78 FR 65107).
The proposed rules provide guidance to lenders regarding how to accept private flood insurance, including:
- A “compliance aid” to help consumers and lenders determine whether a particular private flood insurance policy is required to be accepted;
- For policies that do not meet the mandatory acceptance criteria, the rule includes guidance allowing lenders to exercise discretion in accepting policies as long as certain conditions are met; and
- Criteria to determine whether other types of coverage qualify as “flood insurance” under the Act, including plans offered by a “mutual aid society” (e.g. Amish Aid plans), or policies that are individually negotiated or tailored for non-residential property.
The mandatory acceptance criteria for private flood insurance has three components: (1) the policy has a written summary showing how the policy meet the definition of private flood insurance, including identification of the provisions of the policy that meet each criterion, and confirms that the insurer is regulated in conformity with the definition of private flood insurance; (2) the regulated lender verifies in writing that the policy includes the provisions identified by the insurer and that these provisions satisfy the criteria in the definition; and (3) the policy includes the following provisions either in the policy or in the endorsement: “This policy meets the definition of private flood insurances contained in 42 USC 4102a(b)(7) and the corresponding regulation.”
The discretionary acceptance criteriafor private flood insurance that does not meet the mandatory acceptance criteria, but does meet the following criteria: (1) the insurer is approved to engage in the insurance business by the insurance regulator of the state where the property is located; (2) the policy covers both the mortgagor and the mortgagee as loss payees; (3) the policy provides for cancellation after reasonable notice to the borrower in certain circumstances; and (4) the policy is either “at least as broad as” or otherwise “similar to” coverage provided under a standard flood insurance policy (the rules include guidance for determining what is “as broad as” or “similar to” a standard policy).
Comments on the proposed rules are due 60 days from the date of publication in the Federal Register.