Agencies Issue Final Rule on Private Flood Insurance

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The Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, FDIC, Farm Credit Administration and National Credit Union Administration (collectively, the Agencies) have approved the issuance of a joint final rule to amend their respective regulations regarding loans in special flood hazard areas. The final rule amends flood insurance regulation to incorporate and implement certain provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act).

The final rule requires institutions to accept flood insurance policies that meet the statutory definition of private flood insurance in the Biggert-Waters Act and permits institutions to exercise their discretion to accept flood insurance policies issued by private insurers and flood plans provided by mutual aid societies, even if such policies or coverage doesn’t meet the statutory definition of private flood insurance, as long as certain criteria are met.

Mandatory Acceptance of Private Flood Insurance

The Biggert-Waters Act requires institutions to accept private flood insurance that meets both (1) the statutory definition of private flood insurance and (2) the mandatory purchase requirement. The final rule includes a streamlined compliance aid provision to assist institutions with evaluating policies by relying on written assurances from the insurer that a policy satisfies the criteria set out in the Biggert-Waters Act.

A regulated lending institution may determine that a policy meets the definition of private flood insurance without further review of the policy if the following statement is included within the policy or as an endorsement to the policy: ‘‘This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.’’ To clarify, if a policy includes this statement, the regulated lending institution may rely on the statement and wouldn’t need to review the policy to determine whether it meets the definition of private flood insurance. However, the institution could choose not to rely on this statement and instead make its own determination.

The Agencies also note this provision doesn’t relieve a regulated lending institution of the requirement to accept a policy that both meets the definition of private flood insurance and fulfills the flood insurance coverage requirement, even if the policy doesn’t include the statement. In other words, this provision doesn’t permit regulated lending institutions to reject policies solely because they’re not accompanied by the statement.

Discretionary Acceptance of Private Flood Insurance

The final rule provides that institutions may accept private flood insurance policies that don’t meet the Biggert-Waters Act's criteria for mandatory acceptance, provided that certain conditions are met, including that the policy provides sufficient protection of the loan consistent with general safety and soundness principles.

Institutions may accept flood policies issued by private insurers that don’t meet the statutory and regulatory definition of private flood insurance if the following four criteria are met:

  1. The flood insurance policy must provide coverage in the amount required by the flood insurance purchase requirement.
  2. The policy must be issued by an insurer that’s licensed, admitted or otherwise approved to engage in the business of insurance by the insurance regulator of the state or jurisdiction in which the property to be insured is located or, in the case of a policy of difference in conditions, multiple peril, all risk or other blanket coverage insuring nonresidential commercial property, is issued by a surplus lines insurer recognized, or not disapproved, by the insurance regulator of the state or jurisdiction where the property to be insured is located.
  3. The policy must cover both the mortgagor(s) and mortgagee(s) as loss payees, except in the case of a policy that’s provided by a condominium association, cooperative, homeowners association or other applicable group and for which the premium is paid by the condominium association, cooperative, homeowners association or other applicable group as a common expense.
  4. The policy must provide sufficient protection of the 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.

Coverage by Mutual Aid Societies

The final rule allows institutions to accept certain flood plans provided by mutual aid societies as long as the following criteria are met:

  1. The regulated lending institution’s primary federal supervisory agency has determined that such plans qualify as flood insurance for purposes of the Biggert-Waters Act.
  2. The plan must provide coverage in the amount required by the flood insurance purchase requirement.
  3. The plan must cover both the mortgagor(s) and mortgagee(s) as loss payees.
  4. The plan must provide sufficient protection of the 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 final rule becomes effective on July 1, 2019. The extended date should afford institutions sufficient time to make necessary changes to their policies, procedures and operating systems.

A link to the final rule is provided here for reference. For more information, contact Ginette or your trusted BKD advisor.


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