Understanding New Private Flood Insurance Lending Regulations

Understanding New Private Flood Insurance Lending Regulations

When Congress passed the Biggert Waters Act of 2012 (BW12), the intent of Congress was to make it easier for lenders to accept private flood insurance to satisfy the mandatory purchase requirement.  However, what the Act did was create vague language that took lending regulators seven years to finalize.  Since the lending regulators had to base the final rule around the legislative language, lenders worried that accepting the wrong private flood policy could be seen by a regulator as a violation of the law which would mean a fine of thousands of dollars. In January, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration (FCA), and the National Credit Union Administration (NCUA) (known going forward as the Regulators) issued their final guidance to lenders on how to accept a private flood policy, and on July 1st 2019 it became effective.  Even with the new rule, which should make business easier going forward for consumers purchasing private flood insurance, some questions remain and the industry hopes to receive answers in the coming months. 

The final rule breaks the acceptance of private flood insurance into essentially two types of policies, those that lenders must accept if it meets the definition of private flood insurance found in the Biggert-Waters Act (mandatory acceptance), and policies lenders can consider, but don’t have to accept, if the private flood policy does not meet the definition of private flood insurance (discretionary acceptance).

The definition  of private flood in the Biggert-Waters Act is long and vague, so the new rule allows for a “compliance aid” to be used to determine if a flood insurance policy meets the definition.  If the private flood policy states exactly this phrase, “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation”, the lender must accept the policy.  However, some lenders are concerned that the policy may have the compliance aid, and still not meet the definition of private flood, and impact their clients in a time of a loss and cause fines. 

In addition to the compliance aid, the rule regulates what a policy must contain in order to meet the definition of private flood if the compliance aid is missing, or if a lender wants to check the whole policy for compliance.  In short, it must have language such as a requirement for the policy to name both the lender and the insured as getting paid in a loss, have a 45 day cancelation notice, and have cancelation provisions similar to the federal flood policy. 

Discretionary acceptance are for private flood policies that don’t exactly
meet the definition of private flood insurance.  The policy will have to
meet minimum requirements, such as have the required coverage, the company must be licensed, or not disapproved in the state they are doing business, and cover both the lender and the customer in a loss.  The lender will be able to decide if the policy is consistent with safety and soundness principles of the bank.  The rule allows the bank to accept
the policy, but the lender does not have to accept a discretionary policy. 

While the final rule appears to be the much awaited answer for guiding lenders, consumers, insurance companies and agents for the acceptance of private flood insurance, there are still questions.   It gives lenders assurance that they may accept private policies of varying types without penalty.  It gives insurance companies assurance on what lenders will be looking for to accept a private flood policy.  It provides insurance agents assurance that the policy that they sell will be accepted by their clients lender, and clients assurance that their private policy will be accepted by their lender and not hold up financial transactions.  But for some policies, it may still be unclear to lenders on exactly how they should accept it, leave that liability to the lender, and creates some undue processes that lending institutions have never before had to undergo.