With the spring home buying season fast approaching and an
increase in residential mortgage lending by banks and mortgage
companies, we have been fielding a number of questions from lenders
about the status of private flood insurance regulatory proposals.
This e‑Alert summarizes the status of the banking
agencies' regulatory proposals requiring lenders to accept
private flood insurance policies as alternatives to standard flood
insurance policies issued under the National Flood Insurance
Program ("NFIP"). The brief answer is that no final
private flood insurance rules have been adopted yet and, regardless
what insurance agents or borrowers might tell you, lenders are not
required to accept private flood insurance policies at this
In 2012, Congress passed legislation (the "Biggert-Waters
Flood Insurance Reform Act") that sought to make the flood
insurance market more robust and competitive, and directed the
banking and credit union regulators (FRB, FDIC, OCC, NCUA, Farm
Credit) to issue a joint interagency rule requiring lenders to
accept private flood insurance policies, rather than only accepting
policies issued under the NFIP.
Since then, the agencies have issued two proposed rules for
private flood insurance—first in 2013 and then again in
November 2016. (The 2013 proposed rules were withdrawn before being
adopted.) The 60‑day Comment Period on the latest rule
proposal ended in January, and no final private flood rules have
yet been adopted. The rules requiring lenders to accept private
flood insurance policies have been controversial since they were
first proposed in 2013, and continue to be so. Given the present
uncertainty in Washington over the timing of the adoption of any
new federal regulations, it is unwise to speculate when these
agencies might actually approve the latest proposed flood rule.
We have heard that some insurance agents are incorrectly
advising lenders and borrowers that the final private flood
insurance rules have been issued and are effective, and that
lenders are required to accept conforming private flood insurance
policies. Until the proposed interagency rules have been made
final, this is not the case at this time. It is anticipated that
the cost of purchasing private flood insurance policies may be
substantially less than the cost of purchasing a standard flood
insurance policy issued under the NFIP, so borrowers with this
closing requirement no doubt will be anxious to save costs.
When the new rules are finalized and become effective, regulated
lenders will be required to accept private flood insurance policies
that conform with criteria included in the Biggert-Waters Act. The
determination by lenders of "conforming" provisions in
private flood insurance policies to assure they provide coverage
"as broad as" a standard flood insurance policy issued
under the NFIP is not something mortgage lenders are trained to do
and no doubt this requirement will prove burdensome.
The American Bankers Association recently pointed out in its
comment letter on the proposed rule that the requirement for a
lender to conduct a detailed analysis and comparison of a private
flood insurance policy offered by a borrower could lead to
confusion for lenders and delays for borrowers in closing
The most recent rule proposal includes a "compliance
aid" provision intended to assist lenders in determining if a
private flood insurance policy offered by a borrower is acceptable
and meets the definition of "private flood insurance." If
the following three criteria are met, then the policy meets the
definition of "private flood insurance" under the
the policy must be accompanied by a
detailed written summary from the insurer stating how the policy
meets the statutory definition of "private flood
the lending institution must verify
No. 1 in writing; and
the insurance policy must state:
"This policy meets the definition of private flood insurance
contained in 42 U.S.C. § 4012(b)(7) and the corresponding
No doubt these new private flood insurance requirements, when
they finally arrive, will require changes to be made in your
policies and procedures in this area.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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