Recently, federal agencies proposed revisions to the Interagency Questions and Answers Regarding Flood Insurance.  The agencies are the Comptroller of the Currency, Farm Credit Administration, FDIC, Federal Reserve Board, and National Credit Union Administration (Agencies).  The proposed Q&As will supplement the proposed Q&As issued by the Agencies in July 2020.  Those proposed Q&As contained only two proposed questions on private flood insurance.  Based on questions received by the Agencies regarding private flood insurance rules that went into effect on July 1, 2019, the new proposal includes 24 proposed Q&As on private flood insurance.  Comments on the new proposed Q&As are due by May 17, 2021.

The Agencies divide the new proposed Q&As on private flood insurance into three main categories: (1) mandatory acceptance (nine proposed Q&As), (2) discretionary acceptance (four proposed Q&As), and (3) general compliance (11 proposed Q&As).  The proposed Q&As use the term “Act” to refer to the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as revised by specified federal flood insurance legislation, and use the term “Regulation” to refer to each Agency’s current flood insurance rule.  The Agencies note that they plan to publish in the Federal Register a final document based on the new proposed Q&As and the Q&As proposed in July of 2020.

Among other points, the proposed mandatory acceptance Q&As include the following proposed guidance regarding private flood insurance:

• When a private flood insurance policy comes up for renewal, or the borrower presents a new private flood insurance policy, regardless of whether a triggering event occurred (i.e., making, increasing, extending or renewing a loan), the lender must review the policy to determine if it meets the mandatory purchase criteria.  If the policy does not meet the mandatory purchase criteria, the lender may still accept the policy if it meets the discretionary acceptance criteria.
• If a lender has a policy not to originate mortgage loans in nonparticipating communities or coastal barrier regions in which the flood insurance policies under the National Flood Insurance Program (NFIP) are not available, the private flood insurance requirements under the Regulation do not require that the lender change its policy.
• A lender is not required to accept a private flood insurance policy solely because the policy contains the compliance aid assurance clause if the lender reviews the policy and determines that the policy actually does not meet the mandatory acceptance requirements.  If a private flood insurance policy does not contain the compliance aid assurance clause, the lender must review the policy to determine if it meets the requirements for private flood insurance under the Regulation before the lender may choose to reject the policy.
• If a private flood insurance policy contains the compliance aid assurance clause, a lender may accept the policy without conducting an additional review, provided that the language of the clause is stated in the policy, or an endorsement to the policy, as set forth in the Regulation.  However, please see the following bullet point.
• Even if a lender relies on the compliance aid assurance clause to accept a private flood insurance policy, the lender (1) must ensure that the coverage is at least equal to the lesser of the outstanding principal balance of the loan or the maximum amount of coverage available under the Act for the type of property, and (2) should also ensure that other key aspects of the policy are accurate, such as the borrower’s name and property address.
• If a private flood insurance policy does not include a compliance aid assurance clause, the lender may elect to first review the policy to determine if it meets the criteria for acceptance under the discretionary acceptance provision of the Regulation.  If the policy does not meet such criteria, the lender still must determine if it is required to accept the policy under the mandatory acceptance criteria.

Among other points, the proposed discretionary acceptance Q&As include the following proposed guidance regarding private flood insurance:

• When assessing whether to accept a private flood insurance policy under the discretionary acceptance provision, to evaluate the sufficiency of an insurer’s solvency, strength, and ability to satisfy claims when determining whether the policy provides sufficient protection of the loan consistent with general safety and soundness principles, among other options, a lender may obtain information from the State insurance regulator for the State in which the property is located.  A lender may rely on the licensing or other processes used by the State insurance regulator for such an evaluation.
• If a lender previously accepted a private flood insurance policy in accordance with the discretionary acceptance requirements and the policy is renewed, the lender must review the policy upon renewal to ensure that it continues to meet the discretionary acceptance requirements.  Additionally, the lender must document in writing its conclusion regarding the sufficiency of the protection of the loan upon each renewal to indicate that the policy continues to provide sufficient protection of the loan.

Among other points, the proposed general compliance Q&As include the following proposed guidance regarding private flood insurance:

• For a private flood insurance policy that is accepted under the mandatory acceptance provision, if the total coverage amount does not exceed the maximum amount available under the NFIP, the deductible may not be higher than the maximum deductible permitted for a Standard Flood Insurance Policy (SFIP) under the NFIP.  For a private flood insurance policy with a total coverage amount that exceeds the amount available under the NFIP, the deductible may exceed the maximum deductible under a SFIP.  The Agencies confirm that this guidance differs from prior guidance that when the total coverage amount under a private flood insurance policy exceeds the amount available under the NFIP, the lender should match the SFIP deductible for the coverage up to the maximum amount available under the NFIP, and could exceed the maximum deductible for a SFIP for the coverage amount over the maximum coverage amount available under the NFIP.  The Agencies explain that “based on additional investigation, the Agencies understand that these types of tiered deductibles are not common and the [prior] guidance . . . may not be practicable.  Therefore, the Agencies believe the guidance they are proposing . . . with respect to deductibles for private flood insurance policies accepted under the mandatory acceptance provision will be more consistent with private flood insurance policies available in the marketplace and safety and soundness standards.”
• If a private flood insurance policy is accepted under the discretionary acceptance provision, even for a private flood insurance policy that provides for a total coverage amount up to the maximum amount available under the NFIP, a lender may accept a deductible that exceeds the maximum deductible permitted for a SFIP, provided the lender has determined that the policy provides sufficient protection of the loan consistent with general safety and soundness principles.
• A lender accepting a private flood insurance policy under the mandatory acceptance provision may require a deductible that is lower than the deductible permitted for a SFIP, consistent with safety and soundness principles and based on the borrower’s financial condition, among other factors.  For a private flood insurance policy accepted under the discretionary acceptance provision, the lender need only consider whether the policy, including the deductible, provides sufficient protection of the loan consistent with general safety and soundness principles.
• The Act and Regulation do not prohibit a lender that uses a third party to review private flood insurance policies from charging a fee to the borrower.  However, lenders should be aware of any other applicable requirements regarding fees and disclosures of fees.
• If the declarations page for a private flood insurance policy provides enough information for a lender to determine whether the policy meets the mandatory acceptance provision or discretionary acceptance provision, or if the declarations page contains the compliance aid assurance clause, the lender may rely on the declarations page to determine that the policy complies with the Regulation.  If the declarations page does not provide enough information for a lender to determine whether the policy meets the mandatory acceptance provision or discretionary acceptance provision, the lender should request additional information about the policy to aid in making its determination.
• When servicing a loan for a lender that is supervised by the Agencies, the servicer must comply with the Regulation when determining whether a private flood insurance policy may be accepted under the mandatory acceptance provision or the discretionary acceptance provision.  When servicing a loan for an entity that is not supervised by the Agencies, the servicer should comply with the terms of its contract with the entity.