In February 2019, the Board of Governors of the Federal Reserve System, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency (the interagency regulators) issued a final rule implementing the portion of the Biggert-Waters Flood Insurance Reform Act mandating acceptance of private insurance policies in certain circumstances. The rule goes into effect on July 1, 2019. Is your institution ready to implement the final private flood rule?

The Biggert-Waters Flood Insurance Reform Act of 2012 obligated the interagency regulators to issue a final rule requiring financial institutions to accept private flood insurance. On February 13, 2019, the interagency regulators announced the issuance of this joint final rule. In general, the final rule requires institutions to accept flood insurance policies that meet the Biggert-Waters Act statutory definition of “private flood insurance” through four primary components: (1) mandatory acceptance of private flood insurance; (2) mandatory acceptance of compliance aid; (3) discretionary acceptance of private flood insurance; and (4) flood coverage provided by mutual aid societies. In a June 18, 2019, webinar, representatives from the interagency regulators discussed the final private flood rule and participated in a question-and-answer session regarding implementation of the rule. The information provided here incorporates information from the webinar.

Mandatory Acceptance

The final rule mandates that regulated institutions must accept private flood insurance policies that satisfy the statutory definition of “private flood insurance.” Generally, a private flood insurance policy:

• Is issued by a duly licensed or approved insurance company;
• Provides coverage that is “at least as broad as” the coverage provided under a standard flood insurance policy (SFIP) issued under the National Flood Insurance Program (NFIP);
• Includes a requirement that the insurer must give 45-day notice to the borrower and lender (servicer) prior to cancellation or non-renewal;
• Includes information about the availability of coverage under the NFIP;
• Includes a mortgagee clause similar to the clause in an SFIP;
• Includes a limitation provision that the insured must file suit not later than one year after the date of a written denial of a claim under the policy; and
• Contains cancellation provisions that are as restrictive as an SFIP.

To determine whether a private policy is “at least as broad as” an SFIP, the final rule requires institutions to conduct a substantive review of specific provisions in a private flood policy, including the coverage grant, deductible amounts, conditions, and exclusions. In the June 18 webinar, the interagency regulators articulated their expectation that lenders will conduct such substantive reviews. If a private policy satisfies all these requirements, the lender must accept the policy for purposes of complying with its flood insurance obligations.

Compliance Aid

The final rule includes a “compliance aid” provision to assist institutions with evaluating policies. As set forth in the final rule, the compliance aid language is as follows: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.” If a private policy contains this precise compliance aid language, then the lender need not conduct any further review of the policy.  In the June 18 webinar, the interagency regulators explained that only this specific language would relieve the lender of any obligation to conduct a substantive review of the private policy. In addition, the interagency regulators cautioned that while the compliance aid language is sufficient to satisfy the private flood rule, it is not necessary; a lender may not reject a private flood policy because this compliance aid language is not included.

Discretionary Acceptance 

The final rule also provides that institutions may accept private flood insurance policies that do not meet the statutory definition of “private flood insurance,” which mandates acceptance, so long as other certain conditions are met.  The final rule permits institutions to accept flood insurance policies issued by private insurers that do not meet the statutory and regulatory definition of private flood insurance so long as the private policy:

• Provides coverage in the amount required by the flood insurance purchase requirement;
• Is issued by an insurer that is licensed, admitted, or not disapproved by a state insurance regulator (including recognized surplus lines insurers)
• Provides coverage for both the mortgagor and the mortgagee, with exceptions for a condominium association, cooperative, homeowners association, or other group; and
• Provides sufficient protection of the designated loan, consistent with general safety and soundness principles and the institution must document this conclusion in writing.

In the June 18 webinar, the interagency regulators explained that regulated institutions could approve a private policy on the basis of this discretionary acceptance analysis without determining that the private policy would constitute a “private flood policy” as defined by the Biggert-Watters Act. Thus, an institution may conduct the discretionary acceptance analysis as an alternative to conducting the mandatory acceptance analysis.

Coverage by Mutual Aid Societies 

Finally, the final rule allows institutions to accept certain flood plans provided by mutual aid societies, such as an Amish Aid Plan, when certain conditions are met. The analysis for mutual aid society plans is substantially similar to the discretionary acceptance analysis described above with one important exception. In order to accept a plan provided by a mutual aid society, the institution’s federal regulator must have issued a determination that mutual aid society plans will qualify as flood insurance.

The statement from the interagency regulators that they expect lenders to conduct substantive reviews to determine if a private flood insurance policy is “at least as broad as” an SFIP is a signal that lenders must be ready to implement the final rule on July 1, 2019. Substantive review of a private insurance policy is a time intensive and resource heavy process.  Your institution will benefit greatly by implementing policies and procedures aimed at creating the most efficient private flood insurance policy review process while still ensuring compliance with the new rule.