Banking and Finance Law Daily Institutions must accept private flood insurance under jointly issued final rule
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Monday, January 28, 2019

Institutions must accept private flood insurance under jointly issued final rule

By Colleen M. Svelnis, J.D.

Several federal regulatory agencies have jointly issued a final rule amending flood insurance regulations, requiring institutions to accept private flood insurance as defined under the Biggert-Waters Flood Insurance Reform Act of 2012.

The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Farm Credit Administration, and the National Credit Union Administration have jointly issued a final rule amending the flood insurance regulations covered in 12 CFR Part 339 to implement the private flood insurance provisions of the Biggert-Waters Flood Insurance Reform Act of 2012. The rule requires regulated lending institutions to accept private flood insurance defined in accordance with the Biggert-Waters Act. The rule goes into effect on July 1, 2019.

Federal law requires flood insurance on improved property that secures a loan by a federally regulated lender if the property is in a special flood hazard area for which insurance is available under the National Flood Insurance Program. Under the Biggert-Waters Act, lenders are required to accept insurance that meets the definition of private flood insurance in lieu of federal flood insurance, and borrowers must be told that private flood insurance may be available.

Private flood insurance would be defined as insurance that is issued by an insurance company permitted to do business in the state where the property is located and that provides coverage that is at least as extensive as is provided by a standard flood insurance policy issued under the National Flood Insurance Program.

The final rule institutes the following changes:

  • requires regulated lending institutions to accept policies that meet the statutory definition of private flood insurance in the Biggert-Waters Act and includes a streamlined compliance aid provision to assist regulated lending institutions with evaluating private flood insurance; and
  • permits regulated lending institutions to exercise their discretion to accept flood insurance policies issued by private insurers and plans providing flood coverage issued by mutual aid societies, that do not meet the statutory definition of private flood insurance, subject to certain conditions.

Response to comments. The agencies received 81 written comments after publication of the proposed rule, of which 51 comments addressed some aspect of private flood insurance. In response to suggestions by commenters, the final rule also includes a streamlined compliance aid provision to assist regulated lending institutions in evaluating whether a flood insurance policy meets the definition of private flood insurance. This provision allows a regulated lending institution to conclude that a private flood insurance policy meets the definition of private flood insurance, without further review of the policy, if the institution includes the following statement 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."

The rule also permits regulated lending institutions to exercise discretion to accept flood insurance policies issued by private insurers that do not meet the statutory and regulatory definition of private flood insurance. After considering submitted comments, proposed conditions on the acceptance of such policies were removed in the final rule. However, policies must provide sufficient protection of a 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 rule also allows regulated lending institutions to exercise their discretion to accept certain plans providing flood coverage issued by mutual aid societies—organizations comprised of individuals who share a common bond and that have a documented history of fulfilling their commitment to cover damage due to floods.

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