New Lending Regulations Regarding Accepting Private Flood Insurance

When the Biggert Waters Act of 2012 (BW12) was passed, one of Congress’ goals was to allow for lender acceptance of private flood insurance policies to satisfy the mandatory purchase requirement. The Act contained vague language, and it took lending regulators seven years to finalize a rule for lenders to follow. Prior to the lending regulators creating the final rule, many lenders didn’t accept private flood policies as they were uncomfortable verifying compliance with the BW12 definition and worried about noncompliance fines and collateral protection. In January 2019, 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) issued interagency guidance to lenders on private flood policy acceptance, and on July 1, 2019 the regulations became effective. 

The final rule breaks the acceptance of private flood insurance into essentially two categories: policies that lenders must accept because they meet the definition of private flood insurance found in the BW12 (Mandatory Acceptance), and policies lenders may accept, which are policies that don’t meet the BW12 definition but meet certain other conditions (discretionary acceptance).

The review to verify a private flood policy meets the BW12 definition is tedious and complex, so the rule allows for a “compliance aid” to be used. 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 may rely on that statement for Mandatory Acceptance. However, some lenders are concerned that a policy with the compliance aid may not meet the definition of private flood, impacting their borrowers in a time of a loss. Further the GSE’s may require the terms and amount of coverage to be at least equal to that provided under a National Flood Insurance Program (NFIP) policy based on a review of the full policy and not a compliance aid reliance.

The final rule also regulates what a policy must contain in order to meet the BW12 definition if the compliance aid is missing or if a lender needs/chooses to review a policy for compliance.  In short, the policy must, among other things:

• Name both the lender and the client as loss payees
• Include a mortgage interest clause similar to a NFIP policy
• Have a 45-day cancellation notice
• Define the term “flood” to include the events in a NFIP policy
• Only exclude other causes of loss that are excluded in an NFIP policy

Discretionary acceptance is for private flood policies that don’t meet the BW12 definition of private flood insurance but comply with other minimum requirements, such as having the required coverage, the carrier being licensed or not disapproved in the state they are doing business, and coverage for both the lender and the customer in the event of a loss. The lender may accept a policy if they determine it is consistent with the safety and soundness principles of their institution.

The final rule appears to be a much-awaited answer for guiding lenders, consumers, insurance companies, and agents for the acceptance of private flood insurance. It gives lenders assurance that they may accept private policies of varying types without penalty, provides clarity to insurance companies as to what lenders must have, provides insurance agents assurance that the policies they sell will be accepted by  lenders, and clients the comfort that their private policy will be acceptable and not delay a financial transaction.

However, the new regulation creates an additional verification burden on lenders and, for many policies, requires experience with insurance policy terms and conditions. There are dozens of private flood carriers in the market currently, with more on the way. Policies vary greatly and interpreting coverages, deductibles, terms and conditions and comparing those to a standard NFIP policy can be daunting.    

MassiveCert has developed a service, Private Flood Clearinghouse, to ease the compliance burden on lenders for the review of private flood insurance policies. Irrespective of a compliance aid, we review the entire policy to ensure it meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and conforms to the regulator’s requirements. Upon completion, typically a few hours turnaround-time, we provide the lender a certificate indicating whether the policy must be accepted under the federal mandatory acceptance rules or may be accepted under the discretionary option, and in those cases, identify the specific area(s) where the policy failed to qualify under mandatory acceptance. The peace-of-mind, knowing insurance experts have performed the review, the time saved not doing the review in-house, and the compliance guarantee more than justifies the certification fee.

Learn more about this proprietary offering by MassiveCert at privatefloodclearinghouse.com.