Seven Years in the Making, Final Rule on Lender-Approved Private Flood Insurance Almost Complete

The five federal agencies with oversight over mortgage lenders are in the process of jointly issuing a final rule on private flood insurance. Treasury and the FDIC have already indicated their approval of the rule. If it is approved by the Federal Reserve, the Farm Credit Administration, and the NCUA, the final rule will become effective on July 1, 2019.

The development of the rule was required by a provision in the Biggert-Waters Act of 2012, which reauthorized and reformed the National Flood Insurance Program (NFIP). PIA National has actively urged Congress and the involved federal agencies to comprehensively address this private flood issue.

The final rule requires lenders to accept certain private flood insurance policies that meet the regulatory definition. It allows lenders to rely on a “self-certification” by the insurer that the policy meets the definition and allows lenders to use their discretion to accept private flood insurance that doesn’t meet the statutory definition, as long as the policy provides sufficient protection to the loan in accordance with the lenders’ general safety and soundness requirements (see details below).

On surplus lines: The intent of the regulation is to accept surplus lines policies. The regulation confirms that policies issued by surplus lines insurers are already covered in the Biggert-Waters definition of “private flood insurance.” Effectively, the regulation adopted the existing section of the definition of “private flood insurance” with only nonsubstantive changes.

On discretionary acceptance: Lenders are required to accept private flood policies that look exactly like NFIP policies (same deductibles for similar insurance amounts), etc. Lenders can accept other policies at their discretion; discretionary acceptance requires that a private flood policy provides enough protection of the designated loan, and the FDIC-supervised institution provides, in writing, its conclusion regarding the sufficiency of the protection of the loan.

PIA National views the final rule as a good next step toward expanding consumer options for flood insurance. While this rule answers some questions about flood insurance policies issued by private insurers, it does not answer all of them—most significantly, the issue of continuous coverage. Consumers would benefit from permission to obtain continuous coverage so that they aren’t left in an untenable financial position if, for example, their private flood policy is cancelled for reasons outside their control. Continuous coverage would allow a former NFIP consumer who purchased a private flood policy to return to the NFIP at the same premium rate they were paying before they left. Without continuous coverage, consumers with grandfathered NFIP policies are effectively penalized with higher rates for attempting to purchase an NFIP policy after leaving it for the private market.

PIA National will continue our efforts to make private flood insurance a viable option with appropriate protections for both agents and consumers. 

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