Federal banking agencies issued a final rule, effective July 1, 2019, implementing the requirement in the Biggert-Waters Flood Insurance Reform Act (the "Act") for the acceptance of private flood insurance on covered properties. The final rule largely mimics the proposal (which we addressed previously here), but with a few interesting revisions and additional details.
First, the agencies adopted the proposed definition of "private flood insurance" largely unchanged. The Act defines the term, so the agencies had little discretion. However, the agencies clarified what coverage is "at least as broad as" coverage provided under a standard flood insurance policy ("SFIP"). Specifically, the final rule removes the requirement that the policy cover both the mortgagors and mortgagees as loss payees.
The most important change from the proposed stage may be a revision to the rule's so-called compliance aid. To assist in determining whether a particular private flood insurance policy meets the necessary criteria, the agencies initially proposed that a policy would meet the definition of "private flood insurance" if: (1) the policy includes a written summary identifying the policy provisions meeting each criterion and confirming the insurer's licensing/approval status; (2) the regulated lending institution verifies in writing the provisions identified in the summary, and that those provisions in fact satisfy the criteria; and (3) the policy includes the following assurance clause: "This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation."
The final rule indicated that the reaction to that proposed compliance aid was largely negative. In particular, commenters argued that the first two prongs would be unnecessarily burdensome and may cause delays for borrowers, limiting the compliance aid's utility. In response to these concerns, the agencies removed the first two prongs of the proposed aid, and revised the third prong. Under the final rule, a policy is deemed to meet the definition of "private flood insurance" if the following statement is included 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." If a policy includes statement, the regulated lending institution may rely on the statement and will not need to review the policy further to determine if it qualifies as "private flood insurance." However, lending institutions may not reject a policy solely because it is not accompanied by the statement. In that case, the lending institution must review the policy to determine whether it meets the definition of private flood insurance and fulfills the flood insurance coverage requirement.
The agencies also revised the discretionary acceptance of private flood insurance provisions (which we described here). The final rule removed the proposed requirements for a specific cancellation clause and that the policy be "at least as broad" as and "similar to an SFIP" coverage. Further, the final rule creates a limited exception from the requirement that the policy cover both mortgagors and mortgagees as loss payees with respect to a condominium association, cooperative, homeowners association, or similar group where the group pays the related premium as a common expense. As a result, the final rule permits regulated lending institutions to accept private flood insurance policies that do not meet the definition of "private flood insurance" if: (1) the policy provides coverage in the amount required by the flood insurance purchase requirement; (2) the policy is issued by an insurer appropriately licensed, approved or otherwise recognized by the applicable state or jurisdiction regulator (including surplus line insurers); (3) the policy covers both the mortgagor and mortgagees as loss payees, except with respect to cooperatives, associations and similar groups which pay the premium as a common expense; and (4) the policy provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the regulated lending institution documents its conclusion regarding sufficiency of the protection of the loan in writing.
Finally, the agencies made certain revisions regarding a regulated lending institution's acceptance of a plan provided by a "mutual aid society." A regulated lending institution may accept a plan issued by a mutual aid society if: (1) the regulated lending institution's primary Federal supervisory agency has determined that such plans qualify as flood insurance for the purposes of the Act; (2) the plan provides coverage in the amount required by the flood insurance purchase requirement; (3) the plan covers both the mortgagor and mortgagees as loss payees; and (4) the plan provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the regulated lending institution documents its conclusion regarding sufficiency of the protection of the loan in writing. Those criteria largely track those for discretionary acceptance of a private flood insurance policy, listed above.
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