Regulators Issue New Federal Rules for Private Flood Insurance

Last Friday, federal banking regulators issued a new rule outlining when lenders are required to accept private flood insurance to satisfy mandatory insurance purchase requirements.

The rule implements a portion of the Biggert-Waters Flood Insurance Reform Act that defines “private flood insurance.” The definition was intended to help stimulate growth in the private flood insurance market by mandating that private insurance policies which meet certain standards can satisfy federal flood insurance purchase requirements for homeowners in special flood hazard zones.

A draft rule was originally proposed in October 2013. However, due to complexities in the language of the statute the regulation is based on and other issues—including several important considerations raised by the Big “I” and other groups—it took seven years for banking regulators to actually finalize the rules. Ultimately, the 2013 draft rule was rescinded and a new draft rule was issued in November 2016. The Big “I” submitted comments on the rule in January 2017 and again submitted a joint supplemental comment letter in December 2018.

Under the rule, a federally regulated lender can find that a policy meets the definition of “private flood insurance” if the policy, or an endorsement to the policy, states: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”

However, lenders cannot reject policies solely because they are not accompanied by the statement. The statement is meant to serve as a compliance aid to help lenders determine when a private insurance policy meets a complex federal definition and ensure that lenders are not subject to fines for inappropriately accepting or rejecting private flood insurance policies.

Lenders are also permitted to accept policies for mandatory purchase requirements that do not contain such a statement and that do not meet the statutory and regulatory definition of “private flood insurance” in certain circumstances. In other words, the rule allows lenders to use their discretion on the types of flood insurance they wish to accept as protection for loans subject to mandatory purchase requirements.

The rule also indicates that lenders may accept surplus lines policies.

The rule only applies when a lender can and must accept private flood insurance to satisfy federal mandatory purchase requirements. The rule does not impact the placement of private flood insurance in other circumstances.

Lender acceptance of private flood insurance policies has been a compliance issue for many Big “I” members since Biggert-Waters was enacted in 2012. While the rule does not solve all issues related to the acceptance of private flood insurance, it aims to address some.

Of note, the rule does not impact the acceptance of private flood insurance on Federal Housing Administration (FHA)-backed loans. The Big “I” has been leading a coalition to urge the FHA to allow private insurance policies to be placed on FHA-backed mortgages subject to mandatory purchase requirements. The FHA is currently considering publishing its own rule on private flood insurance.

The rule also does not change rules regarding the acceptance of private flood insurance as it relates to NFIP continuous coverage rules.

The Big “I” supports allowing private flood insurance to satisfy NFIP continuous coverage requirements—ensuring that if a consumer leaves the NFIP for the private market and conditions change, causing the consumer to return to the NFIP, they can do so without penalty. The Big “I” will continue to advocate before FEMA and Congress on this issue and others important to independent insurance agents and brokers.

Jennifer Webb is Big “I” federal government affairs counsel.