Real Estate

Decoding the New Flood Insurance Regulation

A joint ruling by banking regulators including the Federal Reserve, the Office of the Comptroller of Currency (OCC), National Credit Union Administration, Federal Deposit Insurance Corporation, and Farm Credit Administration will implement the provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 to require mortgage lenders and credit unions to accept certain private flood insurance policies in addition to policies under the National Flood Insurance Program (NFIP).

With the addition of acceptance of private insurance flood policies through this rule, the regulators have widened the scope for lenders to accept private flood insurance policies by allowing them to conclude that the policy meets the definition of private flood insurance, “without a further review of the policy, 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.”

According to the OCC, the rule which takes effect on July 1 would also allow financial institutions to rely on an insurer’s written assurances in a private flood insurance policy stating that the policy meets the criteria for flood insurance. It also clarifies that lenders, under certain conditions, can accept policies that don’t meet the Biggert-Waters Act criteria. It also allows lenders to accept some flood coverage plans provided by mutual aid societies subject to agency approval.

The regulation specifies that the amendment would “permit 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 restrictions.”

The OCC said that The proposed rule included conditions for accepting these policies. However, in response to commenters, the agencies removed some of these conditions from the final rule. “The key conditions in the final rule are a requirement that the policy provides sufficient protection for a designated loan, consistent with general safety and soundness principles, and a requirement that the regulated lending institution document its conclusion regarding the sufficiency of protection in writing.”

Read the full analysis of the final rule here.




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