The Board of Governors of the Federal Reserve System, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency (the interagency regulators) issued a final rule in February 2019 implementing the portion of the Biggert-Waters Flood Insurance Reform Act mandating acceptance of private flood insurance. The rule went into effect on July 1, 2019. Recently, the Federal Reserve, the FDIC, and the OCC updated their examination manuals to ensure regulated institutions are in compliance with the private flood insurance rules.
The Biggert-Waters Flood Insurance Reform Act of 2012 (the Biggert-Waters Act) obligated the interagency regulators to issue a final rule requiring financial institutions to accept private flood insurance. On February 13, 2019, the interagency regulators announced the issuance of this joint final rule. The final rule requires regulated institutions to accept flood insurance policies that meet the Biggert-Waters Act statutory definition of “private flood insurance” through four primary components: (1) mandatory acceptance of private flood insurance; (2) mandatory acceptance compliance aid; (3) discretionary acceptance of private flood insurance; and (4) flood coverage provided by mutual aid societies.
1. Mandatory Acceptance
The final rule mandates that regulated institutions must accept private flood insurance policies that satisfy the statutory definition of “private flood insurance.” Generally, a “private flood insurance” policy: (1) is issued by a duly licensed or approved insurance company; (2) provides coverage that is “at least as broad as” the coverage provided under a standard flood insurance policy (SFIP) issued under the National Flood Insurance Program (NFIP); (3) includes a requirement that the insurer must give 45-days notice to the borrower and lender (or servicer) prior to cancellation or non-renewal; (4) includes information about the availability of coverage under the NFIP; (5) includes a mortgagee clause similar to the clause in an SFIP; (6) includes a limitation provision that the insured must file suit not later than one year after the date of a written denial of a claim under the policy; and (7) contains cancellation provisions that are as restrictive as an SFIP.
To determine whether a private policy is “at least as broad as” an SFIP, the final rule requires institutions to conduct a substantive review of specific provisions in a private flood policy, including but not limited to, the coverage grant, deductible amounts, conditions, and exclusions. In a June 18, 2019, webinar, the interagency regulators articulated their expectation that regulated institutions will conduct such substantive reviews. If a private policy satisfies all these requirements, the institution must accept the policy for purposes of complying with its flood insurance obligations.
2. Compliance Aid
The joint regulator rule includes a “compliance aid” provision to assist institutions with evaluating policies. As set forth in the final rule, the compliance aid language is as follows:
“This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”
If a private policy contains this exact compliance aid language, then the institution need not conduct any further review of the policy. In the June 18 webinar, the interagency regulators explained that only this specific language would relieve the lender of any obligation to conduct a substantive review of the private policy. While the compliance aid language is sufficient to satisfy the private flood rule, it is not necessary. Thus, a lender or servicer may not reject a private flood policy because this compliance aid language is not included.
3. Discretionary Acceptance
The final rule allows institutions to accept private flood insurance policies that do not meet the statutory definition of “private flood insurance” so long as the private policy:
- Provides coverage in the amount required by the flood insurance purchase requirement;
- Is issued by an insurer that is licensed, admitted, or not disapproved by a state insurance regulator (including recognized surplus lines insurers);
- Provides coverage for both the mortgagor and the mortgagee, with exceptions for a condominium association, cooperative, homeowners association, or other group; and
- Provides sufficient protection of the designated loan, consistent with general safety and soundness principles and the institution must document this conclusion in writing.
In the June 18 webinar, the interagency regulators explained that regulated institutions could approve a private policy on the basis of this discretionary acceptance analysis without determining that the private policy would constitute a “private flood policy” as defined by the Biggert-Watters Act. Thus, an institution may conduct the discretionary acceptance analysis as an alternative to conducting the mandatory acceptance analysis.
4. Coverage by Mutual Aid Societies
Finally, the final rule allows institutions to accept certain flood plans provided by mutual aid societies, such as an Amish Aid Plan, when certain conditions are met. The analysis for mutual made society plans is substantially similar to the discretionary acceptance analysis described above with one important exception. In order to accept a plan provided by a mutual aid society, the institution’s federal regulator must have issued a determination that mutual aid society plans will qualify as flood insurance. At this point, the OCC has approved the acceptance of Amish and Mennonite mutual aid plans, and the Farm Credit Bureau has approved the acceptance of Amish mutual aid plans. Institutions regulated by the Federal Reserve and NCUA should seek permission to accept a flood plan provided by a mutual aid society, and such requests will be reviewed on a case-by-case basis. The FDIC is also approving mutual aid society plans on a case-by-case basis and is considering whether the particular society is licensed or approved as an insurer by the state in which the property is located or whether the plan itself is treated as insurance by the state.
The statement by the interagency regulators in the June 18 webinar that they expect regulated institutions to conduct substantive reviews to determine if a private flood insurance policy is “at least as broad as” an SFIP policy, as well as the updated examination manuals of the FDIC, OCC, and Federal Reserve, demonstrate that compliance with the private flood rule will be considered during institutional examinations. As noted, the agencies expect substantive review of private insurance policies, which is a time intensive and resource heavy process. Regulated institutions will benefit greatly by implementing policies and procedures aimed at creating the most efficient private flood insurance policy review process while still ensuring compliance with the private flood insurance rule.