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Banks and Credit Unions Will be Required to Accept Certain Private Flood Insurance Policies Starting July 1, 2019

February 12, 2019
Elizabeth Murphy
Garden City

Banks and credit unions will be required to accept certain private flood insurance policies pursuant to a new federal requirement that takes effect on July 1, 2019.

Under current requirements a lender can refuse to accept a private flood insurance policy. The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the National Credit Union Administration (collectively, “Agencies”) have now issued a rule (“Final Rule”) amending their regulations regarding loans in areas having special flood hazards in order to implement the private flood insurance provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (the “Biggert-Waters Act”). Specifically, the Final Rule requires regulated lending institutions to accept flood insurance policies that meet the statutory definition of “private flood insurance” in the Biggert-Waters Act. The Final Rule also permits 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.

Federal flood insurance statutes prohibit regulated lending institutions from making, increasing, extending or renewing a loan secured by improved real estate or a mobile home located or to be located in a Special Flood Hazards Area (“SFHA”) in a community participating in the National Flood Insurance Program (“NFIP”) unless the property securing the loan is covered by flood insurance. The Agencies have each issued regulations implementing these statutory requirements for the institutions they supervise. The Biggert-Waters Act amended the flood insurance statutes to require the Agencies to issue a rule directing regulated lending institutions to accept “private flood insurance,” and to notify borrowers of the availability of flood insurance coverage issued by private flood insurers. 

The Final Rule requires regulated lending institutions to accept “private flood insurance,” which is defined as an insurance policy that:

If the policy meets all of the foregoing requirements, then the regulated lending institution must accept such flood insurance in satisfaction of the purchase requirement.

The Final Rule also includes a streamlined compliance aid provision to help regulated lending institutions evaluate whether a flood insurance policy would meet the definition of “private flood insurance” as set forth in the Biggert-Waters Act. It essentially allows a regulated lending institution to conclude that a policy meets the definition of “private flood insurance” without further review of the policy if the policy, or an endorsement to the policy, states the following: “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 permits regulated lending institutions to choose to accept certain flood insurance policies issued by private insurers, even if the policies do not meet the statutory and regulatory definition of “private flood insurance,” provided such a policy satisfies the following key conditions: (i) the policy provides sufficient  protection for a designated loan, (ii) the policy is consistent with general safety and soundness principles, and (iii) the regulated lending institution documents its conclusion regarding the sufficiency of protection in writing.

As mentioned above, the effective date of the Final Rule is July 1, 2019. If you have any questions regarding the Final Rule or flood insurance in general, please feel free to contact Joseph D. Simon at (516) 357-3710 or via email at jsimon@cullenanddykman.com, Kevin Patterson at (516) 296-9196 or via email at kpatterson@cullenanddykman.com, or Elizabeth A. Murphy at (516) 296-9154 or via email at emurphy@cullenanddykman.com