Challenges with Flood Insurance and the Biggert-Waters Act on Private Flood Insurance

Five federal agencies issued a joint final rule to implement the provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (the Act) requiring regulated institutions to accept certain private flood insurance policies, in addition to National Flood Insurance Program policies.

With these changes and recent compliance concerns expressed by some of the federal regulators, now is the time to evaluate the requirements of the Act, as well as review all the provisions of flood insurance requirements. Below is an outline of the requirements of the Act and some actions to ensure compliance.

As noted in the summary of the final rule, which takes effect July 1, 2019:

  • Requires regulated lending institutions to accept private flood insurance, as defined by the Act;
  • Includes a streamlined compliance aid provision to help regulated lending institutions evaluate whether the flood insurance policy meets the definition of private flood insurance;
  • Clarifies that regulated institutions, under certain conditions, accept private flood insurance policies that do not meet the definition of private flood insurance; and
  • Allows institutions to accept certain flood coverage plans provided by mutual aid societies, subject to agency approval.

The compliance aid provision is designed to help regulated lending institutions determine if the policy meets the definition of private flood insurance and therefore required to accept the policy.

The compliance aid provided indicates that the policy meets 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 42 U.S.C. 4012a(b)(7) and the corresponding regulation.” While regulated lending institutions must accept a policy that contains this statement, they also must accept a policy that meets the definition of private flood insurance and fulfills the flood insurance coverage requirement, even if the policy does not contain the statement. It is their discretion to decide if they want to accept policies that do not meet the definition of private flood insurance.

With that said, if they decide to accept insurance policies issued by private insurers that do not contain all the criteria in the statutory definition of private insurance, they will have to review the terms and coverage to determine whether the policy meets the requirements outlined in the regulation.

The Act did not change the coverage of the flood insurance requirements or the definition of a designated loan, which still is defined as:

  • All loans secured by a building or mobile home affixed to a permanent site (structure), including increases, extensions, refinances and renewals located or to be in a special flood hazard area (SFHA) where federal flood insurance is available.
    • Applies to consumer or commercial loans.
    • Includes table funded loans.
    • Includes improved property even if it is taken as abundance of caution.

The Act also did not change the requirement for financial institutions to determine if the structure, as noted above, is in a flood zone and therefore requires evidence of flood insurance prior to closing the loan and provide timely delivery of the SFHA notice to the borrower. The notice basically informs the borrower that their property is in a flood zone and that flood insurance is required to close the loan.

With the mandatory acceptance of private flood insurance, banks will need to allow more time to obtain the private flood insurance policy and review the contents for either the compliance aid or terms and coverage of the policy to see if the policy meets the definition of private flood insurance. In addition, if accepting policies that do not contain the language or meet the definition of private flood insurance, the process should include documentation of the due diligence and review performed. The process needs to be as seamless as possible, so that there is not a delay in closing the loan.

The Federal Reserve Bank of Kansas City issued guidance that states financial institutions should consider performing the following to manage compliance risk related to originating or servicing loans in a flood zone:

  • Evaluate the number of loans in their portfolio that are secured by improved structure in a flood zone.
  • Determine who is responsible for day-to-day monitoring of the portfolio.
  • Understand whether the management of the portfolio is centralized or decentralized.
  • Review the policies, procedures and training.
  • Evaluate the level of reliance on a vendor for flood monitoring and the validation of the worked performed by the vendor.
  • Confirm measurements are in place to ensure initial and ongoing compliance with the requirements.
  • Review the number of deficiencies or violations that have been detected in flood monitoring, audits and/or examination.
  • Determine if the inherent risk and risk controls related to flood compliance have changed since the last audit and/or examination.
  • As noted in the guidance, there are several risk management practices to help mitigate flood-related violations. The highrisk areas cover adequate flood insurance coverage, notice of SFHA, lapsed coverage and force placement.
  • Next Steps

    Regulators increasingly are concerned about the timely delivery of the SFHA notice and have noted that while some banks have automated the generation and delivery of the SFHA notice to minimize errors, inaccurate or missing information still would result in violations.

    Now is the time to evaluate the determination process to ensure the process allows adequate time to provide the SFHA notice.

    Because of the upcoming changes and the overall risk management concerns relating to flood insurance, in addition to assessing the determination process, it is necessary for financial institutions to assess their risk management practices with all aspects of the flood insurance provisions set forth in the Act.

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