16 OCT 2013

Rule on Requiring Lenders to Accept Private Flood Insurance Proposed

October 16, 2013

Five federal regulatory agencies are considering a rule that could boost sales of private flood insurance. The proposal would require lenders to accept private flood policies to satisfy the mandate that certain homebuyers in flood hazard areas purchase flood insurance.

The rule is intended to implement provisions of the Biggert-Waters Flood Insurance Reform Act of 2012, which reformed the National Flood Insurance Program, relating to private flood insurance, the escrow of flood insurance payments, and the forced-placement of flood insurance.

The proposal would require that regulated lending institutions accept private flood insurance as defined in Biggert-Waters to satisfy the mandatory purchase requirements. In addition, the proposal would require regulated lending institutions to escrow payments and fees for flood insurance for any new or outstanding loans secured by residential improved real estate or a mobile home, not including business, agricultural and commercial loans, unless the institutions qualify for the statutory exception.

The proposal includes new and revised sample notice forms and clauses concerning the availability of private flood insurance coverage and the escrow requirement.

Also, the proposal would clarify that regulated lending institutions have the authority to charge a borrower for the cost of force-placed flood insurance coverage beginning on the date on which the borrower’s coverage lapsed or became insufficient and would stipulate the circumstances under which a lender must terminate force-placed flood insurance coverage and refund payments to a borrower.

The proposed rule is being issued by 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 five federal agencies are soliciting comments on the proposal and on whether the agencies should adopt additional regulations on the acceptance of flood insurance policies issued by private insurers. The public has until Dec. 10, 2013, to comment.

Florida-based Wright Flood provides federal flood insurance and also excess flood coverage. Neal Conolly, president and CEO, welcomes the focus on private insurance but said the impact on the private market is difficult to assess right now.

“We favor every initiative that increases awareness of the need for flood insurance, and permitting private flood insurance for mortgaged property should do so,” Conolly told Insurance Journal. “We don’ t have a projection on what the acceptance of private alternatives will be.”