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.”
- First, the proposal generally would require regulated lending institutions, or servicers acting on their behalf, to escrow premiums and fees for flood insurance for any loans secured by residential improved real estate or a mobile home, unless the institutions qualify for the statutory exception. Except as may be required under applicable state law, a regulated lending institution is not required to escrow if it has total assets of less than $1 billion and, as of the Biggert-Waters Act’s date of enactment, July 6, 2012, was not required by federal or state law to escrow taxes or insurance for the term of the loan and did not have a policy to require escrow of taxes and insurance. The agencies are proposing to implement the exception substantially as set forth in the statute.
- Second, consistent with the Biggert-Waters Act, the proposal would require that regulated lending institutions accept private flood insurance that meets the statutory definition to satisfy the mandatory purchase requirement. The proposal also specifically requests comment on whether the agencies should use their authority under the FDPA to include a provision in the final rules that expressly permits regulated lending institutions to accept a flood insurance policy issued by a private insurer that does not meet the Act’s definition of “private flood insurance” to satisfy the FDPA’s general mandatory purchase requirement. The agencies are also soliciting comment on what criteria the Agencies might require for such a policy. Alternatively, the agencies solicit comment on whether it is appropriate to include a provision in the final rules that specifically requires regulated lending institutions to accept only policies issued by private insurers that meet the statutory definition, and if included, what would be the effect of such a provision on the availability of privately issued flood insurance.
- Third, the proposal includes new and revised sample notice forms and clauses. Specifically, the proposal amends the current Sample Form of Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance to add language concerning the availability of private flood insurance coverage (pursuant to the notice requirements under section 100239 of the Act) and the escrow requirement. The proposal also adds an additional sample notice form, Notice of Requirement to Escrow for Outstanding Loans to assist institutions in complying with the proposal’s requirement to inform existing borrowers about the new escrow requirement. An institution would provide this notice for existing loans when neither the Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance nor the notice of force-placement is provided. Finally, the agencies are proposing a sample clause regarding the new escrow requirement that may be included with the force-placement notice.
- Fourth, the proposal would amend the force-placement of flood insurance provisions to clarify that a lender or its servicer has the authority to charge a borrower for the cost of flood insurance coverage commencing on the date on which the borrower’s coverage lapsed or became insufficient. The proposal also would stipulate the circumstances under which a lender or its servicer must terminate force-placed flood insurance coverage and refund payments to a borrower. It also sets forth the documentary evidence a lender must accept to confirm that a borrower has obtained an appropriate amount of flood insurance coverage.