NCUA Approves Private Flood Insurance Rule
Written By: Reginald Watson, Regulatory Compliance Counsel, NAFCU
NCUA, together with several other federal agencies, issued a final rule to implement the private flood insurance provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters) and provide relief to credit unions from some of its requirements. The final rule is based on proposals from October 2013 and November 2016 which tested the waters on how credit unions evaluate private flood insurance policies in light of NCUA’s flood insurance rule which applies to all federally-insured credit unions.
As a refresher, The National Flood Insurance Act of 1968 created the National Flood Insurance Program (NFIP) to help mitigate the socio-economic impact of flooding across the country. Now under the Federal Emergency Management Agency’s (FEMA’s) control, the NFIP provides federally-subsidized affordable insurance to property owners located in SFHAs in exchange for the community’s engagement in floodplain risk management measures. In an effort to decrease the reliance on federally-subsidized flood insurance, Biggert-Waters also requires lenders, including credit unions, to accept private flood insurance as satisfaction of the flood insurance requirements if the policy meets the NFIP’s insurance standards.
NCUA’s flood insurance rule, which implements the Biggert-Waters Act, requires credit unions to escrow premiums and fees for flood insurance when making, increasing, extending, or renewing a designated loan unless the credit union or a loan meets an exception. See,12 C.F.R. §760.5(a)(1). The escrow requirements apply to loans that are secured by residential improved real estate or mobile homes that are located or will be located in a special flood hazard area (SFHA) in which flood insurance is available under the NFIP. This recent final rule implements the private flood insurance provisions of the Biggert-Waters Act. For reference, “private flood insurance” under Biggert-Waters means an insurance policy that meets all of the following criteria:
(1) is issued by an insurance company or surplus lines insurer that is approved to engage in the business of insurance by the insurance regulator of that State or jurisdiction in which the property to be insured is located;
(2) provides flood insurance coverage that is at least as broad as the coverage provided under a standard flood insurance policy under the NFIP, (including consideration for deductibles, exclusions, and conditions offered by the insurer);
(3) requires the insurer to provide 45 days advanced written notice before cancellation or non-renewal of flood insurance coverage to the insured and the financial institution, or a servicer acting on the institution’s behalf;
(4) includes information about the availability of flood insurance coverage under the NFIP;
(5) includes a mortgage interest clause similar to the clause contained in a standard flood insurance policy under the NFIP;
(6) includes a provision requiring the member to file suit within one year after the date of a written denial for all or part of an insurance claim; and
(7) contains cancellation provisions that are as restrictive as the provisions contained in a standard flood insurance policy.
See, 42 U.S.C. §4012a(b)(7).
Those are quite a few requirements and I’m willing to bet you can’t say that 3 times without a sip of water. This robust definition means the declaration page commonly provided by insurers may not always be sufficient to determine if a given product meets the rule’s requirements. Rather, the definition would likely necessitate a full review of the insurance contract to confirm this detailed information, presenting a burden on credit unions when a borrower elects to use a private flood insurance policy. The final rule simplifies this process by allowing credit unions to safely conclude that a private flood insurance policy is compliant if the policy or an endorsement to the policy provides a compliance aid statement, explaining that: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.” In other words, if the insurance policy attests to this “compliance aid statement,” the credit union is no longer required to review the plan to determine whether it meets the seven elements of the definition of “private flood insurance” from the Biggert-Waters Act.
While the acceptance of private flood insurance meeting these requirements is mandatory, the final rule also provides a discretionary acceptance provision which permits credit unions to make the risk-based decision to accept private flood insurance policies that do not quite rise to this level, but otherwise meet the following minimum requirements:
(1) The policy must provide coverage in the amount required by the flood insurance purchase requirement;
(2) The policy must be issued by an insurer that is licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located;
(3) The policy must cover both the mortgagor(s) and the mortgagee(s) as loss payees, except in the case of a policy that is provided by a condominium association, cooperative, homeowners association or other applicable group and for which the premium is paid by the condominium association, cooperative, homeowners association or other applicable group as a common expense; and
(4) The policy must provide sufficient protection of the designated loan, consistent with general safety and soundness principles, and the regulated lending institution must document its conclusion regarding sufficiency of the protection of the loan in writing.
In determining whether a private flood insurance policy provides “sufficient protection” under the fourth prong of the analysis, the final rule explains that credit unions may consider any of the following aspects of the policy when making this risk-based determination:
- the extent to which the policy’s deductibles are reasonable based on the borrower’s financial condition,
- whether the insurer provides adequate notice of cancellation of the policy,
- the adequacy of policy limits per occurrence or per loss,
- the insurer’s financial solvency, strength and ability to satisfy claims, and
- any applicable state insurance laws.
Lastly, the final rule provides credit unions the flexibility to also accept a plan issued by a “mutual aid society” as defined. To accept a mutual aid flood insurance policy, the policy is required to qualify as flood insurance under NCUA’s determination and meet items 1, 3, and 4 of the previously listed minimum requirements from the discretionary acceptance provision.
For credit unions participating in the secondary market, it is important to keep in mind that the final rule does not alter any flood insurance verification requirements from investors, including government sponsored entities. For compliance with investor requirements an in-depth review of the private flood insurance policy may still be required. See, e.g., Fannie Mae Selling Guide Announcement SEL-2018-09, at 4; Freddie Mac Single Family Seller/Servicer Guide, at 247, 1652.
The final rule becomes effective July 1, 2019, however federally insured credit unions wishing to get a head start on some of these additional options may do so immediately. For additional information on the flood rule, generally, the Federal Reserve has amassed a number of articles discussing the requirements.
Programming Note: NAFCU's office will close at noon today and will also be closed on Monday for Presidents' Day. We will be back to blogging on Wednesday, February 20, 2019. Have a great weekend!