Final Regulation Triggers Important Changes For Flood Insurance

January 29, 2019 at 9:16 am Leave a comment

Image result for floodIt’s been a long and winding road but regulators including the NCUA have finally promulgated a final regulation outlining the conditions under which lenders will be required to accept “private flood insurance.” Just how big of a deal is this? These regulations have been under discussion since 2013 shortly after Congress passed the Biggert-Waters Act which is subsequently amended.

The National Flood Insurance Program mandates that persons who purchase homes in flood zones, have flood insurance. Since its passage in 1968, this requirement has become increasingly controversial, particularly with free market conservatives who rightly argue that the program distorts the true cost of real estate in flood zones by subsidizing risky residential purchases at tax payer expense. Funding for the program has become a challenge.

Biggert-Waters was passed in one of the few spasms of bipartisanship we have seen in the last decade. It requires lenders to accept private insurance provided it is at least as broad as policies provided under the National Flood Insurance Program as well as meets other conditions. For the last several years regulators have struggled to explain what exactly that means.

The final rule is a huge help. It stipulates that lenders must accept private flood insurance “if the policy or an endorsement to the policy states that the policy complies with the statute.” In other words, credit unions can stay out of the insurance analysis business and rely on representations made on the face of policies.

A second question which was posed by our congressional representatives was: Did the statute authorize lending institutions to accept flood insurance which was not as broad as comparable insurance mandated under the Flood Insurance Program? The regulators have concluded that the answer is yes and laid out the conditions under which lenders can exercise this discretion and accept certain policies even if they do not meet the definition of private flood insurance.

I want to reiterate this last point one more time because there’s been some confusion about what the act does and does not do. Starting on July 1st lenders must accept private flood insurance which, as determined under these regulations, is at least as broad as NIFP mandated insurance. Lenders have discretion to accept insurance which does not meet this definition provided the insurance meets certain conditions also outlined in this final regulation. All lenders must still mandate flood insurance for property in flood zones.

There are other nuances in the final regulations which I’m sure someone at your credit union will love to start digging into and operationalize in the coming months. So get to work and remember the clock is ticking. The summer will be half way over before we know it.

Entry filed under: Compliance, Regulatory. Tags: , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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