IBA Compliance Connection

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We are located in a flood-prone area. For a recent residential real estate loan, we received a quote for private flood insurance that is completely unaffiliated with the National Flood Insurance Program (NFIP). Can we accept private flood insurance?

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Yes, we believe that you may — but are not required to — accept private flood insurance at this point in time.

The Biggert-Waters Flood Insurance Reform Act of 2012 (Act) included a provision that directed the federal banking agencies to promulgate a rule to require regulated lending institutions to accept private flood insurance. This provision will only become effective when the federal banking agencies issue their final implementing rule. The agencies issued a proposed rule on private flood insurance in October of 2016, and they have indicated that they plan to issue a final rule this December (2017).

In our view, regulated lenders should be free to choose whether or not to accept private flood insurance policies before the final rule is adopted and the relevant provision of the Act becomes effective. However, having said that, in light of the impending edict that will require you to accept private flood insurance, we also think it would be prudent to begin this practice today, and to familiarize yourself with the proposed rule while doing so.

For resources related to our guidance, please see:

  • 42 USC 4012a(b)(1)(B) (“Each Federal entity for lending regulation . . . shall by regulation direct regulated lending institutions . . . to accept private flood insurance as satisfaction of the flood insurance coverage requirement under subparagraph (A) if the coverage provided by such private flood insurance meets the requirements for coverage under such subparagraph.”)
  • 42 USC 4012a(b)(7) (Defines “private flood insurance” as an insurance policy that: (1) is issued by an insurance company that is licensed, admitted, or otherwise approved to engage in insurance in the state where insured property is located, (2) provides flood insurance coverage that is at least as broad as a standard flood insurance policy (SFIP), (3) requires the insurer to give written notice 45 days before cancellation or non-renewal of flood insurance coverage to the insured and the regulated lending 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 an SFIP, (6) includes a provision requiring an insured to file suit not later than one year after the date of a written denial for all or part of a claim under a policy, and (7) contains cancellation provisions that are as restrictive as the provisions contained in an SFIP.)
  • Interagency Statement on the Impact of Biggert-Waters Act (March 29, 2013) (“Private Flood Insurance: The mandatory purchase requirement has been amended to require lenders to accept private flood insurance policies as satisfaction of the mandatory purchase requirement if the coverage provided by the private flood insurance satisfies the standards specified in the Act. . . . This provision will be implemented by the Agencies through notice and comment rulemaking.  It is the Agencies’ position that this provision of the Act is not effective until regulations are issued.”)
  • Interagency Proposed Rule, 81 FR 78063 (November 7, 2016) (“Specifically, the proposed rule would require regulated lending institutions to accept policies that meet the statutory definition of private flood insurance in the Biggert-Waters Act and permit regulated lending institutions to accept flood insurance provided by private insurers that does not meet the statutory definition of ‘private flood insurance’ on a discretionary basis, subject to certain restrictions.”)