■ ■ ■ Lenders may close the loan in the absence of flood insurance, provided
that insurance is obtained by the borrower directly upon reauthorization
of the program or force-placed as necessary (FRB Consumer Affairs Letter, CA 10-3).
To frame the treatment of a lapse within the terms of the regulation, it
may be helpful to think of the requirements for policies in communities
that do not participate in the NFIP. The mandatory purchase section of the
regulation is titled “Requirement to Purchase Flood Insurance where Available” which means that banks are not required by federal law to treat flood
insurance as compulsory if the property securing the loan is in an SFHA in
a non-participating community, though all other sections of the regulation
continue to apply. When the NFIP lapses, the whole country essentially
becomes a non-participating community for purposes of compliance.
Biggert-Waters and Private Flood Insurance
The last major legislation that affected flood compliance was the passage of
the Biggert-Waters Act in 2012 and subsequent amendments (is it a coincidence it was co-sponsored by Maxine Waters?). This law implemented new,
stiffer penalties for non-compliance, and called for other reforms in the NFIP.
However, the provision of the Biggert-Waters Act that has the most sweeping
implications for our industry, is the requirement for banks to accept privately
issued flood insurance policies— those issued outside the scope of the NFIP.
While we have seen two separate final rules implementing other portions of
the Act, and two separate proposed rules for implementing the private policy
requirements, no final rule has yet been issued to implement this section. Unless
addressed in pending NFIP reform in Congress, ABA expects to see a final rule
in late fall 2018. While the industry remains hopeful that certain updates will
be included in the final rule that may alleviate some of the anticipated burden,
the substance of the requirements are not expected to change significantly.
Banks will be required to accept private flood policies, as long as the policy:
■ ■ ■ Is issued by an insurance company that is licensed, admitted or otherwise
approved (such as approval as a surplus lines insurer) to engage in the
business of insurance in the state or jurisdiction in which the insured
building is located by the insurance regulator of the State or jurisdiction;
■ ■ ■ Provides flood coverage at least as broad as the coverage provided by a
standard flood insurance policy (SFIP) under the NFIP;
■ ■ ■ Includes a requirement of the insurer to give 45 days’ written notice of
cancellation or non-renewal of flood insurance coverage to the insured
and the regulated lending institution;
■ ■ ■ Includes a mortgage interest clause similar to the clause contained in an SFIP;
■ ■ ■ 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
■ ■ ■ Contains cancellation provisions as restrictive as the provisions included
in an SFIP (42 US 4012a ( 7)).
On the surface, this change will necessitate a more detailed review of
the text of policies issued by private insurance companies. Looking deeper,
while it may be relatively simple to review a policy for inclusion of a 45-day
cancellation clause, the provision that may make the most waves here is
the one that appears most simple; “Coverage at least as broad as” a policy
issued under the NFIP. Understanding how to apply this in practice requires
comprehension of an insurance policy and its coverage at a level not previously required of financial institutions. The most common points of conflict
between an NFIP policy and a privately issued policy are:
■ ■ ■ Deductible Amount: An SFIP requires a deductible not to exceed $10,000 for
residential policies and $50,000 for non-residential policies. Private policies
sometimes include a deductible higher than the SFIP requirement, or may
even state the deductible as a percentage of the building’s insurable value.
If stated as a percentage of the value, this may be acceptable so long as the
calculation results in a deductible equal to or lower than the maximum
SFIP deductible. However, beware if the deductible is stated as a percentage
of the building’s value “at time of loss.” The bank cannot predict what the
value at the time of loss might be, since it could depreciate, or significant
improvements could increase the value over time. Accepting a policy with
this deductible provision may not meet the requirements of the regulation.
■ ■ ■ Aggregated vs. Per Occurrence Coverage: SFIPs are written with “Per Occurrence” coverage, which means that the limit of coverage will be applied
to each loss event even if there are multiple loss events in a single year.
Many private policies instead employ “Annually Aggregated” coverage,
meaning that the limit of coverage is applied annually, regardless of the
potential for multiple loss events in the course of one year. While multiple
flooding events on the same property may be an infrequent occurrence,
the SFIP standards afford the greater protection for the borrower and the
bank. Consequently, private policies issued with aggregated coverage do
not meet the “at least as broad as” standard.
■ ■ ■ Certifications of Compliance with the NFIP: As more institutions impose
the Biggert-Waters standards in their acceptance of private policies in an-
ticipation of the pending regulatory change, a trend has emerged among
companies that issue private flood insurance policies. Such policies may
The regulation itself does not anticipate
a lapse in the program and provides no
framework for how a bank should manage
the mandatory purchase requirements
during such a period.