FDIC letter details four key provisions of flood insurance rules taking effect July 1

Federal flood insurance requirements that open the door to private flood insurance beginning this summer are summarized for supervised banks and thrifts in a Financial Institution Letter issued Wednesday by the Federal Deposit Insurance Corp. (FDIC).

The requirements are in a joint agency final rule that was approved in January by the FDIC, Office of the Comptroller of the Currency (OCC), and National Credit Union Administration (NCUA) and this month by the Federal Reserve Board.

The final rule was issued by requirement of the Biggert-Waters Flood Insurance Reform Act of 2012. It directs federally insured banks, thrifts and credit unions to accept private flood insurance as defined by the 2012 statute and allows institutions to use their discretion to accept policies issued by private insurers and flood plans provided by mutual aid societies (if they meet certain criteria). The FDIC letter explains the requirements, along with a streamlined compliance aid provision, as follows:

• Mandatory Acceptance of Private Flood Insurance: The Biggert-Waters Act requires institutions to accept private flood insurance that meets both (1) the statutory definition of private flood insurance, and (2) the mandatory purchase requirement.

• Compliance Aid for Mandatory Acceptance: The final rule includes a streamlined compliance aid provision to assist institutions in evaluating whether a flood insurance policy meets the definition of private flood insurance. This provision allows an institution to conclude that a private flood insurance policy meets the definition of private flood insurance, without further review of the policy, if the following statement is included within the policy or as an endorsement to the policy by the insurer: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.” An institution may also choose not to rely on an assurance statement and conduct its own due diligence to ensure  the private policy meets the definition of private flood insurance.

• Discretionary Acceptance of Private Flood Insurance: The final rule permits institutions to accept flood insurance policies issued by private insurers that do not meet the statutory and regulatory definition of private flood insurance if the policy:

(1) provides coverage in the amount required by the flood insurance purchase requirement;

(2) is issued by an authorized insurer that is licensed, admitted, or not disapproved by a state insurance regulator;

(3) covers both the mortgagor(s) and the mortgagee(s) as loss payees, except in the case of a policy that is provided, and for which the premium is paid by a condominium association, cooperative, homeowners association, or other applicable group; and

(4) provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the institution documents its conclusion regarding sufficiency of the protection of the loan in writing.

• Coverage by Mutual Aid Societies: Pursuant to the final rule, an institution, in satisfaction of the mandatory flood insurance requirement, may accept a plan provided by a mutual aid society, as defined below, if the institution’s primary Federal supervisory agency has determined that such plans qualify as flood insurance for purposes of the Biggert-Waters Act and the plan:

(1) provides coverage in the amount required by the flood insurance purchase requirement;

(2) covers both the mortgagor(s) and the mortgagee(s) as loss payees; and

(3) provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the lending institution documents its conclusion regarding sufficiency of the protection of the loan in writing.

Issuance of Final Rule on Loans in Areas Having Special Flood Hazards—Private Flood Insurance (FDIC FIL-8-2019)

RR: Fed makes it a clean sweep: All four financial regulators sign off on flood insurance provisions (Feb. 12, 2019)

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