Insurance Policies That Do Not Meet the Private Flood Insurance Definition According to the Flood Rules

Issue/Inquiry

The Bank has accepted a private flood insurance policy for the past three years that does not meet the definition of a private flood insurance policy according to the current Flood Rules. Would this policy be “grandfathered in,” or must the Bank force-place flood insurance?

Response Summary

The Bank may accept a private flood insurance policy that satisfies the discretionary acceptance requirements of the Flood Rules. However, if it is determined that the policy accepted by the Bank does not satisfy those requirements, the flood insurance on file will be deemed inadequate. In this case, the Bank must exercise its forced placement procedures.

Response Detail

The Flood Rules do not permit an FDIC-supervised financial institution to make, increase, extend, or renew a loan secured by improved real property located in a special flood hazard area and in a community participating in the National Flood Insurance Program, unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. 12 CFR 339.3(a).

Financial institutions must accept private flood insurance in fulfillment of the mandatory purchase requirement, provided that the definition of private flood insurance is satisfied. 12 CFR 339.3(c)(1).

Financial institutions have the discretion to accept a flood policy that was not issued by the NFIP and does not meet the definition of a private flood insurance policy according to the current Flood Rules, if the policy:

• Provides coverage in the amount required by the flood insurance purchase requirement
• Is issued by an authorized insurer that is licensed, admitted, or not disapproved by a state insurance regulator
• Covers both the mortgagor and the mortgagee 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
• Provides sufficient protection of the designated loan, consistent with general safety and soundness principles. 12 CFR 339.3(c)(3).

This means that the institution is not required to accept the policy. However, if an institution decides to accept such, the mandatory purchase requirements of the Flood Rules must be satisfied.

With respect to force-placed flood insurance, if a lender determines at any time during the term of a loan secured by improved real property located in a special flood hazard area that the property is not covered by flood insurance, or is covered by flood insurance in an amount less than required, the lender must do the following:

• Notify the borrower that the borrower should purchase flood insurance in the appropriate amount, at the borrower’s expense, for the remaining term of the loan
• If the borrower does not obtain flood insurance within 45 days after the lender has notified the borrower, the lender must purchase insurance on the borrower’s behalf. 12 CFR 339.7.

The force placement requirements do not incorporate a “grandfather” rule that would allow for the continuation of a policy that had been accepted in the past, if it is later determined to be inadequate according to the current Flood Rules.

If the Bank has accepted the flood policy in question, it should review the policy to determine whether it meets the current requirements for discretionary acceptance. If it does, then the Bank has fulfilled the mandatory purchase requirements and nothing more needs to be done.

If the policy does not satisfy the discretionary acceptance requirements, the Bank’s acceptance of it does not satisfy the mandatory purchase requirements of the Flood Rules. The proof of flood coverage on file is then deemed inadequate and the Bank must exercise its forced placement procedures.

 

This entry was posted on Tuesday, September 3rd, 2019 at 6:00 am.