Compliance Update with Amy K
by Amy Kleinschmit
Chief Compliance Officer
6/6/2019

Flood Insurance.

Earlier this year, the National Credit Union Administration (NCUA) along with four other agencies recently finalized joint rulemaking regarding mandatory acceptance of private flood insurance. This amends Part 760 – Loans in areas having special flood hazards.

This rule is effective July 1, 2019, and can be found here. Last week the NCUA issued a Regulatory Alert on “Flood Insurance Alternatives” which can be found here.

The final rule requires credit unions to accept “private flood insurance,” as defined in the Biggert-Waters Act. The final rule adds the very lengthy definition of “private flood insurance,” which is based on the statutory definition, to section 760.2. The definition of “private flood insurance” is also included in the Regulatory Alert at the above link.  The final rule also adopted a streamlined compliance aid provision to help credit unions evaluate whether a flood insurance policy meets the definition of “private flood insurance.” As discussed in the final rule, “the Agencies were concerned that many regulated lending institutions, especially small institutions with a lack of technical expertise regarding flood insurance policies, would have difficulty evaluating whether a flood insurance policy meets the definition of “private flood insurance.” Therefore, under new section 760.3(c)(2) “a credit union may determine that a policy meets the definition of private flood insurance in § 760.2, without further review of the policy, if the following statement is included within the policy or as an endorsement to the policy: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”

However, please note, that the above provision is just a “compliance aid.” The Agencies, including the NCUA, cannot require an insurance compliance to include this compliance aid statement on a policy. It is up to insurers to choose to include this statement in their policies. The underlying requirement that the final rule adds – that credit unions must follow - to section 760.3 is that “A credit union must accept private flood insurance, as defined in § 760.2, in satisfaction of the flood insurance purchase requirement in paragraph (a) of this section if the policy meets the requirements for coverage in paragraph (a) of this section.” The paragraph “a” referenced in this requirement is the existing requirement to purchase flood insurance where available, “A credit union shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the building or mobile home and any personal property that secures a loan and not the land itself.”

With regard to the “compliance aid” the NCUA, along with the other agencies explain that, “this provision does not relieve a regulated lending institution of the requirement to accept a policy that both meets the definition of “private flood insurance” and fulfills the flood insurance coverage requirement, even if the policy does not include the statement. In other words, this provision does not permit regulated lending institutions to reject policies solely because they are not accompanied by the statement.”

The final rule also includes a provision on discretionary acceptance of a flood insurance policy issued by a private insurer. Section 760.3(c)(3) provides that “A credit union may accept a flood insurance policy issued by a private insurer that is not issued under the NFIP and that does not meet the definition of private flood insurance in § 760.2 in satisfaction of the flood insurance purchase requirement in paragraph (a) of this section if the policy” meets certain conditions. Items include meeting coverage amounts as required by the regulation and that it is issued by an insurer that is properly licensed, admitted, or otherwise approved to engage in the business of insurance. Also, the policy must cover both the mortgagor(s) and the mortgagee(s) as loss payees, with exceptions included for situations where the premium is paid by a condominium association, cooperative, homeowners association, or other applicable group as a common expense. The policy must also, “provide sufficient protection of the designated loan, consistent with general safety and soundness principles, and the credit union documents its conclusion regarding sufficiency of the protection of the loan in writing.”

Finally, the final rule also includes provisions for accepting plans issued by mutual aid societies to satisfy flood insurance purchase requirements – assuming certain conditions are met. These conditions are listed in the Regulatory Alert at the above link.

Credit unions should be aware of this significant policy change in flood insurance regulations and update policies and procedures to address these alternative options to NFIP policies. As a note – CU Policy Pro has already updated its model policies 7330 and 7420 to account for “private flood insurance.”

As always, CUAD members may contact Amy Kleinschmit with any compliance related questions.

 

 

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