2022 Flood Regulation: Private Flood Insurance & Lender Compliance

2022 has been a big year for flood insurance regulation, all thanks to the release of the Interagency Flood Q&As.

The 263-page final rule reorganized the Q&As from 2009 & 2011, by revising 38 Q&As, and adding 67 Q&As.

Of the 67 new Q&As, 24 focus specifically on private flood insurance, which is divided into three sections:

1. Mandatory (9 Q&As)
2. Discretionary (4 Q&As)
3. Private Flood Compliance (11 Q&As)
   
   

24 Private Flood-Specific Q&As

The private flood Q&As address questions that industry professionals may have in relation to the 2019 Joint Agency Loans “Areas Having Special Flood Hazard” final rule.

LEARN MORE: Sign up for our Flood Regulation Webinar Series for a deep dive on this topic.

The 2019 final rule requires regulated lending institutions to accept private flood insurance (as defined in 42 U.S.C. 4012a(b)(7)) and outlines criteria for both mandatory and discretionary acceptance.

The Agencies were concerned, however, that many institutions would have difficulty determining if a policy meets the definition of “private flood insurance.”

Because of this, the Agencies created a Compliance Aid Statement to assist lenders in policy reviews:

“This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”

Under the mandatory acceptance criteria, the final rule says that lending institutions may determine that a policy meets the definition of private flood insurance if the compliance aid statement is present.

Therefore, if a policy contains the compliance aid statement, the lending institution may decide to accept the policy without further review.

Although the Agencies implemented the Compliance Aid Statement to help simplify the policy review process, many lenders had questions.

Consequently, 7 of the 9 Q&As under the “Mandatory” topic address the Compliance Aid Statement.

From the answers provided by the Agencies, here are a few key takeaways:

1. The Compliance Aid Statement is NOT a conformity clause.

• The Agencies make it clear that the Compliance Aid Statement is only intended to help lenders and consumers recognize policies that meet the “private flood insurance” definition.
• However, as previously stated, lenders may accept that a policy meets the definition of “private flood insurance” if the Compliance Aid Statement is present without further review.

2. The Compliance Aid Statement must match the language provided in the Regulation.

• If the language does not match, the Compliance Aid Statement cannot be relied upon, and the lender must review the policy to determine if it meets the definition of “private flood insurance.”
• Stylistic differences, such as formatting, font, and punctuation, do not create the need for further review.

3. Lenders do not have to automatically accept a policy if the Compliance Aid Statement is present.

• Because the Agencies state that the Compliance Aid Statement is not intended to be a conformity clause, lenders may choose to review a policy to determine if the policy is acceptable under mandatory, discretionary, or mutual aid criteria.

4. Lenders are not permitted to reject a policy simply because the Compliance Aid Statement is missing.

• If the Compliance Aid Statement is missing, the lender is required to review the policy to determine if it meets the definition of “private flood insurance.”
• The lender may also choose to review the policy under discretionary or mutual aid acceptance criteria.
  
  

Other Topics Covered by Private Flood Insurance Q&As

In addition to the Compliance Aid Statement, the private flood insurance Q&As address many other topics, including:

• Acceptable documentation
• Deductibles
• Policy reviews conducted by third-party service providers
• Secondary market investors

To learn more about the private flood insurance Q&As, join us at our upcoming webinar, where we will dive deep into the impact of private flood insurance regulation on your lending compliance program.

Please feel free to reach out anytime and Ask Us Anything.