Even With a Safe Harbor, Private Flood Insurance Rules May Prove Vexing

Seven years after Congress mandated that the federal banking agencies issue rules to facilitate growth of the private flood insurance market, the rules are here, and mortgage lenders and servicers should take notice.

Starting on July 1, the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Federal Reserve, Farm Credit Administration and National Credit Union Association will require the entities they supervise ("lending institutions") to accept certain types of private flood insurance policies and permit acceptance of others. The new rule is technical and nuanced. Some of the most important considerations follow:

When a private policy must be accepted

Lending institutions must accept private flood insurance policies that meet a highly technical definition that includes a requirement that the policy be "at least as broad as" a standard flood insurance policy under the National Flood Insurance Program. Determining the breadth of a private policy involves five elements, including confirming that the policy does "not contain conditions that narrow the coverage provided in an SFIP." Assessing whether a private flood insurance policy meets the definition of "private flood insurance" has the potential to be a time-consuming, confusing, imprecise and costly exercise for lending institutions.