The U.S. Department of Housing and Urban Development (HUD) recently announced a proposed rule to allow the option for private flood insurance on Federal Housing Administration (FHA) insured properties located in Special Flood Hazard Areas.
The National Flood Insurance Act of 1968 (42 U.S.C 4001 et seq.) and the Flood Disaster Protection Act of 1973 (the FDPA), as amended, govern the National Flood Insurance Program (NFIP). The FDPA added the requirement for mandatory flood insurance by providing that “no federal officer or agency may approve any financial assistance for acquisition or construction in any area identified as having Special Flood Hazard Areas, unless the building or mobile home and any personal property is covered by flood insurance.” Property owners located in a community participating in the NFIP are required to purchase a NFIP policy, to the extent that it is available, as a condition of receiving a federally-backed mortgage when the property is located in a Special Flood Hazard Area, which is an area within a floodplain having a one percent or greater chance of flood occurrence in any given year.
Under the proposed rule, HUD would amend FHA regulations at 24 CFR parts 201, 203, and 206 to allow the option to purchase private flood insurance on FHA-insured mortgages. HUD provides that the acceptance of private flood insurance would benefit consumers by allowing them to shop for the most affordable policy available. Also, the changes are designed to be consistent with industry standards, and with the intent of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters) which requires regulated financial institutions to accept private-sector alternatives to NFIP flood insurance.
In February 2019, the Farm Credit Administration, Federal Deposit Insurance Corporation, Federal Reserve Board, National Credit Union Administration and Comptroller of the Currently, issued a joint final rule under Biggert-Waters to require the regulated federal institutions to accept private flood insurance policies. The HUD proposed rule clarifies that FHA is not included in the Biggert-Waters legislation and is not governed by its regulation, except when acting as a direct lender.
The proposed rule would apply to manufactured home loans, single-family home loans, and home equity conversion mortgage loans. “Private flood insurance” is defined as an insurance policy that:
- Is issued by a licensed or approved insurer in the state or jurisdiction where the property is located
- Provides coverage that is at least as broad as those provided under a standard NFIP policy
- Includes a requirement for the insurer to give a written 45-day notice before nonrenewal or cancellation
- Includes information about coverage available under the NFIP
- Includes a mortgage interest clause
- Includes a provision requiring an insured to file suit not later than one year after a date of a written denial for all or part of a claim
- Contains cancellation provisions that are as restrictive as the provisions contained in an NFIP policy
The amendments would include a compliance aid provision to assist lenders in evaluating whether a flood insurance policy meets the private flood insurance definition. Lenders will be able to conclude that a policy is acceptable without further review if the policy or endorsement states, “This policy meets the definition of private flood insurance contained in 24 CFR 203.16a(e) for FHA-insured mortgages.” Lenders could elect to review a policy and make their own determination but would be required to accept a policy that meets flood insurance requirements.
HUD is welcoming comments on the proposed rule until January 22, 2021, which is 60 days after publication in the Federal Register.
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