New private flood rule offers hope and raises concerns
In late 2020, the Department of Housing and Urban Development released its rule proposal to accept private flood insurance for insured loans from the Federal Housing Administration. Currently, the Federal Housing Administration is one of the few loan programs that does not accept private flood insurance on properties located in high risk flood areas. The Federal Housing Administration currently only accepts flood insurance through the National Flood Insurance Program.
Lenders, realtors, insurers, first-time buyers, and others who use the Federal Housing Administration to secure a mortgage are waiting for the Federal Housing Administration to begin accepting private flood policies. While the Federal Housing Administration’s announcement of the proposed rule made headlines and brought hope to many, there are concerns about the proposed rule as drafted as well.
Among the concerns are issues with “compliance assistance” and whether a Federal Housing Administration lender “can” or “must” accept a private flood insurance policy. The industry has reacted strongly to housing and urban development. How housing and urban development responds in its final rule later this year will impact the effectiveness of the Federal Housing Administration’s private flood acceptance rule.
For your information, the federally regulated lending agencies (excluding the Federal Housing Administration) implemented new federal flood regulations in July 2019. These regulations provided the framework for lending institutions accept private flood insurance policies. This regulatory change has allowed lenders to accept private flood insurance policies.
Although challenges remain, the loan and insurance industries have worked to streamline the process. A key element of the 2019 settlement is the inclusion of a ‘compliance aid’, which is a specific statement that, if included in the policy, allows a lender to accept the private insurance policy against flooding without further consideration.
Specifically, the Compliance Assistance Statement reads: “This policy meets the definition of private flood insurance contained in 42 USC 4012a (b) (7) and related regulations.”
This statement has been adopted by many insurers. Unfortunately, in the Federal Housing Administration’s draft rule, Housing and Urban Development includes its own version of a “compliance aid” which is “This policy meets the definition of private flood insurance contained in it. in paragraph (e) of this section for FHA policyholders. mortgage.”
While the goal of Housing and Urban Development may have been to streamline the Federal Housing Administration’s lending process as well, the variation in compliance aids creates challenges and problems. First, this difference in compliance aids would force lenders to adopt separate and specific processes for Federal Housing Administration A loans, which could lead to loan delays. Second, it will delay the industry’s ability to accept private flood insurance policies for loans insured by the Federal Housing Administration, as it will take time for insurance companies to add the language to help the flood. Federal Housing Administration compliance with its police forms. There is also no guarantee that insurance companies will adopt this second Compliance Assistance Statement or that lenders will be willing to accept it. Housing and urban development add a layer of complexity and introduce unnecessary delays.
Another important aspect that is not addressed in the rule proposed by the Federal Housing Administration is the ability for lenders to accept a private flood policy even if the policy does not meet the definition of private flood insurance. flooding. In federal flood regulations, this is called “discretionary review”. While this “discretionary review” is important, some small and medium-sized lenders choose not to accept a private flood insurance policy if it does not meet the strict definition of private flood insurance. This means that currently, some private policies offering sufficient protection are rejected.
While not ideal, housing and urban development can make this problem worse. This is due to the question posed by the Department of Housing and Urban Development, “whether FHA regulations should state that a mortgage lender can accept a qualifying private flood insurance policy in lieu of a mortgage policy. national flood insurance program or that a mortgage lender must accept qualifying private insurance. a flood insurance policy instead of a national flood insurance program policy. ”
If the Department of Housing and Urban Development decides to adopt “may agree” in its final regulations, Federal Housing Administration lenders would essentially be able to reject private flood insurance policies for all of the loans. Federal Housing Administration. Both of these issues have raised concerns for many industry players.
While these concerns are serious, there is still hope. Various business associations submitted a joint letter urging housing and urban development to make changes to simplify compliance, facilitate the ability of lenders to accept private flood insurance policies, and give consumers more choice. Federal Housing Administration borrowers. The Housing and Urban Development response in the form of a Final Rule is expected to be released later in 2021. Once released, the industry hopes those applying for Federal Housing loans Administration – including first-time home buyers – will finally be able to compare the policies, prices and coverage of the national flood insurance program as well as the private flood insurance market.
Joe Rossi is president of the Massachusetts Coastal Coalition.