By: Kari Osier, Compliance Specialist
July 1st is Getting Closer – a couple of weeks left until the Final Flood Insurance Rule takes effect!
Credit unions don’t have much time left before the flood insurance final rule takes effect. Hopefully credit unions that need to be ready are ready to comply!
The final rule amends NCUA’s flood insurance rule, implementing the private flood insurance provisions of the Biggert-Waters Act, and requires credit unions to accept private flood insurance policies. The following is a reminder about what is required.
“Private Flood Insurance” is an insurance policy that meets the following:
(1) Is issued by an insurance company that is licensed, admitted or otherwise approved to engage in the business of insurance by the state insurance regulator or jurisdiction in which the property is located;
(2) Provides flood insurance that is as broad as the coverage provided under a standard flood insurance policy (SFIP), including deductibles, exclusions, and conditions offered by the insurer;
(3) Requires insurer to provide written notice of cancellation or non-renewal of coverage within 45 days, and includes information about availability of coverage under NFIP, a mortgage interest clause similar to one contained in an SFIP, and a provision requiring member to file suit up to one year after a written denial of all or part of a claim; and
(4) Contains cancellation provisions as restrictive as those in an SFIP.
As to the second requirement, “as broad as” means the policy must:
• Define the term “flood” to include events defined as a flood in an SFIP;
• Contain coverage specified in an SFIP, including that relating to building property coverage, personal property coverage, if purchased by the insured mortgagor(s), other coverages, and increased cost of compliance coverage;
• Contain deductibles no higher than the specified maximum and include similar non-applicability provisions, as under an SFIP, for any total policy coverage amount up to the maximum available under the NFIP at the time the policy is provided to the lender;
• Provide coverage for direct physical loss caused by a flood and may only exclude other causes of loss that are excluded in an SFIP; and
• Not contain conditions that narrow the coverage provided in an SFIP.
As it may be difficult for a credit union to determine whether a policy meets the definition of private flood insurance, a credit union is allowed to use a compliance aid to safely conclude a policy is compliant if the policy or an endorsement to the policy includes the following statement:
“This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”
If it contains the above statement, a credit union is not required to review the plan to determine whether it meets all of the above elements of the definition of private flood insurance.
The final rule also allows a credit union the discretion to make a risk-based determination to accept a policy that does not exactly meet the above requirements if it meets the following:
(1) The policy provides coverage in an amount required by the flood insurance purchase requirements;
(2) The policy is issued by an insurer that is licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the state or jurisdiction in which the property is located;
(3) The policy covers both the mortgagor(s) and mortgagee(s) as loss payees, except in the case of a policy that is provided by a condominium association, cooperative homeowners association, or other applicable group and for which the premium is paid by the condominium association, cooperative homeowners association, or other applicable group as a common expense; and
(4) The policy provides 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.
How does a credit union determine if a policy provides “sufficient protection”? The credit union must consider the following factors: (i) A policy’s deductibles are reasonable based on the borrower’s financial condition; (ii) the insurer provides adequate notice of cancellation to the mortgagor and mortgagee to ensure timely force placement of flood insurance, if necessary; (iii) the terms and conditions of the policy with respect to payment per occurrence or per loss, and aggregate limits, are adequate to protect the credit union’s interest in the collateral; (iv) the flood insurance policy complies with applicable state insurance laws; and, (v) the private insurance company has the financial solvency, strength and ability to satisfy claims.
A credit union is also allowed per the final rule to accept a plan issued by a mutual aid society to satisfy the flood insurance purchase requirement. A “mutual aid society” is an organization whose members share a common religious, charitable, educational, or fraternal bond (i.e., Amish Aid Society); that covers losses caused by damage to members’ property pursuant to an agreement, including damage caused by flooding, in accordance with this common bond; and, that has demonstrated history of fulfilling the terms of agreements to cover losses to members’ property caused by flooding. To accept such a plan, the plan satisfies the requirements if:
• NCUA has determined that such plan qualifies as flood insurance;
• The plan provides coverage in the amount required;
• The plan covers both the mortgagor(s) and mortgagee(s) as loss payees; and
• The plan provides sufficient protection of the loan, consistent with safety and soundness principles, and the credit union documents its conclusion regarding sufficiency of the protection of the loan in writing.
Recently, the NCUA issued Regulatory Alert 19-RA-01 with steps a credit union should take for approval of a mutual aid society flood plan:
• A credit union should submit its request to the NCUA through the NCUA’s Regional Office;
• The NCUA will evaluate the request and, if approved, the plan will be listed on the NCUA’s website for future reference;
• The evaluation will assess the plan based on the criteria for mutual aid societies in accordance with the final rule; and
• The credit union must address the factors listed in the requirements for private flood insurance accepted on a discretionary basis in documenting that the mutual aid flood plan provides sufficient protection of the loan.