The U.S. Department of Housing Urban Development (HUD) announced a proposed rule to permit the use of private flood insurance policies with FHA mortgage loans. As previously reported, in February 2019 federal regulators issued a joint final rule (the “Joint Final Rule”) to implement provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (the “Act”) that require regulated financial institutions to accept private flood insurance policies. The regulators are the Farm Credit Administration, Federal Deposit Insurance Corporation, Federal Reserve Board, National Credit Union Administration, and Comptroller of the Currency. Although the Joint Final Rule took effect on July 1, 2019, it does not apply to FHA loans because HUD currently accepts only flood insurance policies issued under the National Flood Insurance Program (NFIP). HUD notes in the preamble to the proposal that, except when FHA acts as a direct lender, the Act does not require the acceptance of private flood insurance policies with FHA loans.
The proposed rule would apply to Title I manufactured home loans, Title II single-family home loans, and home equity conversion mortgage loans (i.e., reverse mortgage loans). Consistent with the Joint Final Rule, to qualify as private flood insurance under the proposal a policy must be issued by an insurance company that meets certain conditions, and the policy must provide flood insurance coverage that is at least as broad as the coverage provided under a standard flood insurance policy (SFIP) issued under the NFIP for the same type of property, including when considering deductibles, exclusions, and conditions offered by the insurer. The proposed rule sets forth specific requirements that a policy must meet to be considered to provide coverage at least as broad as a SFIP.
HUD expressly seeks comment on whether the rule that it adopts should permit, or should require, a lender to accept a qualifying private flood insurance policy with an FHA loan. The Joint Final Rule requires an institution subject to the rule to accept a qualifying private flood insurance policy.
The proposed rule would permit a lender to determine that a private flood insurance policy is a qualifying policy, without further review of the policy, if the following statement is included within the policy or as an endorsement to the policy: “This policy meets the definition of private flood insurance contained in 24 CFR 203.16a(e) for FHA-insured mortgages.” HUD explains that a lender could elect not to rely on the statement, and make its own determination if the policy is a qualifying policy. HUD also advises that a lender could not reject a policy solely because it is not accompanied by the statement.
The proposed rule also differs from the Joint Final Rule in that it would not permit lenders to exercise discretion to accept flood insurance policies, provided by private insurers or mutual aid societies, that do not meet the definition and requirements for a private flood insurance policy.