The final rule promulgated by the Board of Governors of the Federal Reserve (Federal Reserve), the Farm Credit Administration, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration, and the Office of the Comptroller of the Currency (OCC) went into effect on July 1, 2019, to implement the portion of the Biggert-Waters Flood Insurance Reform Act mandating regulated lending institutions to accept private flood insurance policies.
In response to the new rule, the Federal Reserve, OCC, and FDIC have each recently released updated examination procedures used by the agencies to review their respective regulated institutions. The press releases and updated examination procedures can be found at the following sites:
- Federal Reserve Press Release and Updated Examination Procedures
- OCC Press Release and Updated Examination Procedures
- FDIC Updated Examination Procedures
As detailed previously in Bradley’s Financial Services Perspectives blog, the various federal agencies expect lenders to conduct substantive reviews of private flood insurance policies, and this expectation is reflected in the updated examination procedures. The procedures provide guidance regarding the regulators’ expectations as to how institutions will implement the private flood insurance requirements. By way of example, the Federal Reserve’s updated procedures include the following guidance on examination objective and purchase requirements.
- To determine whether an institution performs required flood determinations for loans secured by improved real estate or a mobile home affixed to a permanent foundation.
- To determine if the institution complies with the private flood insurance requirements of the regulation.
- Analysis regarding the mandatory acceptance provision, including whether the policy contains the exact compliance aid language or whether the private flood policy meets the definition of “private flood insurance” set forth in the regulation.
- If a private flood policy was accepted under the discretionary acceptance process, verifying that: (1) the policy provides a sufficient amount of insurance; (2) the policy is issued by an insurer permitted under the regulation; (3) the policy covers both the mortgagor and the mortgagee as loss payees; and (4) the institution determined that the policy provides sufficient protection of the designated loan, consistent with general safety and soundness principles; and (5) the institution documented its conclusion regarding sufficiency of the protection of the loan in writing.
Even with the additional guidance provided in the newly released examination procedures, there are still many open questions regarding how the agencies will interpret various requirements of the private flood insurance rules, particularly with respect to the rejection of any private flood policy. For example, the OCC exam procedure notes, “[c]consumer complaints can be a source of information about private flood policies that the institution did not accept.”
Lenders and servicers should implement a thorough procedure to ensure a complete and efficient private flood insurance policy review process. To the extent lenders and servicers utilize vendors to perform their private flood insurance review, the exam guidelines demonstrate that regulated institutions will bear responsibility for ensuring such vendors are providing private flood insurance review in compliance with the private flood rules.