Depository mortgage lenders are optimistic the final version of a regulation designed to open up the flood insurance market will make it easier for them to comply with a rule requiring them to accept private carrier policies.
Banking regulators released their final rule implementing the Biggert-Waters Act on Jan. 25, the day the partial government shutdown ended. The rule varies significantly from an earlier proposed version by simplifying a compliance aid that lenders and trade groups had said demanded too much of them. The final rule also gives lenders the flexibility to accept private coverage outside the rule’s scope if they feel comfortable with the risk.
“It looks like as of July 1, we’re going to get what we wanted,” said Bill O’Brien, chief lending officer at Bank of Bird-in-Hand. The FDIC-regulated institution lends to Amish borrowers and has long sought the flexibility to be able to accept mutual aid coverage used in the community for flood insurance.
“I’m looking forward to the day that we can use that for flood,” he said. “Otherwise they have to buy commercial flood insurance, which is more expensive.”
The rule takes effect on July 1 for lenders regulated by the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp., the Farm Credit Administration and the National Credit Union Administration.
Once the new rule is in effect, private flood insurance could be used more frequently to cover risks in Special Flood Hazard Areas, which otherwise must be covered through the National Flood Insurance Program. The NFIP has been subject to a shaky congressional process, and is up for renewal on May 31.
“Most lenders had made some effort to accept private flood insurance, but there was not always a consistent approach; and there were lenders that were not accepting private flood insurance,” said John Dickson, CEO of private flood insurance provider Aon Edge. “Lenders now have a clear understanding of what represents acceptable flood insurance.”
Nonbank mortgage lenders are not required by law to follow the rule. But for practical purposes, the new requirements will likely affect their business. Likewise, nonbanks must also adhere to flood insurance requirements of other secondary market players, including Fannie Mae and Freddie Mac.
“The nonbanks aren’t going to be directly regulated by this rule, but there will likely be fallout from it,” said Melissa Klimkiewicz, partner at Washington, D.C. law firm Buckley LLP.
It’s unclear whether the new rule applies to closed loans originated by nonbanks and later sold to depositories. But it may get treated that way nonetheless.
“I can see the banks saying, for uniformity of approach, just follow the rule if you’re going to sell your loans to us,” Klimkiewicz said.
Private flood insurance may not be available in all areas, but if the coverage is available at a lower price, it could make a loan more affordable. The price point for a policy can differ by $200 to $1,000 if private flood insurance is available, Dickson said.
“If you look at a consumer’s ability to pay and what their household finances will absorb from a monthly obligation standpoint, the savings can make a difference,” he added.
Only 6% of all U.S. properties are in SFHAs, but two-thirds of those high-risk properties lack flood insurance coverage, according to CoreLogic’s 2018 National Hazard Report.
Lenders must ensure SFHA borrowers obtain flood insurance, but properties might otherwise go uninsured. A more affordable insurance policy could make a difference in whether a consumer is willing to buy a property or not.
“A growing private market will decrease the coverage gap and ensure that more at-risk Americans obtain necessary insurance coverage,” SmarterSafer.org, a coalition of housing, taxpayer, environmental, and insurance advocates, in a press release about the new rule.
“Whether coverage is purchased through the current federal program or through private insurance the choice is now in the hands of the consumer,” the group noted. “While we continue to review the details of the final rule, we look forward to working with regulators, lenders, and insurance commissioners on a seamless implementation.”