ABA: Flood Proposal Could Create Confusion for Lenders

ABA on Friday commented on a proposal by the federal regulatory agencies to implement the 2012 Biggert-Waters flood insurance reform law’s efforts to stimulate a robust marketplace for private flood insurance that would offer a competitive alternative to the National Flood Insurance Program. The proposal revisits a proposed rule issued three years ago by the agencies.

As proposed, the rule offers two paths to help lenders accept flood insurance: a compliance aid to assist with the acceptance of policies that meet the explicit statutory definition of “private flood insurance,” as well as standards lenders can follow when using their discretion in instances where policies fall outside the statutory definition. ABA pointed out that while well-intentioned, the proposal could create further confusion for lenders and delays for borrowers. For example, in both cases, lenders would be required to conduct a detailed analysis of a private flood insurance policy and compare it to a standard flood insurance policy issued under the NFIP, which could actually impede the acceptance of private flood insurance.

The rule also proposes standards for accepting flood insurance policies from mutual aid societies — guarantees from religious or cultural institutions to rebuild property in the case of flood or other hazard, often employed in cases where religious principles forbid traditional insurance. While ABA supports this provision, it emphasized that the rule must clearly articulate when a mutual aid policy will be deemed acceptable, given that these commitments rarely, if ever, resemble a standard flood insurance policy. For more information, contact ABA’s Anjali Phillips.