4 minutes
National Flood Insurance authorization, proposed rules raise concerns.
With the National Flood Insurance Program set to expire in September, it may be instructive to look back on the last time authorization ran out. Credit unions were caught in the middle regarding flood insurance requirements through the 17 short-term extensions, four lapses and nearly four years before the program was reauthorized in July 2012.
No one wants to experience that uncertainty again, but the future of NFIP depends on the willingness of Treasury Secretary Steven Mnuchin and Acting Federal Emergency Management Agency Administrator Robert J. Fenton Jr. to champion the increasingly expensive program before Congress. FEMA was forced to borrow $1.6 billion from the U.S. Treasury to cover NFIP losses in 2016, which logged the third largest annual loss at $4 billion.
Even as we anticipate drama regarding the reauthorization, the National Credit Union Administration and other federal financial agencies (Federal Deposit Insurance Corp., Farm Credit Administration, Office of the Comptroller of the Currency and Board of Governors of the Federal Reserve System) continue working on the final rules for private flood insurance. The Bigger-Waters Flood Insurance Reform Act of 2012 required lenders to accept private flood insurance; however, the implementation rules have still not been finalized by federal regulators. Comments were due in January regarding the second round of Proposed Rulemaking - Loans in Areas Having Special Flood Hazards - Private Flood Insurance (the first round was in October 2013).
The NCUA received dozens of comments, ranging from two to 42 pages. The problems listed by the vast majority of respondents related to how the proposed rules adversely affect credit unions. Here are the main concerns with the current proposed rules for credit unions and other mortgage lenders:
Increased liability. The proposed rules place the burden directly on lenders to determine if a private flood policy meets requirements. If a credit union determines that a specific policy does not meet requirements and that determination is overruled in court, the credit union would be liable. Conversely, if a credit union approves a specific policy and an NCUA examiner determines it does not meet requirements, the credit union will be subject to action. A safe harbor is needed to protect credit unions from this no-win situation. The decision on whether a private flood policy meets requirements should be made by insurance companies with the expertise to make that determination. A list of approved private flood policies should be readily available through the FEMA website or some other appropriate site. Liability should rest on insurance companies, not credit unions, if a policy is later found to be faulty.
Increased cost of compliance. Credit unions would have to develop internal insurance expertise or hire an outside vendor to review and research each private flood insurance policy to determine if it meets requirements. This mandate increases the time and costs of the lending process. Again, a safe harbor is needed to eliminate this time and expense.
Limitations of forced-placed policy reviews. Current requirements for cancellation of forced-placed insurance require the credit union to accept the member borrower’s flood policy declaration page (policy number along with identity and contact information for the insurance company or agent). This limited information does not allow the credit union to determine if a private flood policy meets requirements. A list of approved private flood policies would resolve this issue.
Complete policies not available at closing. Full insurance policies are often not received until weeks after the closing. Instead, an application with evidence of premium payment, the declarations page, or a certificate of insurance is typically all that is available at closing. Proposed private flood policy requirements would add significantly to loan processing time—and perhaps even drive borrowers away.
Commercial vs. residential. There are a number of differences between commercial and residential private flood insurance policies, such as replacement cost coverage, loss of business income/rental income coverage and deductibles. The proposed rules do not contemplate these differences or consider the sophistication of commercial insurance purchasers. More details regarding commercial lending are needed in the proposed rules.
Required financial ratings of insurance providers. Credit unions have certain financial strength requirements for insurance providers, as specified in loan documents for private flood insurance. The proposed rules do not mention these financial standards, which appears to be a significant oversight.
When NCUA and the other federal financial agencies will publish revised rules based on the comments received is anyone’s guess. They may even wait to see what happens regarding NFIP reauthorization to determine if stronger requirements are made regarding private flood insurance.
NFIP has seen a roller coaster of reforms to phase out subsidies passed in 2012 undone less than two years later. The challenge of reducing the federal government’s role in flood insurance in favor of private flood insurance while not creating panic about affordability is at the heart of this debate. The bottom line for the program is its dual aim is to provide affordable flood insurance for homeowners and to protect lenders' collateral.
Jim Hunt is commercial underwriting specialist for business protection with CUNA Mutual Group, Madison, Wis.
