The language I'm reading about the lack of a compliance aid statement and that if the policy meets standards that banks "Must accept" the policy. Isn't that a really poor choice of words? Won't banks just tell the customer to go find another policy or we don't do the loan? Why didn't the law say something like "...if it meets criteria...then the policy is in compliance...." To say Must Accept is telling banks what to do, and it's getting folks hackles up. What are you all hearing about this. I'm talking about commercial loans, realizing that it's a bit more sticky with consumer and the ever-present Fair Lending threat..

To me, it makes perfect sense. The law (Biggert Waters) mandated that financial institutions must accept private flood insurance in lieu of a NFIP policy. The compliance aid statement is really just a bonus from the regulators in attempt to make things easier. Therefore, the result is this: If the compliance aid is there, you are done. If the compliance aid isn't there, you have to conduct a review of the private policy to see if it meets the definition of private flood insurance and, if it does, you have to accept it in lieu of a NFIP policy. If it does not meet the definition of private flood insurance, you don't have to accept it (but can if you want in some cases - i.e. discretionary acceptance).

You would be out of compliance by not accepting a policy that meets the definition of private flood insurance. I would not want to tell a qualified borrower that brings a policy that meets the mandatory acceptance requirements that they must shop a new policy if they want the loan- because not only have you inconvenienced the borrower for no reason, you are hurting business for that insurance company. And if that insurance company is smart, they will file some sort of complaint against the bank for turning away compliant flood policies.


I don't see how this is different than most any other regulatory requirement

I really don't think this is going to happen as insurance companies are going to get the compliance aid statement on their policies because it will be a competitive disadvantage for them if they don't.

I'm not sure why it's a competitive disadvantage other than it might delay closings due to time to review for compliance....is that your thought process, David?

I think the competitive advantage will come from competition at the insurance agent/broker level, not with financial institutions. In other words, if agents find it too difficult to work with a policy because banks make them jump through a bunch of hoops, they won't use that policy and just go with one that has the Compliance Aid and causes them less headaches.

That makes sense.

That's exactly what I was thinking. Thanks Adam.

To tack onto this. Whatif the policy meets the NFIP requirements but is being issued by an company with a less than steller rating? Are we required to accept that policy?

It appears that this only applies to discretionary policies:
"The Agencies note that some factors, among others, that a regulated lending institution could consider in determining whether a flood insurance policy provides sufficient protection of a loan include: whether the flood insurance policy’s deductibles are reasonable based on the borrower’s financial condition; whether the insurer provides adequate notice of cancellation to the mortgagor and mortgagee to ensure timely force placement of flood insurance, if necessary; whether the terms and conditions of the flood insurance policy with respect to payment per occurrence or per loss and aggregate limits are adequate to protect the regulated lending institution’s interest in the collateral; whether the flood insurance policy complies with applicable State insurance laws; and whether the private insurance company has the financial solvency, strength, and ability to satisfy claims."

Unless you are selling to Fannie or Freddie or another secondary market that requires a specific rating, that is correct.

Thanks, RL, that throws another wrench in the works.

Is anyone looking at taking the approach of accepting all private policies lacking the compliance aid statement, without conducting a review? With that procedure, a bank would not deny acceptance of a private policy that did conform. If the number of loans affected is low, the risk would not be that much of an increase.

(just looking for a solution)

You still have to review them for at least the four required components and I would suggest that the regulators are going to be looking for the review documentation under (D).

(iii) Discretionary acceptance. A member bank may accept a flood insurance policy issued by a private insurer that is not issued under the NFIP and that does not meet the definition of private flood insurance in paragraph (b)(9) of this section in satisfaction of the flood insurance purchase requirement in paragraph (c)(1) of this section if the policy:

(A) Provides coverage in the amount required by paragraph (c)(1) of this section;

(B) Is issued by an insurer that is licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located; or in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property, is issued by a surplus lines insurer recognized, or not disapproved, by the insurance regulator of the State or jurisdiction where the property to be insured is located;

(C) Covers both the mortgagor(s) and the mortgagee(s) as loss payees, except in the case of a policy that is provided by a condominium association, cooperative, homeowners association, or other applicable group and for which the premium is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense; and

(D) Provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the member bank documents its conclusion regarding sufficiency of the protection of the loan in writing.

_________________________

Unfortunately, I don't think the rules let us make this risk-based decision. I would agree with Randy and would not advise accepting all policies without ensuring the policy compliance with the discretionary acceptance requirements. IMO, that would result in a pattern or practice of flood violations which would be followed by a CMP.

FWIW, I agree.