A new rule issued by five U.S. federal agencies this week should make it easier for property owners to get flood insurance by requiring mortgage lenders to accept some private policies, rather than only government ones. The rule, announced Feb 12, goes into effect July 1, 2019. It’s the result of a years-long process that began with the goal of stimulating the private flood insurance market, and seems well-timed given the threat of further sea-level rise to many coastal areas. In a nutshell, it sets a minimum bar for private insurance policies; if the policies meet those requirements, lenders who require flood insurance will have to accept them.
Homeowners in flood-prone areas have for many years been able to take advantage of the National Flood Insurance Program, which is designed to provide affordable protection against water-related destruction. Lenders who required flood insurance in order to get a mortgage had to accept policies from the National Flood Insurance Program. But the program has limitations. For example, it only insures homes up to $250,000. And for commercial properties, the limit is $500,000. Due to such limitations, lawmakers in 2012 passed a bill they hoped would spur on the private flood insurance market.
The expectation was that new private insurers would get into the game and consumers would have better and more comprehensive options. The rule is a result of that 2012 bill. It works by requiring lenders to accept private flood policies that meet certain criteria, such as coming from a state-licensed issuer and being at least as broad as a policy from the government program. It’s worth noting that private flood insurance itself is not new and some lenders already accept those policies. However, prior to the new rule lenders could chose to accept those policies or not. It was up to their discretion.
The new rule eliminates that discretion as long as the private policies meet the minimum criteria. In other words, in certain cases, lenders no longer have the option to reject a policy. Five different regulatory agencies jointly issued the rule: the Federal Reserve Board, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency.
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