At the end of 2020, the Ministry of Housing and Urban Development published its proposed regulation for the adoption of private flood insurance for the insured loans from the Federal Housing Administration. Currently, the Federal Housing Administration is one of the few loan programs that does not accept private flood insurance for property in high risk flood areas. The Federal Housing Administration currently only accepts flood insurance through the National Flood Insurance Program.
Lenders, real estate agents, insurers, first-time buyers, and others using the Federal Housing Administration for a mortgage have been waiting for the Federal Housing Administration to start accepting private flood policies. While the announcement of the regulation proposed by the Federal Housing Administration made headlines and gave many hopes, the proposed rule in its written form is also cause for concern.
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The concerns include questions in connection with the “compliance help” and the question of whether a lender to the federal housing administration “can or must” accept private flood insurance. The industry has responded strongly to housing and urban development. The way housing construction and urban development react in its final rule later this year will affect the effectiveness of the federal housing administration’s private flood acceptance rule.
As a background, the federal regulatory credit agencies (excluding the federal housing administration) introduced new federal flood regulations in July 2019. These regulations provided the framework for credit institutions to accept private flood insurance policies for loans. This change in regulations has provided a way for lenders to accept private flood insurance.
While the challenges remain, both the credit and insurance industries have worked to streamline the process. A key component of the 2019 regulation is the inclusion of a “compliance aid”. This is a specific statement that allows a lender to accept private flood insurance without further verification if it is included in the policy.
Specifically, the compliance statement reads as follows: “This policy corresponds to the definition of private flood insurance in 42 USC 4012a (b) (7) and the relevant ordinance.”
This statement has been adopted by many insurance carriers. Unfortunately, the proposed regulation of the Federal Housing Administration contains its own version of a “compliance aid” in the proposed regulation for housing and urban development, which reads: “This policy corresponds to the definition of private flood insurance in paragraph (e) of this section for FHA-insured persons Mortgage.”
While the goal of housing and urban development may have been to streamline the federal housing administration’s lending process, the variation in compliance tools creates challenges and problems. First, this difference in compliance tools would require lenders to use separate and specific procedures for Federal Housing Administration A loans, which could result in lending delays. Second, it will delay the industry’s ability to accept private flood insurance policies for Federal Housing Administration insured loans as it will take time for insurance companies to incorporate the language of Federal Housing Administration compliance assistance on their insurance forms. Nor is there any guarantee that insurance companies will accept this second statement of compliance or that lenders will be willing to accept it. Housing and urban development add complexity and lead to unnecessary delays.
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Another important aspect that the rule proposed by the Federal Housing Administration does not address is the ability for lenders to accept private flood insurance even if the policy does not meet the definition of private flood insurance. This is referred to as a “discretionary review” in state flood regulations. While this “discretionary review” is important, some small and medium-sized lenders choose not to accept private flood insurance if it does not meet the strict definition of private flood insurance. This means that some private policies that offer sufficient protection are currently being rejected.
Housing and urban development, while not ideal, can exacerbate this problem. This is due to the question posed by the Department of Housing and Urban Development: “The FHA regulations should state that a mortgage can accept qualified private flood insurance instead of a national flood insurance policy, or that a mortgage must accept qualified private flood insurance instead of a national flood insurance policy. ”
If the Department of Housing and Urban Development decides “may accept” in its final ruling, federal housing administration lenders could essentially refuse private flood insurance policies for all federal housing administration loans. These two problems have worried many in the industry.
While these concerns are serious, hope remains. Various trade associations submitted a joint letter calling on housing construction and urban development to make changes to make compliance easier, allow lenders to accept private flood insurance policies, and give federal housing management borrowers more choice. Housing and Urban Development’s response is expected to be released in the form of a final settlement sometime later in 2021. As of its release, the industry hopes that those applying for Federal Housing Administration loans – including those first time home buying – may finally be able to compare policies, rates, and coverage from both the National Flood Insurance Program and the private one Flood insurance market.
Joe Rossi is the chairman of the Massachusetts Coastal Coalition.
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