Pub. 16 2019 Issue 2

Issue 2 • 2019 17 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S There are some key differences in the final private flood rule from the 2016 proposal. The final rule requires the bank to accept private flood that meets the definition of private flood insurance under the rule, without exception. However, it also allows the bank a safe harbor if the policy contains the Com- pliance Aid sentence. The Compliance Aid sentence (sometimes referred to as the magic sentence) is a sentence in the policy that provides safe harbor to the bank where the bank is permitted to rely on the Compliance Aid sentence that states that the policy meets the definition of private flood insurance under the law and regula - tion. The specific sentence is: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.” If the Compliance Aid sentence is not included in the policy, then unfortunately, the bank is required to look through the policy to determine if the policy meets the definition of private flood insurance. In order for the policy to meet the definition of private flood insurance it must be (1) issued by a insurer or surplus insurer that is licenses by the state regulatory agency in which the property is located, (2) be at least as broad as NFIP, including deductibles, exclusions, and conditions, (3) require a 45 written notice for non-renewal or cancellation, (4) include information regarding insurance available under NFIP, (5) have a clause similar to SFIP regarding mortgage interest, (6) include a one year statute of limitations provision, and (7) include cancellation provisions that are as restrictive as those in SFIP. If this seems vague or confusing, Compliance Alliance has a checklist available in our Flood toolkit that may be helpful to the bank: https://www.compliancealliance.com/ find-a-tool/by-toolkit/flood. Unfortunately, the final rule does not specifically address when the Compliance Aid sentence is not 100% correct or varies from the sentence in the rule. However, it would be most conservative to not rely on the sentence if it is not 100% correct or varies from the sentence in the regulation. It would be most conservative to go through the policy to be sure that it meets the definition of private flood insurance as it is defined in the rule. The final rule also does not address the situation where the Compliance Aid sentence is in the policy as it is written in the rule; however, immediately after the Compliance Aid sentence, the policy contradicts the sentence in such a way that it makes it clear to the bank that the policy does not meet the definition of private flood insurance. Again, it would be most conser - vative to not rely on the sentence if it is not 100% correct. It would be most conservative to go through the policy and document exactly why the policy does not meet the definition of private flood insurance as it is defined in the rule. One question that we have gotten on the hotline quite a bit is if the bank may review the policy to determine if it meets the definition private flood insurance, even if it does contain the Compliance Aid sentence. There is not a prohibition in doing that. However, there is a possibility that the sentence could be there, the bank goes through the policy, and then finds that the policy in fact does not meet the definition of private flood insurance, in which case the bank can deny it. However, the bank would want to thoroughly document this practice in the bank’s internal policy and procedures as well as in the loan file regarding why the bank found that the policy did not meet the definition of private flood insurance even though the policy included the Compliance Aid sentence that states that the policy does meet the definition. However, even if the policy does not meet the definition of private flood insurance under the definition in the rule, the bank may still accept the policy, subject to certain restrictions. In order for the bank to accept the policy under discretionary acceptance, the policy must (1) meet the minimum coverage amounts, (2) be issued by a license insurer, (3) include both the mortgage or and the mortgagee as loss payees, and (4) pro - vide sufficient protection, considering safety and soundness, and the bank can document this in writing. The rule also includes specific requirement related to when a bank may accept a mutual aid society policy under discre- tionary acceptance. In order for the society to be considered a mutual aid society such that the rule would allow the bank to accept the policy, (1) the members of the group must share a religious, charitable, educational, or fraternal bond, (2) the group must have an agreement to cover losses due to property damage, including for flooding, and (3) the group must have a demonstrated history of fulfilling the terms of the agreements for flooding. Unfortunately, the final rule does not expand on mutual aid societies and new guidance related to the new final rule has not yet been released by the agencies. The bank will need to thoroughly document its analysis and determination regarding any mutual aid society policies. The bank will need to begin looking at these issues and making policy decisions soon, as the final rule is effective July 1, 2019. It applies when a building secures the loan and it is in a Special Flood Hazard Area (often referred to a SFHA, Flood Zone, High Risk Flood Zone, or 100 year plan), even if it is only taken in an abundance of caution during a MIRE event (Mak - ing, increasing, renewing, or extending). If the building does not secure the loan, it is specifically carved out of the collateral or the loan is secured by something else, like a CD, then the flood rule does not apply. If the building is not in a SFHA, then flood insurance is not required, but may be a safety or sound - ness consideration. n If the bank would like to read more about the final private flood rule, Compliance Alliance has a summary of the final rule available in our flood toolkit. Also in the toolkit is a template flood policy that has been updated for the new final rule, as well as the checklist that was mentioned earlier. https://www.compliancealliance.com/find-a-tool/by-toolkit/flood. One question that we have gotten on the hotline quite a bit is if the bank may review the policy to determine if it meets the definition private flood insurance, even if it does contain the Compliance Aid sentence.