The Impact of NCUA’s Final Rule on Private Flood Insurance 

sand bags and flood rescue personnel
By Jim Hunt

5 minutes

Credit unions will have three ways to meet BW-12’s requirements come July 1.

As late winter and early spring flooding begins its annual assault, we’re reminded once again of the catastrophic and uncontrollable nature of flooding. Nearly 75% of declared disasters in the U.S. are flood-related, and flooding is the country’s most common and expensive type of natural disaster. Since the 1980s, the U.S. has seen a $100 billion increase in flood losses each decade. 

Escalating losses—especially in the post-Hurricane Katrina era—have forced the federal government to revisit its role as the top (and often only) provider of flood insurance. Between 2004 and 2018, the National Flood Insurance Program borrowed $39.4 billion from the U.S. Treasury (repaying $2.82 billion). Seeking ways to transfer insurance coverage from the federal government to private insurance—without driving up insurance rates or compromising lenders’ insurance protection and collateral—led to the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12). One of  BW-12’s main functions: to require lenders to accept private flood insurance as long as it met the conditions defined by BW-12  42 U.S.C. §4012a(b)(7)

In the seven years since the Act’s passage, the National Credit Union Administration has worked in conjunction with four other federal agencies (the Federal Deposit Insurance Corp., Farm Credit Administration, Office of the Comptroller of the Currency and Board of Governors of the Federal Research System) to determine how to implement BW-12. Two rounds of comments (in 2013 and 2016) showed credit unions had concerns in a number of key areas, including liability, cost of compliance, insufficient policy information at time of mortgage closing (which could delay closings and impact borrowing), rules that didn’t reflect key differences between residential and commercial policies, and a lack of financial standards requirements for insurance providers. They also felt it would be difficult to ascertain if a policy truly complied with NFIP standards. 

The final rule on implementation, released in February, simplifies requirements and should make it easier for credit unions to comply with BW-12.

Here’s What Your CU Needs to Know Now

Credit unions will have three ways to meet the requirements of BW-12:

  1. Mandatory acceptance of private flood insurance that includes a compliance aid statement. This statement should include the following language: “This policy meets the definition of private flood insurance contained in 42 U.S.C. §4012a(b)(7) and the ‘corresponding regulation.’”

    If an insurance policy includes this statement, the credit union won’t need to review the entire policy to ensure it meets BW-12 requirements for private flood insurance. This would be the most painless way to determine compliance, but we’re not currently aware of any flood insurance offerings that include this statement. It’s quite possible there will be very few providers that use this exact language in their policy or an endorsement to a policy. 
  2. Discretionary acceptance of private flood insurance. There may be times when your credit union will accept coverage that doesn’t include the above statement in order to best serve members. You’ll have the option to accept a policy that doesn’t include a BW-12 compliance statement as long as it meets these four minimum conditions:

    a. It provides coverage that meets the amount national flood insurance provides or the value of the loan. This condition is quite straightforward and could provide a member and the credit union with full limit protection. Maximum NFIP coverage is $250,000 for a dwelling and $100,000 for contents for a residential property, plus $500,000 each for building and contents with a commercial property. In instances where a member had a more valuable property, private insurance would be an option that could cover a full flood loss.

    b. The policy is issued by an insurer that’s licensed, admitted or otherwise approved by the regulators of that state to provide insurance. In addition to accepting coverage from a standard insurer, this provision also allows your credit union the flexibility to accept coverage offered through a surplus lines policy, which protects against a financial risk that is too high for a regular insurance company to take on.

    c. The policy must cover both the mortgage holder and the member as loss payees. One common exception would be a situation where insurance payments are made by a condo/co-op/homeowners’ association or similar. The mortgage holder would be required to provide documentation to this effect.

    d. The policy must provide sufficient protection of the designated loan consistent with general safety and soundness principles and the regulated lending institution must document its conclusion regarding the sufficiency of the protection of the loan in writing. This condition will likely be the most challenging to meet and puts a high burden of proof on the credit union—especially a small- or medium-sized one with a limited compliance staff. An NCUA auditor is likely to ask about the qualifications of any expert that found a policy in conformance and the credit union should get a written statement from the insurance broker or agent that documents their policy meets BW-12 insurance requirements. We highly recommend conferring with your legal counsel to determine if a statement provided by an insurance broker or agent for a non-conforming policy offers your credit union sufficient protection.  
  3. Acceptance of coverage provided by mutual aid societies, organizations that provide benefits or other help to members when they are affected by such things as death, sickness, disability, old age or unemployment. The credit union will have the discretion to accept coverage provided by a mutual aid society so long as the protection meets conditions 2a, 2c and 2d. An example would be an Amish Aid Plan that provides flood insurance. 

Compliance is mandatory. Only accepting NFIP insurance will no longer be a compliant option starting on the effective date of July 1. The comprehensive summary is available on the NCUA website. cues icon

Who Needs Flood Insurance?

Property owners are required to purchase flood insurance if they have a mortgage and their property is in a Special Flood Hazard Area, as established by the NFIP. This is defined as having a 1 percent or higher chance of flooding every year. Until the passage of the Biggert-Waters Act in 2012, this meant the property owner was required to purchase a Standard Flood Insurance Policy from the NFIP. BW-12 allows property owners to meet the flood insurance requirement with private insurance. 

Jim Hunt is staff underwriting specialist for CUESolutions provider CUNA Mutual Group, Madison,Wisconsin.

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