HUD issues final rule allowing private flood insurance with FHA loans


The U.S. Department of Housing and Urban Development (HUD) recently released a to reign allowing the use of private flood insurance policies with FHA-insured mortgages. HUD also released Letter to mortgagee 2022-18 with respect to FHA-insured loans, general flood insurance requirements, flood insurance requirements for condominiums, manufactured homes, and home equity conversion mortgages (that is, i.e. reverse mortgages) and private flood insurance requirements. The final rule and mortgagee’s letter come into effect on December 21, 2022.

Like before reported In February 2019, federal regulators issued a joint final rule (the “Joint Final Rule”) to implement provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (the “Act ”) that require regulated financial institutions to accept private flood insurance policies. The regulators are the Farm Credit Administration, Federal Deposit Insurance Corporation, Federal Reserve Board, National Credit Union Administration, and Comptroller of the Currency. Although the joint final rule went into effect on July 1, 2019, it does not apply to FHA-insured loans. HUD notes in the preamble to the final rule that the law does not impose requirements on FHA-insured loans. Prior to HUD’s final rule, HUD only accepted flood insurance policies issued under the National Flood Insurance Program (NFIP). Addressing the rationale for permitting private flood insurance policies with FHA-insured loans, HUD states in the preamble to the final rule that “an FHA lender’s acceptance of insurance policies private flood insurance would provide borrowers with more flood insurance choices, promote consistency with industry standards, reduce regulatory restrictions on flood insurance for FHA-insured loans, and harmonize policies of the FHA with the intent of Congress expressed in the… Act to encourage an expanded market for private flood insurance.

The final rule applies to Title I prefabricated home loans, Title II single-family home loans, and HECM loans. According to the Common Final Rule, to qualify as private flood insurance under the HUD Final Rule, a policy must be issued by an insurance company that meets certain conditions, and the policy must provide flood coverage. flood insurance that is at least as broad as the coverage provided. under a standard flood insurance contract (SFIP) issued under the NFIP for the same type of property, including with regard to the deductibles, exclusions and conditions offered by the insurer. The final rule sets out the specific requirements that a policy must meet to be considered to provide coverage at least as broad as a SFIP.

The joint final rule requires an institution subject to the rule to accept a qualifying private flood insurance policy. In proposing the rule for FHA-insured loans, HUD specifically requested comment on whether the final rule should permit or require a lender to accept a qualifying private flood insurance policy with an FHA-insured loan. the FHA. HUD decided to take a permissive approach. Thus, lenders may, but are not required to, accept a qualifying private flood insurance policy with an FHA-insured loan.

The final rule allows a lender to determine that a private flood insurance policy is a qualifying policy, without further review of the policy, if the following statement, referred to as a “compliance assistance statement”, is included in the policy or as an endorsement to the policy: “This policy meets the definition of private flood insurance contained in 24 CFR 203.16a(e) for FHA-insured mortgages.” In the preamble to the final rule, HUD explains that a lender may choose not to rely on the statement and determine on its own whether the policy is a qualifying policy. HUD also advises in the Preamble and Mortgagee Letter 2022-18 that a lender cannot reject a policy solely because it is not accompanied by the statement.

Unlike the Joint Final Rule, the HUD Final Rule does not allow lenders to exercise their discretion to accept private flood insurance policies that do not meet the definition and requirements of a flood policy. private flood insurance, or accepting flood coverage from mutual aid societies, in conjunction with FHA-insured loans.

In Letter to mortgagee 2022-18HUD advises that to be eligible for an FHA-insured loan, a property located in a Special Flood Hazard Area (SFHA) “must be in a community that participates in the [NFIP] and has NFIP available. So even if a lender is willing to accept a qualifying private flood insurance policy with an FHA-insured loan, the security property must be located in such a community.

With respect to servicing Title II loans and FHA-insured HECM loans, the mortgagee’s letter provides that a managing agent shall (1) for properties in an SFHA with flood insurance, review each year if flood insurance is sufficient, and (2) annually review all properties to determine if a property is located within an SFHA.


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