WASHINGTON A proposed overhaul of the National Flood Insurance Program introduced by the Federal Reserve last week would start to move back toward the private market, with credit unions and banks required to provide an alternative to the government program that has dominated the market for the past four decades.
Introduction of the private option comes as 2012 changes to the program are pushing up flood insurance premiums for the federal program in high-risk areas and prompting protests across the country over the removal of subsidies that have kept the premiums artificially low for more than 1 million policyholders.
NCUA and the bank regulators are collecting comments on the Fed’s proposals, which also would: change the force placement provisions of the federal program to allow the lender to charge borrowers for lapsed coverage on the date a coverage is terminated; change the mortgage interest clause to ensure that borrower and the mortgagee are covered in the event of a loss; and, require credit unions and banks to escrow payments and fees for flood insurance for any new or outstanding loans secured by residential improved real estate or a mobile home.
But the major provisions of the new rules will require that all lenders provide borrowers with an option to the NFIP that is approved by state insurance regulators, reintroducing competition in the market that has been monopolized by the federal program since 1973 legislation. Under the proposal, if a state insurance regulator makes a written determination that a flood insurance policy issued by a private insurer meets the definition of “private flood insurance” set forth in the 2012 law, then NCUA or the banking agencies will consider the policy to meet the statutory definition of “private flood insurance.”
The proposals were issued for comment by NCUA, the FDIC, the Office of Comptroller of the Currency, the Farm Credit Administration and the Fed. The proposals were prompted by last year’s overhaul of the federally subsidized floor insurance program in the aftermath of Hurricane Sandy that is causing huge hikes for many homeowners, with property owners in flood zones in Florida particularly hard hit. It comes at the same time Florida insurance regulators are investigating whether the state could induce private companies to sell flood insurance.
The 2012 overhaul, formally known as the Biggert-Waters Flood Insurance Reform Act, is being implemented in stages, with many of the provisions effective as of Oct. 1. It removes subsidies provided to as many as 20% of the homeowners with properties in flood areas. This will result in some homeowners facing increases of thousands of dollars per year.
