Private flood insurance plan falls woefully short, lenders say

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WASHINGTON – A regulatory proposal to allow banks and other mortgage lenders to accept private flood insurance on residential and commercial properties does not go far enough, according to industry groups.

While they support the intent of the plan, they argue it doesn’t give lenders enough flexibility when it comes to relying on private flood insurance as an alternative to insurance policies backed by the National Flood Insurance Program.

"We remain concerned that the proposed rules will not successfully foster the market for private flood insurance as contemplated by Biggert-Waters and will instead create delays and complications for borrowers," Terry Ohr, who runs Bank of America's flood enterprise process oversight, wrote in a Jan. 6 letter to the regulators.

At issue is a 2012 flood insurance bill, co-sponsored by Reps. Judith Biggert, R-Ill., and Maxine Waters, D-Calif., which called for private flood insurance policies to be "at least as broad" as a standard NFIP policy.

The Office of the Comptroller of the Currency, Federal Reserve, Federal Deposit Insurance Corporation, Farm Credit Administration and National Credit Union Administration issued a proposal in early November in response to that mandate.

But the "at least as broad" definition has “discouraged rather than encouraged the goal of expanding the private flood insurance options available to borrowers,” wrote Anjali Phillips, senior counsel with the American Bankers Association.

In their proposal, banking regulators tried to reduce the burden on lenders of evaluating private flood insurance policies by suggesting the use of a "compliance aid."

But this compliance aid still requires the "lender to review the written summary provided by the insurer and verify in writing that the private policy includes the provisions identified by the insurer and that such provisions 'satisfy' the criteria included in the definition of private flood insurance," Ohr wrote.

He noted the lenders generally lack the expertise to evaluate complicated insurance policies.

"In our view," Bank of America said, "the proposal continues to rely too heavily on lenders' conducting extensive evaluations of private flood policies, and thus unlikely to successfully promote a market for private policies."

Wells Fargo also raised concerns with the plan, saying the requirements “do not seem to aid or encourage greater use of private flood insurance as an alternative to NFIP policies," according to David Moskowitz, executive vice president and deputy general counsel for the bank.

But the fix may require Congress to act. Moskowitz blamed the Biggert-Waters Act for the regulators' difficulty in reaching a practical approach to the mandatory acceptance of private flood insurance policies.

He urged the regulatory agencies to "join with the lending and insurance industries in encouraging much needed revisions to BWA as the legislative branch considers reauthorization of the NFIP program in the coming months."

Congress has until Sept. 30 to reauthorize the National Flood Insurance Program. Supporters are hoping the legislators will address these issues so primary lenders and Fannie Mae and Freddie Mac can rely on private insurance.

"We are trying to get the best possible outcome working with the regulators and pushing for legislation," Joseph Pigg, senior vice president at the ABA, said in an interview. "The broad-based goal is to put private flood insurance on par with homeowners insurance. You don’t have a federal regulator for homeowners insurance.”

The SmarterSafer Coalition, a group of environmental groups, taxpayer advocates, emergency management organizations, insurance companies and others, is also encouraging the development of a private flood insurance market.

"We want it to be relatively simple for consumers to choose private flood insurance," said Jenn Fogel-Bublick, a partner and lobbyist at Capitol Counsel in Washington who represents the SmarterSafer Coalition.

"As long as the state insurance commissioner allows the flood insurance product, the lender should be able to accept it. There shouldn't be lot of hurdles to jump over in order to insure properties," she said in an interview.

In Florida, major insurance companies are writing private flood insurance via surplus lines market, according to Fogel-Bublick, which is where new insurance products are tested before they become mainstream products.

In Pennsylvania, many homeowners are “facing sticker shock” when they have to purchase flood insurance thanks to remapping by the Federal Emergency Management Agency, according to Teresa Miller, the state's insurance commissioner.

“In one case, a homeowner would have had to pay $2,700 a year for a NFIP policy, but got comparable private flood coverage through the surplus lines market for $718 annually,” Miller wrote in a Jan. 6 comment letter.

Miller and the National Association of State Insurance Commissioners want to ensure that these “personal lines residential policies offered by surplus lines insurers can be accepted by lenders for purposes of satisfying the mandatory purchase requirement,” under the private flood insurance rule.

Otherwise, “the proposed rule could seriously harm consumers' opportunities to get flood insurance for their homes at the best price,” Miller said.

Meanwhile, proponents of private insurance are optimistic about their chances of securing a flood insurance bill that will facilitate private flood insurance.

In early December, Rep. Blaine Luetkemeyer, R-Mo., who chairs the House Financial Services subcommittee on insurance and housing, issued a statement outlining his principles for flood insurance reauthorization and reform. That included a call for private flood insurance as a way to take off some of the pressure of the federal program, which is $23 billion in debt.

Luetkemeyer pledged to start the reauthorization hearings early this year to avoid any lapses in the National Flood Insurance Program and to focus on the development of private flood insurance.

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