Q: Do regulators require lenders to accept flood insurance policies that meet the discretionary criteria or can the lender make that determination at its discretion? Additionally, if the lender decides to accept a policy that meets the discretionary criteria, what documentation is sufficient to show that the policy provides sufficient protection of the loan, consistent with general safety and soundness principles?
A: A lender must accept a policy that meets the mandatory criteria. A lender does not have to accept a policy that does not meet those criteria. The discretionary criteria in the rule sets forth the minimal acceptable criteria that the flood policy must have for the lender to be allowed to accept it.
Documentation that the policy provides sufficient protection of the loan, consistent with general safety and soundness principles, could include a written acknowledgement that the lender has, with due diligence, reviewed the policy for adequate coverage. Some of the factors that a regulated lending institution could consider in determining whether a flood insurance policy provides sufficient protection of a loan have already been discussed in this webinar and include consideration of deductibles, notice provisions, financial solvency of the insurance provider, among other things.
This Q&A was part of the discussion in the Outlook Live – 2019 Interagency Flood Insurance Update on Private Flood Insurance Rule webinar held on 6/18/19 and focused on the new private flood insurance rules that become effective 7/1/19. Information may be found here: https://www.webcaster4.com/Webcast/Page/577/30085