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Federal Regulators Look to Require Banks to Accept Private Flood Insurance

October 14, 2013

Federal bank regulators are proposing a rule aimed at encouraging flood insurance customers to buy private flood insurance. The rule is mandated by the Biggert-Waters Act of 2012. Free market advocates, especially some members of the House Financial Services Committee, point to the provision as one of the most important reforms imposed by the controversial law.

The proposed rule would require regulated lending institutions to accept private flood insurance as satisfying the B-W mandate that homebuyers in some areas purchase flood insurance.

The proposal would clarify that regulated lending institutions have the authority to charge a borrower for the cost of force-placed flood insurance coverage beginning on the date on which the borrower's coverage lapsed or became insufficient and would stipulate the circumstances under which a lender must terminate force-placed flood insurance coverage and refund payments to a borrower.

The proposed rule also asks interested parties to comment on whether federal banking agencies should adopt additional regulations dealing with the acceptance of flood insurance policies issued by private insurers. 

The proposed rule would also require regulated lending institutions to escrow payments and fees for flood insurance for any new or outstanding loans secured by residential improved real estate or a mobile home, not including business, agricultural and commercial loans, unless the institutions qualify for the statutory exception. 

The proposal includes new and revised sample notice forms and clauses concerning the availability of private flood insurance coverage and the escrow requirement. The proposed rule is being issued by the Board of Governors of the Federal Reserve System, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency.

The comment period for the rule will end Dec. 10.

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