[jnburnett]

We had Customer A provide private flood insurance that did not include the Compliance Aid statement and did not pass the mandatory requirements checklist. We chose to not accept the policy under the discretionary acceptance provisions.

We now have Customer B, who is moving their loan from a larger institution and currently has private insurance through the exact same insurance company that we turned down for Customer A. However, Customer A was in a participating community and Customer B is in a NON participating community.

Our preference is to hold with the mandatory acceptance for private flood insurance as applicable and to not take risks with the discretionary acceptance realm. I will also note; these loans are rather large in amount and from a safety and soundness standpoint the Bank would require flood on Customer B.

Question 1- Since Customer B is in a NON participating community for flood, is the private flood mandatory acceptance criteria a moot point? Or will this private flood still be compared to that guidance?

Question 2- Since we just declined to accept the same policy on Customer A, are there any fairness issues if we do accept it for Customer B? The mutual insurance agent of Customer A and B also has overshared details to their respective clients about our denial of the private flood insurance causing additional room for concerns.

[rcooper]

This is a sticky situation. Here’s my take…
I would want to ensure I have a policy and apply it consistently. Your bank is not required under the flood regs to follow the private flood rules if flood insurance isn’t required, which it would not be for a property located in a non-participating community. However, as you’ve said, as the lender you may (and will) require insurance on this property to protect your collateral. Since the requirement to purchase doesn’t apply to a non-participating loan, you are not required to apply the private flood criteria; however, I think it would make sense from many perspectives: 1) it keeps the bank’s processes simpler for staff to follow which means less room for error; 2) the bank has a right from a safety and soundness perspective to adopt regulatory guidelines even if not required to do so; and 3) consistently applied criteria is a less likely to create any type of unequal treatment issues.

Again, consistency – deciding on policy and adhering to it – is key. You don’t want to document in the file that this policy isn’t acceptable for borrower B due to safety and soundness concerns because it doesn’t meet the private flood rules (in order to avoid the issue that was created by the insurance agent oversharing with borrower A), but then accept a private policy from someone else in a non-participating community that doesn’t have the compliance aid statement.

I’ll forward to Jack to see if he has any additional thoughts for you.
Best of luck!

[jholzknecht]

I agree with all of Robin’s comments regarding the importance of consistency.

Since the property is in a non-participating community FEMA insurance is not available. It appears that options include denying the application, making the loan without property insurance, or making the loan with a private flood policy. If the policy in question is unacceptable the borrower may be able to obtain a policy from another private insurer that is acceptable.

You did not mention the aspect of the policy that is deficient. Is the issue completely unacceptable or is it an issue you could live with if no other options exist? Customer A had the option of purchasing FEMA coverage. Customer B does not have the option of purchasing a FEMA policy, but may have the option of a private policy that is acceptable.

Regarding the “fairness” aspect of your question, it appears that situations regarding Borrower A and Borrower B are different enough (participating and non-participating) to justify the difference in treatment.

[Author]

Posts