WASHINGTON – Jan. 31, 2019 – The National Flood Insurance Program (NFIP) is in trouble. Thanks in part to a multitude of national disasters, the program has paid out far more money than it's taken in by way of premiums but hopes of a federal fix through legislation has been delayed so far. Instead, Congress has authorized a series of short-term delays rather than tackling a broader reform package.
A move by the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency late last week could be the first step in attacking the problem from a different direction, though.
The rule proposal would make private flood insurance more available in flood zones, but it's not official yet – it still needs three other federal regulators, including the Federal Reserve, to sign off on it. It also doesn't tackle all the important issues for homeowners and buyers.
"It appears that regulators are attempting to adopt, by rule, a portion of what was contained in an earlier bill (Ross-Murphy)," says Trey Goldman, Florida Realtors® legislative counsel in the Office of Public Policy. "Under this proposal, banks must recognize and accept private flood coverage. But the bill's 'continuous coverage' language is just as important to homeowners, and the proposed regulations really don't address that. Without continuous coverage, policyholders who leave the NFIP and later come back could be subject to a full risk rate instead of their previous subsidized rate."
Under the FDIC/Comptroller proposal, lenders would have to accept private flood insurance policies if they offer coverage at least as comprehensive as NFIP. Lenders would also have an option to accept private flood insurance policies that don't offer as much coverage as NFIP, which the insurance industry and others want.
Still, any increase in private policy acceptance by lenders offers a ray of hope for homeowners and buyers, in part because a private policy often costs less.
"This ruling has the potential to open up the private insurance market," Michael Barry, a spokesman at the industry-funded Insurance Information Institute told The Wall Street Journal.
Federal law doesn't generally recognize private flood policies. Owners who leave NFIP and return – perhaps because their new cheaper coverage suddenly becomes more expensive later – can lose their grandfathered status under "continuous coverage" if they return to NFIP. If that happens, they often find themselves stuck with two bad choices: Stick with their current private policy that now has a higher premium or return to NFIP and also pay a higher premium because their coverage is no longer subsidized.
Another problem: Some lenders will accept private flood insurance coverage but some do not. For the latter, a homebuyer only has two choices – take out NFIP coverage or find another lender.
Ideally, Congress will address the "continuous coverage" risk when it updates NFIP, which now expires on May 31, 2019.
Source: The Wall Street Journal, Lalita Clozel
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