HUD Issues Proposed Rule for Use of Private Flood Insurance on FHA Loans

HUD issued a proposed rule which would allow borrowers on FHA loans to use private flood insurance instead of requiring insurance through the National Flood Insurance Program (NFIP).

As a condition of receiving a mortgage loan which is insured by the Government, or for a Government Sponsored Enterprise to purchase a loan, federal law requires that borrowers who live in areas with high flood risk must obtain flood insurance through the NFIP.  The NFIP provides for federally-backed flood insurance for borrowers who live in high flood risk areas.  Changes to the relevant laws in the last decade now allow for the use of private flood insurance in certain circumstances.

HUD’s proposed rule would allow borrowers on FHA loans to use insurance from private insurers instead of obtaining flood insurance through the NFIP.  The regulations set certain standards for the use of private insurance policies with respect to coverage, terms, and certain consumer protections.  In effect, the private flood insurance policies must be at least comparable to those offered through the NFIP.  The proposed rule would also allow lenders to rely on representations from the flood insurers that a policy meets the requirements for FHA loans.

HUD is accepting comments on the proposed rule through January 22, 2021.