Consumer Compliance Outlook: First Issue 2024

Overview of Private Flood Insurance Compliance Requirements

By Kenneth J. Benton, Principal Consumer Regulations Specialist, Federal Reserve Bank of Philadelphia

The great Mississippi River flood of 1927 caused more destruction than any flood in American history, covering over 27,000 square miles across several states and producing $427 million dollars in damage (in 1927 dollars).1 In response to this flood, many private flood insurers retreated from the market out of concern that “insurance against the peril of flood cannot successfully be written.”2 Eighty-five years later, Congress tried to revive the private flood insurance market by enacting the Biggert–Waters Flood Insurance Reform Act of 2012 (BWA),3 with the goal of improving the financial stability of the National Flood Insurance Program (NFIP) by increasing the role of private insurers in managing the nation’s flood risks.4

Among other changes, the BWA directed the Federal Emergency Management Agency (FEMA) to implement risk-based pricing of premiums5 and amended the Flood Disaster Protection Act of 1973 (FDPA) to require regulated lending institutions, federal agency lenders, and the government-sponsored enterprises (GSEs) to accept a private flood insurance policy meeting the BWA’s definition of “private flood insurance” to satisfy the FDPA’s mandatory flood insurance purchase requirements.6 This provision was designed to decrease the cost to the federal government of providing flood insurance through the NFIP by encouraging private flood insurance carriers to enter the market. Previously, lenders had the discretion to accept private policies under certain conditions pursuant to questions and answers (Q&As) 63 and 64 of the 2009 notice “Interagency Questions and Answers Regarding Flood Insurance” but were not required to accept them.7

In 2019, the Board of Governors of the Federal Reserve System (Board), the Farm Credit Administration, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) (agencies) jointly issued a final rule to implement the BWA’s private flood insurance provision.8 The agencies had previously implemented the other provisions of the BWA in a final rule published in 2015.9 This article provides an overview of the private flood insurance final rule, which includes 1) mandatory acceptance of private flood insurance, 2) discretionary acceptance of private flood insurance, and 3) flood insurance coverage provided by mutual aid societies. The agencies also conducted an Outlook Live webinar on the final rule on June 18, 2019.10 The first part of the article reviews the regulation’s requirements for these three sections of the final rule, while the second part summarizes the agencies’ clarifications of these requirements in the 2022 updates to the flood insurance Q&As.11


The National Flood Insurance Act, as amended by the FDPA, requires a regulated lending institution or federal agency lender that makes, increases, extends, or renews a loan secured by improved real estate or mobile homes located, or to be located, in a special flood hazard area (SFHA) where flood insurance is available under the NFIP to ensure the loan is covered by flood insurance for the term of the loan for the lesser of the loan balance or the maximum amount of insurance available under the NFIP.12 The agencies’ implementing regulations refer to a loan for which flood insurance is required as a designated loan.13 Loans sold to the GSEs are also subject to the flood insurance purchase requirements.14


Mandatory Acceptance of Private Flood Insurance

The final rule requires regulated lenders to accept a flood insurance policy meeting the regulation’s definition of private flood insurance to satisfy the purchase requirements for designated loans.15 The rule defines private flood insurance as an insurance policy that:

To facilitate lenders’ compliance, the agencies included a compliance aid statement in the private flood insurance final rule, which provides that a lender may determine whether a policy qualifies as private flood insurance, without further review of the policy, if the policy or endorsement contains this verbatim language: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”16

Discretionary Acceptance of Private Flood Insurance

The private flood insurance final rule permits a lender to accept a policy that does not meet the regulation’s definition of a private flood insurance policy if it meets the regulation’s discretionary acceptance standard. To qualify, a policy must:

Mutual Aid Societies

Under the private flood insurance final rule, a regulated lender may accept a plan offered by a mutual aid society to cover flood damages to a member’s property to satisfy the mandatory purchase requirements if the plan meets the regulation’s requirements. The regulation defines mutual aid society as an organization:

The regulation requires that the mutual aid society’s plan must:

Since the regulation requires a lender’s primary regulator to approve a mutual aid society plan, a lender should contact its regulator if it is considering allowing a borrower to use a mutual aid society plan.


When the agencies updated the 2022 revised flood insurance Q&As, they added several clarifying Q&As on the requirements for private flood insurance policies and mutual aid society plans, which we highlight here.

Q&As on Mandatory Acceptance

Q&As on Compliance Aid Statement

Q&As on Discretionary Acceptance and Mutual Aid Societies

Q&As on Requirements for All Private Policies and Plans


Recent data suggest the BWA and other changes in the flood insurance market are increasing the use of private flood insurance policies. According to the Insurance Information Institute (III), an industry trade group, “between 2016 and 2022, the total flood market grew 24 percent — from $3.29 billion in direct premiums written [DPW] to $4.09 billion — with 77 private companies writing 32.1 percent of the business” (see Figure 1). FEMA’s introduction of Risk Rating 2.0 (RR2), which changed FEMA’s pricing methodology to more accurately reflect a property’s actuarial flood risk by analyzing multiple data points,17 contributed to this large increase, according to the III. As RR2 increased premiums for many policyholders, the pricing of private policies became more competitive.18 The III report also noted that communities participating in FEMA’s Community Rating System (CRS), which encourages floodplain standards that exceed FEMA’s minimum standard, can reduce premiums. For example, premiums in Folly Beach, SC, dropped 30 percent after it became a CRS Class-4 community.19

Figure 1


Floods are the most common and expensive natural disaster in the United States.20 Congress enacted the BWA to help mitigate this risk. The agencies’ private flood insurance final rule and the updated flood insurance Q&As have clarified the BWA’s requirements to help lenders comply. Specific issues and questions by lenders should be raised with the lender’s primary regulator.


1Flood History of Mississippi,” National Weather Service.

2 Phyllis Cuttino, “How 20th-Century Events Shaped the National Flood Insurance Program,” Pew Charitable Trusts (June 7, 2016). See also Affordability of National Flood Insurance Program Premiums: Report 1 (The National Academies of Science, 2015), p. 23, and Scott Gabriel Knowles and Howard Kunreuther, “Troubled Waters: The National Flood Insurance Program in Historical Perspective,” Journal of Policy History 26(3): 327.

3 Pub. L. 112–141; 126 Stat. 957, Div. F, Tit. II, Subtit. A (July 6, 2012), codified as amended at 42 U.S.C. §4014(a)(2) and (g), 42 U.S.C. §4017a.

4 H. Rep. No. 112–102 (Committee on Financial Services, June 9, 2011) at 1.

5 Section 100207 of the BWA (codified at 42 U.S.C. §4015). Congress later enacted the Homeowner Flood Insurance Affordability Act (HFIAA), which amended the BWA to impose limits on rate increases so risk-based pricing could be phased in over time to avoid price shocks to insureds. CCO reviewed the HFIAA in a Compliance Spotlight (Second Quarter 2014).

6 Section 100239 of the BWA (codified at 42 U.S.C. §4012a(b)).

7 74 FR 35914, 35944 (July 21, 2009).

8 84 FR 4953 (Feb. 20, 2019). Each agency codified the regulatory text of the final rule into its implementing regulations. Board: 12 C.F.R. §205.25; Farm Credit: 12 C.F.R. Part 614, sub-part S; FDIC 12 C.F.R. Part 339; NCUA: 12 C.F.R. Part 760; and OCC: 12 C.F.R. Part 22. For convenience, this article uses the Board’s citations. The BWA also requires the federal agency lenders and the GSEs to accept private flood insurance meeting the BWA’s definition. See §4012a(b)(2) and (b)(3). In response, the Department of Housing and Urban Development issued a rule allowing acceptance of private flood insurance for Federal Housing Administration–insured loans, using the BWA’s definition. 87 FR 70733 (Nov. 21, 2022). The GSEs updated their selling guides to address private flood insurance requirements.

9 80 FR 43126 (July 21, 2015).

10 The webinar and the presentation slides are available in the Outlook Live archives. Free registration is required in order to view the webinar.

11 87 FR 32826 (May 31, 2022).

12 42 U.S.C. §4012a(b)(1).

13 12 C.F.R. §208.25(b)(5).

14 42 U.S.C. §4012a(b)(3).

15 12 C.F.R. §208.25(c)(3).

16 12 C.F.R. §208.25(c)(3)(ii).

17 CCO summarized RR2 in the Fourth Issue 2021.

18 Flood: State of the Risk (Insurance Information Institute, August 16, 2023).

19 Flood: State of the Risk at p. 2.

20 Flood Insurance and the NFIP (FEMA, June 14, 2021).