On November 23, 2020, the U.S. Department of Housing and Urban Development (HUD) published in the Federal Register a proposed amendment to Federal Housing Administration (FHA) regulations that would allow lenders to accept private flood insurance policies on FHA-insured properties located in Special Flood Hazard Areas. HUD will accept comments for 60 days following the date the proposed rule, Acceptance of Private Flood Insurance for Federal Housing Administration (FHA)-Insured Mortgages (Docket No. FR-6084-P-01), is published.

The proposed rule would allow borrowers the option of purchasing private flood insurance on FHA-insured mortgages for properties located in Special Flood Hazard Areas by amending FHA regulations at 24 CFR sections 201, 203, and 206 as follows:

• 24 CFR § 204.16a would be amended to include the definition of “private flood insurance” from the Biggert-Waters Flood Insurance Reform Act.
• 24 CFR § 203.15a would be amended to include a “compliance aid” provision allowing mortgagees to accept private policies, without further review, where the policy contains the language: “This policy meets the definition of private flood insurance contained in 24 CFR 203.16a(e) for FHA-insured mortgages.”
• HUD also proposes to amend 24 CFR § 201.28(a) (Property Improvement and Manufactured Home Loans), § 203.343(b)
  (Single Family Mortgage Insurance), § 206.45(c) (Home Equity Conversion Mortgage Insurance), and § 206.134(b) (Home
  Equity Conversion Mortgage Insurance) to permit borrowers to obtain private flood insurance.

The proposed rule announcement provides an explanation of the history of the Flood Disaster Protection Act of 1973 (the FDPA), as amended by the National Flood Insurance Reform Act of 1994, and the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters). HUD’s authorization that lenders may accept private flood insurance policies comes nearly two years after 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 interagency regulators) issued a final rule in February 2019 implementing the portion of Biggert-Waters mandating acceptance of private flood insurance. While the interagency regulators’ final rule requires federally regulated lenders to accept private flood insurance went into effect on July 1, 2019, FHA’s existing rules do not permit private flood insurance to satisfy the mandatory purchase requirement of the FDPA. Importantly, HUD advised in the proposed rule that it “will not permit Mortgagees to exercise their discretion to accept flood insurance policies, provided by private insurers or mutual aid
societies, that do not meet the definition and requirements for a private flood insurance policy as laid out in this rule.” As a result, HUD cautioned that “[d]ue to the differences between HUD and the Federal regulators’ rules, compliance with the Federal regulators’ Final Rule should not be interpreted as compliance with HUD’s requirements.” Given this significant and explicit distinction by HUD, federally regulated lenders that originate FHA-insured loans should be mindful that their policies and procedures are designed to ensure compliance with both the interagency regulators’ Final Rule and HUD’s eventual final rule on the topic of acceptance of private flood insurance.

Capital allows a bank to build scale, and the fastest way for a community bank to build capital and scale is through mergers. If properly executed, mergers will lower costs and increase cashflow for reinvestment into fee generating products, growing ROA and franchise value. This is not lost on the markets. The following graphs reflect 2,604 Community Bank M & A valuations since 2007, parsed by asset size of the acquired bank and dollar value of merger deals done by year. These charts evidence two findings: (i) size matters…a $500m bank is 27% more valuable than a $100m bank and (ii) 2020 merger activity is at record levels, despite carrying valuations 30-50% lower than acquisitions (for our purposes, “Mergers” are stock for stock deals, “Acquisitions” are cash for stock deals). The balance of this article will discuss why mergers are gaining popularity, and how this concept could be applied here in Alabama.

Republished with permission. The article titled, "FHA Posts Proposed Rule Permitting Acceptance of Private Flood Insurance," was published by the Alabama Bankers Association in the November 2020 edition of Board Briefs. View the full newsletter.