I. INTRODUCTION
From time to time Congress fails to reauthorize the National Flood Insurance Program (NFIP). As of March 29, 2010, the temporary funding for NFIP expired. The Office of the Thrift Supervision (OTS) has issued a memorandum regarding the effect of the lapse in the NFIP, and other banking agencies are expected to follow suit.
When NFIP funding expires, the authority of the Federal Emergency Management Agency (FEMA) to issue new flood insurance policies, issue increased coverage on existing policies, and issue renewal policies expires. At that point, borrowers are not able to obtain NFIP insurance to close, renew, or increase loans secured by property located in a special flood hazard area (SFHA) until the NFIP is reauthorized, except under the circumstances described below.
II. LENDER REQUIREMENTS
Financial institutions may continue to make loans subject to the flood insurance requirements without obtaining flood insurance during a period when the NFIP is not available. Such lending does not violate 12 C.F.R. § 572. However, institutions must continue to make flood determinations, provide timely, complete, and accurate notices to borrower, and comply with other parts of the flood insurance regulations. In addition, they must evaluate safety and soundness risks and prudently manage those risks during the lapse period. Further, these institutions must have a system in place to ensure that policies are obtained as soon as available following reauthorization for properties that are subject to mandatory flood insurance coverage.
The OTS memorandum has provided a series of questions and answers that provide assistance to lenders in dealing with the NFIP lapse.
A. Retroactivity of Reauthorized Flood Insurance Policies
Why does retroactivity matter?
If authorization is not retroactive, new or renewal policies cannot be obtained for the period when the program was not authorized, UNLESS they were obtained prior to the lapse. Thus, if authorization is not provided retroactively, new policies or renewals issued after the lapse will be effective on the date of reauthorization, at the earliest. In this situation, flood losses will not be covered by the NFIP if they occur in the period subsequent to the lapse, but prior to the date of Congressional reauthorization.
FEMA has stated that if the authorization IS retroactive, a flood insurance policy applied and paid for during the lapse period will be deemed effective as of the date of application and payment. In other words, retroactive application of FEMA flood insurance authority to cover the lapse period will provide coverage in the event of a flood between the start of the lapse and the date of reauthorization for those borrowers who apply and pay for NFIP flood insurance during the lapse.
B. Premium Payments Received Prior to a Lapse
What about flood insurance payment premiums that are received before an expiration of FEMA’s flood insurance issuance authority?
If a completed application (including payment) or a renewal payment is received by NFIP Servicing Agents before a lapse begins, the covered property will be protected in the event of a flood after that date. Claims under existing policies and policies issued based on premiums received prior to the lapse will be processed without delay. Therefore, a borrower who made an application for flood insurance and paid the premium on or before a lapse begins, will receive coverage even if the effective date of the policy is after the lapse starts. This also applies to borrowers who renewed policies on or before a lapse begins, that would otherwise have expired during the lapse period.
C. Flood Insurance Coverage During the Lapse
What are my options regarding new loans that will be affected by a lapse?
The following describes options for you to consider to address a lapse:
Each lender remains responsible for protecting its collateral from risk in a manner appropriate to the circumstances and that ensures the overall safety and soundness of its loan portfolio. You should consider the options above in the context of the overall credit quality of your loan portfolio, safe and sound banking practices, and effective risk management principles. Among the factors to consider are your volume and concentration of lending in special flood hazard areas, including loans already in your portfolio that may be subject to renewal and those to be made during a lapse period. Lenders with an elevated level of risk of flood hazard should conduct their operations by taking advantage of the available options in a manner that minimizes undue risk.