Washington pulled through with a temporary compromise on extending government funding on Monday, thereby continuing to fund many “non‐essential” services and programs – one of which is the National Flood Insurance Program (NFIP). However, this provides us with a three week window and if additional compromises or an agreement is not made we may find ourselves back where we were less than a few days ago. This begs the question, “What do we do if that happens?”
We will continue to monitor the news coming from Washington on this topic. TCA is optimistic that there will not be disruption to the NFIP; but if there is, we should be prepared as best possible. FEMA posted on its website last Wednesday what action it would take if the NFIP was to lapse. In short, FEMA indicated it will continue to honor claims under existing NFIP policies; however, it will not renew or issue new policies. There have been no changes to that post. FEMA provided guidance to insurance agents last month concerning how it would determine the date of new contracts in the event of a lapse (W‐17069). The guidance includes an FAQ section. It appears that, in order for the policy to be accepted, the application had to be submitted no later than the last day prior to the NFIP lapsing (with the most recent lapse, this was Friday, January 19th). There are varying rules depending on the situation concerning when payment of the premium has to be (or had to be, in some cases) received by the insurance agent.
So, what is a bank to do? The FRB issued informal guidance back in 2010 (the last time the program was allowed to lapse). Below is the summary of that article.
Summary: Lenders may continue to make loans subject to the flood provisions of Regulation H, 12 C.F.R. § 208.25 without flood insurance during a period when the NFIP is not available. Such lending does not violate 12 C.F.R. § 208.25. However, lenders must continue to make flood determinations, provide timely, complete, and accurate notices to borrowers, and comply with other parts of the flood insurance regulations. In addition, they must evaluate safety and soundness and legal risks and prudently manage those risks during the lapse period. Further, lenders should 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.
Banks may wish to urge borrowers affected by properties in flood zones to investigate purchasing a “private flood policy.”