Lapse of FEMA Authority to Issue Flood Insurance Policies
FIL-23-2010 May 7, 2010
The authority of the Federal Emergency Management Agency (FEMA) to issue flood insurance policies under the National Flood Insurance Program (NFIP) lapsed between March 28 and April 16, 2010. The attached guidance provides information for institutions about their continuing responsibilities during such lapse periods.
State non-member banks may continue to make loans subject to the National Flood Insurance Act, as amended, 42 U.S.C. §§ 4001-4029, and 12 C.F.R. Part 339, without flood insurance during a period when the NFIP is not available. Such lending does not violate Part 339.
Despite a lapse of FEMA authority, banks must continue to:
make flood determinations,
provide timely, complete and accurate notices to borrowers, and
comply with other parts of the flood insurance regulations.
Banks should evaluate safety-and-soundness and legal risks during the lapse period and prudently manage those risks. Appropriate measures should be taken to mitigate loss exposures.
Regulated institutions should have a system in place to ensure flood insurance policies are obtained as soon as available following reauthorization for properties subject to the mandatory purchase requirement.
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 SFHAs, 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.
Renewals of Flood Insurance Policies
What happens to renewals during a lapse?
For applications and premiums received on or after a lapse begins, FEMA generally processes all renewals as soon as the program is reauthorized. Lenders are encouraged to notify their servicers that flood insurance payment premiums may continue to be accepted during the lapse. Lenders who act as their own servicers may also continue to accept such payments during the period of lapsed authority.
Alternatively, depending on the terms of the mortgage, you may be able to require borrowers to obtain coverage outside the NFIP, as a risk-management measure.
Bank management should be aware of the level of overall portfolio risk created by the lapse in insurance coverage, particularly when a significant portion of lending activity takes place in a SFHA.
Securitization of Mortgage Loans and the Secondary Market
Will I be able to sell loans on the secondary market that do not have flood insurance coverage?
That will depend on the decisions of your purchasers. You should consult them about eligibility requirements and post-closing obligations before closing a loan affected by this problem.
Federal Housing Authority (FHA)/Veterans Administration (VA) Loans
Will I be able to make FHA and VA loans and other federally guaranteed or insured loans during a lapse?
You should consult with the FHA, VA or other federal guarantee agency, as appropriate.
Agency Flood Insurance Enforcement
Will my financial institution violate Part 339 by not obtaining flood insurance coverage of loans made during a lapse in the NFIP statutory authority?
No. The flood insurance rule defines a "designated loan" as a loan secured by a building or a mobile home located or to be located in an SFHA in which flood insurance is available under the NFIP. Because no flood insurance will be available under the NFIP during a lapse, your institution will not be in violation of the prohibition against making loans without flood insurance coverage during that period.
However, you must still make flood determinations, provide timely, complete and accurate notices to borrowers, and comply with other parts of the flood insurance regulations that have not lapsed. Moreover, you must carefully evaluate safety-and-soundness risks and prudently manage those risks during the lapse period. Upon reauthorization, flood insurance coverage must be obtained for any loan where it would have been required before the lapse in FEMA authority. If necessary, this must be accomplished through forced placement of flood insurance by the lender. Failure to obtain insurance after it becomes available would constitute a violation of Part 339.