Without further action by Congress to reauthorize the National Flood Insurance Program (NFIP), the authority of the Federal Emergency Management Agency (FEMA) to issue new federal flood insurance policies will expire on December 16, 2011.
The Flood Disaster Protection Act of 1973 (as amended) prohibits federally-regulated lenders from making, increasing, extending or renewing loans secured by improved real property or a mobile home located in a special flood hazard area (SFHA) where federal flood insurance is available, unless the building or mobile home is adequately protected by flood insurance. The origination of such loans is not prohibited during periods when federal flood insurance is not available, but lenders must follow all of the regulatory requirements which precede the actual issuance of a federal flood insurance policy and promptly obtain flood insurance when the authority of FEMA to issue new policies is restored.
When authority for the program lapsed in 2010, all of federal financial institution regulators (Federal Reserve Board (FRB); Federal Deposit Insurance Corporation (FDIC); Office of the Comptroller of the Currency (OCC); Office of Thrift Supervision (OTS); National Credit Union Administration (NCUA)) provided the same guidance concerning the origination of loans that are secured by collateral located in flood-prone areas.
The guidance from each of the regulators includes the following elements:
* Loans which require flood insurance may be made during a lapse of authority for the federal program, but institutions must continue to follow the flood determination rules; provide timely, complete and accurate notices to borrowers; and comply with all other flood insurance requirements.
* Institutions should have a system in place to ensure that following reauthorization, policies are promptly obtained for properties subject to mandatory flood insurance coverage.
* Institutions must evaluate safety and soundness risks of originating loans without flood insurance and prudently manage those risks. Alternatively, institutions may require borrowers to purchase private flood insurance or postpone loan closings until federal flood insurance is available.
FEMA has also provided guidance which provides details about flood insurance policy processes during a lapse of authorization.
Links to the guidance are provided below.
FRB: http://www.federalreserve.gov/boarddocs/CALETTERS/2010/1003/caltr1003.htm
FDIC: http://www.fdic.gov/news/news/financial/2010/fil10023.html
OCC: http://www.occ.gov/news-issuances/bulletins/2010/bulletin-2010-20.html
OTS: http://www.ots.treas.gov/_files/25338.pdf
NCUA: http://www.ncua.gov/Resources/Pages/LCU2010-08.aspx
FEMA: http://www.nfipiservice.com/stakeholder/pdf/bulletin/w-11084.pdf
Author: Anthony Dandola, Esq., MBA, CRCM serves as Senior Research Manager, Research and Development for ICS Risk Advisors.
