So, the Government may shut down. Again. This has happened before and will likely happen again. When this happens, one of the many “non-essential” services and programs is the National Flood Insurance Program (NFIP). So, what do we do if/when a shutdown happens?
If there is a disruption to the NFIP, we should be prepared as best possible. If the NFIP was to lapse, FEMA in the past has indicated it will continue to honor claims under existing NFIP policies; however, it will not renew or issue new policies. In each shutdown, FEMA provided guidance to insurance agents concerning how it would determine the date of new contracts in the event of a lapse, last in December 2022. The guidance includes an FAQ section. In order for a policy to be accepted, the application had to be submitted no later than the last day prior to the NFIP lapse. 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. In the past whenever the program has lapsed, it is always reauthorized retroactively.
So, what is a bank to do? The FRB issued informal guidance back in 2010. 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. Lenders may determine that the risk of loss is sufficient to justify postponing closing the loan until such time as the NFIP has been reauthorized. 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.”
TCA is your source for any flood questions. Contact us at [email protected] or by phone at (800) 934-7347.
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