|Subject:||Lapse and Extension of FEMA Authority to Issue Flood Insurance Contracts|
|Date of Memorandum:||06/03/2010|
|Expiration Date:|| |
|Office:||Office of Regulatory Policy|
|Signed By:||Jacob, Andrew|
|FCA Contact Person:||Johansen, Mark|
|List of Attachments:||Lapses in FEMA Authorities to Issue Flood Insurance Contract|
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June 3, 2010
To: Board of Directors
Chief Executive Officers
All Farm Credit System Institutions
From: Andrew Jacob, Director
Office of Regulatory Policy
Subject: Lapse and Extension of FEMA Authority to Issue Flood Insurance Contracts
This informational memorandum clarifies System institutions’ compliance obligations under the National Flood Insurance Program (NFIP) when the authorities of the Federal Emergency Management Agency (FEMA) to issue flood insurance contracts lapse. The NFIP lapsed on March 1, 2010, and again on March 28, 2010. It has been reauthorized through May 31, 2010. This guidance applies to any lapses in the NFIP and addresses issues that may arise during a period of lapsed authorization for loans that are or will be secured by property located in a special flood hazard area (SFHA).
Background: The Flood Disaster Protection Act of 1973, as amended, prohibits lenders from making, increasing, extending, or renewing loans secured by improved real property or a mobile home located in a SFHA where federal flood insurance is available unless the building or mobile home is covered by flood insurance. See 42 U.S.C. § 4012a. This requirement is generally satisfied with coverage obtained through the NFIP.
When Congress does not reauthorize the NFIP, the FEMA’s authorities to issue new flood insurance policies, increase coverage on existing policies, and renew policies expire. At that point, borrowers cannot 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.
Summary: Lenders may continue to make loans subject to the NFIP/12 C.F.R. Part 614 Subpart S without flood insurance during a period when the NFIP is not available. Such lending does not violate 12 C.F.R. Part 614 Subpart S. 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. Further, lenders should have a system in place to ensure that flood insurance policies are obtained as soon as available following reauthorization for properties subject to mandatory flood insurance coverage.
The attachment provides further guidance to assist lenders in dealing with a period during which the authority to issue flood insurance contracts under the NFIP has lapsed.
If you have any questions about this memorandum, please contact Mark Johansen, Senior Policy Analyst, Office of Regulatory Policy, at (703) 883-4064, or by e-mail at firstname.lastname@example.org; and/or Mary Alice Donner, Senior Counsel, Office of General Counsel, at (703) 883-4033, or by e-mail at email@example.com.
Lapses in FEMA Authorities to Issue Flood Insurance Contracts
Ability to Make Loans Unaffected by Lack of Authority
o Does a lapse in FEMA flood insurance authority mean that the lender may not make loans secured by improved real property located in SFHAs?
Flood insurance is not available under the NFIP during a lapse in authority. Lenders are not precluded from making loans due to a lack of NFIP flood insurance. During a lapse, a lender may legally make a loan to a borrower secured by improved real property in a flood hazard area without requiring the borrower to obtain flood insurance coverage. This does not mean that a lender is relieved of other obligations under federal flood insurance law, nor does it mean that safety and soundness considerations can be disregarded.
Retroactivity of Reauthorized Flood Insurance Policies
o Why does retroactivity matter?
If NFIP 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. Lenders are encouraged to ensure that borrowers understand this risk.
In the past, FEMA has stated that if the authorization IS retroactive, a flood insurance policy applied and paid for during the lapse will be deemed effective as of the date of application and payment. Therefore, the FEMA will retroactively apply its flood insurance authority to cover losses from a flood event occurring between the start of the lapse and the date of reauthorization for borrowers who apply and pay for NFIP flood insurance during the lapse.
Premium Payments Received Prior to a Lapse
o 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. 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.
Lenders Flood Hazard Determinations and Notice to Consumers Unaffected
o Does a lender still have to make flood hazard determinations during a lapse?
Yes, during a lapse, a lender must continue to make standard flood hazard determinations and must also give borrowers the notice of special flood hazards and availability of federal disaster relief, if applicable, as required by 12 C.F.R. Part 614 Subpart S.
Flood Insurance Coverage During the Lapse
o What are a lender’s options regarding new loans that will be affected by a lapse?
Lenders can have a borrower complete the application and pay the premium, which will be held for processing pending congressional reauthorization by the insurance company.
- These applications will be processed as soon as the program is reauthorized and will be made effective to the fullest extent of that authority. If authorization is not granted, the premiums will be refunded and the new and renewal policies held in abeyance will not be issued.
- Lenders should advise borrowers that remittance of the application and payment will not result in immediate NFIP coverage and cannot legally be required until reauthorization, as well as the consequences of nonretroactive reauthorization.
- Lenders should ensure that borrowers with property in flood hazard areas are similarly informed of the implications of closing on a mortgage loan during a lapse.
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. Lenders may also still require that the borrower obtain private flood insurance where available; however, the cost of such insurance may be a factor that would influence the lender or the borrower to postpone closing rather than incur a long-term obligation to address a possible short-term lapse.
Lenders may make the loan without requiring the borrower to apply for flood insurance and pay the premium pending reauthorization. However, this option poses a number of risks that should be carefully evaluated. Moreover, if Congress reauthorizes the NFIP after a lapse, the FCA expects that flood insurance will be obtained for these loans including, if necessary, by force-placement as provided in 12 C.F.R. Part 614 Subpart S. Before making such loans, lenders should ensure that borrowers are aware of the flood insurance requirements and that force-placed insurance is typically more costly than borrower-obtained insurance. Lenders should also have a system to identify these loans so that lenders can ensure that insurance is purchased if the NFIP is made available subsequent to closing.
Each lender remains responsible for protecting its collateral from risk in a manner appropriate to the circumstances. Lenders should consider the options above in the context of the overall credit quality of their loan portfolio, safe and sound banking practices, and effective risk-management principles. Among the factors to consider are volume and concentration of lending in SFHA, including loans already in the portfolio that may be subject to renewal and those to be made during a lapse. 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 risk.
Renewals of Flood Insurance Policies
o 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.
Alternatively, depending on the terms of the mortgage, a lender may be able to require borrowers to obtain coverage outside the NFIP, as a risk-management measure.
Securitization of Mortgage Loans and the Secondary Market
o Will lenders be able to sell loans on the secondary market that do not have flood insurance coverage?
That will depend on a purchaser’s decisions. Lenders should consult the purchaser about eligibility requirements and post-closing obligations before closing a loan affected by this problem.
Federal Housing Authority (FHA)/Veterans Administration (VA) Loans
o Will lenders be able to make FHA and VA loans and other federally guaranteed or insured loans during a lapse?
Lenders should consult with FHA, VA, or other federal guarantee agencies, as appropriate.
Agency Flood Insurance Enforcement
o Will a System institution violate 12 C.F.R. Part 614 Subpart S 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 that is located or to be located in a SFHA in which flood insurance is available under the NFIP. Because no flood insurance will be available under the NFIP during a lapse, a lender will not be in violation of the prohibition against making loans without flood insurance coverage during that period.
Lenders, however, 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, a lender must carefully evaluate safety and soundness risks and prudently manage those risks during the lapse. Upon reauthorization, flood insurance coverage must be obtained for any loan where it would have been required but for 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 12 C.F.R. Part 614 Subpart S.