|Subject:||Flood Insurance Authority Lapse|
|Date of Memorandum:||12/19/2002|
|Expiration Date:|| |
|Signed By:||Dunn, Michael|
|FCA Contact Person:||Johansen, Mark|
|List of Attachments:||FEMA Nov 25 stakeholder memo.pdf |
FEMA Nov 25 WYO Servicing Agents and Notice 1 and 2.pdf
FEMA Dec 12 stakeholder memo.pdf
FEMA Dec 12 WYO Servicing Agents and Notice 3.pdf
FEMA Dec 20 memo with Notice 4.pdf
Freddie Mac Announcement (12-16-02).doc
December 19, 2002
To: Chairman, Board of Directors
Chief Executive Officer
All Farm Credit Banks and Associations
From: Michael V. Dunn, Director
Office of Policy and Analysis
Subject: Flood Insurance Authority Lapse
This Informational Memorandum (IM) provides guidance to the Farm Credit System (System) institutions on how to manage their flood insurance program during the period in which authority to issue flood insurance contracts under the National Flood Insurance Program (NFIP) will lapse. This IM is similar to the guidance being sent out by the other federal financial institution regulatory agencies.
The 107th Congress adjourned at the end of November 2002 without extending the statutory authority in the National Flood Insurance Act of 1968 to issue flood insurance policies under the NFIP. As a result, the authority of the Federal Emergency Management agency (FEMA) to issue new flood insurance policies, increase coverage on existing policies, and renew policies will expire on December 31, 2002.
Borrowers will be unable to obtain NFIP insurance for loans that close after December 31, 2002, and are secured by property located in a special flood hazard area (SFHA) until such time as the NFIP is reauthorized, except under the circumstances described below.1 FEMA has indicated that it expects the new Congress to reauthorize the NFIP shortly after it convenes on January 7, 2003, and that the reauthorization will likely be made retroactive to January 1, 2003. However, there are no guarantees that Congress will reauthorize the NFIP or that reauthorization will be retroactive.
The following questions and answers provide the salient points for your consideration.
1. Can System institutions still make loans secured by improved real estate located in flood hazard areas after FEMA's authority expires on December 31, 2002?
Yes. System institutions can still make these loans during the period when NFIP insurance is not available.
As noted, Congress has not yet reauthorized the NFIP. This means that flood insurance policies backed by NFIP cannot be written or renewed after December 31, 2002, unless Congress takes legislative action. FEMA has taken the position in a letter to the federal financial institution regulatory agencies dated December 12, 2002, that, during the lapse, flood insurance will not be available. If flood insurance is unavailable under the NFIP, a lender may 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, however, that a lender is relieved of any other obligations under federal flood insurance law nor does it mean that safety and soundness considerations can be disregarded. (Both of these matters are dealt with in more detail below.)
2. What about flood insurance payment premiums that are received before the expiration of FEMA's flood insurance issuance authority?
FEMA has stated in its letter of December 12, 2002, that if a completed application (including payment) or a renewal payment is received by NFIP servicing agents on or before December 31, 2002, the covered property will be protected in the event of a flood after that date. FEMA further states that such claims will be processed without delay. Therefore, according to FEMA, a borrower who makes an application for flood insurance and pays the premium on or before December 31, 2002, will receive coverage even if the effective date of the policy is after January 1, 2003. For example, if a borrower pays for a policy in December, but does not go to closing on the property until January, according to FEMA's letter, the property will be covered.
This also applies to borrowers that renew policies on or before December 31, 2002, that would otherwise expire during the lapse period. Accordingly, to the extent possible, lenders are urged to encourage borrowers to complete applications for NFIP insurance and pay premiums before December 31, 2002.
3. Do I still have to make flood determinations?
Yes. You must continue to make standard flood hazard determinations and you 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. FEMA has provided standard language in the form of a notice for flood insurance agents to provide to borrowers regarding availability of insurance during this period. A copy of the notice is attached. You should ensure that borrowers with property in flood hazard zones are similarly informed of the implications of closing on a mortgage loan during this period.
4. What are a System institution's options for affected new loans?
a. If you know that you will be making a covered loan that will close after December 31, 2002, you should encourage the borrower to complete the application and pay the premium before year-end. If the borrower does so, and the NFIP servicing agent receives it on or before December 31, 2002, the policy can be effective after December 31, regardless of the NFIP reauthorization status.
b. After December 31, 2002, FEMA has stated that you can have the borrower complete the application and pay the premium, which will be held for processing pending congressional reauthorization by the insurance company (see attached FEMA guidance). FEMA indicates that these applications will be processed as soon as the program is reauthorized and will be made effective to the fullest extent of that authority. FEMA has further stated that, if authorization is not granted within a reasonable period of time after Congress convenes, the premiums will be refunded and the new and renewal policies held in abeyance will not be issued. System institutions should ensure that their borrowers understand that remittance of the application and payment will not result in immediate NFIP coverage and the consequences of nonretroactive reauthorization. FEMA has provided standard language in the form of a notice regarding availability of insurance during this period. A copy of the notice is attached.
c. You can still require the borrower to obtain private flood insurance where available. However, the cost of such insurance may be a factor that would influence you or the borrower to postpone closing rather than incur a long-term obligation to address a short-term lapse.
d. You may determine that the risk of loss is sufficient to postpone closing the loan until the NFIP has been reauthorized.
e. Legally, you can make the loan without requiring the borrower to apply for flood insurance and pay the premium pending authorization. After the NFIP is reauthorized, the borrower would be required to apply for and obtain flood insurance. However, under this option, any flood loss sustained by the borrower during the lapse would not be covered by the NFIP, even if the reauthorization is made retroactive. It is for this reason, that the Farm Credit Administration (FCA) considers this option to represent the least attractive alternative for lenders, given its potential for increased risk.
If you choose this alternative, you should be careful to ensure that the borrower is aware of the risk of uninsured flood loss before loan closing and that your files properly document the disclosure to the borrower. Borrowers should also be informed that, once NFIP flood insurance becomes available again, they would then be required to purchase flood insurance coverage and, if a borrower refuses to do so, the lender must then obtain flood insurance coverage on the collateral property through forced placement. You should also keep records that will allow you to determine readily which of your borrowers are in need of flood insurance coverage once FEMA has been reauthorized to make flood insurance contracts under the NFIP.
Each lender remains responsible for protecting its collateral from risk in a manner appropriate to the circumstances and for ensuring 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 lending 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 the lapse period.
5. 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 purchaser. You should consult purchasers before closing a loan affected by this problem.2 Attached is guidance from Freddie Mac stating that its flood insurance requirements remain unchanged during this lapse in NFIP flood insurance coverage.
6. What happens to renewals?
The situation is similar to that of making new loans. If possible, lenders and servicers should accelerate the payment of renewal premiums due in January 2003. If the NFIP servicing agents and Write Your Own (WYO) companies that act on behalf of FEMA receive such payments before January 1, 2003, FEMA has stated that there will be no lapse in coverage. For applications and premiums received on or after January 1, 2003, FEMA has committed to process all renewals as soon as the program is reauthorized. FEMA has provided standard notices (attached) for NFIP servicing agents and WYO companies to provide to policyholders and suggests that these companies continue to collect premiums and hold them for processing until the time that NFIP flood insurance policies are reauthorized. Lenders should therefore notify their servicers that flood insurance payment premiums should continue to be processed during the lapse. Lenders who act as their own servicers should also continue to process such payments during the period of lapsed authority. As noted previously, FEMA has stated that, if reauthorization is not granted within a reasonable period of time after Congress convenes, the premiums will be refunded
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.
7. Will my institution violate the FCA flood insurance rule in 12 C.F.R. Part 614, subpart S, by not obtaining flood insurance coverage of loans while the NFIP statutory authority has lapsed?
No. FCA regulation 614.4925(c) defines a "designated loan" as a loan secured by a building or a mobile home that is located or to be located in a special flood hazard area in which flood insurance is available under the 1968 Act. Because no flood insurance will be available under the 1968 Act during the lapse, your institution will not be in violation of the rule for making loans without flood insurance coverage during the lapse.
Please be aware that your institution must still make flood determinations, provide timely, complete, and accurate notices to borrowers, and comply with other parts of the flood insurance regulations that still apply during the lapse period. Moreover, your institution must carefully evaluate safety and soundness risks and prudently manage those risks during the lapse period. Once Congress reauthorizes the NFIP, flood insurance coverage must be obtained for any loan where federal flood insurance 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. We also expect institutions to have a system in place to ensure that policies are obtained as soon as available for properties that are subject to mandatory flood insurance coverage.
We will issue follow-up guidance to you once the FEMA authority has been restored. Such notice will serve as an official reminder that loans secured by improved real property in flood hazard zones for which flood insurance coverage was unavailable during the lapse in FEMA flood insurance authority must at that point receive an appropriate amount of flood insurance coverage.
If you have any questions about flood insurance, please contact Mark Johansen, Policy Analyst, (703) 883-4064, TTY (703) 883-4434, JohansenM@fca.gov, Wendy Laguarda, Senior Counsel, (703) 883-4234, TTY (703) 883-2020, LaguardaW@fca.gov, or Charlotte Miller, FCA Examiner, (703) 883-4272, TTY (703) 883-4483, MillerC@fca.gov. For additional information from FEMA in this issue go the following FEMA website http://www.fema.gov/nfip/custfaq.htm.
1 This also precludes borrowers from obtaining a renewal or an increase in an existing policy during this time.
2 Attached is guidance from Freddie Mac stating that its flood insurance requirements remain unchanged during this lapse in NFIP flood insurance coverage.