NFIP Lapse - Part 2
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I can't say this hasn't happened before, where we send out a blog one day and the very next day we receive new information. The FRB issued a Consumer Affairs Letter (CA) on March 29, 2010, that provides guidance regarding the lapse of the authority of the Federal Emergency Management Agency (FEMA).
In the letter, an attachment of the Informal Guidance on the Lapse of FEMA's Authority to Issue Flood Insurance Contracts was provided. Here are some of the highlights:
Will financial institutions violate 12 C.F.R. § 208.25 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, institutions will not be in violation of the prohibition against making loans without flood insurance coverage during that period.
The noteworthy point made is that lenders can make a loan without flood insurance during the NFIP lapse. However, policies will need to be obtained as soon as Congress reauthorizes the NFIP. Therefore, you'll need to start force placement procedures on any applicable loans.
In addition, it acknowledged that "a flood insurance policy applied and paid for during the lapse period will be deemed effective as of the date of application and payment. In other words, retroactive application of FEMA's flood insurance authority to cover the lapse period will provide coverage in the event of a flood between the start of the lapse and the date of reauthorization for those borrowers who apply and pay for NFIP flood insurance during the lapse."
Last but not least, the guidance makes it very clear that lenders 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.
So the question you'll have to decide is "is it better to delay closing on loans needing flood insurance until Congress reauthorizes the NFIP or make these loans and then require flood insurance as soon as it is available?" The missing component is "when will Congress reauthorize the NFIP?" Historically, they have only had a few days lapse. Congress reconvenes on April 12th. Will this happen then? We'll have to wait and see.