The OCC Bulletin (2010-20) provides informal guidance to assist national banks in dealing with the periods during which the authority of the Federal Emergency Management Agency (FEMA) to issue flood insurance contracts under the National Flood Insurance Program (NFIP) has lapsed.
One specific discussion within the guidance describes options for a lender to consider:
- A lender can have a borrower complete the application and pay the premium for an NFIP policy, which will be held for processing by the insurance company pending congressional reauthorization.
– 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.
– A lender should advise borrowers that remittance of the application and payment will not result in immediate NFIP coverage and cannot legally be required until reauthorization. The lender should also advise borrowers about the consequences of non-retroactive reauthorization.
– A lender 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.
- A lender may determine that the risk of loss is sufficient to justify postponing closing the loan until such time as the NFIP has been reauthorized.
- A lender may 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.
- A lender 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 Office of the Comptroller of the Currency expects that flood insurance will be obtained for these loans, including, if necessary, by force-placement as provided in 12 CFR 22.7. Before making such loans, the lender should ensure that borrowers are aware of the flood insurance requirements and that force-placed insurance is typically more costly than borrower-obtained insurance. The lender should also have a system to identify these loans so that the lender can ensure that insurance is purchased promptly if the NFIP is reauthorized subsequent to closing.
Additional topics discussed in the June 9, 2010 bulletin include:
- Retroactivity of Reauthorized Flood Insurance Policies;
- Premium Payments Received Prior to a Lapse;
- Renewals of Flood Insurance Policies;
- Securitization of Mortgage Loans and the Secondary Market; and,
- Agency Flood Insurance Enforcement.
We will stay on top of this situation and alert you when the NFIP is once again authorized to sell new polices, issue increase coverage on existing policies, or issue renewal polices.