OCC Bulletin 2010-20| June 9, 2010
Flood Disaster Protection Act: Guidance Regarding Lapse and Extension of FEMA’s Authority to Issue Flood Insurance Contracts
Chief Executive Officers and Compliance Officers of All National Banks, Department and Division Heads, All Examining Personnel, and Other Interested Parties
The guidance attached to this bulletin continues to apply to federal savings associations.
This bulletin provides 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. On May 31, 2010 the current reauthorization of the NFIP lapsed. This bulletin also provides guidance that will apply if there are any future lapses in the NFIP.
Background: The Flood Disaster Protection Act of 1973 (FDPA), as amended, prohibits lenders from making, increasing, extending, or renewing loans secured by improved real property or a mobile home located in a special flood hazard area where federal flood insurance is available unless the building or mobile home is covered by flood insurance. See 42 USC 4012a. This requirement is generally satisfied with coverage obtained through the NFIP.
When Congress does not reauthorize the NFIP, the authority of FEMA to issue new flood insurance policies, issue increased coverage on existing policies, and issue renewal policies expires. At that point, borrowers are not able to obtain NFIP insurance to close, increase, extend, or renew loans secured by property located in a special flood hazard area (SFHA) until the NFIP is reauthorized, except under the circumstances described below. This bulletin contains informal guidance on issues that may arise during a period of lapsed authorization for lenders and borrowers concerning loans that are or will be secured by property located in an SFHA.
Summary: National banks may continue to make loans subject to the FDPA/12 CFR Part 22 without flood insurance during a period when the NFIP is not available. Such lending does not violate 12 CFR Part 22. However, institutions 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. Further, regulated institutions 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.
The following discussion provides guidance to assist national banks (hereinafter, “lenders”) in dealing with a period during which the authority to issue flood insurance contracts under the NFIP has lapsed.
Ability to Make Loans Unaffected by Lack of Authority
- Does a lapse in FEMA flood insurance authority mean that lenders may not make loans secured by improved real property located in special flood hazard areas?
No. Lenders are not precluded during a lapse in flood insurance authority from making loans because of a lack of NFIP flood insurance. However, flood insurance is not available under the NFIP during a lapse. 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, however, 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
- Why does retroactivity matter?
If 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 occurred in the period subsequent to the lapse, but prior to the date of Congressional reauthorization. Lenders are encouraged to ensure 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 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 for and pay for NFIP flood insurance during the lapse.
Premium Payments Received Prior to a Lapse
- What about flood insurance payment premiums that are received before an expiration of FEMA's flood insurance issuance authority?
Generally, 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 after that date. 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 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 before a lapse begins, that would otherwise have expired during the lapse.
Duty of Lenders to Make Flood Hazard Determinations and Provide Notice to Consumers Is Unaffected
- As a lender, do I 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 CFR 22.
Flood Insurance Coverage During the Lapse
- As a lender, what are my options regarding new loans that a lapse will affect?
The following describes options for a lender to consider addressing a lapse:
- 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.
Each lender remains responsible for protecting its collateral from risk in a manner that is appropriate to the circumstances and that ensures the overall safety and soundness of its loan portfolio. A lender should consider the options above in the context of the overall credit quality of the loan portfolio, safe and sound banking practices, and effective risk management principles. Among the factors to consider are the volume and concentration of lending in special flood hazard areas, including loans already in a lender’s portfolio that may be subject to renewal and those to be made during a lapse period. 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 undue risk.
Renewals of Flood Insurance Policies
- What happens to renewals during a lapse?
For applications and premiums received 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 premium payments may continue to be accepted during the lapse. Lenders who act as their own servicers may also continue to accept such payments during the period of lapsed authority.
Alternatively, depending on the terms of the mortgage, the 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
- As a lender, 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 the purchaser. You should consult them about eligibility requirements and post-closing obligations before closing a loan affected by the NFIP authorization lapse.
Federal Housing Administration/Veterans Administration Loans
- As a lender, will I be able to make Federal Housing Administration (FHA) and Veterans Administration (VA) loans and other federally guaranteed or insured loans during a lapse?
That will depend on the decisions of the guarantee agency. You should consult with the FHA, VA, or other federal guarantee agency, as appropriate.
Agency Flood Insurance Enforcement
- Will my financial institution violate 12 CFR 22 by not obtaining flood insurance coverage on 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 special flood hazard area in which flood insurance is available under the NFIP. Because no flood insurance will be available under the NFIP during a lapse, the institution will not be in violation of the prohibition against making loans without flood insurance coverage during that period.
A lender, 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 are unaffected by the lapse. Moreover, a lender must carefully evaluate safety and soundness risks and prudently manage those risks during the lapse period. 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 CFR 22.
You may direct any questions to your supervisory office or OCC Compliance Division (202) 649-5470.
Ann F. Jaedicke
Deputy Comptroller for Compliance Policy