It’s been a stormy year for commercial and residential lenders. Harvey and Irma’s full financial impact on the National Flood Insurance Program (NFIP) is still unclear and will only add to the program’s nearly $25 billion debt. Congressional in-fighting over budgetary matters paired with wide-ranging reform efforts have culminated in numerous short-term program extensions since September 2017. For lenders, that’s where the challenge begins.
Key contributing factors to the program’s financial woes are its subsidized premiums, adverse risk selection, and lack of private market participation needed to spread the risk associated with properties located in and near Special Flood Hazard Areas (SFHAs). The program, which provides $1.27 trillion in flood coverage, only collects $3.6 billion in annual premiums.1
Absent private insurance policies, lenders and their borrowers currently look to the NFIP to cover properties associated with as many as five million mortgages nationwide1. By law, certain property owners must purchase flood insurance as a condition of their mortgage. Without readily available flood insurance, real estate transactions connected to properties in SFHAs are virtually dead.
The NFIP is currently authorized through July 31, 2018, but until Congress passes new legislation to formally reauthorize, program lapses remain a risk for loan originators and servicers. Here are a few things lenders can do to minimize servicing liability during this time.
- Continue to pay renewal bills on escrowed policies. Even when the program has lapsed, NFIP Direct and Write-Your-Own (WYO) agents are authorized to accept renewal premiums on policies scheduled to renew during a lapse. Premiums are date-stamped and once the program is active again, are processed as of the date received. Should the NFIP lapse for more than 30-days, agents will no longer accept payments and monies already accepted will be returned to the insured.
- Send 45-day notices to borrowers on time. Continue to notify policy holders that their flood insurance policy is expired, just as you would normally. While borrowers won’t have access to get NFIP coverage during a lapse, work under the assumption that the NFIP will be re-authorized and retroactively backdated.
- Continue to force-place insurance. Most lenders utilize private insurance policies for force-placed insurance, so an NFIP lapse does not impact the availability of coverage to the lender* (see item 4). Force-placement billing for certificates issued on policies that expired before program lapse should not be delayed. There are also GSE requirements which exist in addition to federal rules, mandating insurance remain in force on serviced loans secured by property located in an SFHA – regardless of availability through the NFIP. However, force-placement of non-GSE serviced and portfolio loans, where requirement to provide coverage is strictly tied to federal mandate, should wait until reauthorization on policies which expire during the NFIP lapse. Should reauthorization be effective after the previous expiration date, those force-placed policies would need to be effective as of the reauthorization date, unless contrary guidance was released by regulators.
- Check for master policy exclusions. Some force-placed master policies include restrictive clauses, stating that coverage is only extended to property that is eligible for coverage through the NFIP. If present, this language could be a problem for lenders needing to issue force-placed insurance during an NFIP lapse.
- Share your plan with compliance. Most often, examiners look to see that flood-related hurdles were cleared with planning and forethought. Documenting process and seeking guidance on uncertainties allows compliance teams an opportunity to proactively address internal concerns and seek regulatory guidance, as needed. Having a documented and approved process exhibits the awareness and control most examiners test to make sure that lenders have in place.
Shelter your risk by looking ahead
While Congress is not likely to let the NFIP lapse for a significant amount of time, another year of flood catastrophes could be disastrous for the program. FEMA has paid out over $7.6 billion in losses to NFIP policyholders on more than 91,000 claims from Hurricane Harvey alone. Looking ahead, the NFIP has only secured $1.46 billion in reinsurance for qualifying flood losses in the coming 2018 calendar year.2
Talk to your HUB advisor to make sure you are protected during this period of NFIP instability. Integrate these best practices to minimize liability until a permanent solution has been reached.