The following article is reprinted with permission from the National Flood Observer Quarterly Newsletter for Summer 2010 here. 

Most people know that recent inaction of Congress to reauthorize the National Flood Insurance Program made the NFIP unable to sell new policies, increase coverage on existing policies, or issue renewal policies from midnight March 28 to April 15.  As a result of the lapse in authority, many lenders and homebuyers were looking for guidance from FEMA.

Since the implementation of the mandatory flood insurance purchase requirements is the responsibility of the various Federal agencies that oversee lenders, many of the agencies provided direction during this period.  Each Federal Lending Regulator, Federal Agency Lender and Government Sponsored Enterprise has the responsibility to issue its own regulations to implement the statutory requirements.  At the end of this article are links to various regulatory agencies' Web sites that provide informal guidance that can and should be heeded during a Program lapse.

One of the most common concerns during the last two lapses was whether a federally-regulated lender could make a designated loan if flood insurance could not be written.  The below is an example of the guidance provided.

Does a lapse in FEMA flood insurance authority mean that loans secured by improved real property located in special flood hazard areas may not be made by lenders?

No, it does not.  Lenders are not precluded during a lapse in flood insurance authority from making loans due to 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.

1. Freddie Mac: http://www.freddiemac.com/singlefamily/news/2010/0326_flood.html
2. Office of Thrift Supervision: http://files.ots.treas.gov/25338.pdf
3. Federal Reserve: http://www.federalreserve.gov/boarddocs/caletters/2010/1003/caltr1003.htm
4. Federal Deposit Insurance Corp: http://www.fdic.gov/news/news/financial/2010/fil10023.html
5. Office of Comptroller of Currency: http://www.occ.treas.gov/ftp/advisory/2002-11.doc

The President signed legislation that reauthorized the National Flood Insurance Program (NFIP) through May 31, 2010.  However, as of June 1, 2010 the NFIP's authority lapsed once again making it prudent for lenders to review the guidance issued by their respective regulatory agencies.