What are the risks of getting a WYO (Write Your Own)flood insurance policy during the National Flood Insurance Program hiatus?

Read this:

http://bsa.nfipstat.com/wyobull/w-09068.pdf

thanks for that, Randy. I find the following interesting. It's always been stated that a premium had to be paid prior to closing and not in conjunction with the closing. The following seems to dispute that:

For loans closing prior to the first day of hiatus, when the premium payment is from the escrow account
(lender’s check), title company, or settlement attorney, and the application date is on or before the
closing, the policy can be issued even if the premium and application are received after the last day of
effective Program authorization.

You can close a loan w/o flood insurance while it's not available, but as soon as Congress reauthorizes the NFIP, you would then have to force place as you have knowledge of an uninsured property. If at possible, I recommend trying to delay the closing of applicable loans until Congress gets the NFIP going again. What a hassle!

Would this also apply to refinancing loans that currently have a flood policy? or should all lending on properties in flood zones be stalled until the program is available again?

David, where did you get that "authority to close" from? Can you point me to a cite? I've not seen that indicated.

DD, I see no problem with refinancing a loan that has a policy in force. We will also hope this is rectified before it comes up for renewal..what an unnecessary mess!

Pardon my ignorance, but where does this permission come from?

I got this from an email from Mira Marshall from the FDIC. Mira is my "Flood Expert" at the FDIC. Here's part of her email:

Short answer: it does not violate our regulation (Part 339) to close a loan without flood insurance, if it is not available from NFIP. With the lapse in authorization, it is not available. However, all the other requirements of Part 339 continue to apply. Also you should keep track of these loans so you can ensure the borrowers get coverage as soon as it’s available. We expect Congress to re-authorize, probably retroactively, once they’re back in session.

Other, non-regulatory considerations: the bank has to decide whether it is willing to risk making the loan without coverage. Also, if you are selling loans on the secondary market, you have to know what your purchaser requires –

Hope this helps,
Mira N. Marshall

This is very annoying. We have an internal approval process that could delay insurance. IMO it could really disadvantage the customer to delay funding until NFIP is available.

So does this hiatus cover just loans where flood insurance is obtained directly thru the NFIP? Or can someone still get flood insurance thru companies like State Farm, All-State, etc? I am moderatley confused as to what is unavailable...Thanks!

Usually the insurance companies you listed act as an agent for FEMA. Unless they are selling private flood insurance.

So to answer your question, I believe yes this will impact those entities.

CompDat-- go to my link in post #1366545 in this thread. You do not have to delay closing or funding as long as you are willing to assume the risk.

KMK---State Farm, All-State, etc policies are issued through the NFIP. You have to go to a private insurer such as Lloyd's.

I agree and thanks for the link. My issue is that I can easily see, unless you monitor this like a hawk, not knowing when the program is reinstated. You could ask their agent to watch this, but I do not want to put my compliance program at the mercy of an insurance agent. Also, we have an internal approval process for NFIP. So, if they approve this and I do not approve the insruance, we may go back and forth a few times (not likely to happen but hey) and miss the deadline. This is the second time in two months NFIP lapsed and it is very frustrating.

The FRB recently issued a Consumer Affairs letter with informal guidance on the NFIP lapse.

http://www.federalreserve.gov/boarddocs/caletters/2010/1003/caltr1003.htm

http://www.federalreserve.gov/boarddocs/caletters/2010/1003/10-3-attachment.pdf

Reads - thanks for those links.

ComDat you would have to establish a follow-up program. And you most definitely would not want anyone outside your bank to be responsible for that follow-up. I know some areas are more prone than others but in all honesty how many loans do you expect to make between now and the time the NFIP is reinstated that is in a SFHA. Would it be so many that you couldn't manage them?

Just spoke with my OCC examiner and he said the OCC will be issuing guidance in a couple days. He said that it will be modeled after the OTS guidance that was issued earlier.


Here is the link to the OTS March Guidance .

From the FRB CA Letter:
Lenders may continue to make loans subject to the flood provisions of Regulation H, 12 C.F.R. § 208.25 without flood insurance during a period when the NFIP is not available. Such lending does not violate 12 C.F.R. § 208.25. However, lenders 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, lenders 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.

IOW, you can make loans in a SFHA w/o flood insurance BUT when the NFIP is reauthorized, you must force place on these loans.

I have a couple of questions about that.
When the NFIP is reauthorized can the borrower just go apply for a policy and save the money it would cost to force place? Would we have to wait the 45 days prior to force placeing?


In reading the FAQs from FEMA it sounds like our borrowers should still go apply and write a check for the premium so that when they are able to write policies again it is already taken care of. Am I reading that correctly?

i THINK David is simply referring that you would have to send out your 45 day letter...they can certainly buy their own.

From page 3-4 of the FRB that Reads Regs posted:

The following describes options for lenders to consider addressing a lapse:
o Lenders can have a borrower complete the application and pay the premium, which will be held for processing pending Congressional reauthorization by the insurance company.
• 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.
• Lenders should advise borrowers that remittance of the application and payment will not result in immediate NFIP coverage and cannot legally be required until reauthorization, as well as the consequences of non-retroactive reauthorization.
• Lenders 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.
o Lenders may determine that the risk of loss is sufficient to justify postponing closing the loan until such time as the NFIP has been reauthorized.
o Lenders may still 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.
-4-
o Lenders 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, the Federal Reserve expects flood insurance to be obtained for these loans after the lapse, including, if necessary, by force-placement as provided in 12 C.F.R. § 208.25(g). Before making such loans, lenders should ensure that borrowers are aware of the flood insurance requirements and that force-placed insurance is typically more costly than borrower-obtained insurance. Lenders should also have a system to identify these loans so that they can ensure that insurance is purchased if the NFIP is made available subsequent to closing.

We were discussing loans for which we have flood insurance renewals coming up in the next 30 days and what we should do about those.

We getermined that we were going to renew the loans without flood insurance, however, we wanted to inform the customer of the unavailability of the NFIP insurance via a letter.

Is anyone else going to do this? If so, does anyone have a sample letter they can share? Working on developing one now, but trying not to reinvent the wheel if not necessary....

FEMA issued a bulletin on 3/29/10 to Write Your Own Companies about the NFIP lapse. It includes FAQs for consumers and then a more technical version of the FAQs. Here's a link to it. http://bsa.nfipstat.com/wyobull/w-10029.pdf

The ABA had posted information about this on its website.

I still would like thoughts on this posted earlier:

thanks for that, Randy. I find the following interesting. It's always been stated that a premium had to be paid prior to closing and not in conjunction with the closing. The following seems to dispute that:

For loans closing prior to the first day of hiatus, when the premium payment is from the escrow account
(lender’s check), title company, or settlement attorney, and the application date is on or before the
closing, the policy can be issued even if the premium and application are received after the last day of
effective Program authorization.