Despite the risk, regulators will allow financial institutions to make loans that would typically require flood insurance, even though the authorization for the National Flood Insurance Program (NFIP) has lapsed.
As explained in the Interagency Questions and Answers Regarding Flood Insurance, in Q&A Applicability 12, lenders may continue to make loans without flood insurance coverage during this time but must continue to make flood determinations; provide timely, complete, and accurate notices to borrowers; and comply with other applicable parts of the flood insurance regulations. In addition, lenders should evaluate safety and soundness and legal risks and should prudently manage those risks during the lapse period. The guidance from the Farm Credit Administration, FDIC, Federal Reserve Board, OCC and NCUA also addresses the availability and use of private flood insurance.
However, regulators cautioned that financial institutions “must continue to make flood determinations; provide timely, complete, and accurate notices to borrowers; and comply with other applicable parts of the flood insurance regulations. In addition, lenders should evaluate safety and soundness and legal risks and should prudently manage those risks during the lapse period.”
The risk for some lenders can be significant. Flooding accounts for 90% of all natural disasters in the U.S., according to NFIP. But much of the agency’s funding lapsed when finding for the federal government lapsed at the end of September.
Hurricane season, which runs until the end of November, could well include at least one more significant storm, according to reports.
Flood insurance contracts signed before the September 30 expiration would continue until the end of their policy term of one year, according to the Congressional Research Service. NFIP to borrowing authority would be slashed from $30.425 billion to $1 billion.
The NFIP doesn’t have long-term authorization; attempts to enact long-term legislation have repeatedly failed. Instead, it has been authorized through 33 short-term reauthorization measures, according to the CRS.
Congress has attempted to reauthorize the NFIP even as the spending stalemate continues. For instance, Reps. Troy Carter, Sr., D-La.; Mike Ezell, R-Miss.; and Lizzie Fletcher, D-Texas, have introduced legislation that would reauthorize the program through November 21, 2025, the same deadline as a Continuing Resolution to fund the government that the House passed in September.
“We cannot allow the dysfunction of government to punish everyday Americans by letting the National Flood Insurance Program lapse, leaving families and businesses without critical protection,” said Rep. Carter when the legislation was introduced. “This program is not only vital to Louisiana but to communities across the nation that face the growing risk of flooding. I have consistently stressed, since filing a long-term reauthorization earlier this year, that NFIP authorizations should not be tied to contentious government funding battles that put homeowners in jeopardy. Instead, we must provide this program with long-term certainty so that Congress can focus on modernizing the NFIP and ensuring it remains affordable and accessible for everyone.”
Other legislation was also introduced before the start of the government shutdown.
