Compliance Alliance Q&A 3-5-18
Do we have to require flood insurance during an NFIP lapse?
Flood insurance technically is not required if the NFIP has lapsed. The reason for this is that flood coverage is only required for a “designated loan,” which is generally defined as a loan secured by a building located in a SFHA in which flood insurance is available under the NFIP. There are several big caveats to this though. The bank should consider obtaining private coverage for safety and soundness purposes, and because regulators will expect force placement where applicable when the NFIP is reauthorized. Remember: the bank can always choose to require coverage up to the insurable value, even if the flood regulations would not mandate it.
So lenders effectively have four options for making new loans during a lapse:
1. Have the borrower complete an application and pay the premium, and hold it for processing pending reauthorization.
2. Postpone loan closing until reauthorization.
3. Require that the borrower obtain private flood insurance coverage.
4. As a last resort, make the loan without any flood insurance.
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Contact Diane Harman for more information.