THE ENFORCING REGULATION behind the Flood Disaster Protection Act doesn’t take long to read from start to finish. Perhaps 12 minutes at a moderate pace. Newer compliance officers may mistake the simplicity of the regulation for minimal risk and calm waters, while seasoned compliance officers know that it only takes minutes for a thunderstorm to
gather and rain down a flash flood of violations and civil money penalties. The text of the regulation
alone is not enough to understand the full scope of our responsibilities for flood compliance. Shifting
supervisory expectations and an uncertain legislative environment only complicate these already
turbulent waters, so let’s dive below the surface of the regulation and explore deeper.
Which Way are the NFIP Currents Flowing?
While funding for the National Flood Insurance Program (NFIP)
itself is not generally a subject of debate, times of pervasive political
polarity often have a largely unintended effect on the stability of
the program. The authorization congress must provide in order
for the program to function, has historically become attached
to more contentious legislation, and this can result in lapses in
the availability of flood insurance. In 2010, predicting whether
or not the NFIP was going to be funded on any given day (and
preparing for the case that it wouldn’t be), became a central focus
for compliance officers. As of mid-May, 2018 has seen two short
lapses in the program, and current political waves seem to indicate
continuing choppy waters.
The regulation itself does not anticipate a lapse in the program
and provides no framework for how a bank should manage the
mandatory purchase requirements during such a period. Guid-
ance issued by the FDIC to bridge frequent lapses in 2010, clarifies
that consummating a loan secured by property in a Special Flood
Hazard Area (SFHA) during a lapse without flood insurance in
place, is permissible. It further indicates that banks should continue
to comply with determination, notification and other require-
ments of the regulation, and that insurance should be obtained
for all covered upon reauthorization of the NFIP (FDIC Financial
Institution Letter, FIL-23-2010). Cross-referencing this with the
Federal Reserve Board’s Consumer Affairs letter on the topic is-
sued the same year, reveals additional permissive, direction for
compliant handling of new loans during a lapse:
■ ■ ■ Lenders may request that the borrower complete an appli-
cation and submit payment for an NFIP policy, which will
be processed upon reauthorization. The FRB points out here
that borrowers should be informed that they cannot legally be
required to remit payment for the policy until the program is
reauthorized, and that doing so is voluntary.
■ ■ ■ Lenders may delay closing of a loan secured by property in an
SFHA in the event it is determined that closing the loan without
flood insurance in place would present too great a risk of loss.
■ ■ ■ Lenders may require that a borrower obtain privately issued
flood insurance. It should be noted that privately issued policies
of this nature may need to conform to NFIP standards (more
on this in the next section).