Breaking Down the NFIP Installment Rule: Top Questions Answered

Feel like this year’s October Surprise came in November with the NFIP Installment Payment Plan rule? You’re not alone!

FEMA issued this new rule without providing public notice or allowing interested parties to submit comments, citing the Homeowner Flood Insurance Affordability Act of 2014 as precedent. Due to their expedited push to implement the rule, many in the industry have been left with questions.

FEMA Timeline to the NFIP Installment Payment Plan Rule

The compliance experts at AFR Services are here to help! While it’s too early to provide a complete guide and we aren’t industry attorneys, we have reviewed the rule to bring some clarity to this time of uncertainty.

Here are the key dates to keep in mind:

• While the rule technically goes into effect on December 31, 2024, FEMA is granting the industry until October 1, 2025, to establish the necessary procedures for compliance.
• During this period, industry advocates may raise concerns about the rule’s feasibility, which could lead to potential changes or legal challenges.

Importantly, if the rule remains as is, it will not require any changes to the processes used by AFR’s insurance tracking program.

What The Rule Says

FEMA will not issue or renew flood insurance policies unless one of the following payment methods is presented:

• The full annual premium OR
• The first installment of a monthly payment plan, inclusive of all surcharges, fees, and assessments.

This applies to policies purchased directly through the Federal Government via NFIP Direct or through participating insurance companies under the Write Your Own (WYO) Program. Policyholders who are not required to escrow must have the option to pay in full or through monthly installments.

Questions Abound

Does this apply to both residential and commercial property?

Yes, this rule applies to all properties in participating communities that adopt and enforce floodplain management regulations and purchase insurance through the NFIP.

How will fees, surcharges, and assessments be handled under a monthly installment payment plan?

FEMA requires all fees, surcharges, and assessments to be paid upfront with the initial premium installment.

How will monthly installments be tracked?

• For NFIP Direct policies: The federal government will manage tracking.
• For WYO policies: WYO companies must follow their standard billing practices to comply with federal requirements. They are responsible for recording and reporting transactions under the WYO Transaction Record Reporting & Processing Plan, which is analyzed by the NFIP Bureau & Statistical Agent.

What happens when a policyholder defaults or underpays on a monthly installment plan through NFIP Direct?

If it is discovered that a policyholder has failed to pay the required monthly installment in full: 

• FEMA will notify the policyholder and any mortgagee/trustee.
• The policyholder must pay the outstanding balance within 30 days.
• If payment is not made, FEMA will reduce the coverage amount accordingly.

How will nonpayment affect a WYO company?

WYO companies must notify FEMA of any underpayment or nonpayment, leading to reduced coverage. FEMA does not cancel policies for nonpayment and WYO companies do not qualify for a pro-rata premium refund.

How will lenders be notified of nonpayment?

It’s important to remember that lenders will only be impacted if the policyholder does not escrow payments. WYO companies are responsible for notifying affected lenders and FEMA in cases of nonpayment.

Can lenders purchase coverage if a borrower defaults?

Yes, lender-placed flood insurance can be purchased at higher rates.

What happens if a flood event occurs before the full premium is paid?

FEMA will not reduce coverage for policyholders who make timely payments. However, any remaining premium balance must be paid in full. FEMA will allow this to be deducted from claim proceeds.

What if a WYO policyholder defaults and experiences a flood?

WYO companies are authorized to facilitate the adjustment of NFIP claims. They must adjust claims in line with NFIP Claims Manuals and federal procedures. The unpaid premium balance may be deducted from the claim payout, or the coverage amount may be reduced based on the premium paid to date.

Will rates go up to pay for this change?

FEMA anticipates no additional costs for policyholders.

Final Thoughts

Although this rule takes effect on December 31, 2024, FEMA is allowing companies until October 2025 to comply. As the industry navigates these changes, there are still countless unknowns, additional questions and updates are expected.

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