Government Shutdown & the NFIP: Key Questions Answered for Lenders

It’s official. On October 1, the federal government entered a shutdown due to a lapse in funding. Because the National Flood Insurance Program (NFIP) is directly tied to government funding, its authorization also lapses during a shutdown.

During this time, FEMA cannot:

• Issue new NFIP flood policies
• Increase coverage on existing policies
• Process renewals

However, the NFIP will continue to assess, manage, and pay claims on existing policies.

How can lenders stay compliant during a lapse?

Lenders should continue normal flood-compliance activities:

• Making flood determinations
• Providing timely and accurate borrower notices
• Monitoring for active flood insurance policies
• Placing insurance if borrower coverage lapses

Private flood markets remain available and often provide broader coverage at competitive rates.

Can loans in SFHAs still be made without NFIP coverage?

Yes, but with conditions. A lapse in NFIP authority does not prohibit lenders from making loans secured by improved real property in Special Flood Hazard Areas (SFHAs).

According to recent guidance from the FCA, FDIC, FRB, NCUA, and OCC: banks and credit unions may continue to close loans without flood insurance during a lapse, provided they have procedures in place to obtain flood insurance promptly once the NFIP is reauthorized or private coverage becomes available.

During the lapse, lenders remain responsible for:

• Meeting other obligations under federal flood insurance law
• Considering safety and soundness requirements

What are the available alternatives for borrowers to purchase flood insurance while the NFIP is down?

A simple option is for a borrower to obtain private flood insurance where available. AFR offers private flood insurance that meets regulatory requirements and can provide a quote prior to purchase. To learn more or request a quote go to floodrates.com or contact us at either 800-995-8667 or info@afrservices.com.

What should borrowers do if the NFIP is the only option?

Borrowers may still submit an application and premium during the lapse. These will be held in abeyance and processed once the NFIP is reauthorized. If Congress grants retroactive authority, coverage will be effective as of the application date. If not, coverage will begin no earlier than the reauthorization date — and any losses during the lapse will not be covered. Lenders should ensure borrowers clearly understand this risk and may wish to postpone closing until NFIP coverage is available.

Can lenders sell loans without flood insurance on the secondary market?

It depends on the investor. Agencies such as Fannie Mae and Freddie Mac generally require proof of flood insurance before purchase. Lenders should confirm investor requirements and post-closing obligations before selling loans affected by the lapse.

What happens to premiums received before vs. after the lapse?

If NFIP Servicing Agents receive a completed application and payment (or a renewal payment) before the lapse, coverage will remain in force. Claims will be honored, even if the effective date of the policy falls during the lapse period.

For applications and premiums received after a lapse begins, FEMA generally processes all applications and renewals as soon as the program is reauthorized.

What is retroactivity, and why does it matter?

When Congress reauthorizes the NFIP, it may or may not apply coverage retroactively, which can have significant implications.

• If retroactive: Policies submitted with premium during the lapse will be effective as of the application date, covering losses that occurred during the lapse.
• If not retroactive: Policies will be effective no earlier than the reauthorization date, and any losses during the lapse will not be covered.

Lenders should clearly explain this risk to borrowers before closing.

AFR Support

During this time, AFR is here to support you. Our team is fully prepared to help you continue placing coverage through AFR’s network of private flood markets. These markets often provide competitive pricing and broader coverage than the NFIP, giving you reliable alternatives for your borrowers. Your AFR representatives remain available to guide you and provide quotes throughout the hiatus.

At AFR, our priority is helping you stay compliant and protect your portfolios no matter the circumstances.