Preparing for a Government Shutdown: Flood Insurance Alternatives and Guidance for Borrowers and Lenders with a Potential NFIP Closure

Should the government shut down on November 17, 2023, the NFIP will also shut down. Borrowers will not be able to obtain NFIP insurance to close, increase, extend, or renew loans until the NFIP is reauthorized (funded). This message from AFR is intended to give you guidance on how to operate while NFIP flood insurance is not available and to make you aware that AFR offers private flood insurance as an alternative to the NFIP.

Banks and credit unions may continue to make loans without flood insurance during a period when the NFIP is not available. However, institutions must continue to make flood determinations, provide notices to borrowers, and comply with other parts of the flood insurance regulations.

When the NFIP is reauthorized, it can be done by Congress either retroactively or not. In the past, FEMA has stated that if the authorization is retroactive, a flood insurance policy applied and paid for during the lapse period will be deemed effective as of the date of application and payment.  Based on recent shutdowns, the authorization is typically retroactive.

If authorization is not retroactive, new or renewal NFIP policies cannot be obtained for the period when the program was not authorized, UNLESS they were obtained prior to the lapse. Thus, if authorization is not provided retroactively, new NFIP policies or renewals issued after the lapse will be effective on the date of reauthorization. In this situation, flood losses will not be covered by the NFIP if they occurred in the period subsequent to the lapse, but prior to the date of congressional reauthorization. Lenders are encouraged to ensure borrowers understand this risk.

Lender Options for Flood Insurance Coverage During the Lapse

• 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 www.floodrates.com or contact us at 469-443-5410 or quotes@afrservices.com.
• For NFIP policies, a lender can have a borrower complete the application and pay the premium, which will be held for processing by the insurance company pending congressional reauthorization.

              - These applications will be processed when the program is reauthorized and will be made effective to the fullest extent of that authority. If authorization is not granted, the premiums will be refunded, and the new and renewal policies held in abeyance will not be issued.

              - A lender should advise borrowers that remittance of the application and payment will not result in immediate NFIP coverage and cannot legally be required until reauthorization. The lender should also advise borrowers about the consequences of non-retroactive reauthorization.

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

• A lender may determine that the risk of loss is sufficient to justify postponing closing the loan until such time as the NFIP has been reauthorized.

Hopefully, a government shutdown will be avoided, but if not, we hope this information is helpful.

If you have questions, please contact us at 800-995-8667 or email info@afrservices.com.