By Jennifer Van Horn
It’s been a stormy few years for commercial and residential lenders. In addition to tragic flooding across multiple regions, the National Flood Insurance Program (NFIP) continues to face choppy waters with rolling short term extensions and threat of lapse. For lenders, this dual threat creates the perfect storm.
By law, property owners in Special Flood Hazard Areas (SFHAs) must purchase flood insurance as a condition of their mortgage. Without readily available private flood insurance, the NFIP covers as many as five-million mortgages nationwide.
Here are a few things lenders can do to minimize servicing liability in the event an NFIP lapse becomes reality:
Pay renewal bills on escrowed policies regardless of a lapse. During a lapse, NFIP Direct and Write-Your-Own (WYO) agents are instructed to accept renewal premiums on policies scheduled to renew during the lapse. Once the program is active again, date-stamped premiums will be processed as of the date received. Should the NFIP lapse extend beyond 30-days, agents will no longer accept payments and any monies already accepted will be returned to the insured.
Continue to force-place insurance. Force-placement billing for certificates issued on policies that expired before program lapse should not be delayed. In addition to federal rules, GSE requirements mandate insurance remain in force on serviced loans secured by property located in an SFHA, regardless of availability through the NFIP. However, where a requirement to provide coverage is strictly tied to federal mandate in the force-placement of non-GSE serviced and portfolio loans, lenders should wait until reauthorization on policies expire during the NFIP lapse. If reauthorization is effective after the previous expiration date, the force-placed policies would need to be effective as of the reauthorization date, unless regulators released other guidance.
Send 45-day notices to borrowers on schedule. As normal, continue to notify policy holders that their flood insurance policy has expired. While borrowers won’t have access to reinstate their NFIP coverage during a lapse, you should still work under the assumption that the NFIP will be re-authorized and retroactively backdated.
Look out for master policy exclusions. Some force-placed master policies include restrictive clauses, stating that coverage is only extended to property that is eligible for coverage through the NFIP. Such clauses can be an issue for lenders needing to issue force-placed insurance during an NFIP lapse.
Share your plan with compliance. Examiners will look to see that flood-related hurdles were eliminated in advance. Documenting your process and seeking guidance on uncertainties will provide compliance teams with an opportunity to see that you’ve proactively eliminated existing and potential issues. Having a documented and approved process exhibits the awareness and control examiners are looking for.
Shelter your risk by looking ahead. The full financial impact that storms Maria, Harvey and Irma had on the NFIP is still unclear, and will only add to the program’s nearly $25 billion debt. Remain on top of the latest NFIP news. Consider Congress’ potential next moves and prepare different or layered plans in response.
Make sure your credit union has a strategy in place to shelter both your borrowers and loan servicing teams from potential NFIP lapses.
Jennifer Van Horn is the Director of Mortgage Program Management and Senior Compliance Officer for Hub Financial Services. She leads the mortgage product unit, overseeing coverage and program design, workflow analysis, regulatory compliance and system configuration. She has been with HUB for 17 years.