NFIP Reauthorization and Reform: Are More Changes Coming to Lenders' Flood Insurance Requirements

The National Flood Insurance Program (NFIP or the Program) will expire on September 17, 2017, unless it is timely reauthorized. Because the Program is $23 billion in debt, there is significant speculation regarding whether and how Congress may restructure the Program this year. Changes to the NFIP may impact lenders’ and servicers’ compliance obligations, borrowers’ surplus income and corresponding ability to repay their loans, and even the overall value of the real estate securing mortgage loans. This article discusses some of the options that various constituencies have suggested for the Program, along with the potential effects these changes could have on mortgage lenders and servicers.

When Congress established the NFIP in 1968, it intended for the Program to ensure affordable flood insurance coverage and encourage communities to engage in floodplain management to reduce flood risk. Congress has amended the Program over the years, including in 1973, when it created the mandatory purchase requirement that prohibits certain mortgages from being made, increased, renewed, or extended unless the buildings and any personal property securing them are covered by flood insurance. Most recently, in 2012 and 2014, Congress adopted measures to increase the financial solvency of the Program and require lenders to accept certain private flood insurance policies, among other changes.

Despite repeated efforts to improve the NFIP, the Program is on shaky ground. The NFIP has been in debt since Hurricane Katrina and currently owes $23 billion to the U.S. Treasury, for which FEMA already has spent $2.9 billion on interest alone. Although it is widely acknowledged that additional reform may be necessary, Congress has not agreed on the best path forward. Short-term Program reauthorizations resulting from those disagreements have created instability and uncertainty. Between 2008 and 2012 alone, there were at least 17 short-term extensions of the Program, some as brief as five days. Furthermore, the NFIP expired four times in 2010, which created serious issues because the NFIP is not able to issue new or renewal policies or increase coverage on existing polices during an expiration period, making it impossible for lenders to comply with the mandatory purchase requirement.

Originally published in Mortgage Compliance Magazine; reprinted with permission.