Federal Reserve Posts Pandemic Related Flood Insurance Compliance Information

John Zasada, Compliance Consulting Director, Financial
Institutions Group

On May 6^th, 2020, the Federal Reserve (Fed) issued Consumer Affairs Letter CA 20-7 concerning frequently asked questions about flood compliance requirements and the COVID-19 pandemic.

The letter answered the question of whether a bank, that works with its borrowers by extending maturities/payments or balloon payments due to the pandemic, is required to make a new flood zone determination and provide new notices of special flood hazards for the extended loan. The Fed stated flood insurance requirements are generally triggered upon the making, increasing, renewing or extending of any designated loan. If a lender modifies a loan by extending the loan term, then this change is a triggering event and flood-related requirements kick in. There is no waiver of flood requirements in emergency situations. However, the Fed indicated they will consider the unique circumstances impacting borrowers and institutions resulting from the pandemic. They do not expect to issue an enforcement action against an institution, provided the circumstances were related to the pandemic and the institution made good faith efforts to support borrowers while complying with the flood insurance requirements, as well as responding to any needed corrective action.

Additionally, the letter focused on a previous announcement (FEMA Bulletin W-20002) related to the grace period to renew National Flood Insurance Program (NFIP) policies that expire between Feb. 13, 2020 and June 15, 2020 (FEMA emergency period), which has been extended from 30 days to 120 days due to the pandemic. A borrower will be covered by the NFIP policy if the flood insurance premium is paid before the 120-day grace period expires. Regarding policies that expire during the FEMA emergency period, FEMA provided the following information:

• A lender may provide the required notice to the borrower after determining the policy has expired with an indication the NFIP grace period has been extended for 120 days. Lenders may inform borrowers that, in light of Bulletin W-20002, force placement will not occur until after the end of the 120-day period.
• Alternatively, a lender may provide the required notice to the borrower at least 45 days before the end of the 120-day grace period.
• For either alternative, the lender must force place flood insurance on the borrower’s behalf if the borrower does not pay the premium by the end of the 120-day grace period.
• Consistent with the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)” dated April 7, the Federal Reserve does not expect to take supervisory or enforcement action against the lender for violating the flood insurance force placement requirements, provided the circumstances were related to the COVID-19 national emergency, and the lender has made good faith efforts to support borrowers and comply with the flood insurance requirements, as well as responded to any needed corrective action.
• Lenders should be aware if they force place flood insurance for NFIP policies that expire during the FEMA emergency period prior to the expiration of the 120-day grace period and the borrower pays the premium by the end of the 120-day grace period, consistent with the flood insurance regulatory requirements, the lender would be required to refund the borrower for any overlapping flood insurance coverage.

If you have questions about how these flood insurance regulations might impact your financial institution, contact Doeren Mayhew’s compliance specialists.