The Impact of NFIP Expiration

If you’ve been mired in HMDA, TRID and beneficial ownership of late, you may have missed a deadline that is fast approaching.  The National Flood Insurance Program (NFIP) as created by Congress through the 1968 National Flood Insurance Act is set to expire on November 30, 2018.  Before we can discuss the potential impact of its expiration, let’s first talk about the premise of the program itself.  

The NFIP, since its inception, has enabled property owners in participating communities to purchase flood insurance protection, administered by the government, against losses from flooding. It also requires flood insurance on all loans or lines of credit that are secured by buildings, manufactured homes or buildings under construction, that are located in a community that participates in the program.  The program has historically been designed to provide an insurance alternative to disaster assistance to meet the escalating costs of repairing damage to buildings and their contents caused by floods.  According to the most current data, the NFIP has issued over 5 million policies, providing more than $1.28 trillion in coverage.

The cost of the program has traditionally been covered by its premiums…until the end of 2004…Enter Hurricanes Katrina and Sandy.  Due to the devastation ravaged by these colossal storms, combined with the ongoing administration of the program, the NFIP accumulated approximately $25 billion in debt by August 2017.  Premiums collected no longer are sufficient to support the program. After several previous extensions, the program was set to expire on July 31, 2018.  Legislation further delayed its expiration to this November.

So, should November 30th come and go, and the NFIP expire, what would be the impact?  

  • The Program’s authority to provide new flood insurance contracts would expire.  If you have loans in the pipeline for which the collateral is located in a flood zone, you would want to get ahead of the expiration date and seek alternatives.  The proliferation of the private flood insurance market should provide you – and your borrower – the coverage they need should the NFIP expire and be unable to issue new policies.

  • Contracts entered into before the NFIP’s expiration would continue until the end of the policy term of one (1) year.  You’ll need to take a look at your portfolio of flood loans, identify those with NFIP-issued policies, and pay close attention to their expiration dates. Again, private insurance may provide a viable alternative.

  • The NFIP’s authority to borrow funds from the U.S. Treasury would be significantly reduced (e.g. $30B to $1B). 

  • Claims could be effected.  FEMA would use incoming premium dollars to pay claims; however, it is  difficult to ascertain whether those premium dollars coming in would be sufficient to cover incoming claims – especially if there are areas hit with significant flooding.  Should all incoming premium dollars be depleted, claims would only be paid as additional premiums flow into the program unless Congress were to appropriate supplemental funds.  

While the deadline looms, we strongly recommend you carefully review your portfolio of flood loans to determine the specific potential impact to your institutions.

by Sterling Compliance