MBA, Trade Groups Press For Flood Loan Guidance

December 17, 2002

MBA - Sorohan, Mike

The Mortgage Bankers Association of America and several other trade associations sent a letter Friday to the heads of key federal agencies asking for guidance during the current lapse in congressional reauthorization of the National Flood Insurance Program (NFIP).

TheDecember 13 letter [pdf] to the heads of the Federal Deposit Insurance Corp., the Federal Reserve Board, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said that the lapse in authorization of the NFIP could place lenders making loans in Special Flood Hazard Areas at risk.

"We strongly urge you to address key concerns that will affect the ability of our members to originate and refinance certain mortgage loans during the lapse in congressional reauthorization of the [NFIP]," the groups said. "In particular, we urge you to consider providing specific authority to financial institutions to close loans during the hiatus. In addition, we seek assurances that closing such loans and servicing existing loans without renewals of flood policies will not place institutions at risk from a safety and soundness perspective."

The National Flood Insurance Reform Act of 1994 (NFIRA), which authorized NFIP under the Federal Emergency Management Agency, provides for the mandatory purchase of flood insurance if a property is located in a Special Flood Hazard Area (SFHA). But Congress failed to reauthorize the program before adjourning this year; thus, the program is scheduled to expire on December 31.

House Financial Services Committee Chairman Michael G. Oxley, R-Ohio, and incoming Ranking Member Rep. Barney Frank, D-Mass., announced last week that they would introduce legislation next year to reauthorize NFIP and address any lapses in the coverage. Presumably, reinstatement of the program would prevent any disruptions for policyholders, homeowners, mortgage lenders and insurers assuming that language in the bill would take effect as of December 31.

But MBA and the other trade associations—the American Bankers Association, America's Community Bankers and the Consumer Mortgage Coalition—said that even with reauthorization of the program, a gap of two-to-three weeks could occur in which coverage is uncertain at best.

"As a result of the lapse in the NFIP, many financial institutions and their mortgage subsidiaries need guidance from the appropriate federal regulatory authorities about whether loans in SFHAs are permitted to be closed without flood insurance pending the reauthorization," the groups said. "Reauthorization of the NFIP is not expected until the second or third week of January 2003. It is unclear whether settlements scheduled to occur between the end of 2002 and the date of reauthorization may go forward."

The groups' letter urged the federal agencies to "make, extend, increase and renew mortgages without flood insurance during the lapse in the NFIP. In addition, we urge you to clarify that financial institutions will not be viewed by their regulators as taking an undue risk or posing a safety and soundness concern if they continue to originate loans without flood insurance or are unable to renew flood policies during the hiatus. Immediate action in providing guidance to financial institutions is critical to avoid the potential shut down of mortgage lending on properties in SFHAs.

Source: MBA NewsLink

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