All participants in the housing industry are grappling with the effects of COVID-19, from borrowers to originators to servicers. The emergency has influenced all facets of the mortgage origination and servicing business, prompting additional restrictions in some instances while triggering flexibilities and relaxed requirements in others. Flood insurance requirements, which are usually strict and inflexible, have not been immune.
On March 28, 2020, the Assistant Administrator for the Federal Insurance and Mitigation Administration of the Federal Emergency Management Agency ("FEMA") released a memorandum notifying National Flood Insurance Program ("NFIP") insurers of an extension of the NFIP premium payment grace period. Under normal circumstances, an insurer must receive the payment to renew an NFIP policy within 30 days of expiration. However, recognizing the difficulties experienced by many policyholders (including loss of income and potential disruptions in employment), the administrator has extended the 30-day grace period to 120 days for all policies with expiration dates between February 13, 2020 and June 15, 2020. In addition, the administrator extended the deadline for a borrower to make an additional premium payment after receiving an underpayment notice from 30 days to 120 days for notices received by policyholders between those dates.
The grace period extension has important ripple effects. Generally, if a borrower's flood insurance lapses, the regulated entity must send a notice of the requirement to maintain sufficient flood insurance for the term of the loan. If the borrower has not purchased sufficient flood insurance within 45 days after the notification, the regulated entity must place adequate flood insurance on the borrower's behalf. However, in response to the FEMA extension of the grace period, at least one regulator (the Office of the Comptroller of the Currency (the "OCC")) has stated that it " does not expect" to take supervisory or enforcement action against its regulated entities for reasonable delays in complying with the 45-day force placement requirement in connection with the extended grace period, provided the entity made good faith efforts to support borrowers and comply with the force placement requirements, and responded to any needed corrective action identified in supervisory feedback.
In a letter provided to certain trade industry organizations, the OCC provides two examples: (i) the regulated entity may provide the required notice after determining the flood policy has expired, but must also indicate in the notice that the NFIP grace period has been extended for 120 days, or (ii) a regulated entity may delay providing the notice until 45 days prior to the end of the extended grace period. At the end of the grace period, the regulated entity must force place flood insurance on the borrower's behalf if the borrower has not secured adequate flood insurance.
The OCC notes that if the regulated entity force places flood insurance on a policy that expires during the declared emergency period prior to the end of the grace period, and the borrower pays the related premium prior to the end of his or her grace period, the regulated entity must refund the borrower for any overlap. This is consistent with other provisions in the regulations which prohibit double charging of borrowers for flood insurance policies.
Generally the agencies regulating entities in connection with flood insurance requirements act in lockstep. However, at this point we are aware of only the OCC applying the grace period to the force placement requirement. It is unclear if the others will follow suit in granting force-placement flexibilities to regulated entities.
Originally published 24 April, 2020
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