Banks May Still Make Loans That Would Otherwise Be Subject To Flood Insurance Even Though Program Has Lapsed, Regulators Say

Financial institutions may continue to make loans that would otherwise be subject to federal flood insurance statutes even though the authorization for the National Flood Insurance Program (NFIP) has lapsed, federal financial regulators reassured lenders.

During a NFIP lapse, lenders are permitted to make these loans without requiring federal flood insurance, the Farm Credit Administration, FDIC, Federal Reserve Board, OCC and NCUA said, in joint guidance to financial institutions.

The regulators cautioned, however, that institutions "must continue to make flood determinations; provide timely, complete, and accurate notices to borrowers; and comply with other applicable parts of the flood insurance regulations. In addition, lenders should evaluate safety and soundness and legal risks and should prudently manage those risks during the lapse period."

Much of the NFIP lapsed when funding for much of the federal government expired on September 30.

The Congressional Research Service has said that flood insurance contracts entered into before the September 30 expiration would continue until the end of their policy term of one year. The authority for the NFIP to borrow funds from the U.S. Treasury would be reduced from $30.425 billion to $1 billion.

The NFIP is not authorized under a long-term authorization; attempts to enact long-term legislation have repeatedly failed. Instead, it has been authorized through 33 short-term reauthorization measures, according to the CRS.

Members of Congress have been pushing legislation to reauthorize the NFIP even as the spending stalemate continues. For instance, Reps. Troy Carter, Sr., D-La.; Mike Ezell, R-Miss.; and Lizzie Fletcher, D-Texas, have introduced legislation that would reauthorize the program through November 21, 2025. That was the same deadline as a Continuing Resolution to fund the government that the House passed in September.

And, Rep. Andrew Garbarino, R-N.Y., has introduced legislation that would reauthorize the program through September 30, 2026.

On the Senate side, Sen. John Kennedy, R-La. has called on Congress to enact standalone NFIP legislation.

However, Politico has reported that House Republican leaders oppose enacting such legislation at this point.

Industry trade groups have called on Congress to extend the NFIP program, warning that without easy access to flood insurance, property buyers could lose financing.

The CRS estimated that during a lapse in June 2010, each day more than 1,400 home sale closings were canceled or delayed. That represented more than 40,000 sales each month.

In recent years, there has been a growth in private flood insurance, according to AM Best, which reported that the share of premiums in that segment grew from 13% in 2016 to 27% in 2024. Private flood insurance may be an option in some cases.

Despite the guidance from the regulators, lenders must consider investor and agency requirements regarding flood insurance.

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