September 12, 2017 - As we have all read, flooding from hurricanes Harvey and Irma have devastated parts of Texas and Florida and those states are assessing the damage and putting the pieces back together. Although quite minor in the overall scheme of things, the loan market has experienced at least a temporary reversal on an issue related to that flooding, i.e., mandatory flood insurance for commercial properties under the National Flood Insurance Program (NFIP).
As we noted in July, the mandatory commercial insurance requirement under NFIP requires banks to ensure that collateral located in a flood zone is insured even if the real estate is not a meaningful or material part of the collateral package. Often the burdens far outweigh the value. On May 1st, Rep. Blaine Luetkemeyer introduced a bill (H.R. 2246) to “repeal the mandatory flood insurance coverage requirement for commercial properties located in flood hazard areas.” This bill was part of a series of bills that passed through the House Financial Services Committee as part of a package to reauthorize NFIP which would otherwise end by its terms on September 30th. Since commercial flood insurance represents only a small portion (about 6%) of the overall NFIP, there was a distinct possibility that this carve-out proposal could survive and that this burdensome flood insurance would no longer be required.
The hurricanes, and the ensuing flooding, have put at least a temporary halt on any prospects for reform. Because the NFIP program was already deeply in debt (to the tune of over $25 billion) and because the damage from the hurricanes so vast, Congress decided that with the looming deadline to reauthorize the NFIP it would not be possible to agree on substantive reauthorization legislation. Instead, as reported by Housingwire, last Friday the House and Senate passed, and president Trump signed, a clean extension of the NFIP through December 8th. Because there are so many contentious issues to resolve among many competing constituencies, it is not at all clear whether the carveout for mandatory commercial flood insurance will survive any final bill. We will continue to closely follow these developments.