June 22, 2017 - This week the House Committee on Financial Services took the first step in a process that could reverse an obscure and burdensome provision of a law that requires banks to ensure that real property collateral be insured under the National Flood Insurance Program (“NFIP”). The law requires federally regulated lenders to determine whether improved real property collateral securing a loan is located in an area designated by the FEMA as being subject to special flood hazards (“SFHA”), and, if so, to ensure that adequate flood insurance covers the structure. The obligations on the banks kick in through a number of “tripwire events” such as making, increasing, renewing or extending a loan (perhaps appropriately called “MIRE”). The crusher is that the banks are stuck with these requirements even if the real estate is not a meaningful or material part of the collateral package. Often the burdens far outweigh the value.
The good news is that at a markup of a series of bills designed to reauthorize the NFIP (which runs out at the end of September), the committee passed, by a vote of 36 – 24, H.R. 2246 introduced by Rep. Blaine Luetkemeyer (R. MO), which would “repeal the mandatory flood insurance coverage requirement for commercial properties located in flood hazard areas.” The bill, along with six other NFIP related bills that were passed through committee will likely be considered by the entire House in the coming weeks. The Senate Banking Committee is expected to introduce its own NFIP reauthorization bill soon and the final bill will be worked out in conference. Unlike many other issues being considered by Congress, flood insurance aligns along geographical lines rather than solely partisan lines – Congressmen tend to support the flood insurance program if their districts sit in a flood zone – so passage of a bill is likely. Moreover, since commercial flood insurance represents only a small portion (about 6%) of the overall NFIP and carving out the mandatory requirement is not particularly controversial, there is a distinct possibility that this carve-out proposal will survive and that the burdensome flood insurance requirements will evaporate.