May 18, 2017 - An obscure and burdensome rule that requires banks to ensure that real property collateral be insured under the National Flood Insurance Program (“NFIP”) may be going down the drain.  The rule requires federally regulated lenders to determine whether improved real property collateral securing a loan is located in an area designated by the Federal Emergency Management Agency (“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”).   (See slide 29 of The (Loan) World).

In response to its members, the LSTA in 2014 published revised loan documentation provisions to address the incredibly burdensome and complicated flood insurance processes for agents and lenders.  (see slide 30 of The (Loan) World for some of the details).  More recently, some lenders, concerned with regulatory pressure, have been seeking an independent right to review and approve satisfactory flood insurance due diligence. (See slide 31).

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? There may be a light at the end of the water tunnel.  The NFIP runs out by its terms at the end of September 2017 unless it is reauthorized by Congress and the president.  On May 1st, Rep. Blaine Luetkemeyer introduced legislation (H.R. 2246) to “repeal the mandatory flood insurance coverage requirement for commercial properties located in flood hazard areas.”  Since commercial flood insurance represents only a small portion (about 6%) of the overall NFIP, it is a distinct possibility that this carve-out proposal will survive and that the burdensome flood insurance requirements will be washed away.  We will continue to monitor this issue closely.

Become a Member

Membership in the LSTA offers numerous benefits and opportunities. Chief among them is the opportunity to participate in the decision making process that ultimately establishes loan market standards, develops market practices, and influences the market’s direction.

View a list of all members.

Our Partners

cusip-global-services-vector-logo.svgFitch Group logoRefinitiv-(March-2019)SP-Global-Market-Intelligence

Search Results by Relevancy

LSTA Bylaws

BYLAWS of the Loan Syndications and Trading Association, Inc. Amended as of September 19, 2019

LSTA Newsletter – September 20, 2019

This week we explain the big SOFR jump, share Lee Shaiman’s and David Lerner’s Morning Consult op-ed, highlight some LIBOR […]

LSTA Meets With Rep. Andy Barr

This week LSTA members and staff met with Rep. Andy Barr (KY-06). Barr, a member of the House Financial Services […]

LIBOR Trending Too…

While the daily SOFR spike grabbed the headlines this week, other LIBOR coverage should be noted as well. First, LIBOR’s […]

SOFR Above Tuesday?

For those that missed it – which, based on our email traffic, was no one – the published overnight SOFR […]