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How Long Must Your Borrowers Wait?

The 30-day waiting period before flood insurance goes into effect is a pretty basic rule that lenders need to be aware of when they are making a loan for a property in a Special Flood Hazard Area (SFHA). However, applying this “basic” rule can be a little complex, so let’s take a look at the background of the 30-day rule and what its exceptions are.

Why Require a 30-Day Wait?

The National Flood Insurance Reform Act (NFIRA) of 1994 lengthened the waiting period required before a National Flood Insurance Program (NFIP) policy can go into effect from 5 to 30 days. This 30-day wait is for “coverage under a new contract for flood insurance” and “any modification to coverage under an existing flood insurance contract.” The express intent of Congress in mandating a 30-day waiting period was to prevent the purchase of flood insurance just before a flood hits. Unless an exception applies, as described in the following two sections, a 30-day waiting period is required before NFIP flood insurance goes into effect.

In layman’s terms, Congress sought to avoid a situation in which property owners in high-risk areas such as the Atlantic and Gulf Coast states played “hurricane roulette” by letting their policies expire when the hurricane forecast was good and then, when the forecast showed a hurricane developing off the African west coast, “re-upping” with only a 5-day wait. Hence, the name “hurricane roulette,” since it usually takes longer than 5 days for a hurricane to cross the Atlantic. After the hurricane seasons we had in 2004 and 2005, it’s hard to imagine a “good year” for hurricanes, but treating the threat like roulette in a year with a relatively less active hurricane season has been known to happen.

Playing roulette with insurance coverage is clearly shortsighted because it’s not just hurricanes that flood homes. “Small storms” with little warning can also tear a house apart. A 30-day waiting requirement promotes a longer view of financial protection from flood losses.

The Two Exceptions

The following two exceptions are crucial to a variety of situations that lenders deal with every day. They apply when coverage is placed in conjunction with loan activity or the remapping of a community. The NFIRA contains what is called the “initial purchase” provision, which states that the 30-day waiting period does not apply to the following instances: (1) “The initial purchase of flood insurance… when the purchase is in connection with the making, increasing extension, or renewal of a loan,” or (2) “The initial purchase of flood insurance… pursuant to a [map] revision or updating of floodplain areas of flood zones,” within a 1-year period.

The effective date of coverage begins at 12:01 a.m. local time on the first calendar day after the application date and the presentment of payment of the premium.

It is significant to note that the first exception described above is much broader than it may appear. FEMA has interpreted the exception to the 30-day waiting period to apply in situations pertaining to refinancing, placement of second mortgages, and modification of existing mortgages. This also applies to lender placement, increased limits at renewal, and map revisions.

Applying the Exceptions

Following are two examples of how the exceptions to the 30-day waiting period may get a little tricky.

When a Community Changes to the “Regular Program”

If a community’s status changes from the NFIP’s Emergency Program to the Regular Program, thereby increasing the amount of federal flood insurance available, must a lender require a borrower to increase the amount of flood insurance as soon as it has knowledge of that charge? Or may the borrower wait until the flood policy renews to increase the amount of coverage?

A lender should require the increase to get the best coverage available for the homeowner. Policyholders in Regular Program communities are eligible for the maximum amount of NFIP food insurance available.

Usually when a community changes from the Emergency Program to the Regular Program, its map changes from a Flood Hazard Boundary Map (FHBM) to a Flood Insurance Rate Map (FIRM). The FHBM is a basic “in-or-out” map, showing only areas at high and low flood risk, while the FIRM has a variety of risk zones clearly delineated.

So, if the property in question was shown as a moderate risk on the FHBM but is now in the SFHA on the FIRM, a lender would apply only a 1-day waiting period for the purchase of the higher amount of insurance. If the property was at high risk on the FHBM and is now in the SFHA on the FIRM (and thus, there is no change – change being the key to applying the exception), that policy is subject to the 30-day waiting period.

When the Policy Changes Hands

There is no waiting period when an existing policy is assigned to a purchaser of improved real estate. But the intention to assign the contract must be clear.

Prior to NFIRA, the regulations provided for no wait if the policy was applied for and the premium was paid at or prior to the time the title transfer or assignment of the policy occurred. Now, unless there is an assignment of the policy from the seller to the buyer where the purchaser does not obtain a mortgage, a 30-day wait is required.

The General Conditions article of the Standard Flood Insurance Policy form contains an assignment provision – “D. Amendments, Waivers, Assignment” – which allows an assignment upon transfer of title.

Looking for More Information?

Watch for upcoming legislative changes in this area. The NFIP’s manual on lender issues is the Mandatory Purchase of Flood Insurance Guidelines, available online.

Reprinted with permission from Watermark.