National Flood Insurance Program: 2023 Refresher and Updates

At a Glance

• With the passage of the most recent spending deal this past September, Congress passed a short-term extension of the NFIP, leaving open the possibility that the NFIP will lapse in a few weeks.
• If the NFIP is allowed to lapse, potential fallout could include: the inability of the federal government to issue new or renew existing flood insurance policies; and the reduction of funds available for FEMA to pay for claims under existing NFIP policies.

As we enter the last quarter of a year that saw historic flooding across the country, including most recently in New York City, it is a good time to review the National Flood Insurance Program (NFIP) and highlight a few recent developments.

Those in the insurance industry are most likely to encounter the NFIP in the contexts of commercial real estate lending (either on the borrower or the lender side of the loan origination or modification process) and acquisition and management. Changes to the program can have important effects for commercial real estate lenders with respect to insurance underwriting requirements as well as other industry participants with respect to the availability of real estate financing and the affordability of risk management for projects in the certain areas of the country.

The NFIP was created through the passage of the National Flood Insurance Act in 1968 (NFIA) and later amended by the National Flood Insurance Reform Act in 1994 (NFIRA). The program is administered by the Federal Emergency Management Agency (FEMA) through the Federal Insurance and Mitigation Administration and has two primary goals: to provide a risk-sharing framework for flood losses through flood insurance; and to reduce flood damages by restricting floodplain development.

Principally, the program enables property owners in participating communities to purchase insurance protection against losses from flooding and prohibits federally regulated banks, government-sponsored enterprises and federal agency lenders from making, increasing, renewing or extending any loan secured by improvements to real property located in a Special Flood Hazard Area (SFHA) (i.e., areas that have a 1% or greater chance of a flood occurring in any given year) unless flood insurance is purchased and maintained.

As a product of the legislative appropriation process, Congress must periodically renew funding and authorization for the NFIP (a process that has been undertaken on a short-term basis 25 times prior to 2023). With the passage of the most recent spending deal this past September, Congress yet again passed a short-term extension of the NFIP through November 17, 2023, leaving open the very real possibility that the NFIP will lapse in only a few short weeks.

If the NFIP is allowed to lapse, the potential fallout could include: the inability of the federal government to issue new or renew existing flood insurance policies after 11:59 pm Eastern time on November 17, 2023; and the reduction (and potential drying up) of funds available for FEMA to pay for claims under existing NFIP policies.

During any such lapse, private flood insurance would not be affected and certain requirements under the program for lenders may be suspended, but the uncertainty of the NFIP’s future will certainly add volatility to an already fragile real estate market.

As we monitor the ongoing deliberations on Capitol Hill, please stay tuned for further updates on the NFIP.