To: All Member Banks and Others Concerned in the Third Federal Reserve District

Attention: Chief Executive Officer

Subject: LAPSE OF FEMA AUTHORITY TO ISSUE FLOOD INSURANCE CONTRACTS

Summary:

On December 23, the Federal Reserve Board announced the issuance of interagency guidance to assist borrowers and lenders in dealing with issues that may arise during a lapse in federal flood insurance authority that will begin January 1, 2003.

The Congress adjourned in November 2002 without extending the statutory authority to issue flood insurance policies under the National Flood Insurance Program (NFIP). As a result, the authority of the Federal Emergency Management Agency (FEMA) to issue new flood insurance policies, issue increased coverage on existing policies, and issue renewal policies will expire on December 31, 2002.

The guidance provides that state member banks may make loans that are or will be secured by property located in a flood hazard area without flood insurance during the time the NFIP is not available. These banks will not be cited for violating federal flood insurance regulations. However, the lapse in the availability of NFIP coverage does not relieve lenders of any other obligations under federal flood insurance law or of their responsibility to prudently manage safety and soundness risks.

FEMA has indicated that it expects the new Congress to reauthorize the NFIP shortly after it convenes on January 7, 2003, and that the reauthorization will likely be made retroactive to January 1, 2003. The federal financial institution regulatory agencies will notify financial institutions of any congressional action to reauthorize the NFIP.

The guidance, which is being issued jointly by federal bank and thrift regulatory agencies, is attached (31 KB, 6 pages).