[DOCID: f:sr214.110]
From the Senate Reports Online via GPO Access
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Calendar No. 460
110th Congress Report
SENATE
1st Session 110-214
======================================================================
FLOOD INSURANCE REFORM AND MODERNIZATION ACT OF 2007
_______
November 1, 2007.--Ordered to be printed
_______
Mr. Dodd, from the Committee on Banking, Housing, and Urban Affairs,
submitted the following
R E P O R T
[To accompany S. 2284]
The Committee on Banking, Housing, and Urban Affairs,
having had under consideration an original bill (S. 2284) to
amend the National Flood Insurance Act of 1968, to restore the
financial solvency of the flood insurance fund, and for other
purposes, having considered the same, reports favorably thereon
and recommends that the bill do pass.
INTRODUCTION
On October 17, 2007, the Senate Committee on Banking,
Housing, and Urban Affairs considered a Committee Print
entitled ``The Flood Insurance Reform and Modernization Act of
2007,'' a bill to modernize and bring financial solvency to the
National Flood Insurance Program, and for other purposes. The
Committee voted unanimously to report the bill to the Senate.
BACKGROUND
Congress established the National Flood Insurance Program
(NFIP) in 1968 after finding that floods have ``created
personal hardships and economic distress which have required
unforeseen disaster relief measures and have placed an
increasing burden on the Nation's resources.'' (P.L. 90-448)
After flooding events, including flooding in the 1950s, federal
disaster assistance was paid out to communities and
individuals. In establishing the flood insurance program,
Congress wanted to create ``a reasonable method of sharing the
risk of flood losses through a program of flood insurance which
can complement and encourage preventive and protective
measures.'' (P.L. 90-448) Through a federal insurance program,
the government could collect flood insurance premiums, while
tying participation to community efforts to prevent flood
losses. Almost 20,000 communities, covering roughly 75 percent
of all communities in the United States, now participate in the
flood insurance program; these communities must undertake
floodplain management activities designed to reduce threats to
lives and the potential for damages to property in flood-prone
areas.
The flood insurance program is a three-pronged program
including insurance, mapping and mitigation. All of these
elements are critical to meeting Congressional intent of
linking insurance with protective measures. Communities that
choose to participate in the program are required to undertake
mitigation efforts to limit flood related damage as well as to
implement stringent building codes for all new development. All
buildings in the Special Flood Hazard Areas, or the 100-year
flood plain, are required to meet these stringent building code
requirements and are required to carry flood insurance.
Properties that were built prior to the inception of the
program and the completion of flood insurance rate maps (pre-
FIRM properties) pay subsidized rates as intended by Congress.
Congress believed that it was inequitable to require all
property owners to pay actuarial rates, given that structures
were built prior to rate maps and the flood program, resulting
in premiums on these properties that would be prohibitively
expensive. In 1978, 70 percent of properties in the flood
program were subsidized, compared to under a quarter of homes
in the program today. These properties do not pay actuarial
rates, leaving the flood program with less funds than needed to
pay for losses in higher than average loss years. While
Congress initially believed that pre-FIRM properties would be
destroyed, rebuilt, or mitigated, the phaseout of pre-FIRM
properties has been slow. Modern construction techniques have
extended the useful life of these buildings. To address the
most at-risk properties, in 2004 Congress established a severe
repetitive loss pilot program to mitigate those properties that
experienced multiple flood losses. These properties are a drain
on the National Flood Insurance Program, and Congress intends
for FEMA to take actions to assist in relocating, rebuilding,
elevating, or undertaking other mitigation efforts with respect
to these pre-FIRM properties.
Explicit rate subsidies are not the only cause of financial
difficulties in the flood program. Flood maps, a critical
component of the program, are out of date and in many cases,
inaccurate. A large majority of flood maps are over a decade
old, leaving communities and their residents without an
accurate assessment of flood risks. According to FEMA,
``because flood hazards are dynamic and usually increase over
time as development occurs, old maps tend to understate actual
existing flood hazards. Additionally, most of the maps were
produced using now antiquated manual cartographic techniques.''
(NFIP--Program Description, August 1, 2002) FEMA has identified
lack of funding as the primary reason that flood maps are out
of date.
In addition, participation in the program is not as robust
as Congress anticipated. Since 1973, participation in NFIP is
required for properties in the 100-year flood plain with
federally regulated mortgages. Such mandatory purchase is
enforced through federal banking regulations. Many property
owners without federally backed mortgages, and those with no
outstanding mortgage, have chosen not to participate in the
program. In fact, according to recent studies conducted by the
American Institutes for Research, less than 50 percent of
single-family homes in special flood hazard areas, and only 75-
80 percent of property owners required to purchase flood
insurance, actually do so. Notwithstanding the decision of many
owners not to participate, all of the structures within the
100-year floodplain are exposed to heightened risk.
While only 1 percent of homes outside mandatory purchase
areas have flood coverage through NFIP, 25 percent of flood
claims are outside of the 100-year floodplain. This indicates
that areas of residual risk, outside the 100-year floodplain,
are also at risk of flooding. Structures in ``residual risk
areas,'' those protected by manmade structures such as dams or
levees, are not required to purchase flood insurance. While the
risk of flooding for these properties remains low, a flooding
event caused by a breached dam or levee, in a residual risk
area, is likely to be widespread and cause significant flood
damage.
In 1983, in an effort to increase effectiveness and
participation in the program, NFIP formed a public-private
partnership with private insurance companies. Under this
partnership, private insurance companies, known as Write Your
Own (WYO) companies, handle the sale and administration of
flood insurance policies. Over 90 percent of flood policies are
sold through WYO companies, though the federal government
underwrites the policies. 88 private insurance companies
participate in the WYO program, and they are paid an
administrative fee of over 30 percent of all premiums
collected, as well as 3.3 percent of any claims paid, and
additional fees for adjusting claims, and writing additional
policies. The formula for devising the fees paid to WYO
companies is based on the administrative costs in other
insurance lines, not on actual costs of administering this
program.
The NFIP has grown significantly over its history from 1
million policyholders and $50 billion of risk exposure to over
5.4 million policyholders with in excess of $1 trillion of risk
exposure. While the program has been largely self-sustaining,
the catastrophic nature of the 2005 hurricane season, coupled
with the flood losses of 2004, showed weaknesses in the program
and left FEMA with almost $20 billion in debt to the U.S.
Treasury. In the years between the program's inception and
2005, taxpayers paid out $1 billion for flood claims, with the
large majority of claims being paid through premium income.
Claims payments resulting from the 2005 hurricanes exceed the
cumulative claims payments made to policyholders since the
program began. Due to the structure and the current financial
situation of NFIP, the program is not in a position to meet the
claims of policyholders, nor is it in a position to pay back
the debt incurred from the 2005 claims.
PURPOSE OF THE LEGISLATION
This legislation makes several key reforms to ensure that
the program can continue to operate, is self-sustaining, and
adequately identifies areas at risk of flood loss.
FEMA, as well as the Congressional Budget Office and the
General Accounting Office, has indicated that it will be unable
to repay the debt currently owed to the U.S. Treasury. Interest
alone on this debt is approximately $900 million annually,
almost 40 percent of annual premium income. To ensure the
continuation of NFIP as well as the long-term financial
solvency of the program, this bill forgives the almost $20
billion in debt, and makes a number of changes designed to
increase the ability of the program to pay claims in the
future.
Under this bill, additional property owners will be
required to purchase flood insurance, and those in the 500-year
flood plain will be told of their flood risks, increasing the
likelihood that they will voluntarily purchase flood coverage.
This legislation will require flood coverage for property
owners in residual risk areas, those behind levees and
downstream from dams, as well as property owners in the 100-
year flood plain or residual risk areas with mortgages through
state-regulated lending institutions. In addition, the bill
requires that flood insurance premiums be escrowed to ensure
continuity of insurance coverage. While most property owners
will not face significant increases in charged premiums as a
result of this bill, certain pre-FIRM structures will, over
time, be required to pay actuarial rates; those that are non
primary residences, including vacation homes and businesses,
severe repetitive loss properties and properties substantially
damaged or improved.
This legislation will require FEMA to review rates and use
actuarial principles in setting rates in NFIP. FEMA will also
be required to review and conduct rulemaking on insurance
company reimbursement so that reimbursements and actual
administrative expenses are aligned. FEMA will also be required
to build up a reserve fund, over time, equal to 1 percent of
all insurance in force so that it can pay for flood claims in
high loss years. These changes are designed to protect the
taxpayer from paying for flood insurance claims in all but the
most catastrophic loss years.
The legislation also establishes a map modernization
program so that maps are updated, accurate and readily
available. The Technical Mapping Advisory Council is re-
established to ensure that FEMA adopts meaningful standards for
mapping that are consistent and based on the most accurate data
and information.
In addition, the bill reiterates FEMA's responsibilities
under the Bunning-Bereuter-Blumenauer flood reform bill of 2004
to establish minimum training standards for insurance agents
who sell flood policies, so that prospective policyholders are
given accurate and consistent information and are sold the
correct coverage. The severe repetitive loss mitigation pilot
program established in 2004 is extended through 2013 so that,
when implemented, there are a full five years of mitigation
activities for the most at-risk properties. In addition to the
pilot program, the Committee expects FEMA to take all actions
at its disposal to mitigate flood risks, including its
authority under Section 1361 of the National Flood Insurance
Act of 1968 to encourage local and state measures to guide
development and assist in reducing flood damage. Criteria used
to determine community participation in the program should be
reviewed and should ensure that the original intent of
Congress, to mitigate flood risk, is met. These criteria can
include zoning, building codes and other local land use
provisions that can assist in meeting this important goal.
HEARINGS
The Committee heard testimony in the 110th Congress on
October 2, 2007, regarding proposals to reform the National
Flood Insurance Program. The witnesses were: Mr. David
Maurstad, Assistant Administrator for Mitigation and Federal
Insurance Administrator, Federal Emergency Management Agency;
Ms. Orice Williams, Director of Financial Markets and Community
Development, Government Accountability Office; Mr. Chad
Berginnis, CFM, State Hazard Mitigation Officer, Ohio Emergency
Management Agency, on behalf of the Association of State
Floodplain Managers, Inc.; Dr. Gerald E. Galloway, Professor of
Engineering, University of Maryland; Mr. J. Robert Hunter,
Director of Insurance, Consumer Federation of America; Mr.
Vince Malta, National Association of Realtors; Mr. Mark Davey,
President and Chief Executive Officer, Fidelity National
Insurance Company; and Mr. Don Griffin, Vice President,
Personal Lines, Property Casualty Insurers Association of
America.
In the 109th Congress, the Committee held hearings
regarding proposals to reform the national flood insurance
program. On February 2, 2006, the witnesses testifying were:
Mr. David Conrad, Senior Water Resources Specialist, National
Wildlife Federation; Ms. Regina Lowrie, Chair, Mortgage Bankers
Association; Mr. J. Robert Hunter, Director of Insurance,
Consumer Federation of America; Mr. David Pressly, President,
National Association of Homebuilders; Mr. Paul Gessing,
Director of Government Affairs, National Taxpayers Union; Mr.
David John, Research Fellow, The Heritage Foundation; and Ms.
Pam Pogue, Chair, Association of State Floodplain Managers. On
January 25, 2006 the witnesses were: The Honorable David
Walker, Comptroller General, United States Government
Accountability Office; Mr. David Maurstad, Acting Director,
Mitigation Division, Federal Emergency Management Agency; and
Mr. Donald Marron, Acting Director, Congressional Budget
Office.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title
This section contains the short title of the bill, ``Flood
Insurance Reform and Modernization Act of 2007.''
Section 2. Findings
This section contains the Committee's findings that the
flood insurance program is in debt and that the program must be
strengthened to ensure it can pay future claims.
Section 3. Definitions
This section defines the 100- and 500-year floodplain, as
well as ``Write Your Own.''
Section 4. Extension of National Flood Insurance Program
This section reauthorizes the National Flood Insurance
Program through 2013.
Section 5. Availability of insurance for multifamily properties
This section allows multifamily residential buildings,
those with 4 or more units, to purchase flood insurance up to
the commercial coverage limits, currently $500,000 for the
structure. There is currently some confusion about what level
of coverage is available for these multifamily properties.
Section 6. Reform of premium rate structure
Currently, 25 percent of properties in the flood insurance
program pay subsidized rates because they were built prior to
flood rate maps (pre-FIRM). To strengthen the financial
situation of NFIP, this section requires the following pre-FIRM
properties to pay actuarial rates (rates that reflect the true
risk of flooding) phased in over 4 years: non-primary
residences, severe repetitive loss properties, any properties
where flood losses have exceeded the property value, and any
business property. In addition, FEMA will be permitted to
increase premiums by 15% per year, up from the current 10% cap.
This section requires that any new flood insurance policy
for a property not covered by a flood insurance policy as of
the date of passage must be insured at actuarial rates.
Section 7. Mandatory coverage areas
This section requires the Director to issue an amended
regulation defining special flood hazard areas, those where
flood insurance is mandated, to include residual risk areas,
those protected from flooding by man-made structures such as
levees or dams. Once all essential residual risk areas are
mapped, properties in these areas will be required to purchase
flood insurance.
Section 8. Premium adjustment
This section prohibits FEMA's current practice of allowing
properties that are remapped into the 100-year floodplain to
indefinitely pay rates that reflect their old risk level.
Properties mapped into the 100-year flood plain must pay rates
reflecting their new risk designation. Properties covered by
flood insurance at the time of remapping will have the new
rates phased in over 2 years.
Section 9. State chartered financial institutions
This section requires that by December 31, 2008, as a
condition of state participation in the National Flood
Insurance Program, lending institutions chartered by the states
and not insured by the Federal Deposit Insurance Corporation
shall be subject to regulations by that State that are
consistent with the requirements for federal depository
institutions with regard to maintaining flood insurance on
mortgaged properties in special flood hazard areas. This will,
in effect, require mandatory purchase of flood insurance for
those properties in the 100-year floodplain with mortgages
through state-regulated lending institutions. The Committee
believes that all properties at risk, regardless of type of
mortgage or lender, should carry flood insurance coverage.
Section 10. Enforcement
This section increases the cap on civil monetary penalties
for lenders that fail to ensure that properties required to
have flood coverage purchase such coverage from $350 to $2000
per violation. This section also eliminates the $100,000 annual
cap on fines that can be levied against a lender. The Committee
urges FEMA to consistently review mandatory purchase
compliance.
Section 11. Escrow of flood insurance
This section requires that lending institutions place flood
insurance payments into an escrow account on behalf of the
borrower. This section shall apply to any mortgage outstanding
or entered into on or after the expiration of the 2-year period
beginning on the date of the enactment of this Act.
Section 12. Borrowing authority debt forgiveness
This section completely eliminates any obligations owed to
the United States Treasury by the National Flood Insurance
Program for the 2005 hurricane season. This section also
decreases the borrowing authority for the program from $20.775
billion to $1.5 billion, the borrowing authority prior to the
2005 storm season. The Committee believes this is necessary for
the future of the flood program; without debt forgiveness, FEMA
will have to substantially increase premiums on all
policyholders.
Section 13. Minimum deductibles for claims under the National Flood
Insurance Program
This section increases minimum deductibles as follows:
minimum pre-FIRM property deductibles will be increased from
$1,000 to (a) $1,500 if the property is insured for $100,000 or
less or (b) $2,000 if the property has over $100,000 in
coverage. Minimum post-FIRM property deductibles will increase
from $500 to (a) $750 for those with $100,000 of coverage or
less, or (b) $1,000 if the flood insurance policy covers
greater than $100,000.
Section 14. Considerations in determining chargeable premium rates
NFIP currently prices premiums to cover an average loss
year. This section requires NFIP to use actuarial principles in
determining rates, and to consider catastrophic loss years in
the calculation of average losses.
Section 15. Reserve fund
To help cover losses in higher-than-average loss years,
this section creates a reserve fund of 1 percent of all risk
exposure in force within the program. FEMA will be required to
put 7.5 percent of the target reserve fund away each year until
the reserve fund meets its target. This section also gives
discretion to the Director to report to Congress if hitting the
reserve target ration for any given fiscal year would have
serious negative implications for the overall program. In order
to meet reserve targets, FEMA may not increase premiums more
than otherwise allowable.
Section 16. Repayment plan for borrowing authority
This section requires detailed reporting and repayment
plans be submitted to the Treasury and Congress whenever NFIP
borrows funds to pay for losses in the National Flood Insurance
Program.
Section 17. Payment of condominium claims
This section clarifies that condominium owners with flood
insurance policies should receive claims payments regardless of
the adequacy of flood insurance coverage of the condominium
association and other condominium owners.
Section 18. Technical Mapping Advisory Council
This section re-establishes the Technical Mapping Advisory
Council, similar to the one established in 1994, to ensure that
NFIP adopts meaningful standards for updating and maintaining
maps. The Advisory Council will be comprised of government
officials and others with expertise in mapping, and will make
recommendations to FEMA on how to improve the accuracy of maps
and on standards that should be adopted for flood rate maps,
data, map maintenance efforts and funding needs and strategy.
FEMA will be required to report annually to Congress on
recommendations made by the Technical Mapping Advisory Council
and actions taken by FEMA to address such recommendations.
Section 19. National Flood Mapping Program
This section requires FEMA to establish an ongoing mapping
program to review, update and maintain flood insurance rate
maps, including all areas within the 100-year and 500-year
floodplains and areas of residual risk, including those
protected by levees and dams. Requires that the most accurate
data be used in mapping and maintenance, and requires that each
map include certain elements to ensure consistency and
accuracy. This section authorizes $400 million annually for
mapping.
Section 20. Removal of limitation on state contributions for updating
flood maps
This section lifts the current prohibition barring states
from contributing greater than 50 percent of the cost of map
modernization, thus allowing states to invest additional funds
in mapping.
Section 21. Coordination
This section requires the various federal departments (e.g.
NOAA, FEMA, USGS) to work together to coordinate mapping and
risk determination budgeting, and requires OMB, FEMA and others
to submit a joint report to Congress within 30 days of the
budget submission on the crosscutting budget issues with
respect to mapping.
Section 22. Interagency coordination study
This section requires FEMA to contract with the National
Academy of Public Administration to conduct a study on how FEMA
can improve interagency coordination on flood mapping and
funding, and how FEMA can establish joint funding mechanisms
with federal, state, and local agencies to share the collection
and use of data for mapping.
Section 23. Non mandatory participation
This section states that while it is not mandatory to
purchase flood insurance in the 500-year floodplain, due to the
risk of flooding, it requires that communities be given notice
when they are mapped into a 500-year floodplain, and requires
lenders to give notice to purchasers of property in the 500-
year floodplain.
Section 24. Notice of flood insurance availability under RESPA
This section amends 5(b) of the Real Estate Settlement
Procedures Act (RESPA) by requiring the Secretary of Housing
and Urban Development to include in the booklet distributed an
explanation of, and information on, the availability of flood
insurance.
Section 25. Testing of new flood-proofing technologies
This section permits structures to be built to test flood-
proofing methods so long as the structures are taken down after
testing. There is some concern about the safety of flood-
proofing, and this Committee believes that FEMA should consider
the safety of any planned testing.
Section 26. Participation in state disaster claims mitigation
Requires FEMA, at the request of a State Insurance
Commissioner, to take part in state-sponsored, non-binding
mediation to resolve insurance claims disputes where there are
multiple insurance claims on the same property. This section
also maintains federal jurisdiction over NFIP.
Section 27. Reiteration of FEMA responsibilities under the 2004 Reform
Act
This section reiterates the responsibilities of FEMA under
the 2004 Act to establish minimum training requirements, and
requires that FEMA report to Congress within 3 months on the
status of all reforms. The Committee is disappointed with
FEMA's progress on these critical reforms, and expects FEMA to
quickly move to implement any outstanding measures.
Section 28. Additional authority of FEMA to collect information on
claims payments
To ensure that FEMA can determine the accuracy of flood
claims payments, this section requires FEMA to collect from
insurance companies that sell flood insurance policies (Write
Your Own companies) information on total claims made on a
property in addition to flood, including wind and other
damages, if the insurance company also underwrites the
insurance for the other damages.
Section 29. Reimbursement of Write Your Own companies
This section requires that FEMA collect accurate and
adequate information on WYO company expenses. Under this
section, FEMA is required to conduct rulemaking within 180 days
formulating a data collection methodology to gather expense
information from insurance companies in a consistent manner.
Within 60 days of a final rule on expense data collection, all
Write Your Own companies will be required to submit 5 years of
data based on that methodology. Using that data, FEMA will be
required to conduct rulemaking on reimbursement rates, to
ensure that Write Your Own companies are being reimbursed based
on actual expenses, including standard business costs and
operating expenses. After the rulemakings, GAO is required to
report to Congress on the efficacy of the rules.
Section 30. Studies and reports
This section requires FEMA to submit an annual report to
Congress on NFIP's activities and financial health, including
the amount paid in premiums, losses, expenses, number of
policies, insurance in force, estimate of average loss year and
a description and amount of claims paid. This section also
requires GAO to conduct a study of pre-FIRM structures to
determine what types of properties are pre-FIRM, who owns the
properties, locations, property values, and other information.
In addition, this section requires GAO, in consultation
with the Department of Homeland Security Inspectors General
office, to review the three largest contractors used by FEMA in
operating and managing the flood insurance program. It is the
Committee's understanding that much of the administration of
this program is done by contractors. It is in the government's
best interest to ensure that this program is operating in a
cost-effective way and that there are no conflicts of interest
in using outside contractors to manage this program.
Section 31. Extension of pilot program for mitigation of severe
repetitive loss properties
This section extends the pilot program established in 2004
to mitigate severe repetitive loss properties through 2013.
FEMA will be required to issue a rule implementing the pilot
program within 90 days, and report to Congress on status and
implementation of the pilot program within 6 months. The
Committee is concerned with the status of this pilot program,
and the length of time it has taken FEMA to implement this
important program which will help protect people and properties
in harm's way, as well as mitigate properties which have been a
financial drain on the program.
Section 32. Flood insurance advocate
This section establishes an Office of the Flood Insurance
Advocate to assist policyholders with any problems they have
with the NFIP and claims, to propose administrative changes to
the Director that will help policyholders, and to make
recommendations for legislative and regulatory changes needed
in the program. The Flood Advocate will report to the Director
of NFIP but will submit annual reports directly to Congress
without review or approval at FEMA or in the Administration to
ensure independence. The Flood Advocate will have the power to
open regional offices, as well as temporary local offices to
serve policyholders after a flooding event.
COST OF LEGISLATION
October 31, 2007.
Hon. Christopher J. Dodd,
Chairman, Committee on Banking, Housing, and Urban Affairs,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for the Flood Insurance
Reform and Modernization Act of 2007.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Daniel
Hoople (for federal costs), Melissa Merrell (for the state and
local impact), and Paige Piper/Bach (for the private-sector
impact).
Sincerely,
Peter R. Orszag.
Enclosure.
Flood Insurance Reform and Modernization Act of 2007
Summary: The Flood Insurance Reform and Modernization Act
of 2007 would modify the National Flood Insurance Program
(NFIP) to increase the amount of premiums collected and reduce
the cost of expected claims. The program's outstanding debt to
the Treasury of $17.5 billion also would be forgiven. CBO
expects that enacting this legislation would improve the
financial status of the NFIP and significantly increase the
likelihood that the program could continue to offer insurance
coverage and pay claims in a timely fashion. CBO expects that
without a change in law, the NFIP will be unable to pay all
flood insurance claims promptly, and faced with a nonfunctional
program, policyholders may abandon it. In such cases, the
federal government may be called upon to provide additional
relief in the aftermath of a disaster for properties that would
have otherwise been insured. CBO cannot predict when this might
occur, but today, the program faces a future with inadequate
resources to pay its obligations.
The bill would direct the Federal Emergency Management
Agency (FEMA) to increase premium rates by 25 percent per year
on certain policies that pay less than the expected cost under
current law. FEMA would be authorized to impose average annual
rate increases of up to 15 percent on all other categories of
policyholders. CBO estimates that premium increases at this
maximum level would be necessary to establish the reserve fund
that would be created under the bill to pay insurance claims
whenever necessary. Finally, the bill would require
policyholders to carry a larger deductible and would end the
current practice of offering new policies to some property
owners at less than their expected cost. These changes would
increase the cost to policyholders and reduce the net cost of
the program to the federal government.
CBO estimates that the proposed changes to the NFIP and the
elimination of its Treasury debt would increase premium revenue
over the next 10 years by nearly $19 billion and would reduce
NFIP outlays by about $10.6 billion relative to current law.
CBO expects this legislation would allow the program to avoid
developing a growing backlog of unpaid claims, which we
estimate could reach a value of $21 billion by 2017. At the
same time, because the bill would forgive the NFIP's debt to
the Treasury, CBO estimates that the Treasury would forgo
interest payments from the NFIP of about $9.7 billion over the
2008-2017 period. The net impact of the bill--including its
effect on the NFIP and on the Treasury's interest collections--
would be an increase in direct spending of about $1.2 billion
over the 2008-2017 period.
As the value of flood insurance coverage in force continues
to grow, the expected cost of claims that the NFIP will face in
the next decade also will increase. In most years, they will
probably total between $1 billion and $5 billion--similar to
the losses the insurance program experienced in the years
before Hurricane Katrina--but there could be another
catastrophic flood in the next decade with much larger losses.
CBO's estimate assumes that annual flood insurance claims
during this period, under current law, will be equal to the
amounts anticipated by the program's actuaries on an expected
annualized basis (which includes some probability that a
catastrophic event would occur). This estimate also assumes
that substantial numbers of policyholders would drop flood
insurance coverage or find alternatives to the NFIP as their
premiums rise steadily over the period.
The bill would authorize the appropriation of $2.4 billion
over the 2008-2013 period for FEMA's flood mapping program. In
addition, it would authorize the appropriation of $190 million
over the 2008-2013 period to extend the pilot program to
mitigate severe repetitive losses through 2013 and establish
the Office of the Flood Insurance Advocate. Finally, the bill
would require FEMA to participate in state-sponsored mediation
programs and would direct the Government Accountability Office
(GAO) to conduct multiple studies on the NFIP. Assuming
appropriation of the necessary amounts, CBO estimates that
implementing those provisions would cost about $1.6 billion
over the 2008-2012 period and an additional $1 billion after
2012.
The bill contains two intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA) because it would
direct state regulatory agencies to require, and state lenders
to provide, information on flood risk to more mortgage
borrowers. CBO estimates that the cost for state governments to
comply with those mandates would be small and well below the
annual threshold established in UMRA ($66 million in 2007,
adjusted annually for inflation).
The bill also would impose private-sector mandates, as
defined in UMRA, on certain mortgage lenders. Based on
information from industry sources and FEMA, CBO expects the
direct costs to comply with those mandates would fall below the
annual threshold for private-sector mandates established in
UMRA ($131 million in 2007, adjusted annually for inflation).
Estimated cost to the Federal Government: The estimated
budgetary impact of the legislation is shown in the following
table. The costs of this legislation fall within budget
function 450 (community and regional development).
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-----------------------------------------------------------------------------------------------------------------------------------------------------------
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008-2012 2008-2017
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN DIRECT SPENDING\1\
Changes to the NFIP:
Estimated Budget Authority...... 725 600 175 0 0 0 0 0 0 0 1,500 1,500
Estimated Outlays............... 725 600 175 0 -225 -800 -1,275 -1,850 -2,525 -3,325 1,275 -8,500
Forgone Treasury Interest Receipts:
Estimated Budget Authority...... 775 925 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 4,700 9,700
Estimated Outlays............... 775 925 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 4,700 9,700
Total Changes:
Estimated Budget Authority.. 1,500 1,525 1,175 1,000 1,000 1,000 1,000 1,000 1,000 1,000 6,200 11,200
Estimated Outlays........... 1,500 1,525 1,175 1,000 775 200 -275 -850 -1,525 -2,325 5,975 1,200
CHANGES IN SPENDING SUBJECT TO APPROPRIATION
Flood Mapping:
Authorization Level............. 400 400 400 400 400 400 0 0 0 0 2,000 2,400
Estimated Outlays............... 100 260 340 400 400 400 300 140 60 0 1,500 2,400
Severe Repetitive Loss Mitigation
Pilot Program:
Authorization Level............. 0 0 40 40 40 40 0 0 0 0 120 160
Estimated Outlays............... 0 0 8 24 40 40 32 16 0 0 72 160
Office of Flood Insurance Advocate:
Authorization Level............. 5 5 5 5 5 5 0 0 0 0 25 30
Estimated Outlays............... 3 5 5 5 5 5 2 0 0 0 23 30
GAO Studies:
Estimated Authorization Level... 1 0 0 0 0 0 0 0 0 0 1 1
Estimated Outlays............... 1 0 0 0 0 0 0 0 0 0 1 1
Total Changes:
Estimated Authorization Level... 406 405 445 445 445 445 0 0 0 0 2,146 2,591
Estimated Outlays........... 104 265 353 429 445 445 334 156 60 0 1,596 2,591
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\1\In addition, CBO estimates that revenues from civil penalties assessed on lenders would increase by about $1 million a year over the 2008-2017 period.
Basis of estimate: For this estimate, CBO assumes that the
bill will be enacted by the end of calendar year 2007 and that
the authorized amounts will be appropriated for each fiscal
year.
To estimate program expenses over the next 10 years, CBO
assumes that reimbursement agreements to private insurance
companies that sell and service flood insurance policies on the
behalf of the federal government will remain unchanged. In
addition, we assume that claims over the next 10 years, under
current law, will equal amounts anticipated by the program on
an actuarial basis (which includes some proportionate risk of
catastrophic events) and that the premium currently assessed by
FEMA on unsubsidized policies is sufficient to cover the full
risk of the insurance.
Direct spending and revenues
Over the 2008-2017 period, CBO estimates that enacting the
legislation would reduce net outlays for the flood insurance
program by about $8.5 billion and would increase the Treasury's
outlays for interest by about $9.7 billion--an estimated net
increase in direct spending of $1.2 billion over the ten year
period.
Changes to the NFIP. The Flood Insurance Reform and
Modernization Act of 2007 contains several provisions that
together would govern the magnitude of future rate increases
for flood insurance and reduce the amount of expected claims.
Those provisions would:
<bullet> Require the NFIP to establish a reserve
fund;
<bullet> Increase the ceiling on average annual rate
increases that can be imposed on policyholders from 10
percent a year to 15 percent a year;
<bullet> Forgive the program's outstanding debt to
the Treasury;
<bullet> Phase out subsidized premiums for some
policyholders;
<bullet> Require policyholders to carry a larger
deductible; and
<bullet> Prohibit FEMA from subsidizing new or
previously unsubsidized policies.
CBO estimates that those changes would reduce net outlays
of the NFIP because premium increases would be greater than
those that would occur under current law and because no
interest would have to be paid to the Treasury on the program's
current debt. That decline would be partially offset by higher
claims payments because, under the bill, the NFIP would have
sufficient funds to pay expected claims; under current law, CBO
expects it would not.
Establish a Reserve Fund and Increase the Limit on Annual
Rate Increases. FEMA would be required to establish a reserve
fund equal to at least 1 percent of the value of flood
insurance coverage in force during the previous year. As of
August 2007, FEMA reported that flood insurance coverage in
force totaled about $1.1 trillion. During the five-year period
prior to the hurricane seasons of 2004 and 2005, total coverage
had been increasing by about 7 percent per year. If such a rate
were to continue into the future, the amount of flood insurance
coverage would reach about $2.1 trillion by 2017. CBO
estimates, however, that coverage in force would reach about
$1.8 trillion under the bill, because some policyholders would
drop coverage as a result of the premium increases estimated to
occur under the bill. FEMA would gradually accumulate reserves
by depositing an amount equal to 7.5 percent of the required
reserve in each year until the fund is fully capitalized.
The bill also would increase the maximum amount that FEMA
could increase average premium rates within each risk category
from 10 percent to 15 percent. CBO expects that FEMA would need
to increase most rates by the maximum allowable percentage
under the bill in order to pay claims and accumulate the
required reserves, even if those rates exceed the amount FEMA
estimates would cover the full cost of providing flood
insurance. Even so, assuming that claims over the next several
years occur at the level estimated by actuarial studies, a
significant portion of the increased premium collections would
be needed to pay flood claims and would not be available to
accumulate in a reserve. Therefore, CBO estimates that it would
be unlikely that FEMA would be able to collect enough premiums
to meet the reserve fund target in the first few years after
enactment. However, as successive rate increases are
implemented, we estimate that the reserve fund would begin to
accumulate reserves totaling about $8.5 billion by 2017, which
is over half the amount that would be required to be deposited
under the bill by that time. (If losses due to floods are less
than the actuarial average over the period, the balance would
be greater. If losses exceed the average--for example, because
of a catastrophic event--the balance would be smaller. Based on
FEMA's actuarial review of the NFIP, CBO estimates that the
expected annualized loss would be about $2.4 billion for
policies in force in 2008.)
For this estimate, CBO assumes that FEMA could begin to
implement premium increases to establish the reserve fund in
May 2009. In the past, FEMA has typically proposed rate
increases in November that would be effective in May of the
following year. It takes a year before any rate increase is
fully implemented because individual flood insurance policies
are renewed throughout the year.
To estimate the amounts that could be collected and
deposited into the reserve fund, CBO reduced the projected
value of flood insurance in force to reflect the likelihood
that some policyholders would drop NFIP coverage after
successive years of 15 percent annual rate increases which
could quadruple their insurance premiums if sustained for 10
years. Policyholders living in lower-risk areas would be
especially likely to seek out and find alternative insurance
products if their cost to participate in the NFIP far exceeds
their actuarial risk. In addition, some policyholders might
retain their policies, but choose to reduce the amount of
coverage.
Increase Rates for Pre-FIRM Properties. The bill also would
authorize the NFIP to implement larger average rate increases
on certain properties that were built before flood insurance
rate maps (FIRMs) were completed or before 1975, whichever is
later. Those properties are collectively known as pre-FIRM
properties. The bill would authorize annual average rate
increases of up to 25 percent for certain pre-FIRM properties,
including:
<bullet> Nonresidential structures;
<bullet> Nonprimary residences (such as vacation
homes);
<bullet> Properties that have been flooded four or
more times with total claims payments exceeding
$20,000; or properties with two or more claims
exceeding the fair market value of the property (also
know as severe repetitive loss properties);
<bullet> Properties that sustain damage exceeding 50
percent of the fair market value of the property after
enactment of the bill; and
<bullet> Properties that undergo improvements or
renovations exceeding 30 percent of the fair market
value of the property.
Under current law, the NFIP charges many pre-FIRM
properties a premium that is less than the actuarial cost of
the insurance. On average, FEMA estimates that those policies
are discounted between 60 and 65 percent. Under the bill, FEMA
would increase rates on those specified types of pre-FIRM
properties by 25 percent per year until the actuarial rate is
achieved. At this rate, CBO expects that most of those pre-FIRM
properties would start paying actuarial premiums within the
next 10 years.
Based on information from FEMA, CBO estimates that about
475,000 pre-FIRM properties would be affected by the bill. The
average premium for those properties is about $800 a year. CBO
expects that owners of some of those properties would either
drop flood insurance coverage or reduce their level of coverage
in response to an increase in premium charges.
Raise Deductible for Pre-FIRM Properties. Section 13 would
increase the annual deductible from $1,000 to $1,500, for pre-
FIRM properties with coverage of less than $100,000 and from
$1,000 to $2,000 for pre-FIRM properties with coverage of more
than $100,000. The bill also would increase the deductible for
post-FIRM properties from $500 to $750 for coverage less than
$100,000 and from $500 to $1,000 for coverage greater than
$100,000. Based on information from FEMA, CBO estimates that
claims payments for all properties would decrease by an average
of 5 percent if this higher deductible were implemented.
Forgone Treasury Interest Payments. Section 12 would
relieve the NFIP of its obligation to repay funds borrowed to
pay claims from the 2005 hurricane season. As of September
2007, the program had an outstanding debt of $17.5 billion.
Current law requires FEMA to repay any borrowed funds (with
interest) as it collects premiums. In the absence of this
legislation, FEMA would need to use a portion of its premium
income to repay debt-service costs to the Treasury. Under this
bill, such payments would not be necessary, and income that the
NFIP would otherwise use to service this debt would instead be
used to pay policyholders' claims and to accumulate reserves.
Interest payments from the NFIP to the Treasury are
intragovernmental transactions. Eliminating those payments
would increase the Treasury Department's net outlays by an
estimated $1 billion per year because it would be receiving
less interest income. While the forgiveness of the debt would
reduce FEMA's outlays for interest payments, CBO expects that
the program would use such funds to pay claims that would have
otherwise gone unpaid under current law. As such, CBO estimates
that forgiving FEMA's obligations to the Treasury would
increase net outlays of the federal government by $9.7 billion
over the 2008-2017 period.
Civil Penalties. Section 10 would increase the civil
penalty from $350 to $2,000 for lenders that do not enforce the
mandatory flood insurance purchasing requirement. CBO estimates
that the increased revenue from the civil penalties established
under this bill would amount to about $1 million a year.
Other NFIP Modifications. The bill would make certain
changes to the NFIP that might increase the number of policies
in the program and result in the program collecting more
premium income than it would under current law. CBO does not
have sufficient information to estimate the number of policies
that could be added to the program from enacting those
sections. However, because CBO assumes that the additional
policies generated by those provisions would be priced
initially at full-risk rates, any additional premiums collected
would be at least sufficient to pay out claims on an expected-
value basis.
Mandatory Coverage Areas. Section 7 would require that
homes located behind levees, dams, and other man-made
structures become part of special flood hazard areas. The bill
would require property owners to purchase flood insurance once
the NFIP updates its flood maps to include those new areas.
Expansion of Mandatory Coverage Requirement to State
Chartered Lenders. Section 9 would require that the NFIP
refrain from selling flood insurance policies in states that do
not require state-chartered lenders to require that certain
loans be covered by flood insurance at certain levels. Under
current law, such a requirement already exists for lenders
insured by the Federal Deposit Insurance Corporation.
Nonmandatory Participation for the 500-year Floodplain.
Section 23 would require the NFIP and regulated lending
institutions to notify communities if they are entirely or
partially located within the 500-year floodplain (that is, an
area with at least a 0.2 percent chance of being inundated with
water in any year). Owners of properties within the 500-year
floodplain (but outside of the 100-year floodplain) would not
be subject to mandatory purchase requirements but might
voluntarily purchase flood insurance upon receiving
notification of potential risk.
Spending subject to appropriation
The bill also would authorize additional discretionary
spending. Assuming appropriation of the specified amounts, CBO
estimates that such spending would total about $1.6 billion
over the 2008-2012 period.
Flood Mapping Program. Section 19 would authorize the
appropriation of $400 million for each of fiscal years 2008
through 2013 to update and maintain flood maps. In 2007, the
Congress provided $199 million for this activity (see Public
Law 109-295). Under the bill, maps also would be updated to
include the 500-year floodplain and areas that would be flooded
if a dam or levee failed. In addition, the bill would
reestablish the Technical Mapping Advisory Council to assist
with managing flood mapping activities. Based on historical
spending rates for this program, CBO estimates that
implementing this provision would cost $1.5 billion over the
2008-2012 period and an additional $900 million thereafter,
subject to appropriation of the specified amounts.
Severe Repetitive Loss Mitigation Pilot Program. Section 31
would authorize the appropriation of $160 million to extend
through 2013 a pilot program to reduce potential future damages
to properties that have experienced repetitive losses through
floods. In 2004, the Congress authorized $40 million a year for
the pilot program to operate through 2009 and, in 2007,
provided $50 million through the National Flood Insurance Fund
(NFIF) for this activity (see Public Law 109-295). The bill
would continue that authorization level for fiscal years 2010
through 2013. CBO estimates that implementing this section
would cost $72 million over the 2008-2012 period and an
additional $88 million after 2012, subject to appropriation of
the authorized amounts.
Over the next 10 years, some or all of such costs might be
offset by lower claims payments, depending on the effectiveness
of the mitigation efforts. CBO expects that such lower claims
would have no effect on premium levels, but would result in
additional amounts set aside in the reserve fund. Furthermore,
savings from lower future claims cannot be attributed directly
to this legislation because the size and duration of any
mitigation program would depend on amounts provided in future
appropriation acts.
Office of Flood Insurance Advocate. Section 32 would
authorize the appropriation of $5 million a year over the 2008-
2013 period to establish the Office of the Flood Insurance
Advocate. The office would assist in resolving conflicts
between policyholders and the NFIP and would propose changes in
the administrative process to prevent future conflicts from
occurring. CBO estimates that implementing this provision would
cost $23 million over the next five years, subject to
appropriation of the specified amounts to the National Flood
Insurance Fund.
Studies. The bill would direct the Government
Accountability Office to conduct several studies on the NFIP,
including an annual report on the financial activities of the
program. CBO estimates that conducting those studies would cost
about $1 million over the 2008-2012 period, subject to
appropriation of the necessary funds.
Participation in Claims Mediation. Section 26 would require
FEMA to participate in state-claims mediation programs to help
expedite the settlement of disputed flood insurance claims. The
additional administrative costs of this provision are uncertain
because it is unclear how the program would be implemented. If
large staff increases were necessary, however, it is likely
that the NFIP would increase the policy fee assessed on
policyholders to cover this additional cost--resulting in no
net cost to the federal government.
Intergovernmental and private-sector impact: The bill
contains two intergovernmental mandates as defined in UMRA. It
would require state agencies that regulate mortgage lenders to
require that those lenders provide borrowers with information
about flood insurance if the property covered by the mortgage
is located in the 500-year floodplain. It also would require
state agencies that offer direct mortgages to provide such
information. Based on information from mortgage lenders, state
regulatory agencies, and state housing authorities, CBO
estimates that the cost for state regulatory agencies would be
minimal and the number of loans for which state agencies would
be required to provide flood insurance information would be
small. The total cost for state agencies to comply with those
requirements would be well below the annual threshold
established in UMRA ($66 million in 2007, adjusted annually for
inflation).
The legislation would impose private-sector mandates, as
defined in UMRA, on certain mortgage lenders. Based on
information from industry sources and FEMA, CBO expects the
direct costs to comply with those mandates would fall below the
annual threshold for private-sector mandates established in
UMRA ($131 million in 2007, adjusted annually for inflation).
The bill would require federally regulated mortgage lenders
when making, increasing, extending, or renewing any loan
secured by property located in an area within the 500-year
floodplain to notify the purchaser or lessee and the servicer
of the loan that such property is located in that floodplain.
The bill also would require certain mortgage lenders to notify
policyholders that insurance coverage may cease with the final
mortgage payment and to provide direction as to how the
homeowner may continue flood insurance coverage after the life
of the loan. In addition, certain mortgage lenders would be
required to deposit premiums and fees for flood insurance in an
escrow account on behalf of the borrower. According to industry
representatives, the cost for mortgage lenders to provide the
additional notices and direction and to escrow flood insurance
payments would be small.
Previous CBO estimates: On September 20, 2007, CBO
transmitted a cost estimate for H.R. 3121, the Flood Insurance
Reform and Modernization Act of 2007, as ordered reported by
the House Committee on Financial Services. Both bills would
modify the NFIP, but contain substantial differences that are
reflected in the cost estimates.
Estimate prepared by: Federal Costs: Daniel Hoople; Impact
on State, Local, and Tribal Governments: Melissa Merrell;
Impact on the Private Sector: Paige Piper/Bach.
Estimate approved by: Theresa Gullo, Deputy Assistant
Director for Budget Analysis.
REGULATORY IMPACT STATEMENT
In accordance with paragraph 11(b), rule XXVI, of the
Standing Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact of the bill.
This legislation seeks to address several gaps in coverage
areas within the National Flood Insurance Program. Section 9 of
this legislation requires states, as a requirement of
participation in the program, to require state-chartered
financial institutions to maintain flood insurance on all
current and future mortgages starting December 31, 2008. This
section will enhance safety and soundness of state-chartered
financial institutions by ensuring that assets used to secure
loan payments are sufficiently covered in the event that assets
are damaged or destroyed by a flooding event. Section 10
updates the maximum allowable civil money penalties per
violation that regulators may impose against financial
institutions for failing to comply with the provisions of this
Act. Section 10 also eliminates the $100,000 annual cap that
regulators may impose on financial institutions to ensure
compliance with this Act. Section 11 of this Act requires that
all flood insurance payments are escrowed, which insures that
flood insurance payments remain current and that assets used to
secure loan payments are protected.
This legislation also requires the NFIP to keep and
maintain a reserve fund of one percent of total risk exposure.
This provision ensures that policyholders' claims will be paid
without the assistance of the U.S Treasury and is also
consistent with the goal of working to eliminate some portion
of the $1.3 billion annual subsidy for the program.
It is expected that the reported bill will have no impact
on the personal privacy of the current or prospective flood
insurance policyholders. This bill is expected to strengthen
the financial status of the NFIP by making rates more
actuarially sound and expanding the population purchasing flood
insurance. This bill also provides for more equitable treatment
between policyholders as well as protecting the U.S. taxpayer
from further loss.
CHANGES IN EXISTING LAW (CORDON RULE)
On October 17, 2007, the Committee unanimously approved a
motion by Senator Dodd to waive the Cordon rule. Thus, in the
opinion of the Committee, it is necessary to dispense with
section 12 of rule XXVI of the Standing Rules of the Senate in
order to expedite the business of the Senate.
<all>