[Senate Report 110-214]
[From the U.S. Government Publishing Office]



                                                       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
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\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:
           Require the NFIP to establish a reserve 
        fund;
           Increase the ceiling on average annual rate 
        increases that can be imposed on policyholders from 10 
        percent a year to 15 percent a year;
           Forgive the program's outstanding debt to 
        the Treasury;
           Phase out subsidized premiums for some 
        policyholders;
           Require policyholders to carry a larger 
        deductible; and
           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:
           Nonresidential structures;
           Nonprimary residences (such as vacation 
        homes);
           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);
           Properties that sustain damage exceeding 50 
        percent of the fair market value of the property after 
        enactment of the bill; and
           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.

                                  
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