Flood Insurance: Extent of Noncompliance with Purchase		 
Requirements Is Unknown (21-JUN-02, GAO-02-396).		 
                                                                 
The Federal Emergency Management Agency (FEMA) run National Flood
Insurance Program (NFIP) has combined flood hazard mitigation	 
efforts and insurance to protect homeowners against losses from  
floods. The program provides an incentive for communities to	 
adopt floodplain management ordinances to mitigate the effect of 
flooding upon new or existing structures. Virtually all 	 
communities in the country with flood-prone areas now participate
in the NFIP, and over four million U.S. households have flood	 
insurance. Nevertheless, the President's proposed budget for 2003
characterizes the NFIP as "moderately effective," because many	 
at-risk properties remain uninsured. The proposed budget	 
establishes a goal to increase flood insurance policies in force 
by five percent in 2003 and would increase funding for flood zone
mapping activities to better identify at-risk properties.	 
Although the assessment and goal described in the proposed budget
apply to the entire NFIP, the success of a particular component  
of the program--the mandatory purchase requirement--has been the 
subject of debate for many years. The federal bank regulators	 
overseeing lending institutions that hold or service mortgages on
properties that must have flood insurance believe that there is a
high level of compliance. However, others have questioned whether
the requirements are being met. The different types of evidence  
collected by bank regulators and government-sponsored enterprises
on the one hand, and FEMA on the other, are the bases for their  
opposing perspectives on lender noncompliance with flood	 
insurance purchase requirements. Federal organizations overseeing
lenders use bank examinations and loan portfolio reviews to	 
examine a nonstatistical sample of loans for compliance. These	 
organizations uncovered few significant violations, leading them 
to believe that lenders are complying with flood insurance	 
purchase requirements. In contrast, FEMA relies on its own	 
noncompliance estimates from data it generates itself, from other
entities, limited studies it conducted, and anecdotal evidence	 
from public officials and others with knowledge of the program to
gauge noncompliance. These data indicate that lenders are not	 
adequately complying with the requirements. GAO's analysis of	 
readily available data does not suggest a major noncompliance	 
problem at loan origination in highly flood-prone areas.	 
Property-specific data on mortgages, flood zone determinations,  
and flood insurance policies--compiled at loan origination and at
various points during the life of the loan--would be needed to	 
fully measure compliance. These data are needed to ensure that	 
homeowners purchase, maintain, and do not terminate required	 
flood insurance.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-396 					        
    ACCNO:   A03623						        
  TITLE:     Flood Insurance: Extent of Noncompliance with Purchase   
Requirements Is Unknown 					 
     DATE:   06/21/2002 
  SUBJECT:   Data collection					 
	     Flood insurance					 
	     Government guaranteed loans			 
	     Noncompliance					 
	     Program evaluation 				 
	     Regulatory agencies				 
	     FEMA National Flood Insurance Program		 

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GAO-02-396
     
Report to Congressional Committees

United States General Accounting Office

GAO

June 2002 FLOOD INSURANCE Extent of Noncompliance with Purchase Requirements
Is Unknown

GAO- 02- 396

Page i GAO- 02- 396 Extent of Noncompliance with Purchase Requirements
Letter 1

Results in Brief 4 Background 5 Noncompliance Debate Is Based on Differing
Types of Data 8 GAO Analysis of Available Data Suggests Noncompliance

Could Be Low at Loan Origination 12 Mortgage, Flood Determination, and
Insurance Policy Data

Needed to Fully Assess Compliance, but Challenges Exist 15 Agency Comments
and Our Evaluation 19

Appendix I Objectives, Scope, and Methodology 21 Flood- Prone Area Data 23
Mortgage Data- All New Mortgages in 1999 That Were Subject to

NFIP Regulations 23 Flood Insurance Data 24 Analysis of the Census- Tract,
Mortgage, and Flood Insurance Data 24

Appendix II Federal Financial Institution Regulators? Compliance Policies
and Procedures 26

Appendix III Review Procedures Established by Freddie Mac and Fannie Mae 28

Fannie Mae 28 Freddie Mac 29

Appendix IV Comparison of Flood Insurance Policies Issued to Mortgages
Originated in Certain Flood- Prone Census Tracts in 1999 31

Appendix V Comments from the Federal Emergency Management Agency 33 Contents

Page ii GAO- 02- 396 Extent of Noncompliance with Purchase Requirements
Appendix VI Comments from the Federal Deposit Insurance

Corporation 37

Appendix VII Comments from the Federal Reserve Board 38

Appendix VIII Comments from Fannie Mae 39

Appendix IX Comments from Freddie Mac 41

Appendix X GAO Contacts and Staff Acknowledgments 43 GAO Contacts 43 Staff
Acknowledgments 43

Figure

Figure 1: Flood Zone Determination Portion of the Lender Mortgage Approval
Process 7

Page iii GAO- 02- 396 Extent of Noncompliance with Purchase Requirements
Abbreviations

FDIC Federal Deposit Insurance Corporation FEMA Federal Emergency Management
Agency FRB Federal Reserve Board GSE government- sponsored enterprises HMDA
Home Mortgage Disclosure Act HUD Department of Housing and Urban Development
IG Office of the Inspector General MSA metropolitan statistical area NFIP
National Flood Insurance Program OCC Office of the Comptroller of the
Currency OFHEO Office of Federal Housing Enterprise Oversight OTS Office of
Thrift Supervision SFHA special flood hazard area SFHDF standard flood
hazard determination form VA Department of Veterans Affairs

Page 1 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

June 21, 2002 The Honorable Barbara A. Mikulski Chairman The Honorable
Christopher S. Bond Ranking Member Subcommittee on VA, HUD, and Independent
Agencies Committee on Appropriations United States Senate

The Honorable Paul S. Sarbanes Chairman The Honorable Phil Gramm Ranking
Member Committee on Banking, Housing, and Urban Affairs United States Senate

The Honorable Charles E. Schumer Chairman The Honorable Jim Bunning Ranking
Member Subcommittee on Economic Policy Committee on Banking, Housing, and
Urban Affairs United States Senate

Floods have inflicted more economic losses upon the United States than any
other natural disaster. Since its inception 34 years ago, the National Flood
Insurance Program (NFIP) has combined flood hazard mitigation efforts and
insurance to protect homeowners against losses from floods. The program,
which is administered by the Federal Emergency Management Agency (FEMA),
provides an incentive for communities to adopt floodplain management
ordinances to mitigate the effects of flooding upon new or existing
structures. It offers property owners in participating communities a
mechanism- federal flood insurance- to cover flood losses without increasing
the burden on the federal government to provide disaster relief payments.
Virtually all communities in the country with flood- prone areas now
participate in the NFIP, and over 4 million U. S. households have flood
insurance. Nevertheless, the President?s proposed budget for 2003
characterizes the NFIP as

?moderately effective,? because many at- risk properties remain uninsured.
The proposed budget establishes a goal to increase the number of flood
insurance policies in force by 5 percent in 2003 and would increase

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

funding for flood zone mapping activities to better identify at- risk
properties.

While the assessment and goal described in the proposed budget apply to the
entire NFIP, the success of a particular component of the program- the
mandatory purchase requirement- has been the subject of debate for many
years. Since 1973, flood insurance has been required for properties located
in flood- prone areas of participating communities for the life of mortgage
loans made or held by federally regulated lending institutions 1 or
guaranteed by federal agencies. Mortgages purchased by governmentsponsored
enterprises (GSE) were also included under the National Flood Insurance
Reform Act of 1994. 2 In 1990, we reported that differing viewpoints had
emerged about whether all homeowners required to obtain flood insurance
actually had it; 3 these differences of opinion still remain. Lending
institutions and companies that hold or service mortgages on properties that
must have flood insurance are responsible for ensuring that this insurance
is purchased when the mortgage is originated and maintained over the life of
the loan. The federal bank regulators overseeing these lending institutions
believe that there is a generally high level of compliance with the flood
insurance purchase requirements. Reports issued by FEMA?s Office of
Inspector General (IG) and others, however, have questioned whether the
requirements are being met, and FEMA therefore has stated that noncompliance
rates might be significant. Still, no definitive analysis has been conducted
that measures the extent to which property owners who are required to
purchase flood insurance actually do so.

Concerned about whether lender noncompliance could be high, the Subcommittee
on VA, HUD, and Independent Agencies, Senate Committee on Appropriations,
mandated that we examine lender compliance with the mandatory insurance
purchase requirement. Additionally, the Senate Committee on Banking,
Housing, and Urban Affairs and its Subcommittee on Economic Policy asked us
to review this issue. As agreed with your offices, this report addresses the
following questions:

1 A federally regulated lending institution is any bank, savings and loan
association, credit union, farm credit bank, federal land bank association,
production credit association, or similar institution supervised by a
federal entity for lending regulation.

2 A GSE is a privately owned, federally chartered corporation that serves a
public purpose. 3 U. S. General Accounting Office, Flood Insurance:
Information on the Mandatory Purchase Requirement, GAO/ RCED- 90- 141FS
(Washington, D. C.: Aug. 22, 1990).

Page 3 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

1. What are the bases for the differing perspectives on lender
noncompliance?

2. What does other readily available data indicate about the extent of
noncompliance?

3. What data would be needed to fully measure noncompliance? To address
these objectives, we spoke with and obtained information from FEMA, federal
regulators of lending institutions, GSEs, flood zone determination
companies, mortgage companies, and others to obtain perspectives and to
collect readily available data on lender noncompliance. We also obtained and
analyzed home mortgage origination data and flood insurance policy data for
certain flood- prone areas to obtain an independent perspective on the
extent of noncompliance at the time mortgages are made. However, this
analysis could not match specific mortgages with insurance policies to
determine a compliance level. Moreover, data were not available to determine
whether insurance was in force at loan origination for all geographic areas
or during the life of the mortgage loan; therefore, we could not analyze all
aspects of noncompliance with the mandatory purchase requirements. This
report focuses on the activities of the following regulatory agencies that
have regulatory authority over most of the pertinent mortgage market: the
Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board
(FRB), the Office of the Comptroller of the Currency (OCC), and the Office
of Thrift Supervision (OTS). We also focused on the two GSEs that have
direct responsibility for compliance- the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac). Our work focused only on compliance with mandatory flood
insurance purchase requirements for residential properties. No analysis is
provided in this report about participation rates in the NFIP, a measure
that encompasses homeowners in flood- prone areas who are not required to
obtain flood insurance. We testified about participation rates in May 2001.
4 See appendix I for more details on our scope and methodology.

We conducted our review from April 2001 through April 2002 in accordance
with generally accepted government auditing standards.

4 U. S. General Accounting Office, Flood Insurance: Emerging Opportunity to
Better Measure Certain Results of the National Flood Insurance Program, GAO-
01- 736T (Washington, D. C.: May 15, 2001).

Page 4 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

The different types of evidence collected by bank regulators and GSEs on the
one hand, and FEMA on the other, are the bases for their opposing
perspectives on lender noncompliance with flood insurance purchase
requirements. Federal organizations responsible for overseeing lenders use
bank examinations and loan portfolio reviews to examine a nonstatistical
sample of loans for compliance. These organizations have uncovered few
significant violations, leading them to believe that lenders are complying
with flood insurance purchase requirements. In contrast, FEMA relies on its
own noncompliance estimates that are based on data generated itself and
other entities, limited studies it conducted, and anecdotal evidence from
public officials and others with knowledge of the program to gauge
noncompliance. These data have indicated to FEMA officials that lenders are
not adequately complying with the requirements.

Our analysis of readily available data does not suggest a major
noncompliance problem at loan origination in the highly flood- prone areas
we reviewed. We obtained and analyzed readily available 1999 data on the
number of new mortgages reported by lenders and new flood insurance policies
as reported by FEMA for the nation?s most flood- prone areas. Our comparison
of the number of new mortgages and policies for 471 highly flood- prone
areas in 17 states does not suggest that noncompliance was a major problem
in these areas because, for most of the areas, more insurance policies were
purchased than mortgages originated. In 44 locations- 9 percent of the areas
we analyzed- the data suggest there could be some noncompliance because, in
those areas, fewer insurance policies were purchased than mortgages
originated. However, explanations exist that may account for these areas
having fewer new policies than mortgages, such as mortgages originated for
condominiums, which have different flood insurance purchase requirements.

Property- specific data on mortgages, flood zone determinations, and flood
insurance policies- compiled at loan origination and at various points
during the life of the loan- would be needed to fully measure compliance.
These data are needed to ensure that homeowners purchase, maintain, and do
not terminate flood insurance when it is required. Comparing these data
would allow the computation of compliance rates nationally, regionally, or
locally and would- with an additional piece of data, the mortgage lender
identification numbers- identify specific noncomplying lenders. However,
there are a number of challenges to obtaining and analyzing these data.
These challenges include establishing reporting requirements on lenders to
provide relevant mortgage data, determining an appropriate authority to
receive and compare these data, and determining the costs and benefits of
obtaining these data. The regulators Results in Brief

Page 5 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

and GSEs, on the one hand, and FEMA, on the other, have differing viewpoints
of the viability of and the need for obtaining these data.

We provided a draft of this report to FEMA, federal bank regulatory
agencies- FDIC, FRB, OCC, and OTS- and GSEs- Fannie Mae and Freddie Mac-
that are responsible for the issues discussed in this report. All of these
organizations generally agreed that the report (1) presents an accurate and
objective presentation of the differing perspectives on noncompliance with
the mandatory purchase requirements and (2) narrows the concerns over
noncompliance to the area of policy renewals and retention. FEMA also
provided additional information regarding its belief that problems exist
with insurance policy retention and its plans to address this concern.
Additionally, several organizations provided technical comments that we
considered and incorporated in the report where appropriate.

Created by the National Flood Insurance Act of 1968, 5 the NFIP is designed
to protect homeowners from flood losses while also minimizing the exposure
of property to flood damage. To participate in the program, communities must
adopt and enforce floodplain management ordinances to mitigate the effects
of flooding on new or existing homes in special flood hazard areas (SFHA).
Flood insurance is available in communities participating in the NFIP and is
offered to eligible homeowners for homes and their contents. FEMA, through
its Federal Insurance and Mitigation Administration, manages the federal
flood insurance program and floodplain mitigation programs.

When the program was created, the purchase of flood insurance was voluntary.
To increase the impact of the program, however, the Congress amended it in
1973 and in 1994 to require the purchase of flood insurance by many
homeowners and to place the onus for ensuring compliance upon lending
institutions. Currently, homeowners in SFHAs in participating communities
must purchase flood insurance as a condition of obtaining mortgages on their
homes if the loans are

 made, increased, extended, or renewed by federally regulated lending
institutions;

5 P. L. 90- 448. Background

Page 6 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

 sold to Fannie Mae or Freddie Mac; 6 or

 made, insured, or guaranteed by a federal agency, such as the Small
Business Administration, Federal Housing Administration, or the Department
of Veterans Affairs. 7

No definitive data on the number of mortgages meeting these criteria exist;
however, on the basis of 1999 data reported by lenders, most mortgaged
properties meet the above criteria and, if in a SFHA, would be subject to
the requirements of the National Flood Insurance Act.

Federally regulated lending institutions- which make most of the mortgages
in the United States- and loan servicers 8 must ensure that, where required,
flood insurance is purchased at the time that the mortgage is obtained and
maintained throughout the life of the loan, or added if the residence
involved is reclassified as being located in a SFHA. They may not make,
increase, extend, or renew a loan secured by a structure located in a SFHA
in a participating community unless the structure is covered by flood
insurance. Lenders generally purchase flood zone determinations from flood
zone determination companies that use FEMA flood maps and other data to
ascertain if properties are situated in flood zones. The companies record
the results of their determinations on a standard flood hazard determination
form (SFHDF) and provide this form to lenders, who are required to maintain
it. Figure 1 shows the process that lenders generally follow for obtaining
and recording flood zone determinations as part of their mortgage approval
process.

6 Fannie Mae and Freddie Mac are GSEs chartered by the Congress to support
residential housing by providing a secondary market for mortgages. 7 There
are some exceptions to these requirements. A property that meets all of
these criteria may be exempted if it can be proven that the property?s
elevation actually exceeds the flood plain even though it is not accurately
recorded on the flood map. In such cases, FEMA issues letters of map
amendment or letters of map revision. Conversely, homeowners without
mortgages or whose mortgages are not made by regulated lenders may be
required to purchase and maintain flood insurance as a condition of
accepting federal disaster relief.

8 A servicer is the entity responsible for (1) receiving any scheduled,
periodic payments from a borrower under the terms of a loan, including
amounts for taxes, insurance premiums, and other charges with respect to the
property securing the loan; and (2) making payments of principal and
interest and any other payments from the amounts received from the borrower
as may be required under the terms of the loan. Some lenders do their own
servicing, while others sell the servicing rights to loans in their
portfolio.

Page 7 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

Figure 1: Flood Zone Determination Portion of the Lender Mortgage Approval
Process

Legend: SFHDF standard flood hazard determination form Source: GAO analysis
of information provided by FEMA, federal regulatory, insurance, and mortgage
loan- servicing officials.

If a lender or servicer determines at any time during the life of the
mortgage that a property is located in a SFHA- even if a flood zone
remapping places it in a SFHA after the mortgage was first originated- the
lender or servicer must ensure the purchase of the appropriate flood
insurance.

The federal agencies that regulate lending institutions and the GSEs were
also given certain compliance responsibilities. As required by the 1994
amendments to the National Flood Insurance Act, the regulatory agencies

Page 8 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

established rules directing lending institutions not to make loans secured
by improved real estate located in SFHAs unless flood insurance had been
purchased. The regulatory agencies are to examine loans for compliance with
these regulations during their periodic examinations of member financial
institutions, using uniform policies and procedures for assessing lender
compliance with flood insurance requirements. The GSEs were required to
implement procedures reasonably designed to ensure that flood insurance
coverage exists for any purchased loan that is secured by improved real
estate located in a SFHA. The GSEs have established flood insurance purchase
requirements to be followed by institutions that sell mortgages to them or
service mortgages for them and have procedures in place to assess loans for
compliance. Appendix II contains additional information on bank examination
procedures and processes, and appendix III contains additional information
on the review and audit procedures followed by GSEs.

Officials involved with the flood insurance program developed contrasting
viewpoints about whether lenders are complying with flood insurance purchase
requirements primarily because the officials use differing types of data to
reach their conclusions. Federal bank regulators and officials from Fannie
Mae and Freddie Mac base their belief that lenders are generally complying
with the NFIP?s purchase requirements on regulators? examinations and GSEs?
reviews conducted to monitor and verify lender compliance. In contrast, FEMA
officials believe that many lenders frequently are not complying with the
requirements, which is an opinion based largely on noncompliance estimates
computed from data on mortgages, flood zones, and insurance policies;
limited studies on compliance; and anecdotal evidence indicating that
insurance is not in place where required. Neither side, however, is able to
substantiate its differing claims with statistically sound data that provide
a nationwide perspective on lender noncompliance.

On the basis of their bank exams and compliance reviews, bank regulators and
GSE officials believe that the rates of noncompliance with flood insurance
purchase requirements are very low. According to representatives of the
regulatory agencies, very few violations of flood insurance requirements
have occurred. Moreover, according to the bank regulators? 1994- 2000 annual
reports to the Congress, most of the violations found during examinations
have been of a technical nature, such as improperly completing necessary
forms or not giving borrowers timely notification that the property is in a
flood zone before the loan Noncompliance

Debate Is Based on Differing Types of Data

Bank Exams and Compliance Reviews Are Bases for Regulators and GSEs? Views
on Noncompliance

Page 9 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

closing date. More serious violations, such as failure to confirm that
insurance is in place when required, or failure to obtain a flood zone
determination for a property, have been infrequently detected during
examinations. For example, since 1996, the bank regulators have levied 51
civil monetary penalties on lending institutions that committed serious
violations of flood insurance requirements. Fannie Mae and Freddie Mac may
force lenders who sell loans to repurchase a loan if their requirements for
flood insurance are not met. Both enterprises told us that this action has
rarely occurred because instances of noncompliance are almost always
corrected by the lenders.

Similarly, the bank regulators? examiners and managers responsible for
conducting bank examinations that we talked to said lending institutions are
doing a good job of complying with flood insurance requirements. In general,
the examination process involves field examiners assessing a lending
institution?s procedures for ensuring compliance with the flood insurance
requirements and checking a sample of loan files to verify that the
procedures are routinely followed. According to the examiners, lending
institutions are familiar with the stipulations of various consumer
compliance laws and fulfilling the requirements for flood insurance has
become a standard procedure in mortgage lending. Bank regulatory and
industry officials have stated that completing standard flood hazard
determination forms and ensuring that borrowers obtain flood insurance for
properties where it is required are standard business practices for lenders.
They added that at larger lending institutions, automated systems typically
track borrowers? flood insurance policies throughout the life of a loan.

Nevertheless, the regulatory agencies and GSEs acknowledge that complete
data on compliance do not exist and the data they obtain from bank
examinations are not statistically representative of compliance either for
the bank or the country. Regulators and GSEs do not use a statistical sample
of loans when examining for flood insurance compliance. Their findings at a
lending institution, or even from all of the lending institutions that they
regulate, therefore, cannot be generalized to the industry. Examining for
compliance with flood insurance purchase requirements is but one of
approximately 20 different laws and regulations- such as those relating to
equal opportunity lending, truth- in- lending, and debt collection
practices- included in compliance examinations. Staff of one regulatory
agency told us that obtaining a statistically valid sample for any of these
issues would require examination of many more loans than currently inspected
and would seriously threaten their ability to examine bank compliance with
other requirements. They do not believe it would be

Page 10 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

prudent or cost- effective to review a statistically valid sample of loans
for compliance with NFIP regulations without stronger evidence of widespread
noncompliance.

FEMA officials disagree with bank regulators and GSEs about the level of
overall lender compliance with flood insurance requirements. Although FEMA
officials believe that lenders have been doing a better job of ensuring the
purchase of flood insurance in recent years, they also believe that
noncompliance rates are still significant. FEMA officials base their opinion
on three factors: (1) their estimate of the aggregate number of homeowners
who live in flood zones, have federally backed mortgages and, therefore, are
required to have flood insurance compared with the number of flood insurance
policies in force; (2) a small number of relevant, but limited, studies; and
(3) anecdotal information obtained from conversations with local government
officials and others knowledgeable about the flood insurance program.

FEMA does not have information on the individual properties that should be
covered by flood insurance, but it has estimated the number of properties
that should be insured. Using that estimate, it developed an overall
estimate of noncompliance indicating that many properties do not have the
required insurance. According to FEMA?s estimate, in fiscal year 2000 nearly
one out of three homes required to have flood insurance did not have it. On
the basis of Mortgage Bankers Association data on homes and mortgages, U. S.
Corps of Engineers data on the percentage of structures located in SFHAs,
and its own insurance policy data, FEMA estimates that less than 2.9 million
flood insurance policies have been issued for over 4.3 million mortgaged
properties in SFHAs. According to this estimate, nearly 1.4 million- 32
percent- may not have flood insurance. FEMA officials acknowledge that an
accurate rate of noncompliance will not be known until mortgage data are
linked to flood insurance policy data. They nevertheless believe that the
estimate indicates a potentially significant noncompliance problem.

FEMA officials point out that two studies the agency conducted also indicate
noncompliance with the mandatory purchase requirement. A 1999 study
conducted by a FEMA regional office and a 2000 study by the FEMA IG assessed
specific areas to determine the number of homes that had Estimates, Studies,
and

Contacts with Local Officials Are Bases for FEMA Views on Noncompliance

Page 11 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

flood insurance. 9 The two studies examined different localities, but each
found a portion of sampled properties- as high as 45 percent in the regional
office study- that did not have the required insurance, as discussed below.

 A post- disaster compliance study issued in April 1999 by one of FEMA?s
regional offices assessed rates of noncompliance after a 1998 flood in
Vermont. The study examined 120 properties located in a SFHA and found that
54- or 45 percent- had mortgages from a federally regulated institution and
should have had insurance but did not. Moreover, the study found that the
federal government provided $500,000 in disaster assistance to these
properties- assistance funds that would not have been paid had these
properties been insured.

 An August 2000 IG study examined the rate of noncompliance for 4,195
residences located in SFHAs in 10 states. The study found that for these
residences, about 416- or 10 percent- were required to have flood insurance
but did not. For example, a North Carolina subdivision that had been built
in a SFHA in 1996 contained 27 uninsured homes of which 20 had a mortgage
from a federally regulated lending institution. The study also noted that
statistics for that state showed that of about 150,000 structures located in
SFHAs, only 33 percent were covered by flood insurance.

In addition to these analyses, FEMA officials cite the results of studies
conducted by private companies after presidentially declared disasters in
North Dakota and Kentucky that found that from 28 to 38 percent of the
properties sampled did not have flood insurance. 10 While neither of these
studies took into consideration whether the homeowners without flood
insurance had mortgages from regulated lenders, FEMA officials believe that
it is reasonable to assume that this indicates a potential problem with
compliance since a large percentage of the homes in this country have
mortgages from regulated lenders.

9 FEMA Office of Inspector General, Opportunities to Enhance Compliance with
Homeowner Flood Insurance Purchase Requirements, I- 02- 00 (Washington, D.
C.: Aug. 2000). FEMA Region I, Vermont Lender Compliance with the Flood
Disaster Protection Act of 1973 and the Title V of the Riegle Community
Development and Regulatory Improvement Act of 1994, DR- 1228- VT (Boston,
Mass.: Apr. 1999 Draft).

10 The sampled properties were located within the SFHA.

Page 12 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

Finally, FEMA officials stated that their concerns about lender compliance
are bolstered by anecdotal evidence they have obtained during FEMAsponsored
workshops and field visits and from insurance and flood zone determination
industry officials. For example, during a NFIP lendertraining workshop that
we observed, bank employees discussed with FEMA officials examples of
noncompliance that were known but not corrected. The bank employees said
that they have observed instances in which other bank officials discovered
that a home required flood insurance when its owner sought to refinance the
mortgage it had with the bank. When the owner decided not to refinance, the
bank officials did not require the purchase of the flood insurance to
protect the existing loan, even though the law mandates such purchase.
Similarly, when providing assistance in presidentially declared disaster
areas, FEMA officials have heard accounts of flood victims who should have
been required by their lender to have flood insurance but were not told that
they needed it. Moreover, representatives of the insurance and determination
industries told us they consistently informed FEMA that they believe the
extent of noncompliance is a problem.

FEMA officials acknowledge that their opinions on compliance are based on
limited data. Nevertheless, they believe that the preponderance of
information available to them indicates that lenders are not fully ensuring
compliance with flood insurance purchase requirements.

To be in compliance, the purchase of mandatory flood insurance must occur
when a mortgage is originated, and this insurance must be retained and
renewed over the life of the loan. No data were readily available to enable
us to assess noncompliance at both loan origination and over the life of the
loan and in all geographic areas. However, other readily available data we
obtained suggest that in highly flood- prone areas, noncompliance could be
low at loan origination. We compared the number of new mortgages made in
1999 with new flood insurance policies issued in certain of the nation?s
most highly flood- prone census tract areas. For that period and for most of
the geographic areas we examined, this comparison did not suggest a major
noncompliance problem at loan origination, because only 44- 9 percent of the
471 census tracts we analyzed- showed fewer insurance policies than
mortgages. Moreover, buildings such as cooperatives and condominiums- which
are under different purchase requirements- exist in some of these areas and
could account for fewer policies than mortgages being issued. GAO Analysis
of

Available Data Suggests Noncompliance Could Be Low at Loan Origination

Page 13 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

To obtain a perspective on the level of noncompliance with the mandatory
flood insurance purchase requirements at loan origination, we first
identified highly flood- prone census tracts 11 where 90 to 100 percent of
the properties are located in SFHAs. We then compared data reported by
lenders 12 on new mortgages made in 1999 by federally regulated lending
institutions or guaranteed by a federal agency with FEMA data on new flood
insurance policies issued in that year in each selected tract. These data,
in the aggregate, do not suggest that noncompliance is widespread at the
time of loan origination in highly flood- prone areas. For the 471 census
tracts we selected, located in 64 different counties, over 88, 000 insurance
policies were issued in 1999, or about 88 percent more than the 47,000
mortgages originated in those census tracts during that period. A summary,
by county and state, of the census tract data we examined is contained in
appendix IV.

Most of the census tracts had more new insurance policies purchased than
mortgages originated. Of the 471 census tracts we analyzed, 413 had more new
insurance policies issued than mortgages, and in many of the census tracts
substantially more flood insurance policies were purchased than mortgages
originated. For example, nearly 4 times more flood insurance policies were
purchased than new mortgages originated in census tracts in 6 of the 64
counties. Two reasons for this could be that some homeowners in the census
tracts who did not have new mortgages purchased insurance or that
unregulated lenders originated a significant number of mortgages in those
areas and also required the purchase of flood insurance. We contacted flood
zone administrators for 2 of these counties, and they attributed the large
number of insurance policies purchased to many factors, including an
increasing awareness of flood dangers resulting from hurricanes affecting
their counties during 1999 as well as recent public outreach and education
efforts.

Our analysis does suggest that a noncompliance problem at loan origination
might exist in some geographic areas. For counties containing 44 of the
census tracts- 9 percent of the tracts we examined- we were

11 A census tract is a small, relatively permanent statistical subdivision
of a county. 12 Under the Home Mortgage Disclosure Act, mortgage data must
be reported by nondepository lenders that have assets above $10 million or
depository institutions that have assets above $29 million, maintain a home
or branch office in a metropolitan statistical area (MSA), or make loans in
a MSA. Institutions that make 100 or more loans (including refinancings)
during the calendar year are also required to report.

Page 14 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

able to determine that there were fewer insurance policies issued than
mortgages. For example:

 In a Hawaii county that has 5 census tracts that are virtually entirely in
a SFHA, 357 loans were made but only 88 flood insurance policies were
issued.

 In a New Jersey county with 4 census tracts that are virtually entirely in
a SFHA, 291 loans were made but only 81 flood insurance policies were
issued.

 In a New York county with 1 census tract with 97 percent of the properties
in a flood zone, 98 mortgage loans were made but only one new insurance
policy was issued.

However, floodplain managers in the states mentioned above point out that
these areas are densely populated and contain many buildings that are
condominiums or, in the case of New York and New Jersey, cooperatives. These
structures have different purchase requirements than other residential
properties. For example, condominium owners may not have to obtain a flood
insurance policy if the building?s condominium association has purchased one
that covers the entire structure. Consequently, there would be fewer flood
insurance policies than new mortgages in those situations.

For the remaining 14 census tracts we analyzed, we also found that there
were fewer insurance policies than mortgages issued. However, these census
tracts are in counties where a number of insurance polices were issued that
could not be identified with any specific census tract and which could
account for the shortage of policies as compared with mortgages. For
example, in a North Carolina county with one census tract that had 37
mortgages and only 15 insurance policies issued, there were also 201
insurance policies that could not be identified with any of the six census
tracts in the county. It is possible that a portion of these policies were
actually for properties in the highly flood- prone census tracts in these
counties.

We discussed our analysis of mortgage and insurance data with officials of
the bank regulatory agencies, GSEs, and FEMA. The regulatory and GSE
officials stated that the analysis supports their position that few concerns
exist regarding noncompliance with flood insurance purchase requirements.
They stressed that they are confident that their examination procedures are
effective and appropriate. Additionally, they said that our data were from
1999, before some of the regulators had completed examinations of all
institutions they oversee to assess them for

Page 15 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

compliance with the current requirements. They believe that any
noncompliance that may exist will be further reduced after all institutions
have been examined and made fully aware of the flood insurance compliance
requirements.

FEMA officials agreed that the analysis indicates relatively low levels of
noncompliance at the time loans are made and that on the basis of our
analysis, noncompliance at the time of loan origination is not an area of
major concern. Nevertheless, they still believe that significant
noncompliance problems exist with insurance policy retention and renewal.
They believe that lenders and homeowners fail to ensure that the insurance
policies remain in force for the life of the loan and pointed out that our
analysis was unable to examine existing mortgages to determine if insurance
policies are being retained and renewed as required over the life of the
loan.

Property- specific data on mortgages, flood zone determinations, and flood
insurance policies- obtained both at loan origination and at various points
during the life of the loan to ensure the insurance remains in force- would
be needed to fully assess compliance. Comparing these data would allow
computation of compliance rates nationally, regionally, or locally and
would- with an additional piece of data, the mortgage lender identification
numbers- identify specific noncomplying lenders. However, there are a number
of challenges to obtaining and assessing these data. These include
establishing data reporting requirements for lenders to provide relevant
mortgage data, designating an organization to receive and compare these
data, and determining the costs and benefits of obtaining these data. The
regulators and GSEs, on the one hand, and FEMA, on the other, have differing
viewpoints of the viability of and need for obtaining these data.

The three data elements that would have to be linked to fully measure
compliance are property addresses, flood zone determinations, and proof of
flood insurance for those properties. Property addresses would need to be
obtained for those properties financed by mortgages covered by the NFIP
legislation, namely, those made by federally regulated lending institutions
or guaranteed by federal agencies, or those purchased by GSEs. At the time
the loan is made, flood zone determinations for properties associated with
those mortgages are required to be performed by the lender- making it
possible to identify the pool of mortgages for which flood insurance is
required. Once this pool of mortgages is Mortgage, Flood

Determination, and Insurance Policy Data Needed to Fully Assess Compliance,
but Challenges Exist

Mortgage and Flood Zone Determination Data Would Need to Be Linked to Flood
Policy Data to Measure Compliance

Page 16 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

identified, it would be necessary to match the individual mortgages to the
flood insurance policies issued to determine whether insurance policies had
been issued for those properties required to have them. The results could be
used to (1) compute compliance rates nationally, regionally, and locally and
(2) identify individual properties without flood insurance at origination.

To monitor the status of compliance over the life of the mortgage, updated
mortgage and insurance information would be needed. Mortgages are frequently
sold and therefore held by a different entity. Similarly, the status of
flood insurance policies may change. Currently, there are requirements for
various notifications when these events occur, and these changes are
required to be recorded in loan files.

Collection of an additional data element- lender identification numbers-
would permit measurement of noncompliance on lender specific levels. Lender
identification numbers are necessary for identifying the specific lender
associated with a mortgage and for determining the appropriate federal
regulator. Obtaining lender identification numbers would reveal which
lenders did not ensure that flood insurance was purchased and maintained
when required.

A number of challenges exist to collect and assess the data needed to
determine compliance. First, reporting requirements would be needed to
centrally collect data components to determine if flood insurance is being
purchased as required when mortgages are originated. As previously
explained, for each mortgage originated by a regulated lending institution
or purchased by a GSE, key data identifying the specific mortgaged property
(i. e., property address), the flood zone determination for the property,
and proof of insurance for properties in SFHAs would need to be compiled.
Lenders, FEMA, and others currently hold all or parts of these data. For
example, lenders maintain all of these data in their loan files, and FEMA
maintains a database that contains all insurance policy data. Consequently,
no new data would have to be generated, but they would have to be centrally
reported.

Second, a single organization would need to be assigned the responsibility
for measuring compliance. This organization also would need to have
appropriate authority to collect the data needed to measure compliance.
Although some organizations have various authorities to obtain data- for
example, the bank regulators can collect data from lenders, and FEMA can
obtain data from insurers- no organization currently has the authority to
Challenges Exist to Fully

Measure Compliance

Page 17 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

collect from lenders, insurance companies, or other organizations all the
data needed to fully measure compliance. Specific legislative authority may
be needed to enable a single organization to collect the data necessary to
measure compliance.

Third, costs and benefits would need to be fully explored to determine
whether establishing a new system for measuring compliance is justified. The
regulators and GSEs, on one hand, and FEMA, on the other, have differing
viewpoints on the viability of and need for obtaining compliance measurement
data. In this regard, regulatory and GSE officials said that this effort
would result in significant costs for lending institutions if they were
required to report all flood insurance- related mortgage data. An official
from one regulatory agency pointed out that although there are no data on
the costs of implementing new reporting systems, any new data requirement
placed on lenders would result in changes to the lenders? information
systems. The official estimated that costs could be in the millions of
dollars for even minimal changes, and for institutions that have older
systems, or that are not highly automated, additional data reporting
requirements could have a significant impact.

The regulatory and GSE officials also said that in addition to concerns that
obtaining this compliance measurement data would be costly, they also
believe that little benefit would be obtained through such action. They
stated that there continues to be no empirical evidence that there is any
widespread noncompliance with flood insurance requirements, and that in
fact, our analysis points to a high level of compliance. Officials from
these organizations added that as they do their compliance examinations and
reviews of lenders, they look at a sample of a lender?s entire portfolio of
mortgages- both new and existing- and if these examinations and reviews are
ensuring compliance at origination, they are also ensuring compliance over
the life of the mortgage loan. Consequently, according to these officials,
without further evidence of noncompliance problems, establishing a new
process to require reporting and monitoring of flood insurance data is not
justified.

Officials from many of the regulatory agencies believe that instead of
establishing a new compliance measurement program, it would be better to
have FEMA use the data it currently has to measure compliance and to conduct
additional post- disaster compliance studies. The officials stated that FEMA
has significant data on mortgages requiring flood insurance, and that
additional data to measure compliance could be obtained from the insurance
agents that sell flood insurance policies. They further said that conducting
compliance studies after disasters have occurred could

Page 18 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

determine if there were any significant amounts of noncompliance in the
affected area. They added that more of these studies would better determine
if there actually are noncompliance problems and help pinpoint geographic
areas in which they may need to shift greater focus to flood insurance
compliance in their examination activities.

FEMA officials, however, believe that establishing a comprehensive
noncompliance measurement program may be beneficial and appropriate. They
said that they remain concerned that insurance policies are not being
retained and renewed where required on existing mortgages, as their data
show that the retention rate for flood insurance policies is about 90
percent, which is below the insurance industries? homeowners policy
retention rate of 95 percent. The FEMA officials said that if lenders were
adequately ensuring the renewal of flood insurance policies, the retention
rate would be similar. Therefore, they believe that only a comprehensive
program that gathers and analyzes data on existing mortgages will resolve
the debate over noncompliance and ensure that both property owners and the
federal government are adequately protected. FEMA officials added that
because FEMA is involved in the selling of insurance policies and in the
financial condition of the insurance program, a comprehensive noncompliance
measurement program might more appropriately rest outside of FEMA in an
organization that would be more independent.

Additionally, FEMA officials stated that with the provisions in the
president?s proposed budget that will significantly increase their efforts
to remap and update the nation?s flood zones, establishing a process to
identify noncompliance is even more critical. They pointed out that the
remapping efforts will likely place more properties in SFHAs, and more
property owners- including those with existing mortgages- will be required
to purchase flood insurance. They expect that this remapping will result in
potentially more noncompliance, and that a comprehensive noncompliance
monitoring effort will be needed to ensure that all owners of properties
requiring flood insurance purchase such insurance.

Finally, FEMA officials said that conducting post- disaster studies is not
the solution to the noncompliance debate. They said that post- disaster
studies can only offer a limited perspective on noncompliance and do not
address noncompliance issues for the nation as a whole. Moreover, a major
flaw with this approach would be that FEMA would be identifying
noncompliance when it is too late- after the disaster has occurred and
uninsured properties are flooded. They said that it is much more important
to identify noncomplying properties before they are damaged in a disaster,
thereby providing the opportunity to ensure that property owners have

Page 19 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

insurance protection and minimizing the need for federal disaster assistance
for these properties. Lastly, FEMA officials said that conducting post-
disaster studies is very resource intensive. They said that they do not have
the resources and capabilities to conduct any significant number of
compliance studies.

We provided a draft of this report to FEMA, regulatory agencies- FDIC, FRB,
OCC, and OTS- and GSEs- Fannie Mae and Freddie Mac- that are responsible for
the issues discussed in this report. All of the agencies generally agreed
that the report presents an accurate and objective presentation of the
differing perspectives on noncompliance with mandatory flood insurance
purchase requirements. FEMA, FDIC, FRB, Fannie Mae, and Freddie Mac provided
letters commenting on the draft that appear in appendixes V, VI, VII, VIII,
and IX. OCC and OTS provided clarifying language and technical comments that
were incorporated into the report as appropriate.

Three organizations provided additional perspectives and comments. FEMA said
that it continues to believe that significant problems exist with insurance
policy retention. It stated, as an example, that last year?s gains in new
policies were offset by attrition from the previous years? number of
policies in force. FEMA also described a number of strategies it has
initiated to improve policy retention. These strategies include working with
the regulatory agencies and GSEs to identify actions FEMA could take to
improve lender compliance; assessing state escrow laws and systems to
determine whether obstacles to flood insurance escrow exist and, where
necessary, work with states to resolve these obstacles; and improving its
flood insurance public education and advertising campaign.

FRB maintained that compliance is generally satisfactory with the
institutions they supervise. It said that our analysis suggests low levels
of noncompliance at loan origination and that the report helped narrow any
future inquiry on lender noncompliance to areas of policy renewal and
retention. FRB added that on the basis of years of experience in examining
state member banks, it believes that those banks have a good record of
compliance with flood insurance purchase requirements not only at loan
origination but also during the time the banks own the loan.

Freddie Mac commented that certain facts contradict FEMA?s assertions that
noncompliance is substantial. Specifically, Freddie Mac noted that FEMA
acknowledges that compliance at origination is high and 90 percent of
policies are renewed. Therefore, it sees no basis for FEMA?s belief that
Agency Comments

and Our Evaluation

Page 20 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

noncompliance is substantial; rather, the evidence suggests that
noncompliance is marginal. Additionally, Freddie Mac commented that FEMA
should take a more proactive role in compliance monitoring by collecting and
analyzing data currently available to it and conducting investigations to
determine reasons for noncompliance. Freddie Mac said that it does not share
FEMA?s belief that having responsibility for compliance creates a conflict
of interest with its responsibility for managing the National Flood
Insurance Program.

We will send copies of this report to the Director, Federal Emergency
Management Agency; Chairman, Federal Deposit Insurance Corporation;
Chairman, Board of Governors of the Federal Reserve System; Comptroller of
the Currency; Director, Office of Thrift Supervision; Chairman and CEO,
Fannie Mae; and Chairman and CEO, Freddie Mac. We will also make copies
available to others upon request. In addition, this report will be available
at no charge on the GAO Web site at http:// www. gao. gov. If you have any
questions about this report, please call me or John Schulze at (202) 512-
2834. Key contributors to this report are listed in appendix X.

JayEtta Z. Hecker Director, Physical Infrastructure

Appendix I: Objectives, Scope, and Methodology

Page 21 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

Federal Emergency Management Agency (FEMA) officials and bank regulators
disagree about whether lenders are fully complying with the flood insurance
purchase requirements of the National Flood Insurance Program (NFIP). Given
this disagreement, and concerned that lender noncompliance could be high,
the Subcommittee on VA, HUD, and Independent Agencies, Senate Committee on
Appropriations, directed us to examine whether lenders are complying with
the purchase requirements. In response to that mandate and to requests from
the Senate Committee on Banking, Housing, and Urban Affairs and its
Subcommittee on Economic Policy, we focused our work on the following
questions:

1. What are the bases for the differing perspectives on lender
noncompliance?

2. What does other readily available data indicate about the level of
noncompliance?

3. What data would be needed to fully measure compliance? To obtain an
overall understanding of the NFIP, we analyzed the program?s history,
regulations, policies, and procedures. We interviewed and gathered studies
from FEMA officials, federal regulatory agencies, government- sponsored
enterprises (GSE), flood zone determination companies, mortgage companies,
mortgage servicers, insurance companies, and industry associations. We
examined reports issued by the FEMA Inspector General and documents from
FEMA?s Federal Insurance and Mitigation Administration. In addition, we
interviewed this organization?s former Administrator, Acting Administrator,
Director of Marketing, Lender Compliance Officer, and other officials
responsible for administering the NFIP. We also interviewed FEMA?s Assistant
Inspector General who is responsible for that office?s flood insurance
compliance review.

To address the first objective, we determined how four regulatory agencies
and two GSEs monitor lender compliance. Specifically, we focused on the
Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board
(FRB), the Office of the Comptroller of the Currency (OCC), the Office of
Thrift Supervision (OTS), the Federal National Mortgage Association (Fannie
Mae), and the Federal Home Loan Mortgage Appendix I: Objectives, Scope, and

Methodology

Appendix I: Objectives, Scope, and Methodology

Page 22 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

Corporation (Freddie Mac). 13 We interviewed officials from each of these
agencies, including 25 field managers and bank examiners from the FDIC, FRB,
OCC, and OTS. In addition, we analyzed examination files from the FDIC,
Federal Reserve Bank of New York, OCC, and OTS to identify banks and thrifts
that had been subjected to civil monetary penalties and other enforcement
actions; we further examined correspondence between the GSEs and servicers.
We also observed FDIC and OTS bank examinations in the Baltimore, Md., area
to better understand the policies and procedures of such examinations.

Additionally, we reviewed FEMA?s data and efforts to measure and assess
noncompliance. We interviewed officials from FEMA?s Federal Insurance and
Mitigation Administration and obtained information and documentation of
FEMA?s estimates on overall levels of noncompliance; processes it uses to
estimate structures in special flood hazard areas; processes it uses to
collect, report, and share flood insurance policy data; and actions it has
taken to inform the public about floodplain mapping and compliance with
mandatory purchase requirements. We interviewed FEMA officials and flood
zone determination industry officials and obtained information and
documentation on studies about levels of participation in the NFIP and
lender compliance issues. We attended meetings and training sessions held by
FEMA with insurance officials, local government officials, and lender
representatives and observed discussions of noncompliance.

In determining what other readily available data indicates about the level
of noncompliance, we found that the data necessary to assess lender
noncompliance are currently not reported in a way to permit full evaluation
of this issue. However, we did determine a methodology that would enable us
to obtain a perspective on noncompliance at loan origination. We compared
the number of new mortgages made with the number of flood insurance policies
issued in the same locations, in certain of the nation?s highly flood- prone
areas. This analysis required that we (1) identify flood- prone areas; (2)
determine the number of new mortgages

13 The regulators we chose account for most of the pertinent mortgage
market. We did not include the Farm Credit Administration, National Credit
Union Administration, Federal Home Administration, Veterans Affairs
Administration, or the Rural Housing Service. These agencies were excluded
because they either originate a small percentage of all outstanding loans or
because their loan programs fall under the jurisdiction of one of the
regulatory agencies. The Government National Mortgage Association was
excluded because it does not have direct responsibility for compliance with
the mandatory purchase of flood insurance requirements.

Appendix I: Objectives, Scope, and Methodology

Page 23 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

made in such areas that were subject to NFIP regulations; (3) determine the
number of flood insurance policies written; and (4) compare the number of
mortgages with the number of flood insurance policies in certain areas to
infer levels of lender noncompliance in those selected areas. Data on
properties with existing mortgages in these flood- prone areas were not
available; therefore, we did not perform any analysis on the level of
noncompliance on existing mortgages. Further, we did not perform any
analysis of the accuracy of the determinations made by flood zone
determination companies and used by lenders as the basis for whether flood
insurance is required.

For our review, we defined as ?flood- prone areas? all census tracts in
which 90 percent or more of the tract is in a flood zone. To identify these
census tracts, we used the percentage of properties determined to be flood-
prone as a proxy for the percentage of each census tract area that may be
flood- prone. We obtained data on flood zone determinations from
Transamerica Flood Hazard Certification, Inc., which has been collecting
information on properties in the United States since 1977. Its database
consisted of about 62 million properties nationwide for which flood
determinations have been made. Of those properties, 2.8 million, or 4.6
percent, have been certified as located in flood hazard areas. We obtained
this information by state, county, and census tract.

Transamerica?s data covered properties in 59, 506 census tract areas. About
1 percent (742) of these census tracts had at least 90 percent of the
properties determined to be in SFHAs. We focused on these 742 census tract
areas.

To identify the number of new mortgage loans that would be covered by NFIP
regulations in the flood- prone census areas, we used Home Mortgage
Disclosure Act (HMDA) data that regulators collected for the 1999 calendar
year. The HMDA information shows the number of loans granted during 1999. We
refined the number of mortgages to be included in our analysis by choosing
only owner occupancy and single- family loans subject to government
regulation. We excluded business loans, unregulated loans not purchased in
the secondary market by either Fannie Mae or Freddie Mac, and loans that
were designated for home improvements, multifamily dwellings, and
refinances. This resulted in a total of 3, 717,735 mortgage loans in 1999.
We then aggregated all loan originations at the census- tract level. Flood-
Prone Area

Data Mortgage Data- All New Mortgages in 1999 That Were Subject to NFIP
Regulations

Appendix I: Objectives, Scope, and Methodology

Page 24 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

To identify the number of flood insurance policies written for the
floodprone census- tract areas, we used NFIP data that FEMA collects from
insurance companies that issue policies. We obtained from FEMA a database
that aggregated the number of flood insurance policies written in 1999
according to the state, county, and census tract of the property. To obtain
policy data that would be comparable to mortgage data, we refined the policy
data to include only new policy transactions for principal residences. We
excluded policies that were not for a homeowner?s principal residence or
were only to cover the contents of a property. This resulted in a total of
549,255 policies for 1999. 14 These data were aggregated at the census-
tract level.

To determine whether the number of flood insurance policies in force
approximated the number of regulated mortgage loans made in floodprone
areas, we merged the three types of data described above by census tract
within each state and county for 1999. We assumed that the distribution of
the properties, loans originated, and insurance policies written were the
same within each census tract area.

As previously indicated, we focused on those 742 census tract areas that had
at least 90 percent of their properties in flood areas. To provide a greater
degree of confidence that the data we obtained were representative of the
entire census tract, we developed additional selection criteria whereby at
least 20 loans had been made in that census tract and at least 100
properties within the census tract had flood- zone determinations. As a
result, the number of census tracts we examined totaled 471 covering 17
states. For these areas, we found that 46,965 loans had been made and 88,
300 flood insurance policies had been issued. 15

We did not attempt to independently verify the accuracy of the data sets
used for our analysis. We did, however, to the extent possible, assess the
reliability by (1) performing electronic tests (as described below) and (2)
discussing results of the testing and analysis with knowledgeable
individuals. We cross- checked Transamerica?s determination data with data
from another flood zone determination company (Geotrac of

14 Of the policies written, 26,544 (5 percent) could not be identified with
a census tract and were not used in our analysis. 15 We cannot say with
certainty that any particular loan we identified definitely required flood
insurance. We did not have property addresses for insurance policies or
mortgages. Flood Insurance Data

Analysis of the Census- Tract, Mortgage, and Flood Insurance Data

Appendix I: Objectives, Scope, and Methodology

Page 25 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

America, Inc.) to determine if both companies? data identified the same
flood- prone census tracts. We found a high degree of correlation between
the data of the two flood zone determination companies. We also determined
that the variables we used from the HMDA data was complete in its coding and
did not have questionable outliers. Therefore, we determined that the data
were reliable enough for the purposes of this report.

To determine what data would be needed to fully measure compliance, we
analyzed the processes established by the participants in the NFIP to
collect, report, and share data on lender compliance with flood insurance
purchase requirements. We interviewed officials and gathered documents from
the Federal Insurance and Mitigation Administration, federal regulators,
GSEs, loan servicers, insurance companies and their servicers, and related
industry associations, including the National Floodzone Determination
Association, the Independent Bankers Association of America, and the
Mortgage Bankers Association. We made site visits to flood zone
determination companies in Austin and Arlington, Tex.; Lakewood, Colo.; and
Hasbrouck Heights, N. J.; and interviewed officials with a flood zone
determination company in Norwalk, Ohio. These companies represent about 80
percent of the flood zone determination market.

After determining how information pertaining to compliance is processed, we
developed a process that would allow better measurement of noncompliance
with the mandatory flood insurance purchase requirements. We then discussed
this process with FEMA and bank regulatory officials to obtain their
perspective on its viability, costs, and benefits.

We conducted our review from April 2001 through April 2002 in accordance
with generally accepted government auditing standards.

Appendix II: Federal Financial Institution Regulators? Compliance Policies
and Procedures

Page 26 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

Federal financial institution regulators have primary responsibility for
ensuring that the institutions they supervise comply with the requirements
of the National Flood Insurance Program. The regulators have issued uniform
flood insurance regulations and examination procedures for enforcing and
monitoring lender compliance. The policies and procedures are designed to
ensure that flood zone determinations for mortgaged properties are
performed, flood insurance is obtained when required, and flood insurance
policies remain in force for the life of the loan.

The National Flood Insurance Reform Act of 1994 directed that regulatory
agencies promulgate rules to implement the act?s provisions and to
coordinate their development through the Federal Financial Institutions
Examination Council. The agencies? regulations became effective on October
1, 1996, and established, among other provisions, new requirements for
escrowing flood insurance premiums, documenting flood hazard determinations
on the Standard Flood Hazard Determination Form, and ?force- placing? flood
insurance under certain circumstances.

In November 1996, the regulators adopted uniform procedures for assessing
lender compliance with the new flood insurance regulations. These procedures
require that for the flood insurance component of the examinations the
regulators assess

 whether an institution performs required flood determinations for home
mortgage loans, including mobile homes affixed to a permanent foundation;

 if the institution requires flood insurance in the correct amount when it
makes, increases, extends, or renews a covered loan;

 if the institution provides the required notices to the borrower whenever
flood insurance is required as a condition of the loan;

 if the institution requires flood insurance premiums to be escrowed when
other items, such as hazard insurance and taxes, are required to be
escrowed; and

 if the institution complies with the forced placement provisions in cases
where flood insurance on the loan is not sufficient to meet the requirements
of the regulation.

To fulfill these requirements, bank examiners review a sample of loan files
to verify that flood insurance requirements are met. For smaller banks and
thrifts, which make few mortgage loans, the sample may consist of all loans
made since the last examination, and all loans in the portfolio known to be
secured by properties in special flood hazard areas. For larger
institutions, examiners review a nonprojectable sample of loans. Appendix
II: Federal Financial Institution

Regulators? Compliance Policies and Procedures

Appendix II: Federal Financial Institution Regulators? Compliance Policies
and Procedures

Page 27 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

Depending on the findings from those files, an examiner may analyze
additional loans for further examination. If a lender appears to have failed
to require adequate flood insurance coverage on selected loans, it may be
required to conduct a review of its entire loan portfolio and report the
results to the bank regulator. If violations of the flood insurance
requirements are detected during an examination, corrective action may be
required of the lender, and fines can be levied against the lender by the
regulatory organization if it finds a pattern or practice of violations.

Bank regulators perform compliance examinations on a periodic basis,
generally every 12 to 60 months. In addition to compliance with flood
insurance requirements, these examinations cover compliance with other
consumer laws and regulations. The length of time between examinations is
determined by several factors, including the bank?s rating at the time of
its last examination and the size of the institution. In addition to regular
examinations, examiners are to follow- up with institutions in which
violations have been found to verify that any violations noted during the
most recent examination have been resolved.

Appendix III: Review Procedures Established by Freddie Mac and Fannie Mae

Page 28 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

The 1994 National Flood Insurance Reform Act directed Fannie Mae and Freddie
Mac to implement procedures designed to ensure that loans that they purchase
are covered by flood insurance for the term of the loans. While GSEs have no
regulatory authority over their sellers and servicers, they require their
sellers and servicers to comply with the flood insurance requirements
through their contracts with them. These requirements are spelled out in the
GSEs? Seller/ Servicers Guides.

Fannie Mae and Freddie Mac also require that servicers have processes in
place that allow the servicer to identify map changes, determine which
mortgaged dwellings affected by map changes need flood insurance, and to
ensure that the affected borrowers obtain such insurance within 120 days of
the effective date of the map change.

If Fannie Mae or Freddie Mac finds that a lender is not complying with their
requirements for flood insurance, they may require that the lender
repurchase the loans and correct deficiencies in their system for ensuring
compliance. Officials from both enterprises told us that this occurs very
rarely.

The act also directed the Office of Federal Housing Enterprise Oversight
(OFHEO), an independent agency within the Department of Housing and Urban
Development responsible for regulation of Fannie Mae and Freddie Mac, to
assess whether they have adopted and are adhering to flood insurance
compliance procedures, and to report on this assessment in OFHEO?s annual
reports to Congress for 1996, 1998, and 2000. OFHEO reported that the
policies and procedures established by Fannie Mae and Freddie Mac with
respect to the flood insurance requirements under the Flood Disaster
Protection Act were adequate and were being used.

The review procedures for flood insurance established by Fannie Mae and
Freddie Mac are explained below.

 Post purchase review: Flood insurance compliance is incorporated as part
of the monthly quality control reviews of a nonprojectable sample of
recently purchased or securitized mortgages. Lists of property addresses are
sent to two flood zone determination companies to review the flood zone
determinations on file for properties both in and outside of flood zones.
The mortgage file is checked to verify that a copy of the special flood
hazard determination form is present; the loan is coded properly; and, if
appropriate, evidence that flood insurance coverage was obtained. Appendix
III: Review Procedures Established

by Freddie Mac and Fannie Mae Fannie Mae

Appendix III: Review Procedures Established by Freddie Mac and Fannie Mae

Page 29 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

 Portfolio review: On an annual basis, Fannie Mae performs a review on a
sample of all loans it owns or has securitized to verify that sellers and
servicers appropriately obtained and have maintained flood insurance, as
applicable, throughout the term of the mortgage. The scope of the review
emphasizes areas where flood zone remapping has occurred, or communities
whose participation status in the National Flood Insurance Program has
changed, to ensure that sellers and servicers are in compliance with the
requirement to have procedures in place to monitor such changes. For a
nonprojectable sample of mortgages in special flood hazard areas, sellers
and servicers are required to provide documentation to confirm that flood
insurance is in force for each selected mortgage, and that the mortgages
were properly identified at delivery.

 Quality control operational review: Fannie Mae regional offices perform
regular quality control reviews that examine sellers and servicers?
management, policies, and procedures, rather than examining individual
mortgage files. These reviews include on- site examination of processes for
ensuring the accuracy of the flood zone determinations that are obtained.
Generally, the largest sellers and servicers are evaluated every year;
others are reviewed every 2 to 3 years.

In addition, Fannie Mae is looking at various options to improve its
methodology for performing its flood insurance reviews. One such option is
the use of Geographic Information Systems data and flood maps to target
loans in its portfolio for flood reviews. This effort is currently in the
testing stages.

 Quality control program: The data file for each mortgage purchased by
Freddie Mac must contain a special characteristic code describing the
mortgage?s status regarding flood insurance, as follows: in a flood zone
with insurance coverage in place; in a flood zone with no flood insurance
coverage; not in a flood zone with flood insurance coverage; or not in a
flood zone and no flood insurance coverage. As part of Freddie Mac?s quality
control program, a statistical sample of newly delivered mortgages is
reviewed for the correct special characteristic codes regarding flood
insurance; proper documentation of the flood zone determination; and, if
applicable, the flood insurance policy.

 Flood audit program: Freddie Mac auditors provide a list of addresses for
all of a servicer?s mortgages to a flood zone determination company. The
flood zone determination company reviews the addresses in the portfolio and
arrives at a list of 25 properties located entirely within special flood
hazard areas. The list is then sent to several other participating flood
zone determination companies to verify that the identified properties are
within Freddie Mac

Appendix III: Review Procedures Established by Freddie Mac and Fannie Mae

Page 30 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

SFHAs. Each company performs independent flood zone determinations for the
listed properties; Freddie Mac eliminates any properties for which the ?in?
determination is not unanimous. At the sellers and servicers? facilities
during the audit, Freddie Mac audits the mortgage files for the selected
properties to verify that all of the flood insurance requirements are met.
This includes ensuring that flood insurance is in effect and that the
coverage meets Freddie Mac?s requirements.

 Underwriting reviews: Freddie Mac reviews sellers and servicers?
management controls for identifying properties in SFHAs, ensuring that flood
insurance is maintained, and ensuring that flood insurance coverage is at
least equivalent to that provided under the NFIP.

 Servicing review: Freddie Mac auditors review the management controls that
sellers and servicers have in place to (1) become aware of changes in SFHAs,
(2) ensure that the borrower obtains flood insurance coverage if the sellers
and servicers become aware that existing coverage does not adequately
protect the mortgaged premises, (3) ensure that the borrower obtains the
required insurance, and (4) ensure that the sellers and servicers obtain the
required coverage if the borrower does not obtain it.

Appendix IV: Comparison of Flood Insurance Policies Issued to Mortgages
Originated in Certain Flood- Prone Census Tracts in 1999

Page 31 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

State County Total number of

census tracts in county

Number of census tracts in

flood- prone areas

Policies issued in flood- prone

census tracts Mortgages

originated in flood- prone census tracts

Percentage of policies issued

to mortgages originated

California Contra Costa 168 1 48 68 71 California Kern 109 2 445 183 243
California Los Angeles 1,652 39 9,943 2, 706 367 California Merced 53 1 136
51 267 California Orange 484 20 2,777 1, 216 228 California Sacramento 207
39 4,986 2, 713 184 Florida Broward 164 55 16,978 11,217 151 Florida
Charlotte 22 6 1,825 845 216 Florida Collier 31 8 1,657 889 186 Florida Dade
267 48 12,301 9, 395 131 Florida Escambia 54 2 280 144 194 Florida Glades 2
1 47 24 196 Florida Hillsborough 168 7 1,178 716 165 Florida Lee 93 24 5,297
2, 669 198 Florida Manatee 45 4 878 213 412 Florida Monroe 29 8 1,518 349
435 Florida Palm Beach 211 3 1,057 738 143 Florida Pasco 38 2 778 325 239
Florida Pinellas 191 23 3,709 2, 653 140 Florida Sarasota 42 5 896 439 204
Florida St. Johns 14 2 177 91 195 Florida St. Lucie 39 2 121 100 121 Georgia
Chatham 71 1 206 54 381 Hawaii Honolulu 200 5 88 357 25 Iowa Pottawattamie
26 1 102 30 340 Louisiana Assumption 6 1 100 30 333 Louisiana Jefferson 116
38 5,491 2, 377 231 Louisiana Lafourche 20 5 632 169 374 Louisiana Orleans
184 30 2,944 1, 131 260 Louisiana St. Bernard 17 1 100 40 250 Louisiana St.
Charles 15 1 348 203 171 Louisiana St. Tammany 33 4 683 282 242 Louisiana
Terrebonne 18 2 236 73 323 Louisiana Vermilion 13 1 148 26 569 Maryland
Worcester 23 5 657 218 301 Mississippi Harrison 40 1 191 62 308 New Jersey
Atlantic 71 7 1,200 407 295 New Jersey Bergen 210 1 114 56 204 New Jersey
Cape May 23 7 1,583 593 267 New Jersey Hudson 161 4 81 291 28

Appendix IV: Comparison of Flood Insurance Policies Issued to Mortgages
Originated in Certain Flood- Prone Census Tracts in 1999

Appendix IV: Comparison of Flood Insurance Policies Issued to Mortgages
Originated in Certain Flood- Prone Census Tracts in 1999

Page 32 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

State County Total number of

census tracts in county

Number of census tracts in

flood- prone areas

Policies issued in flood- prone

census tracts Mortgages

originated in flood- prone census tracts

Percentage of policies issued

to mortgages originated

New Jersey Monmouth 147 1 49 45 109 New Jersey Ocean 87 9 1,175 675 174 New
Mexico Valencia 12 1 90 35 257 New York Kings 789 1 0 21 0 New York Nassau
270 3 521 217 240 New York New York 298 1 1 98 1 North Carolina Beaufort 10
1 156 36 433 North Carolina Dare 6 1 15 37 41 North Carolina New Hanover 31
1 148 34 435 North Carolina Pamlico 2 1 137 35 391 North Dakota Grand Forks
19 1 76 20 380 South Carolina Beaufort 22 5 710 203 350 South Carolina
Charleston 89 5 832 328 254 South Carolina Colleton 9 1 50 24 208 Texas
Brazoria 55 1 139 61 228 Texas Cameron 64 1 198 62 319 Texas El Paso 95 1 88
26 338 Texas Galveston 67 9 1,169 485 241 Texas Harris 582 2 135 74 182
Texas Taylor 36 4 289 141 205 Virginia Accomack 9 1 130 26 500 Virginia
Norfolk City 90 1 66 41 161 Virginia Poquoson City 3 1 78 40 195 Washington
Skagit 12 1 112 58 193

Total 8,134 471 88,300 46,965 188

Source: GAO analysis of FEMA, HMDA, and TransAmerica data.

Appendix V: Comments from the Federal Emergency Management Agency

Page 33 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

Appendix V: Comments from the Federal Emergency Management Agency

Appendix V: Comments from the Federal Emergency Management Agency

Page 34 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

Appendix V: Comments from the Federal Emergency Management Agency

Page 35 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

Appendix V: Comments from the Federal Emergency Management Agency

Page 36 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

Appendix VI: Comments from the Federal Deposit Insurance Corporation

Page 37 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

Appendix VI: Comments from the Federal Deposit Insurance Corporation

Appendix VII: Comments from the Federal Reserve Board

Page 38 GAO- 02- 396 Extent of Noncompliance with Purchase Requirements

Appendix VII: Comments from the Federal Reserve Board

Appendix VIII: Comments from Fannie Mae Page 39 GAO- 02- 396 Extent of
Noncompliance with Purchase Requirements

Appendix VIII: Comments from Fannie Mae

Appendix VIII: Comments from Fannie Mae Page 40 GAO- 02- 396 Extent of
Noncompliance with Purchase Requirements

Appendix IX: Comments from Freddie Mac Page 41 GAO- 02- 396 Extent of
Noncompliance with Purchase Requirements

Appendix IX: Comments from Freddie Mac

Appendix IX: Comments from Freddie Mac Page 42 GAO- 02- 396 Extent of
Noncompliance with Purchase Requirements

Appendix X: GAO Contacts and Staff Acknowledgments

Page 43 GAO- 02- 396 Extent of Noncompliance with Purchase Requireme

JayEtta Z. Hecker (202) 512- 2834 John R. Schulze (202) 512- 2834

In addition to those named above, Martha Chow, Lawrence D. Cluff, Colin J.
Fallon, Kerry D. Hawranek, DuEwa A. Kamara, Signora J. May, John T. McGrail,
Lisa M. Moore, Patricia D. Moore, Bob Procaccini, and John J. Strauss made
key contributions to this report. Appendix X: GAO Contacts and Staff

Acknowledgments GAO Contacts Staff Acknowledgments

(394005)

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