Some consider this excessive and suggest instead that FEMA publish a list of areas where significant remapping has occurred. This "constructive notice" would trigger the requirement for lenders to review loans within significant remap areas. We support the "constructive notice" suggestion as the most practical approach coupled with the provision in S. 2907 that lenders may require flood insurance any time it is determined that a property is in a SFHA.

Finally, there is the question of what to do about existing portfolios of mortgage loans which may not be in compliance for whatever reason. We submit that this is a risk management issue and only Congress can decide if it is an acceptable risk to concentrate on the front-end side and let time solve the problem of existing noncompliance.

I should add that my company has no stake in that decision. We do not profit from portfolio reviews which we perform for no fee or greatly reduced fees and we have no financial interest in the sale of flood insurance. Our charter is to assist lenders in complying with the law and we pledge our best efforts to fulfill that charter, whatever that may entail.

Without new legislation tightening controls on flood hazard determinations and the purchase and maintenance of flood insurance, we are only postponing the inevitable. At the same time, lenders must be given the authority they need to comply with the wishes of the Congress. S. 2907 does both.

The current situation with only about 15 percent of homes located in Special Flood Hazard Areas covered by flood insurance is a disaster waiting to happen. We urge you to enact the lender compliance elements of this legislation. Through increased lender compliance, Congress can insure the health of the National Flood Insurance Program by building the fund through increased numbers of insurance policies and premium dollars to support the full range of needs of the program.

SEPTEMBER 14, 1993

Transamerica Flood Hazard Certification has performed more than 3,000,000 flood hazard determinations since the company was formed in 1977. Each month, we provide determinations all across the Nation to between 1,500 to 2,000 lenders, large and small, national, regional, and local.

Over the years, we have worked closely with the Federal Insurance Administration, Fannie Mae, and Freddie Mac to help make the National Flood Insurance Program work effectively.

We have first hand experience with lenders, borrowers, appraisers, surveyors, and communities and we are well aware that existing legislation has not fully achieved the intent of Congress to minimize the economic impact of floods on individual homeowners, communities, and the Federal budget. The best estimate is that only about 15 percent of properties located in Special Flood Hazard Areas (SFHA) are protected by flood insurance.

We support S. 1405, the National Flood Insurance Reform Act of 1993. We believe it is an excellent bill which, with some fine-tuning, will come to grips with the fundamental issues underlying the problems of noncompliance, and through increased compliance, funding for mitigation efforts will be more readily available through an expanded policy base and the increase in the flood insurance fund.

PROBLEM #1-AUTHORITY TO IMPOSE FLOOD INSURANCE AFTER CLOSING

Current legislation does not clearly permit lenders to impose flood insurance after closing even if they learn that the original flood hazard determination was incorrect or if new or revised flood maps have been issued by the Federal Emergency Management Agency (FEMA) changing the status. With an average of 6,000 flood map changes per year, a great many homes whose flood hazard status has changed from "not in" to "in" a SFHA will not be covered by flood insurance.

S. 1405 addresses this issue, but we believe some minor adjustment to the language in the bill would strengthen this provision. We suggest that Sec. 204(e) “Required Actions By Lender" be revised as follows:

(1) Notification to Borrower of Lack of Coverage. If, at any time during the term of a loan secured by improved real estate or by a manufactured home located in an area that has been identified by the Director as an area of special flood hazard and in which flood insurance is available under this title, a regulated lending institution or Federal agency lender determines that the building or manufactured home and any personal property securing the loan held or serviced by the regulated ending institution or Federal agency lender is not covered by flood insurance, for any reason, in an amount not less than the amount required by subsection (bX1), the regulated lending institution or Federal agency lender shall notify the borrower that such flood insurance shall be purchased at the borrower's

expense, an amount of flood insurance that is not less than the amount required by subsection (bX1), for the term of the loan.

Notwithstanding any Federal, State or local law if, not later than 60 days after receiving such notification, the borrower fails to purchase such flood insurance, the regulated lending institution or Federal agency lender shall purchase the insurance on behalf of the borrower and may charge the borrower for the cost of premiums and fees incurred by the regulated lending institution or Federal agency lender in purchasing the insurance.

PROBLEM #2-COMPETITIVE DISADVANTAGE

It is a well-known fact in the industry that borrowers seldom voluntarily purchase flood insurance. Compliant lenders, therefore, can be at a competitive disadvantage when they notify borrowers that flood insurance is required by law and is a condition of the mortgage. We know firsthand of instances when borrowers have then gone to another lender which did not require flood insurance. By extending the requirement to more lenders, which the bill does, Congress lessens this problem.

We recommend the following additions, all of which were in previous proposed legislation, to S. 1405 to help create a level playing field:

(1) Give lenders specific authority to pass along the flood search fee, including FHA and VA loans notwithstanding any Federal, State or local law. We suggest the following wording be inserted into Sec. 205(e). "Notwithstanding any other Federal, State, or local law, any user of the Standard Determination Form as described in Sec. 1365(c) may charge the borrower a reasonable fee for the costs of determining whether the improved real estate or manufactured home securing the loan is located in an area of special flood hazards."

(2) Specifically prohibit waiving the flood insurance requirement for any reason. PROBLEM #3-INACCURATE DETERMINATIONS

Many lenders use third parties such as flood determination firms, appraisers, or surveyors to make the flood hazard determination at loan origination. There are some flood zone determination companies that have the ability to monitor the flood hazard status of the loan for the life of the loan. S. 1405 includes the provision that any such third party must guarantee the accuracy of its work.

We support this provision, but we believe that the legislation should be more explicit in defining the guarantees. We have seen guarantees which are limited to a refund of the flood search fee or which have very large deductibility rendering the guarantee meaningless. We believe S. 1405 should include minimum standards for the guarantee to encourage greater accuracy in making determinations.

We recommend that if a wrong determination was made the third party be held liable for reimbursing the homeowner or the lender for all damage and if the determination was in error and flood insurance was ordered when it was not required, the third party should reimburse the homeowner for all premiums paid.

We also support the monetary penalty provisions in S. 1405 as a means of improving compliance.

PROBLEM #4-EXAMINING FOR COMPLIANCE

We believe the Standard Flood Hazard Determination Form called for in S. 1405 will make it easier for examiners to determine lenders' level of compliance and it will also benefit the secondary market in identifying loans that must be tracked for flood insurance renewal.

PROBLEM #5-NO EVIDENCE OF FLOOD INSURANCE AT CLOSING

We believe that S. 1405 should include a provision requiring lenders to notify borrowers at least 10 days in advance of closing, or at time of commitment, whichever is earlier, that the property is in a SFHA and evidence of flood insurance is required prior to closing.

These are the current FEMA guidelines which we believe should be incorporated into S. 1405. If a borrower finds out at closing that flood insurance is required, there is no way to be in compliance since there is a 5-day waiting period for flood insurance to be in effect. Moreover, there is a serious consumer protection issue involved when a borrower comes to closing and learns about a significant factor that may have affected the purchase decision.

In terms of compliance, we are aware of cases where borrowers who were first notified at closing that flood insurance was required and promised to purchase the insurance after closing but failed to do so.

PROBLEM #6-PORTFOLIOS OF EXISTING LOANS

We agree that the portfolio review requirement not be made part of this legislation. It is nevertheless critical to update portfolios as new or revised flood maps are

issued. Therefore, we recommend that the "constructive notice" provisions be included in the legislation. With a significant number of new or revised flood maps issued each year by FEMA, and unless lenders/servicers are required to review the specific portion of their portfolio these issuances affect, there will continue to be a large number of properties in SFHAs not covered by flood insurance.

We support the provision that requires FEMA to give notice of the publication of new and revised flood maps and Letters of Map Amendment and Letters of Map Revisions.

PROBLEM #7-COMMUNITY INVOLVEMENT IN MAKING DETERMINATIONS

Sec. 1364(e) requires participating communities to notify and warn homeowners and "known lenders" when individual properties are reclassified as in a SFHA on a new or revised flood map. This implies that the communities will be making flood zone determinations. There are a number of questions to be raised in connection with this approach:

(1) How will it be determined what source documents communities will use for flood determinations? Will there be penalties for using unofficial maps (official flood maps are issued by FEMA), or using the wrong flood map?

(2) In accordance with the guarantee provision, will the community be required to guarantee accuracy of its determinations and be held liable for erroneous determinations?

(3) How will the community determine which lenders are active in their community? What about unknown lenders?

(4) Since many lenders sell or transfer the servicing of their mortgage loans to firms located all over the nation, and the servicer is responsible for updating, how will the communities know whom to notify?

We agree that communities and FEMA should be partners in community awareness programs but this provision is unwieldy and unworkable as written, and should be deleted from the bill. We recommend replacing the entire section with the following:

(c) Participating Communities.

The Director shall by regulation require each participating community, upon receiving the semiannual list prepared and distributed by the Director of all changes, revisions, and amendments made to the flood insurance rate maps during the preceding 6 months, to determine whether any portion of their community has been affected. To ensure the public and lending institutions in their community are aware that properties within the community may have been affected by changes, revisions, and amendments made to the flood insurance rate maps, the community will provide notices in local publications, or notices by other reasonable methods. The community will also advise the public, if they are notified by the lender/servicer that their property is determined to be in a special flood hazard area, of the requirement to purchase Federal flood insurance.

PROBLEM #8-RELIANCE ON UP TO FIVE YEAR OLD DETERMINATIONS

We believe that Sec. 205(e) which permits reliance on a previous determination less than five years old to be counterproductive. As mentioned above, FEMA estimates that there is an average of 6,000 new and revised flood maps issued annually. Inevitably, the change in flood status of many properties will be missed over five years resulting in uninsured flood losses on properties in a SFHA, the situation the legislation is designed to eliminate.

In addition, the question of third-party liability arises and the issue of contractual relationships between the original lender and subsequent lenders is unclear.

We are confident that S. 1405 with some of the minor modifications suggested, will achieve the objectives of Congress to create a self-sustaining National Flood Insurance Program that will protect lenders, homeowners, and taxpayers from the economic impact of disastrous floods.

Thank you for the opportunity to express our views.

ADDITIONAL COMMENTS ON S. 1405

AUGUST 31, 1993

Transamerica Flood Hazard Certification has performed more than 3,000,000 flood hazard determinations since 1977. We have first hand experience with lenders, borrowers, and communities all across the Nation and we are well aware that existing legislation has not fully achieved the intent of Congress to minimize the economic impact of floods on individual homeowners and on the Federal budget.

As has been stated repeatedly, the best estimate is that only about 15 percent of properties located in Special Flood Hazard Areas (SFHA) are protected by flood insurance. Although some of the uninsured properties do not have mortgages, and are thus not covered by current legislation, there is little question that a majority of high-risk households, including those with mortgages, do not carry flood insurance. The Flood Disaster Protection Act of 1973 is clear. No Federally-connected lender may make, increase, renew, or extend a mortgage loan secured by improved real estate, or a manufactured home, without first determining whether the insurable structures are located in a SFHA and, if so, requiring that flood insurance be obtained prior to closing and maintained for the life of the loan.

Nevertheless, data released by the Federal Emergency Management Agency (FEMA) in August of 1993 show that in the nine Midwestern States affected by the recent floods, less than 5 percent of the households located in a SFHA were covered by flood insurance.

The impact of this situation on the Federal budget is also clear. The National Flood Insurance Program is denied premium income with which to settle claims from those households at greatest risk and may have to exercise its authority to borrow from the U.S. Treasury. And FEMA will pay billions in disaster relief to homeowners whose losses could have and should have been covered by flood insurance. While non-compliance is a significant factor, it is also true that the mortgage lending industry has undergone major changes since 1973 not anticipated and therefore not dealt with by current law.

We therefore strongly support legislation which takes into account both the issues of compliance and the realities that have changed the face of the mortgage lending industry.

We believe that S. 1405 offers the framework for such legislation and that with some fine-tuning will prove beneficial to all concerned. We have several specific suggestions:

1. Current legislation does not permit lenders to impose flood insurance after closing even if they learn that the original flood hazard determination was incorrect for whatever reason. This appears to be counter to the purpose of the legislation. Given the history of spotty compliance and the frequency and volume of flood map changes, we believe it is critical that S. 1405 include a provision that lenders may require flood insurance whenever it is determined that the insurable structures on a mortgaged property are located in a SFHA.

Moreover, both Fannie Mae and Freddie Mac require lenders who sell loans to them or service loans for them to warrant that the flood hazard status of the loans has been updated to reflect changes in FEMA flood maps and that flood insurance has been required where appropriate. Without the authority to impose flood insurance after closing, lenders will be unable to comply with the requirements of the secondary market, a major and growing factor in mortgage lending, except at great cost.

2. Current legislation, and all previous draft legislation, specifically prohibited waiving the flood insurance requirement for any reason. Our experience is that homeowners will seldom purchase flood insurance voluntarily and that if the flood insurance requirement becomes a "judgment call" much of the effect of the legislation will be diminished. We assume the omission the waiver prohibition from S. 1405 was an oversight and we urge that it be restored.

3. Among the major industry changes has been the growth of national and regional lenders. There are approximately 95,000 flood map panels, many of which may be updated in any given year, so that acquisition and maintenance of a current file of flood maps is a major undertaking the cost of which would surely be passed along to the consumer.

This has given rise to a growing industry of professional flood hazard determination firms which perform determinations on behalf of lenders at a modest fee—usually less than $15, by far the lowest item on the list of closing costs. Previous draft legislation permitted lenders to pass this reasonable fee along to borrowers notwithstanding any Federal, State, or local law. We believe that the restoration of this fee pass-along provision to S. 1405 will greatly improve compliance and accuracy.

4. No matter who performs the flood hazard determination, the lender is responsible for its accuracy. We agree with all previous draft legislation which protected both lenders and borrowers by requiring any third party performing flood hazard determinations to guarantee the accuracy of its work. Further, we believe that at a minimum these guarantees should include reimbursement for any uninsured flood loss or unnecessary flood insurance premiums paid due to an inaccurate determination.

5. S. 1405 includes penalties for non-compliance but has omitted the provision in previous draft legislation that these penalties do not rule out other causes for action. We believe that this is an important consumer protection issue and should be restored.

6. Similarly, there is no mention of when a lender must notify a mortgage applicant that the property is in a SFHA. Without notification prior to closing, the applicant does not have the opportunity to make an informed decision regarding a major purchase. Nor can the borrower obtain flood insurance, a condition of closing, prior to closing. Current guidelines specify notification at least 10 days prior to closing, or at time of commitment, whichever is earlier. These guidelines have worked well in the past and should be included in S. 1405.

7. Section 1364(e) requires participating communities to notify and warn homeowners and "known lenders" when individual properties are reclassified as in a SFHA on a new or revised flood map. This implies that the communities will be making the determinations. There are a number of questions to be raised in connection with this approach:

a. How will it be determined what source communities will use for flood hazard determinations? Will they use FEMA flood maps exclusively? How will this be regulated? Will there be penalties for using unofficial maps?

b. In accordance with the guarantee provision, will the community have to guarantee the accuracy of its determinations and reimburse the homeowner for an uninsured flood loss or unnecessary flood insurance premiums paid due to an inaccurate determination?

c. How will the community determine which lenders are active in their community? What about "unknown" lenders?

d. Since many lenders sell or transfer the servicing of their mortgage loans to firms located all over the Nation, and the servicer is responsible for updating, how will the communities know whom to notify?

In short, we believe this provision is unworkable and favor the "constructive notice" provision of previous draft legislation.

8. We also believe to be unworkable the provision that requires FEMA to review upon request all appeals of determinations that properties are located in a SFHA. Our experience shows, and the statistics bear out, that homeowners seldom purchase flood insurance willingly. We believe that FEMA will be inundated with appeals that will be both costly and time-consuming, even if FEMA is permitted to charge a fee for appeals.

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Considering that as many as 1,000,000 mortgages are issued annually on properties in a SFHA, the entire NFIP program could become bogged down in the peals process. We believe that an appeals process is essential, but we fear that in this instance the cure may be worse than the disease.

FEMA has recently published guidelines regarding the appeals process which we believe are adequate.

9. We believe that Section 205(e) which permits reliance on a previous determination less than five years old to be counter-productive. FEMA estimates that there is an average of 6,000 new and revised maps issued annually.

Inevitably, the change in flood status of many properties will be missed over a period of five years resulting in uninsured flood losses on properties in a SFHA, the situation the legislation is designed to eliminate.

We are confident that S. 1405, fine-tuned as above, will achieve the objective of Congress to create a self-sustaining National Flood Insurance Program that will protect lenders, homeowners, and taxpayers from the economic impact of disastrous floods. Thank you for the opportunity to express our views.

TESTIMONY OF DR. PETER M. FALLON

NORTH BEACH CIVIC ASSOCIATION OF VERO BEACH, FLORIDA

Mr. Chairman and Members of the subcommittee, my name is Peter Fallon and I represent the North Beach Civic Association of Vero Beach, Florida.

Thank you for the opportunity to tell you how this bill affects Florida.

We feel the NFIP has been a very successful program and agree that it needs some fine tuning. However, the thrust of its reform should address the 8.5 million structures in flood zones that are not currently insured but should be. The present Mississippi riverine flooding highlights this sorry fact.