the borrower should obtain [flood insurance] at the borrower's expense... for the term of the loan. It is unclear whether the proposed bill changes the applicability of flood insurance to cover properties that subsequently fall within a flood hazard area because of a map revision. If the property becomes subject to flood insurance subsequent to any loan decision, and the lender is unaware of the change (and therefore does not notify the borrower) would the lender be held liable? Would this be a violation of this section? Section 204. Placement of Flood Insurance By Regulated Lending Institutions or Federal Agencies Section 204(e)(2)(b) amends section 102(e) of the Flood Disaster Protection Act to "apply to all loans outstanding on or after the date of enactment of the National Flood Insurance Reform Act of 1993." Does this mean that the flood insurance requirements would cover loans secured by property that, subsequent to the loan decision, fall within a flood hazard area? (This could be the result of FEMA's issuing a new map.) Section 1365. Standard Flood Hazard Determination Forms Section 1365(d) Guarantees Regarding Information. This section states that “a person may rely on information provided by a third party to the extent that the third party guarantees the accuracy of the information." If the bank relies on the guarantor, is there a violation if the guarantor is wrong? Does the bank recover from the guarantor? Section 1365(e) states that a person or institution increasing, extending, renewing, purchasing, or servicing a loan may rely on a previous flood hazard area determination if the "previous determination was made not later than 5 years after the date of the transaction, and the basis for the previous determination has been set forth on a determination form." What does the term "transaction" refer to here? Is it the "original transaction"? Section 206. Examinations Regarding Compliance by Regulated Lending Institutions Section 206(a) amends Section 10 of the Federal Deposit Insurance Act. Section 206(h)(1) indicates that the "appropriate Federal banking agency shall, during each scheduled on-site examination required by this section, determine whether the insured depository institution is complying with the requirements of the National Flood Insurance Program." Flood insurance is reviewed as a part of System compliance examinations. It is unclear whether this section would trigger a flood insurance examination every time a System examination is conducted, whether it is commercial, trust, EDP, or anything else. This part should be redrafted to be more specific about the type or purpose of the examination intended. Section 207. Penalties and Corrective Actions for Failure to Require Flood Insurance, Escrow, or Notify Under Section 207(1) Civil Penalties-any bank found to have a "pattern or practice of violating this section shall be assessed a civil penalty. . . of not more than $350 for each violation. A penalty. . . may be issued after notice and an opportunity for a hearing on the record." Because we presently have the ability to impose penalties under FIRREA, this section appears unnecessary. In addition, because this section does not consider the severity of violations covered, it is possible that penalties could be imposed where no harm was incurred to the consumer, or the bank. For example, if examiners discovered two or three instances where a bank did not provide the notice to the consumer that his/her property was in a floodplain within the prescribed amount of time, but did require the borrowers to obtain flood insurance prior to settlement, should a fine be imposed? Substituting "may" for "shall" may be more appropriate. Second, while the Federal Reserve may presently levy fines for other regulations and statutes, I do not believe that any of these require a notice or a hearing. Since State member banks are informally provided the option of meeting with Reserve Bank or Board staff to discuss examination problems, I do not believe that this section is necessary. Section 207(X4) 3-Year Limit-states that penalties may not be imposed on banks "after the expiration of the 3-year period beginning on the date of the occurrence of the violation." This section does not appear to make sense. If a bank did not require flood insurance four years ago on an outstanding loan, the loan is still in violation of the flood insurance provisions. Section 606. Funding for Increased Administrative and Operation Responsibilities As stated in section 606(b)(6), any penalties collected appear to go FEMA. Under FIRREA, penalties collected go to the Treasury, not the agency. Directing any penalties to Treasury in this instance would appear more even handed. TITLE V-FLOOD INSURANCE TASK FORCE Section 501(b)(1) Membership-states that there will be 11 members of the Task Force, and then details these members. From my calculations, however, there appear to be 12 members of this group, if you count the FFIEC as having 5 members. Section 501(c)(4)—states that one of the duties of the Task Force (which includes FFIEC representatives) is to "study the extent to which the flood insurance rate structure could be revised to minimize existing premium rate subsidies, to incorporate premium rate adjustments for erosion hazards, to account for catastrophic loss events, and to propose strategies to establish an actuarial-based premium structure to account for all insurable risks identified under the National Flood Insurance Act of 1968." The responsibilities set forth here are outside of the scope of the Board's responsibilities and expertise in examining State member banks for compliance with flood insurance provisions. I would suggest that this section be changed. Section 604. Updating of Flood Insurance Maps and Identification of Under Section 604(e)(2) Assessment of Need to Update Areas.-The proposal provides that a State or community may request that a flood map be revised or updated, provided that the "State or community making the request agrees to provide not less than 50 percent of the cost, or the equivalent value of data, technical analysis or other in-kind services. for the requested revision or update." Presently, FEMA is the only one who can issue revised maps. If FEMA wants to ensure that its maps are current, and if communities or States request revised maps when they deem a problem with the existing one, it seems that this section would not serve those interests, but deter any State or community from applying for a map revision. Section 604(f) and (h) refer to the availability of flood insurance maps and related information. In these sections, State agencies responsible for coordinating and communities participating in the National Flood Insurance Program may receive copies of flood maps and "related information" free of charge. All others would be charged for these materials. Presently, Reserve Banks receive copies of FEMA's Community Status Book as an examination reference tool. This book lists all the communities where special flood hazard areas have been identified, whether the communities participate in the National Flood Insurance Program, and the appropriate flood map for these communities. In addition, FEMA presently provides some material used to train System compliance examiners. Given that examiners need access to some FEMA resources to conduct effective flood insurance examinations, it would be helpful to continue to receive some information from FEMA free of charge. STATEMENT OF THE OFFICE OF THRIFT SUPERVISION Mr. Chairman and Members of the subcommittee, the Office of Thrift Supervision ("OTS") is pleased to provide views on S. 1405, "The National Flood Insurance Reform Act of 1993." Our remarks are limited to key provisions of the bill that directly affect the Federal financial regulatory agencies and their supervised institutions. Those provisions are primarily contained in Title II. We support the broad-based goals of the National Flood Insurance Program (NFIP"), which are to mitigate future flood damage through incentives for prudent floodplain management and to ensure that flood insurance is available at reasonable cost to owners of improved real property in special flood hazard areas. In addition, we support the concept of protecting property owners against potential losses, using an insurance mechanism that is funded primarily with premiums paid by those who benefit directly from such protection. We also support the objective of S. 1405 to ensure that the NFIP combines predisaster mitigation efforts with an insurance and compliance program to reduce the physical and economic affects of flood-related damage on the Federal, State and local governments, and individuals. EXISTING REGULATORY FRAMEWORK The Flood Disaster Protection Act of 1973 ("FDPA”) directs the Federal financial regulatory agencies ("the agencies") to issue regulations that prohibit supervised institutions from granting credit secured by improved real estate or a manufactured home located in an identified special flood hazard area unless the borrower satisfies certain flood insurance purchase requirements. Clearly, the success of this aspect of the NFIP is directly related to the level of compliance by lenders, including financial institutions, with these regulations. OTS regulations implementing the FDPA are codified at 12 CFR 563.48. They closely track the statutory requirements and are substantially similar to those of the other agencies. However, OTS regulations additionally require that flood insurance be obtained for loans purchased by a savings association from other creditors. Our regulations require a savings association: • Not to make, increase, extend, purchase, or renew any loan secured by improved real estate or a mobile home located or to be located in a designated special flood hazard area unless the property securing such loan is covered by flood insurance; • To maintain sufficient records to indicate the method used to determine whether such loan requires flood insurance; • To provide written notification to the borrower within 10 days before closing that the property securing such loan is or will be located in a special flood hazard area (or, in lieu of providing notice, to obtain satisfactory written assurances that a seller or lessor has notified the borrower, prior to execution of any agreement for sale or lease, that the property securing the loan is or will be located in a special flood hazard area); To notify the borrower whether, in the event of damage to the property caused by flooding in a Federally declared disaster area, Federal disaster relief assistance will be available for the property; and, • To require the borrower, prior to closing, to provide the association with a written acknowledgment that the property securing the loan is or will be located in a special flood hazard area and that the borrower has received the required notice regarding Federal disaster relief assistance. OVERVIEW OF THE OTS COMPLIANCE PROGRAM Compliance by savings associations with laws and regulations is a priority of this Agency. Our examination efforts pertaining to flood insurance are concentrated on ensuring full compliance by savings associations with the FDPA and our implementing regulations. The cornerstone of these efforts is our specialized compliance examination program. Under this program, compliance examinations are conducted by specially trained, career-professional staffs in our five regional offices. Our compliance personnel receive in-depth training in the pertinent laws and regulations and our examination approach and philosophy. Flood insurance is covered in specific segments of our Compliance I (for entry-level compliance examiners) and Compliance II (for more experienced examiners) training schools. Incidentally, the Federal Emergency Management Agency ("FEMA”) provides a guest lecturer on flood insurance at our Compliance II school. To enhance the effectiveness of our overall supervisory efforts, compliance examinations are conducted concurrently with safety and soundness examinations whenever practicable. However, we use a separate rating system to evaluate an association's compliance performance. The rating system triggers the frequency of subsequent examinations. Savings associations that receive satisfactory or outstanding compliance ratings are examined on a two-year cycle, while associations that exhibit various degrees of unsatisfactory performance are examined on either a one-year or six-month cycle. Our policies also permit more frequent examinations where warranted. SPECIFIC COMMENTS ON S. 1405 Section 101 expands the coverage of the FDPA to include non-financial institution lenders and their appropriate regulatory agencies. This expansion creates a more level playing field among lenders and provides additional protections for nonfinancial institution borrowers. However, the other affected entities are in a better position to assess the impact that the proposed requirement may have on them or the industries they regulate. Section 201(a) requires each "Federal entity for lending regulation" to consult with the Federal Financial Institutions Examination Council ("FFIEC") prior to adopting any regulations to implement S. 1405. At the present time, the flood insurance regulations of the FFIEC member agencies are virtually identical. Moreover, the agencies use uniform examination procedures for determining compliance with the flood insurance requirements. We are confident that any revised regulations or procedures would continue to be coordinated on an interagency basis. Section 202 directs each "Federal entity for lending_regulation" to issue regulations that require a lender to escrow all charges for flood insurance if the lender also requires the escrowing of taxes, insurance premiums or other charges for loans secured by residential real estate or manufactured homes. We believe this requirement may help ensure that flood insurance coverage is purchased and maintained on properties in special flood hazard areas. Section 203 directs the same Federal agencies to issue regulations that require lenders to notify borrowers of the special flood hazards and the need to purchase and maintain flood insurance. The required notice must include: (1) a warning that the property securing the loan is located in a special flood hazard area; (2) a description of the flood insurance purchase requirements; (3) a statement that flood insurance coverage may be purchased under the NFIP or be available from private insurers; and, (4) other information that the FEMA considers appropriate. This proposed notice requirement is similar to our existing requirement, but is more extensive. We believe the additional specificity will be helpful to borrowers and avoid creating an unreasonable burden for lenders. Under our regulation, no notice is necessary if a savings association has obtained satisfactory written assurances a seller or lessor has notified the borrower, prior to execution of any agreement for sale or lease, that the property securing the loan is or will be located in a special flood hazard area. The subcommittee may wish to consider this type of exception. Section 204 authorizes lenders to "force place" insurance on behalf of a borrower and to recover reasonable costs incurred in purchasing the insurance. We believe this requirement will help ensure that flood insurance coverage is purchased on properties in special flood hazard areas and will increase overall compliance with the NFIP, without adding excessive regulatory burden. Nonetheless, the subcommittee may wish to consider other ways to equitably allocate the responsibility for forceplacing insurance that would involve, for example, insurance companies, local governments or local offices of FEMA. To clarify that this section does not apply to a situation where the original borrower has sold the loan and has no other relationship with the borrower, we suggest language to clarify that the note holder is the party responsible for forceplacing the insurance. Section 206 amends section 10 of the Federal Deposit Insurance Act (FDIA) to require that the flood insurance requirements be reviewed as part of each scheduled on-site examination. Under subsection (d)(1) of section 10, the agencies are required to conduct annual safety and soundness examinations of certain institutions. However, consumer compliance examinations, which address flood insurance, are excluded from those requirements under subsection (d)(6). Our compliance examination program ensures compliance by savings associations with the flood insurance purchase requirements. Our program emphasizes regulatory areas of greatest risk and sensitivity. It also concentrates on the role that the association's management should play in effectively administering its compliance responsibilities, including those related to the flood insurance requirements. Thus, our program enables us to allocate examiner resources to those institutions, and to areas within those institutions, that pose the greatest risk and supervisory concern. As indicated earlier, poorly performing institutions receive compliance examinations on an annual or more frequent basis. We believe our current examination approach provides us with the necessary flexibility to effectively exercise our supervisory responsibilities. Therefore, we prefer that the bill not contain a specific examination requirement for flood insurance. If the proposed requirement to include a review of flood insurance compliance as part of each scheduled on-site examination remains intact, then on a more technical level we suggest language to clarify that this review be included within the scope of each scheduled on-site compliance examination. Section 10 of the FDIA distinguishes between safety and soundness and compliance examinations and we would prefer to continue to keep flood insurance as part of our compliance program. Section 207 provides that a lender found to have a pattern or practice of flood insurance violations is to be assessed a civil money penalty of not more than $350 for each violation, not to exceed $100,000 per year. It also authorizes the agencies to take any necessary remedial action when a lender falls short of regulatory compliance and has not shown measurable improvement in compliance after the imposition of civil money penalties. Our policy is to ensure that prompt, fair, and firm action is taken to correct violations of the laws and regulations we enforce. We already have a number of enforcement tools available ranging from moral suasion to formal enforcement actions, such as cease and desist orders. For example, we have specific authority under the FDIA (12 USC 1818) to initiate an enforcement action for a violation of any law or regula tion and the power to assess civil money penalties. Therefore, we believe our existing enforcement tools are sufficient to ensure compliance with the flood insurance requirements. We also believe that supervisory enforcement of savings associations is most effective when we have discretion to determine which of the various remedies available to effect compliance is best suited to the institution. Therefore, we suggest that any penalty or corrective action provisions be discretionary, not mandatory. CONCLUSION This year's devastating floods in the Mississippi Valley tragically serve as the most recent example of the need for an effective national flood insurance program. OTS is committed to fulfilling its responsibilities under the NFIP and to ensuring regulatory compliance by savings associations. We believe the program is beneficial to the thrift industry and the Nation as a whole. We also believe compliance by the lending community demonstrates sound business practice as well as regulatory compliance. We are always prepared to provide assistance to achieving the goals and objectives of the NFIP by continuing to work with Congress, our fellow Federal financial regulatory agencies and the thrift industry. COMMENTS OF THE FEDERAL DEPOSIT INSURANCE CORPORATION FDIC RESPONSIBILITY UNDER CURRENT LAW Under the Flood Disaster Protection Act of 1973 (FDPA), the FDIC has promulgated regulations (12 CFR, Part 339) which require FDIC-supervised financial institutions to determine whether improved property securing a loan is located in a special flood hazard area and whether the property is located in a community that participates in the National Flood Insurance Program (NFIP). If it is determined that the property meets these conditions, regulated financial institutions may not make, increase, extend or renew any loan secured by improved real estate or a manufactured home if the property is located in a special flood hazard area where the community participates in the NFIP, unless flood insurance is purchased. In addition, requisite notices must be provided to the borrower concerning the flood hazard status of the property and eligibility for disaster relief assistance from the Federal Emergency Management Agency (FEMA) in the event of damage to the property caused by flooding whether or not the community is participating in the NFIP. If the security is located in a special flood hazard area and flood insurance is not available because the community is not participating in the program, it is not eligible for government guaranteed loans, such as FHA, VA and SBA loans. Enforcing compliance with the FDPA by FDIC-supervised institutions is an integral part of the FDIC's compliance examination program. In the flood insurance examination process, FDIC examiners review and assess an institution's applicable policies, procedures and internal controls-particularly the methods used by the institution to make the flood hazard determination. Examiners also review the institution's policies and procedures to ensure that they provide proper notification to the borrowers and to ensure that sufficient insurance coverage remains in effect for the term of the loan. Examiners also may offer appropriate information and technical assistance, thereby helping institutions to understand their obligations under the flood insurance regulations and the FDIC's enforcement role. After the examination is completed, the appropriate FDIC Regional Office follows up on the examination findings to assure that necessary corrective actions are taken by the institution. The FDIC normally takes increasingly stringent administrative actions until banks comply with the applicable corrective actions identified by the examination process. The FDIC's available enforcement tools include assigning unsatisfactory ratings, entering written memoranda of understanding, and issuing cease-and-desist orders and imposing civil money penalties. Because determining an institution's compliance with flood insurance and other consumer protection laws is a complex and important part of FDIC's compliance examinations, the FDIC has developed a force of examiners who specialize in compliance examinations. These specialized compliance examinations, however, are not always conducted simultaneously with scheduled safety and soundness examinations. For this reason, section 206 of the bill which mandates that Federal banking agencies check compliance with flood insurance requirements "during each scheduled onsite examination" should be changed to require a determination during each sched |