uled on-site examination where compliance with flood insurance requirements is evaluated. S. 1405 AND DEFICIENCIES UNDER CURRENT LAW The existing flood insurance program has been criticized in that it does not: 1) apply to all mortgage lenders; 2) provide any mechanism for monitoring the maintaining of insurance coverage by borrowers when loans are sold and purchased on the secondary market; 3) assure accurate, up-to-date and readable maps and other information for institutions to determine flood hazard areas; 4) provide incentives for borrowers to obtain flood insurance other than by the requirement of the law; and 5) result in sufficient coverage of mortgaged properties in flood hazard areas. S. 1405 attempts to address many of these deficiencies. S. 1405 would mandate Federal Financial Institutions Examination Council (FFIEC) interagency involvement with flood insurance program policy decisions of FEMA and the Federal Insurance Agency (FIA), as administrators of the NFIP. Such formalized interaction should result in improved coordination, education, and understanding between bank regulators and the governmental entities responsible for implementing flood insurance programs. This should facilitate better implementation and enforcement of the flood insurance laws. COVERAGE The bill does not directly cover all mortgage lenders. Mortgage bankers, mortgage companies and similar lenders are not "regulated lending institutions" as defined in the bill, but are responsible for significant mortgage loan activity. However, the bill does contain provisions which would place pressure on these unregulated institutions to comply with flood insurance requirements. "Regulated lending institutions" and "Federal agency lenders" would be bound by flood insurance program requirements not only on mortgage loans they originate but on loans they purchase. Thus, unregulated mortgage lenders which, as a group, often sell their loans in the secondary market have more incentive to assure that the loans meet flood insurance requirements in order to improve their marketability. By increasing the incentives for unregulated lending entities to meet the requirements of flood insurance laws, S. 1405 should improve their compliance. Under S. 1405, lending institutions and Federal agency lenders must notify a borrower that a securing property is in an identified flood area and that flood insurance is required before "making, extending, increasing or renewing" a loan. The FDIC views this language as an improvement over prior versions of flood insurance legislation which covered "transfers" of loans. As this subcommittee knows, the FDIC frequently resolves failed financial institutions through purchase and assumption transactions where an acquiring institution takes some or all of the assets from the failed institution. While the language of S. 1405 does not appear to apply to the transfer of a failed institution's assets by the FDIC as receiver to an acquiring institution, the subcommittee might want to consider providing an explicit exemption for such transactions. Of course, the FDIC's transferee would still be prohibited from making, extending, renewing or increasing acquired loans without meeting the flood insurance requirements. In a typical purchase and assumption transaction, a provision requiring the review of all loans of a failed institution could require the FDIC, in its receivership capacity, to review thousands of loans of a failed institution before it could sell or transfer them to the acquiring institution. Often purchase and assumption transactions take place over a period as short as a few days. In these situations, it would not be feasible for the FDIC to review the large numbers of assets of the failed institutions in such a short period of time. Reviewing individual loans in this context could increase the delay and expense of the resolution of a failed institution. A similar clarification may be necessary to ensure that the FDIC in its receivership capacity may rely on a previous determination of whether real property securing such loan is in a special flood or erosion hazard area under section 205 of the bill if it increases, renews or services a loan in the receivership. ESCROW Compliance with flood insurance statutes would be strengthened by the provisions of S. 1405 that require financial institutions to escrow flood insurance payments if they escrow other items such as taxes and casualty insurance premiums. While this provision increases the likelihood of continued coverage, it would appear that the efficacy of the provision concerning escrow of flood insurance payments could still be severely compromised by the frequency of mortgage servicer turnover. If a purchasing or assuming mortgage servicer does not practice escrow collection, the insurance coverage could lapse without detection, at least until such time as it would be sold on the secondary market when intermediaries such as FNMA and FHLMC would require proof of coverage. DETERMINATIONS OF THE NEED FOR FLOOD INSURANCE S. 1405 mandates penalties and corrective actions against financial institutions for failure to require flood insurance, escrow payments, or notify borrowers. As the subcommittee knows, the FDIC is already empowered under the Federal Deposit Insurance Act to issue corrective orders and levy civil money penalties for violations of laws for which it has enforcement responsibility. While a fine may serve to improve compliance among supervised institutions, it does not address the difficulty financial institutions have in making flood hazard determinations from maps which are constantly changing and are extremely difficult to read. Due to the complex nature of the Flood Insurance Rate Maps and the number of amendments or revisions, third parties are generally hired by lending institutions to make such determinations. While S. 1405 would allow the lender to rely on third party guarantees of accuracy, there is no known licensing authority over the Map Determination Companies who guarantee the accuracy of determinations. In addition, licensed appraisers are generally not trained to make flood determinations with guaranteed accuracy. Rather than forcing institutions to contract out their flood insurance determinations, the FDIC believes that consideration should be given to placing primary responsibility for flood hazard determinations upon a central agency, such as FEMA, which develops, amends, updates and disseminates the maps and community status directories needed for compliance with the NFIP under current law. Rather than charge for maps and materials, the agency could simply charge for the determination itself. Consideration should also be given to the concept of a central data base operation, accessible by toll-free telephone or other method, to institutions, borrowers, and third parties that could guarantee accurate flood hazard determinations. It may well be that the costs of such an operation—which would provide accurate flood hazard determinations, community ratings and status at the outset could be offset by reduced costs for publication, notification, and dissemination of the voluminous materials currently necessary to keep affected parties apprised of NFIP requirements. CONCLUSION The FDIC generally supports the objectives of the National Flood Insurance Program (NFIP) and favors improvements which would contribute to improved compliance. Yet, improved compliance may require additional regulatory burdens on financial institutions and borrowers. We welcome meaningful changes which could_enhance the effectiveness of the NFIP and we look forward to working with the Congress to achieve this goal in the least burdensome method possible. PUBLIC POLICY ISSUE PAPER FOR THE NATIONAL PERFORMANCE REVIEW NEW DEVELOPMENT IN DEEP FLOODPLAINS IS BAD PUBLIC POLICY: EXECUTIVE SUMMARY WRITTEN BY GARY W. ESTES CITIZEN FROM AUBURN, CALIFORNIA At issue are Federal policies which INCREASE the risk to public health and safety from deep flooding. This increased risk is caused by encouraging more people to live and more buildings to be constructed in deep floodplains, such as Natomas Basin. This paper argues that to knowingly increase the risk to public health and safety is bad public policy. The flood protection programs of the U.S. Army Corps of Engineers (Corps) and the National Flood Insurance Program administered by the Federal Emergency Management Agency (FEMA) work together to increase the number of people and buildings at risk of catastrophic flooding. This result is caused by the Corps building flood control structures, like levees and dams, creating a false sense of safety. Once a floodplain is protected from the 100-year flood by such structures, then urban development can proceed without any restrictions. FEMA compounds this false sense of safety by making flood insurance available to the people who move into the "protected" floodplain, but not requiring flood insurance. The Corps and FEMA are en couraging floodplain development by offering the Federal Government's "seal of approval" that floodplains are safe for development. An example of this public policy gone wrong is the Natomas Basin located in the Sacramento (California) floodplain. The 55,000 acre Natomas Basin already has over 31,000 people and 13,730 structures located on 7,260 acres at risk of flooding to depths of 8 to 23 feet. The structures, plus the contents, are valued at $2.351 billion with flood damage to them estimated at $1.592 billion. By protecting these people and buildings, the remaining 47,622 acres of agricultural and vacant land are opened to development. This undeveloped land area totals 75 square miles which is LARGER than the District of Columbia (69 square miles). Three local governments control land use decisions in Natomas Basin. Proposed urban development plans by these jurisdictions would allow over 170,000 more people and over 80,000 new homes to reside in Natomas Basin. The result would equal a city in excess of 200,000 people living in over 93,000 homes. The value of all structures and contents is estimated at over $15 billion with potential flood damage estimated at $8 to $10 billion. How much development has been encouraged in floodplains throughout the United States by existing public policy? How many times will this be repeated in the future across America? How many more disastrous floods must occur before we act? The Great Flood of 1993 shows the consequences of the current public policy. Now is the time to establish a decisive policy opposing Federal encouragement of urban development in deep floodplains. This new policy can be implemented by enacting the same limitations on Federal actions which once encouraged development of coastal barrier areas. Enacted in 1982, the Coastal Barrier Resources Act (COBRA) prohibits Federal flood insurance for new development and restricts Federal financial assistance to designated coastal barrier areas. The same restrictions should apply to deep floodplains. Such restrictions applied to Natomas Basin will prevent: • adding over 170,000 people living at risk of deep flooding, • adding over $13 billion of property at risk of destruction from deep flooding, • increasing the future cost of government to recover from a catastrophic flood disaster, • shifting accountability for the consequences of local land use decisions to the Federal Government, and • taxpayers subsidizing profits estimated at $5 to $10 billion for land speculators and developers. FOREWORD On March 3, 1993, President Bill Clinton announced the National Performance Review to the Nation. Vice President Al Gore will lead this effort to bring Total Quality Management (TQM) concepts to all parts of our Nation's government. The National Performance Review will focus six months of intense effort to evaluate the performance of government. Every aspect is open for evaluation. The President stated the Review will ". challenge the basic assumptions of every program asking: Does it work? Does it provide quality service? Does it encourage innovation?" He observed that many programs began for good reasons, but times have changed. He continued, "If there is something the Federal Government should stop doing, we will try to make changes." President Clinton and Vice President Gore asked citizens to communicate their suggestions for improving our Federal Government. In response to their invitation, this issue paper is offered to focus attention and initiate dialogue regarding a flawed public policy. This paper identifies problems and offers possible solutions, though the problem definitions and solutions will likely change as the dialogue continues. GEOGRAPHIC LOCATION 1 Our story begins in the floodplain of Sacramento, California. Formed by the confluence of the Sacramento River and American River, the Sacramento floodplain contains 116,000 acres (181 square miles). "To the conventional wisdom that one ought never to build on a floodplain, California has responded with its capital city."2 In the part of the Sacramento floodplain known as Natomas Basin, over 31,000 people have been allowed by Federal, California, and local governments to build their homes in a deep floodplain. Flood depths range from 8 to 23 feet in the existing developed areas. This 55,000-acre man-made basin was created in 1914 to "reclaim" wetlands and floodplain lands for agriculture.3 The entire Natomas Basin (86 square miles) covers an area larger than the District of Columbia (69 square miles). Approximately 13 percent (7,260 acres) of the land is in urban use and the remaining 87 percent (47,622 acres) consists of agricultural and vacant land available for development. Figure 1 shows the Sacramento floodplain which could be flooded by a 100-year and 400-year flood event. The reader can see the rivers, creeks, and land areas comprising the 116,000 acre floodplain. The Sacramento River is the western boundary of the floodplain. Flowing north to south the Sacramento River passes Natomas, West Sacramento, Downtown Sacramento, and South Sacramento on its way to the Pacific Ocean through San Francisco Bay. The American River begins its journey in the Sierra Nevada Mountains flowing east to west joining the Sacramento River just south of Natomas Basin. 1 Much of the information in this paper was obtained from the American River Watershed Investigation, California: Feasibility Report dated December 1991. The Report was prepared by the U.S. Army Corps of Engineers, Sacramento District, and issued jointly with The Reclamation Board, State of California. It consists of Part I: Main Report and Part II: Environmental Impact Statement/Environmental Impact Report (EIS/EIR) with Appendixes A through T. This Report will be referenced as Corps Feasibility Report. 2 John McPhee, Assembling California, Farrar, Straus and Giroux, (New York, 1993), page 177. Corps Feasibility Report, EIS/EIR, page EIS 7-12. "The 100-year floodplain is approximately 110,000 acres and the 400-year floodplain is approximately 116,000 acres. Source: Corps Feasibility Report, Appendix C, page C-14. |