graph on Human Adjustment to Floods, published by the University of Chicago in 1942. I later served as Vice-Chair of President Truman's Water Resources Policy Commission, and as Chair of the Bureau of the Budget Task Force on Federal Flood Control Policy that in its 1966 report (House Document 465) recommended the study of the feasibility of a Federal flood insurance program, and to President Johnson's Executive Order on activities by Federal agencies in locating installations and disposing of lands in floodplains. During the past 25 years I have had occasion to appraise various Federal, State, and local programs dealing with floods, most recently in reviewing the report of the Federal Interagency Task Force on assessment of Floodplain Management in the United States, 1992, and in helping prepare an accompanying non-Federal review entitled Action Agenda for Managing the Nation's Floodplains, 1992. 1. It is painfully evident that unless Federal support of flood insurance is approached as an integral component of floodplain management it may be ineffective or even counter-productive. When the emphasis is primarily upon selling insurance policies the effect may be to encourage publicly unwise use of floodplains and to lose opportunities to nourish sound action at the local level. Unhappily, this has been the record in many floodplains in the United States. The record of damages, insurance coverage, and Federal relief expenditures is available. The objectives stated in Section 1302(c) of the National Flood Insurance Act of 1968 that "a flood insurance program should be integrally related to a unified national program for floodplain management" and that "the President should transmit to Congress for its consideration any further proposals necessary for such a unified program, including proposals for the allocation of costs among beneficiaries of flood protection" still have not been achieved. As indicated in the Assessment report, the Federal agencies involved in supporting the essential work of local and State agencies need to be directed to coordinate their activities in close cooperation with the Federal Insurance Administration. I was struck at the meeting of the Write Your Own insurance companies personnel last March that only a handful of those present were aware of the findings and ideas in the Assessment report, and of how they might collaborate. This requires not only the improvements in policy specified in S. 1405, such as requirements for lending agencies, but solid support from FEMA for the work of State agencies assisting local communities in designing suitable floodplain management programs, including public health and safety, economic land use, and natural values. 2. The early days of the flood insurance program demonstrate that a well-intentioned commitment to promptly make insurance available in all the Nation's floodplains led to the establishment of uniform policies that were unsuitable in numerous environments and that, once prescribed nationally, were difficult to change and sometimes self-defeating. This was the case with mapping and classification of hazardous areas. S. 1405 seeks to correct many of those errors, but it runs the same danger as the earlier administration. It could again, in seeking to rapidly improve matters, freeze into national procedures a number of criteria and methods that will prove unwise. There are two linked directives that the Congress might give the Federal Insurance Administration to minimize that danger: a. Prescribe that the new procedures be tried in diverse sample areas for a year or two before extended to the Nation. b. Request that the Administration report in that connection the observed effects of such procedures on the use and quality of the area affected. It is not enough to report the numbers of policies sold and the claims settled: the key question is what appears to be the consequence for the community's and the Nation's vulnerability to flood loss, the accompanying economic gains if any, and the quality of its social and natural environment. What, for example, is the effect of new erosion hazard identification upon the volume of insured property and of property liable to damage requiring Federal relief assistance? While the bill recognizes the importance of natural and beneficial functions of floodplains it gives almost no guidance as to how those are to be appraised. The kind of request for report on observed effects noted above would help sharpen that dimension. In that connection, it should be noted that while the bill gives encouragement to the Community Rating System, and while a considerable number of communities have been rated by the specified criteria, there is not yet available a thorough, impartial evaluation of what has happened in terms of use and natural functions in communities that have been rated. Based on previous experience, it would seem prudent for the Congress to request that the Administration take the time to find out in some detail the consequences of those activities before or while proceeding more widely. A similar problem occurs with respect to how increased cost of construction will be handled in terms of ways in which the victims use the coverage to floodproof their structures. To summarize: the bill is very much in a needed direction, and its provisions seem on the whole wise, but it could benefit from two major lessons from the past 25 years. Don't forget that the primary aim is promoting beneficial use of floodplains; selling insurance is only one possible aid. Don't rush into new inflexible national programs without testing them in terms of operating methods and results. Let the agencies and the overseeing units in the Congress take the time and trouble to do the job right. COMMENTS OF ALFRED POLLARD DIRECTOR, GOVERNMENT RELATIONS SAVINGS & COMMUNITY BANKERS OF AMERICA Dear Mr. Chairman, Savings & Community Bankers of America welcomes the opportunity to express our opinions regarding S. 1405, the National Flood Insurance Reform Act of 1993 introduced by Senator John Kerry. SCBA is a national trade association representing over 1,800 community-based savings and loan associations and savings banks domiciled in all fifty States. The National Flood Insurance Program, authorized in 1968, has not succeeded in meeting its goal of reducing the Federal Government's risk of loss associated with flooding disasters. The program has not fully achieved its potential for many reasons including the unavailability of accurate flood area maps and the lack of participation in the program by homeowners and businesses located in flood hazard areas. Further evidence of the inadequate reach of the program has been discovered by recent congressional studies that revealed that only 2.4 million out of approximately 11 million households in flood hazard areas have actually purchased flood insur ance. Mortgage lenders are caught in the middle of the issue by their mandate to require borrowers with property located in flood-prone areas to purchase flood insurance. However, it is important to note that approximately 50 percent of the owners of the property in these areas are not required to purchase flood insurance because their property is not mortgaged. Many of the owners of mortgage free property located in flood-prone areas take advantage of the jurisdictional safe harbor that removes them from the reach of the program's only compliance enforcers-mortgage lenders. Until the issue of non-mortgaged property owners in flood hazard areas is adequately addressed, there cannot be full compliance and participation in the flood insurance program. This in turn will continue to expose the Federal Government to enormous potential losses. SCBA and its membership recognizes the need to increase compliance and has worked closely with Senator Kerry and FEMA over the years in trying to develop effective solutions to the problems of the flood insurance program. SCBA supports efforts to reform the flood insurance program as embodied in S. 1405 and wants to continue to work to address those sections of the bill that need further refinement to make it more effective from the standpoint of mortgage lenders who are the program's compliance check point. Regulators should have the responsibility of monitoring lender compliance with the program. Requiring Fannie Mae and Freddie Mac, with oversight from their new regulator, the Office of Federal Housing Enterprise Oversight, to check for compliance for loans sold in the secondary market is an efficient and accurate method for monitoring the compliance activity of nondepository institutions, and provides additional monitoring for depository institutions that do business with the two agencies. SCBA favors the bill's requirement that FEMA publish in the Federal Register on a semi-annual basis all changes and revisions to flood insurance maps. This requirement will greatly reduce the confusion mortgage lenders currently experience when conducting flood hazard area determinations to assess the need to require the purchase of insurance. The required mapping could facilitate the provision of computerized geocoding by private sector software. The requirement of S. 1405 that lenders escrow for flood insurance if an escrow account is already required for other purposes should provide greater control over the premium payments by borrowers and create little burden if any on lenders. Ap propriate language under HUD escrow regulations to permit this practice would be necessary. Granting mortgage lenders the authority to "force-place" flood insurance any time during the life of the loan if the property is determined to be in a flood-prone area is another positive step toward increasing compliance. The ability of lenders to actually purchase insurance on behalf of borrowers who refuse to purchase the insurance themselves should provide lenders with the extra tool necessary to conform their portfolio to flood area map changes made available by FEMA and further reduce the Federal Government's risk of loss in cases of flood disasters. However, requiring lenders to notify borrowers of the need to "force-place" flood insurance should be revised to require Fannie Mae, Freddie Mac or any other entity that has purchased loans from the originating mortgage lender to accept the notification responsibility. Servicing fees paid to lenders by secondary market agencies do not cover the costs associated with notification and therefore this notification requirement and any subsequent costs should be placed with the entity with ultimate exposure in case of a flood disaster. These secondary market investors will, in all likelihood, revise their servicing agreement to include this service, but the negotiating position of the originator/servicer will be enhanced if the formal responsibility is on the owner of the mortgage. SCBA favors the requirement that FEMA along with Federal regulators develop a standard flood hazard determination form for use in originating loans secured by property in flood hazard areas. However, language should be added to this section to require regulators to accept comment from financial institutions on the development of this form. It is in the best interest of all parties involved that this standard determination form be developed so it does not become complicated, unnecessarily detailed and create an additional administrative burden on the part of lenders. SCBA supports the penalties for noncompliance established in the legislation. Civil money penalties for lenders found to have engaged in a "pattern of practice" of violations pertaining to flood insurance is basically reasonable. The requirement that such a "pattern of practice" be determined before a violation and penalty is assessed should be sufficient to prevent the levying of penalties on institutions where an unintentional error occurred during efforts to comply with the National Flood Insurance Program. The requirement granting regulators the authority to take remedial action if deficient lenders have not demonstrated measurable improvement in compliance is also reasonable. SCBA again wants to state its support for S. 1405 and efforts to reform the National Flood Insurance Program. While this legislation and its reforms are positive, no lender-based program can ever achieve 100 percent compliance and ensure participation in the program by all property owners. SCBA hopes consideration will be given to our suggestions for refinement of S. 1405 and pledges to continue to work with the committee to develop more comprehensive approaches, such as integration with the property tax system, for increasing compliance in the flood insurance program. Thank you very much for considering us to submit our views and opinions on this legislation. For further information, please contact me or Bruce Crain at (202) 857– 3121. COASTAL ADVOCATE, Inc. 2101 Central Ave P.O.Box 475 Ship Bottom. NJ 08008 (609) 361-0550 October 27, 1993 Donald W. Riegle, Jr., Chairman United States Senate Committee on Banking, Housing and Urban Affairs Washington, D.C. 20510-08076 Re: S.1405, the Flood Insurance Reform Act Dear Chairman Riegle: I recently received a copy of three questions submitted by your committee at the request of Senator Mack to Kathleen McCauley, Marshfield, MA, regarding S.1405, the Flood Insurance Reform Act. The questions were raised pursuant to several conversations I had with Senator Mack's office. and I would like to take the liberty of answering them from my perspective, which is similar to Ms. McCauley's. "Q.1. What do you think the impact of mapping erosion zones will be on property values? "A.1." The impact of mapping erosion zones on property values has not been considered in the introduction of the legislation. An economic impact study should be done before the legislation is enacted to ensure that, on balance, the economic health of the entire coastal zone is not harmed. The reduction in property values which may occur should be assessed, and a full examination of the legislation's impact on the solvency of the National Flood Insurance Program should be undertaken. I'm attaching a transcribed copy of a series of questions subaitted by your committee to the Federal Emergency Management Agency on the possible impact of this legislation. FEMA's answers are detailed and enlightening, and I would ask you to take particular note of 8b at the top of page 5. FEMA estimates huge premium increases, up to 750%, for structures that were built in conformance with FEMA elevation and construction requirements. Note the increase in average premium for $60,000 in coverage from $560 to as much as $3,880, with even higher increases for post-FIRM, nonconforming (older, lower elevated) structures. In my opinion, the impact of this legislation on coastal property owners will be extremely negative, and the truly unfortunate thing about it is that it will have virtually no effect toward "reforming" or maintaining the solvency of the program. Indeed, it will drain the program's reserves for an unnecessary mapping program and an unfocused mitigation program, both of which will provide no measurable benefit to the NFIP. COASTAL ADVOCATE, Inc. 2101 Central Ave P.O.Box 475 Ship Bottom, NJ 08008 (609) 361-0550 Senator Mack's questions regarding S.1405 Page 2. 0.2." What is there under the current program, and under S.1405, "A.Z." There is no provision under the current program, nor under Regarding the revision of erosion hazard areas: under Section 604 In other words, post-storm erosion will be revised, but natural beach The legislation has been proposed as a motivating force for communities to manage and control erosion. That's good, but the downside is the severe devaluation of properties through reduced marketability caused by astronomic premium increases. As the FEMA report notes, the increases will be extreme even for structures which were built in conformance with program standards. Individual property owners can utilize an appeal process to reclassify their designation, based on accretion, but it will involve time, expense and no guarantees. If they can prove they are not in an erosion hazard area, the normal premium charges would apply, though there may still be loadings for mitigation coverage. Question 3. has further relevance to this. Coastal Management Services Kenneth J. Smith |