through, Michael Stamper, Kenneth Austin, Larry Palmer, and Robert Engelstad, in that order.

Ms. Bowker.

Ms. BOWKER. Good morning.

Senator KERRY. The light will flash, and if you could try to stick in there, we can-all testimonies will be placed in the record in full, as if read.

STATEMENT OF PEGGY BOWKER, CHAIRPERSON, NATIONAL FLOOD DETERMINATION ASSOCIATION, RENO, NV

Ms. BOWKER. All right.

I'm the Chair of the National Flood Determination Association, and I'm happy to be here today to testify on behalf of NFDA on S. 1405.

Flood zone determination companies offer specialized services to lenders by reviewing location of properties which will secure a loan, and by providing information as to whether it is within a special flood hazard area shown on FEMA's flood insurance rate maps. This review provides sufficient information for a borrower to determine whether flood insurance is required in a lending transaction. Our organization represents a broad spectrum in the flood determination industry, and includes members who've been in this business for more than 15 years, as well as more recently formed businesses. We have large national corporations, and we have small regional companies.

We'd like to commend you, Senator, and your staff, as well as the other Senators, for the formulation of this important piece of legislation. We feel that it's extremely important to the provisions that the current law be strengthened, especially in regard to compliance. The NFDA strongly supports the intent of the legislation which is before us today. We do have some comments on specific sections.

We commend the requirement that premiums for flood insurance be paid to an escrow account. Currently, we feel that part of the problem with increasing the policy base is that borrowers will take out a policy to close a loan and subsequently drop it.

We do, however, prefer the current practice of the 10-day notice that is used in the guidelines for closing a loan, rather than the language that's in the bill. We feel that if a borrower is notified at the closing table that the property that he's purchasing is flood prone, and that he needs to have flood insurance, it's not sufficient time for him to make a decision or obtain a policy. So the current practice of a 10-day notice is probably preferable in line with the goals of the compliance section of this bill.

We feel like the notification by participating communities of changes in their maps to individuals within their community perhaps is going to place a large, unnecessary burden on the community. There are an awful lot of communities that don't have the facility of database and computer-driven tax statements.

We believe that currently it's FEMA's, when FEMA changes a map, they publish within the Federal Register elevations, change flood elevations. They also publish those within the paper of circulation in the community where the changes take place.

We believe if that policy of publishing elevations was modified and that perhaps a map that showed the effected areas were published by FEMA at the conclusion of map changes, that it might be more effective.

We think that the provision for the Director of FEMA to provide a review, when determinations that have been performed on properties are contested, may be unnecessarily burdensome to FEMA. We've found, especially when we're doing determinations on a second mortgage or something where someone already has a mortgage in place, and then they're notified that they're in a flood zone, they become a little argumentative about whether they're in a flood zone and whether they need flood insurance. I think that the amount of contested determinations has been perhaps under-estimated in this case. I don't believe that the Director's office or the regional offices of FEMA have the resources to do those.

The two issues that were not included in this bill, that we believe would be important to achieve your compliance objectives, one would be the prohibition on any waiver of insurance which some lenders make a decision to waive insurance requirements and selfinsure. The other one is a provision for pass-through

Senator KERRY. You would not allow-you would have a prohibition on that?

Ms. BOWKER. In the case of flood insurance, yes, if you wish to have the program operated as envisioned.

Senator KERRY. Prohibition on waiver?

Ms. BOWKER. Yes. And an additional provision that was in earlier legislation was the provision that lenders could pass through fees for determinations. Some State and local laws prohibit that, and some agency regulations.

Senator KERRY. And you're recommending?

Ms. BOWKER. We're recommending a provision be included, and there's specific language in my written testimony, adapted from S. 2907.

Senator KERRY. Which would make it optional or?

Ms. BOWKER. Which would make it allowable that a reasonable fee be passed through.

Senator KERRY. OK, fair enough.

Ms. BOWKER. We also commend, in title VI, the provisions that changes to amounts be published, because that's certainly something that makes it difficult for lenders and determination companies to form their services.

Senator KERRY. Good. Good recommendations. Thank you very much.

We've sort of changed the order here. We'll go to Mr. Engelstad. STATEMENT OF ROBERT J. ENGELSTAD, SENIOR VICE PRESIDENT FOR MORTGAGE AND LENDER STANDARDS, FEDERAL NATIONAL MORTGAGE ASSOCIATION, WASHINGTON, DC

Mr. ENGELSTAD. Mr. Chairman, my name is Robert Engelstad. I'm Fannie Mae's Senior Vice President for Mortgage and Lender Standards. We appreciate the opportunity to discuss Senate Bill 1405.

Fannie Mae supports the major provisions of the legislation as they relate to the secondary mortgage market corporations. In par

ticular, we believe the enhancements to be provided by clear authority to require flood insurance after loan origination when remapping occurs, the escrow requirements, a standardized flood hazard determination form, more informative flood insurance rate maps, and the establishment of a flood insurance task force and a mapping advisory council, can all significantly help mortgage lenders ensure that flood insurance is obtained when required.

Our one disagreement concerns the proposed requirement that Fannie Mae's new regulator develop regulations to cover our flood insurance compliance efforts. This disagreement has little to do with our desire to make sure that every mortgage we buy that should have flood insurance indeed has it.

Instead, we are concerned that a comprehensive regulatory framework that was 2 years in the making first be given a chance to work as intended before additional responsibilities are assigned to the regulator.

My testimony this morning will summarize two areas from the prepared statement that was submitted to the subcommittee on Monday.

First, a general description of the principles of Fannie Mae's underwriting standards, and the quality control procedures we use to ensure that lenders that sell loans to us are in compliance. And, second, some specific comments on the proposed legislation.

Fannie Mae requires flood insurance for any property when its improvements are located in a special flood hazard area that has federally mandated flood insurance purchase requirements. Our property appraisal standards require that our lender's appraiser determine whether or not the property is located in a special flood hazard area.

We recently changed the appraisal form in order to improve the quality of the information. Previously, the appraiser indicated whether the property was in a special flood hazard area and, if so, provided specific information from the FEMA map.

With the change, appraisers are now required to note the FEMA map information for all properties, regardless of whether or not the property is in a special flood hazard area. We think this small change will help improve lender compliance. In addition to relying on the appraiser for making the determination, some lenders also rely on information provided by companies that specialize in making flood hazard area determinations.

Whether a lender relies on the appraisers determination or another source, Fannie Mae holds the mortgage lender accountable for the accuracy of the determination.

Our guidelines on flood insurance are part of the extensive underwriting standards we have established for loans we buy from primary lenders. Rather than underwriting every loan purchased, we delegate the underwriting and approval of the loans to the origination lender. Our contracts with these lenders require them to warrant that each loan sold to Fannie Mae complies with all of our requirements.

We enforce these guidelines and ensure the integrity of our purchase through lender monitoring programs, quality control, underwriting reviews, and the lender's contractual obligation to repurchase loans found not to meet our standards.

As a secondary market investor that is not involved with the mortgage until after it is made, our flood insurance compliance efforts begin after the loan is originated. Through our underwriting reviews, our lender operation reviews and the contractual obligations of our lenders to remedy mortgage deficiencies, we effectively enforce the policy of holding our lenders accountable for proper flood insurance coverage, both when the mortgage is made as well as throughout the life of the loan that Fannie Mae holds the mortgage investment.

We use several methods to monitor compliance with our flood insurance requirements. These checks includes the underwriting reviews that we do after we purchase the loan on a sample of the loans we purchase. Our review includes checks of the HUD-1 settlement statement. When the appraisal form indicates that the property is in a flood hazard area, the HUD-1 settlement statement will tell us whether or not the flood insurance was purchased at settlement.

Another method we use to check whether or not the lender's determination was appropriate is for a sample of loans that we buy, we will order our own appraisals of the property and our instructions to the appraiser include checking whether or not the property was indeed in a flood hazard area.

In any case that we determine that the lender did not get flood insurance when they should have, the loan either must be repurchased by the lender, unless the lender can then obtain the flood insurance.

With respect to maintaining the insurance throughout the life of the loan, we have, as part of our normal course of business, reviews of lender operations, and that review includes assessments to make sure that the lenders have in place procedures to ensure the maintenance of the insurance during the life of the loan.

Now a few specific comments on the legislation.

The National Flood Insurance Reform Act contains many initiatives that Fannie Mae believes will be beneficial. Because most of the provisions do not affect Fannie Mae directly, I will confine my comments to two areas where Fannie Mae has significant interest. Because of the difficulties due to the ambiguity of the current statute, Fannie Mae supports revisions to clarify the lender's authority to require the borrower to obtain flood insurance on existing loans, particularly loans reclassified as being located in special flood hazard area after FEMA remapping. But we believe that the provision of the bill that covers this needs some minor technical correction in order to make it quite clear that that authority exists.

An additional correction of the scope of the provision is needed to achieve maximum effectiveness in accomplishing statutory objectives. The bill requires that borrowers be notified of the need for flood insurance by regulated institutions and Fannie Mae and Freddie Mac.

We believe that this provision is both too broad and too narrow. It should include not only regulated institutions, that is, banks and savings associations, but also other lenders, such as mortgage bankers, in order to pick up all those who are in the best position to notify borrowers of the necessity for flood insurance. For the

same reason, the secondary market agencies should not be included since we have no direct contact with the borrowers.

And finally, there is one section of the proposed legislation that Fannie Mae cannot support; section 201(a)(3) would require the independent HUD regulator to issue regulations mandating that Fannie Mae and Freddie Mac establish procedures to ensure flood insurance coverage of all loans they purchased that are located in special flood hazard areas at the time of origination.

We appreciate that, at first blush, it seems like traditional practice to assign new regulatory requirements when it identifies a problem and assembles a package of directives to address the issue.

But as the President and Vice President pointed out just last week in their initiatives to reinvent Government, the standard operating procedure leads to so many new regulations that one often needs a forklift to carry them around.

We believe that, in this case, a close examination of the problems suggest that new regulatory authority is not necessary, may involve added costs for everyone, and moves away from the new regulatory approach that Congress designed just last year in establishing our regulator.

Indeed, this committee will be marking up, next week, a bill to develop community development banks, and title III of the bill addresses regulatory relief and paper work reductions for federally regulated institutions.

In sum, we urge Congress not to impose new regulations, not because we disagree with your goal, but because we share it, and we do not believe it is necessary to add to the regulatory costs of the housing finance system.

Ensuring flood insurance coverage is something that we want to do, something that we are doing, and something that is in our best business interest to do.

We welcome the opportunity to discuss this matter today, and look forward to continuing to help the subcommittee and FEMA in every possibly way to improve administration of the flood insurance laws. I'd be pleased to answer any questions.

Senator KERRY. Thank you very much.

Mr. Stamper.

STATEMENT OF MICHAEL K. STAMPER, EXECUTIVE VICE PRESIDENT FOR RISK MANAGEMENT, FEDERAL HOME LOAN MORTGAGE CORPORATION, WASHINGTON, DC

Mr. STAMPER. My name is Mike Stamper. I'm the Chief Credit Officer of the Federal Home Loan Mortgage Corporation, otherwise known as Freddie Mac.

Thank you for the opportunity to testify on flood insurance and this important piece of legislation. I'll keep my comments direct and to the point.

We applaud Senator Kerry and the Members of the subcommittee for their efforts to clarify and strengthen policies and procedures relating to flood insurance. There are three areas I'd like to address in my testimony today.

First, Freddie Mac's experience with flood insurance. In fact, I'm pleased to report to the subcommittee that Freddie Mac is in sub