stantial compliance with the statutory mandate under the National Flood Insurance Act.

Second is the subcommittee's concern that large numbers of homeowners in flood hazard areas do not have flood insurance, and why this is the case.

There are many reasons why a homeowner in a flood zone does not have flood insurance, not the least of which is that about 42 percent of homeowners don't have mortgagees.

And, third, some technical issues having to do with post-origination authority contained in the proposed legislation.

Let me give you just a little bit of background on Freddie Mac. We're a secondary market institution, which means we're a business, not a regulator. We purchase mortgages from lenders called sellers, and these mortgages are subsequently by institutions called servicers. It's a high volume business, and as an example, last year, we bought 1.7 million individual mortgages.

The secondary market delivers huge benefits to consumers, but it depends on efficient, streamlined processes to keep the costs to consumers low. We achieve these efficiencies by relying on representations and warranties from seller/servicers and maintaining a compliance monitoring system.

What I'd like to do is describe that system and how it works, but as one summary point, I'd like to point out that we've experienced three major floods in the past 4 years, and we've not experienced any material losses as a result of that. Let me start first with our compliance around newly originated loans.

Our basic requirement is that every property obtains an appraisal. The appraisal identifies whether the property is in a flood zone. And if it is, either flood insurance or proof of a waiver is required. The way we ensure compliance to this is we conduct on-site audits of sellers to determine the adequacy of their internal proc

esses.

Since 1990, we've conducted 500 such audits and our compliance rate is 98 percent. Moreover, the institutions who were not in compliance have had to adjust their control weaknesses. In addition, we reinforce this with various quality control processes and with third party audits.

And finally, just prior to this testimony, just to make sure that we have compliance on obtaining flood insurance, we drew a special sample of loans in flood zones to review the level of compliance, and found no instances of non-compliance in the sample.

The second area is the ability of services to maintain the flood insurance after the loan has been originated. Our basic requirement is that servicers are required to maintain flood insurance throughout the life of the loan. This process is very similar to the process they use for all forms of homeowners insurance. Again, the servicers are subject to audits.

And once again, to make sure we had compliance, we drew an additional special sample of seasoned loans in midwestern flood zones to determine the compliance rate. In this case, the sample indicated the compliance rate was 98 percent.

Finally, there's the area of remapping and what occurs post-origination. We go beyond the statutory mandate to require servicers to

obtain flood insurance on existing loans if they are aware that the property has been remapped into a flood zone.

In this area, we've had difficulty obtaining compliance for basically two reasons. The first is that there are questions about the statutory authority to require flood insurance when the properties have been remapped. Second, and maybe more substantive, is that the communication around remapping from FEMA just isn't effective.

We're pleased to see that one of the intents of the Kerry bill is to address both of these issues, and we'd very much like to work with the subcommittee to address some technical issues relating to both of these points.

Finally, in summary, there's three points I want to summarize. First of all, because our portfolio is already in compliance, additional regulations on Freddie Mac would not significantly improve compliance for the National Flood Insurance Program.

Second is that there's ambiguity around the authority of lenders to require insurance on properties that have been remapped, and this ambiguity needs to be clarified.

Third, the maps are difficult to read, and communication around remapping is unclear. And we're very pleased that the Kerry bill seeks to address this problem.

Thank you. And I'd be happy to answer any questions.

Senator KERRY. Thank you very much.

Obviously, we hope in this bill that we're addressing this mapping issue which everybody concurs is a problem. And I think we are, and hopefully that can be eliminated.

Let me jump over to Mr. Austin, and then I'll come back for Mr. Palmer.

STATEMENT OF KENNETH L. AUSTIN, JR., VICE CHAIRMAN OF LOAN ADMINISTRATION COMMITTEE, MORTGAGE BANKERS ASSOCIATION OF AMERICA, WASHINGTON, DC

Mr. AUSTIN. Mr. Chairman and Members of the subcommittee, I'm Kenneth L. Austin, Jr., executive vice president of Wendover Funding, located in Greensboro, North Carolina. I'm also currently serving as vice chairman of MBA's Loan Administration Committee.

MBA appreciates the opportunity to appear before you today to testify on S. 1405. MBA supports the objectives of the National Flood Insurance Program, and believes that flood insurance is essential to protecting both the property owner and the lender.

In the past, MBA believes that there was little emphasis placed on that program and that has contributed to low compliance. However, I strongly believe that situation has changed in the last several years. I believe that mortgage lenders and servicers, in response to heightened interest in the program, are making significant, honest efforts to comply with the existing mandatory flood insurance requirements.

However, these efforts have been partially thwarted by the lack of clear legal authority to require flood insurance when there is a remapping after the loan is originated. Mortgage servicers are waiting for clear direction from Congress as to what precisely their servicing responsibilities are. Given the potential expense, this is

understandable. Mortgage servicers need to have the tools in order to make this program work.

Servicers need to know precisely what form of notice consumers should receive when their property has been found to be within a flood zone. Servicers need to have standard procedures to follow when notifying borrowers about a flood zone change and when they have to force place insurance if the borrower fails to purchase the insurance. S. 1405 contains guidelines for these notices and for handling consumer disputes abut a flood zone designation.

These provisions need to be clarified to cover mortgage bankers. This provision also needs further clarification to preempt State or local laws and regulations that conflict with these requirements. Lenders and servicers should only need to comply with one set of requirements established in the Federal statute.

Some State authorities have questioned the legality of requiring flood insurance after the mortgage has been executed, as well as the method of notification, the mechanism of resolving disputes over the flood zone determination, and the requirement that borrowers purchase that insurance at their own expense.

Finally, current law requires the lender to make a flood zone determination only at the time the loan is originated. After origination, the lender must maintain the tracking of insurance for the life of the loan. However, current law does not require lenders or servicers to review loans during their terms to determine if a remapping has brought a property within, or removed a property from a flood zone.

Although S. 1405 clarifies the law somewhat, MBA is extremely concerned that, as currently drafted, it does not extend this clarification to mortgage banking servicers. The mortgage banking industry strongly supports clarification of these issues in order to allow servicers to enhance their efforts to upgrade compliance with the flood insurance program.

MBA is pleased to see that S. 1405 requires FEMA to publish all map changes, revisions, and amendments. This will give lenders and servicers a single source to rely upon to determine whether mapping changes have taken place.

We believe the most appropriate balance of responsibilities is to provide lenders with the tools to carry out the compliance objectives laid down by S. 1405. Enhanced guidance and explicit legal authority are key to putting lenders in the position to achieve these objectives.

I would like to address another issue. It is often stated that mortgage bankers are not covered by the Federal flood insurance program. It's true that non-bank and non-thrift lenders are not directly mandated by the flood insurance statute to require flood insurance. But mortgage bankers are regulated by function.

By this, I mean that mortgage bankers are quite clearly, although indirectly, drawn into compliance. They sell many of the mortgages they originate to Fannie Mae and Freddie Mac, and they must originate FHA and VA mortgages in compliance with strict regulations.

Current law requires and S.1405 underscores that FHA and VA loans, as well as loans purchased by Fannie Mae and Freddie Mac, must carry flood insurance if the property is located in a floodplain

zone, and that flood insurance must be maintained for the term of the loan.

I would like to turn now to compliance requirements. S. 1405 requires lenders to maintain a standardized flood and erosion hazard determination form in every loan file. This form must be less than 5 years old. MBA has several concerns about these requirements. First, keep in mind that S.1405 imposes a significant new servicing responsibility, which is to extend coverage to properties where there has been a remapping after origination. Today, a lender is only required by law to check a loan at origination and then to maintain coverage.

MBA supports expansion of the law to cover post-origination changes. However, in meeting that expanded compliance burden, we hope that this committee will minimize the impact on outstanding loans that are currently in servicing portfolios.

MBA does not believe that services should be required to update existing loan files once the standard hazard determination form is created. This requirement should cover loans originated after the standard hazard determination form is developed. Otherwise, servicers are essentially subject to a de facto requirement to perform a portfolio review in order to place the appropriate standard form in each and every loan file.

For outstanding loans, MBA believes servicers should only be required to provide relevant flood information, as it is currently contained in the loan files, whenever that information is requested.

Second, S. 1405 gives the flood certification a 5-year lifetime gain, for loans outstanding, this is a significant additional servicing burden. MBA believes this requirement should only apply to loans originated after enactment. Lenders can then require borrowers to purchase a certification contract that will be good for the life of the loan.

If indeed it's the intent of S.1405 that all servicers must maintain the standard form and go back into outstanding loan files to insert this new information, and to recertify this information every 5 years, then MBA strongly believes that an amendment should be added to allow servicers to pass the cost of providing this standard form through to borrowers.

In summary, MBA supports the goals of the National Flood Insurance Program. The objective of ensuring adequate flood insurance where necessary is one that the industry embraces. MBA believes that consumers benefit when servicers assume the burden to determine flood zone coverage. The Federal program, as well as State and local authorities, share in that benefit.

MBA appreciates this opportunity to testify and express our views on S. 1405. We would be pleased to answer any questions or provide further information.

Senator KERRY. Thank you very much. Appreciate it.
Mr. Palmer.

STATEMENT OF LARRY W. PALMER, REDLAND INSURANCE COMPANY, COUNCIL BLUFFS, IA

Mr. PALMER. Mr. Chairman, I'm Larry Palmer, director of Flood Insurance for Redland Insurance Company. We're an Iowa domi

ciled property and casualty company headquartered in Council Bluffs, IA.

Our primary insurance products are directed toward the heartland. We provide WYO Federal flood insurance primarily in the upper Midwest.

I'm testifying today on behalf of Redland Insurance Company and its participation in the National Flood Insurance Program, and in particular, our experience this summer with the devastating floods that occurred within the very core of our marketing region. Furthermore, I'm also representing the Flood Insurance Servicing Companies Association of America, Inc., also known as FISCAA, of which I am a charter member, director and officer, speaking on behalf of its member companies that collectively have issued over 700,000, roughly 30 percent of the 2.6 million NFIP flood insurance policies issued nationwide primarily through independent insurance agents.

My personal experience with the NFIP and its "Write Your Own" initiatives started with its very inception in 1983. My focus today is on the issue of compliance.

I share some of Senator Kerry's concerns expressed in his statement in the August 6, 1993, Congressional Record. Redland Insurance Company and FISCAA strongly support legislation that will strengthen the NFIP, increase compliance, provide incentives for community floodplain management, and mitigation assistance.

I appreciate the point that Senator Kerry makes in his Congressional Record statement by quoting from the Bible about the foolish man who “. . . builds his house upon the sand. . . ." However, it seemed appropriate for me today to correct the record slightly by pointing out that the majority of the folks in the upper Midwest build their homes on soil that supports their main "home place," that, in many cases, they have resided in for years.

The house, on average, is about 40 years old-that's pre-firm by NFIP standards-and has a basement or storm cellar, is constructed from wood with clapboard siding and does not afford a breathtaking view of any ocean body of water. The house is typical of a home in Valley Junction, Cedar Rapids, or Hamburg, IA. The value of these structures, on average, are less than $70,000.

There most certainly is no mass migration of people to retire or build a second recreational home in any of these areas as above mentioned. In many cases, their main home place was built before the NFIP even existed. The problem is, however, they were built in Special Flood Hazard Areas that were later determined by the NFIP.

I cannot believe that these families continue to live there because flood insurance is available now from the NFIP. They live there simply because their home place is their roots. It's not a whole lot different than why the Bush's of Kennebuckport, ME, and the Kennedy's of Hyannisport, MA, and many other Americans maintain their homes where they do.

I've been following the reform legislation affecting the NFIP since Congressman Bereuter of Nebraska introduced H.R. 1236 in 1990 and H.R. 62 in January 1992, which I might add are both very similar in many respects to Senate Bill 1405, particularly with the compliance requirements.