dures that will check for the continuation of hazard insurance, and when required, flood insurance. Second, we sample some individual loan files to make sure that the procedures are being followed.

Senator KERRY. That's about a 10 percent spot check, isn't it?
Mr. ENGELSTAD. Yes.

Senator KERRY. Do outside auditors focus currently on the degree to which the flood insurance requirements are met?

Mr. ENGELSTAD. I don't believe they do. I'll check that and report back to you.

Mr. AUSTIN. I would like to comment that yes, they do, in that we're required to comply with the Act. Also, just to comment on the compliance, one of the things we had requested in our comments is the legal authority to require the flood insurance, which is something that's been lacking in the existing law. If we're given the tools representing the servicers and lenders, we can mandate the coverage.

Senator KERRY. You can mandate it for?

Mr. AUSTIN. To the borrower. And that's one of the tools that we've been lacking is that legal authority to proceed with that. Senator KERRY. Understood.

Mr. AUSTIN. And S. 1405 goes a long ways to give us that legal authority.

Mr. STAMPER. Senator, if I could also add to that? We have a requirement that our sellers have their own quality control process, looking at 10 percent of the loans they originate.

One of the issues they have to review is the existence of flood insurance. That quality control process is subject to review by their independent auditor, and we get reports back from our independent auditor as to their compliance with their quality control program. So that's another form of outside review beyond what the independent auditor might be doing as a service for the servicers.

Senator KERRY. How would you folks respond to the notion that if you haven't bought flood insurance, and there is proof of adequate notice, legitimately being within the flood hazard line, that you would not get disaster assistance?

That at the time of purchase, this notice is given to you.

Mr. STAMPER. You being the borrower or you being

Senator KERRY. Borrower.

Mr. STAMPER. It's my understanding that that's already the requirement.

Senator KERRY. No, it's waived basically and it's not.

Mr. AUSTIN. Well if we, the lender, have been given notice that they are in there, we take it upon ourselves to move on that, to either force place it or demand it from the borrower, if we'd been given notice.

Senator KERRY. But do you think there's been an attitude within the institutions essentially saying, well, this really isn't too serious, because if there is such a flood or disaster, it's going to be taken care of, so we're not really at risk, and therefore it's not a problem? Wouldn't enforcement go up automatically if there was a greater perception of truly being at risk?

Mr. AUSTIN. Yes, sir. And it has been heightened over the last 2 years because of all the disasters. I think it's been brought to the attention of many lenders.

Senator KERRY. So you think there's a marketplace impact already?

Mr. AUSTIN. Absolutely.

Senator KERRY. Which is one of the things we're trying to balance, obviously; the degree to which there really is that marketplace impact, and the degree to which you don't want to have some over burdened regulatory intrusion on top of the already significant intrusion there is for lending institutions. So I think we're trying to-would you say this is a pretty fair balance with that?

Mr. AUSTIN. Yes. Once again, given the legal authority to move forward with the bill, and the fact that we would have the ability to force place.

As a comment was made earlier, many people are reluctant, even knowing that they are in a floodplain, are reluctant to purchase the insurance. And we have to go through several notifications to the borrower that we know you're in a floodplain, you know you're in a floodplain. It's mandatory upon you to obtain this insurance. It takes quite a bit of follow up and convincing.

And it still may be challenged, based on today's program, it may be challenged based on what the instrument says or what the State requires. So that's why we need the legal authority.

Mr. PALMER. Senator, I have a point of view on those disaster assistance loans, and I may be wrong on this, but I'm learning as this unfolds too. But my impression is that when an individual qualifies for an SBA loan, that to the institution sponsoring the loan, that is guaranteed 80 percent of its paybacks.

For example, maybe perhaps the mindset of the officer in the bank at the time is saying, well, if we don't require flood insurance, our fallback position is the guarantee. So the flood waters can come, there's no flood insurance, big deal. We've got a fallback position of 80 percent of the loan.

Senator KERRY. Sure. Well, I think that's reality. I think that's the question of risk, the perception of risk that I was asking earlier, and it may well be that some of the disaster programs, the guaranteed loans and so forth have eliminated a sense of that risk. So the marketplace isn't really working as effectively.

But obviously, if many, many more people were participating, the rates are going to be also potentially much lower. I mean, the current people being forced to buy and buying are carrying more of the burden of the current rate risk because others aren't. What about the mapping, Ms. Bowker? I'd particularly like you to comment on that.

Ms. BOWKER. What about the mapping?

Senator KERRY. Do you think this 5-year period is sufficient to be able to clarify the mapping issues?

Ms. BOWKER. The 5-year period as provided for in the Technical Advisory Council?

Senator KERRY. Yes.

Ms. BOWKER. It would be a good start. We've been working on mapping issues since I've been involved in NFIP. And I've been involved, in one way or another, since 1979.

Senator KERRY. You raised the issue of the sufficient database over notification in some areas. Was that you who raised that?

Ms. BOWKER. Oh, yes, I did, sir. What I'm concerned about is the requirement that the local community, on that particular issue, that the local communities have to notify individual property owners. That's how I read that section, once the maps are changed. I've been a floodplain administrator in a large county, and I think

Senator KERRY. How would you go about that? Do you think the communities, or there are certain communities, would you distinguish it by the size of the community perhaps, and then maybe have some alternative for certain sized communities? Or would simply obviate the need for the communities to do it, and have some other form of notification. FEMA, you suggested?

you

Ms. BOWKER. Well, my alternative would be to require some publication of the maps. From my personal experience of being involved with the

Senator KERRY. Well that will happen. Under the structure of our bill, I think there's a three-tiered process.

Ms. BOWKER. Right.

Senator KERRY. There will be the publishing, and FEMA will do the Federal Regulatory, the Federal Register, and so forth. There'll be newspaper and other form of notification, then there'd be the direct communication from the communities.

Ms. BOWKER. Sure. And quite frankly, if you hold public hearings, especially in the western States, nobody comes if it's a sunny day. I mean, it's a tough sell.

[Laughter.]

Senator KERRY. OK. Nobody comes here if it's a sunny day, either.

[Laughter.]

Ms. BOWKER. But there are a number of like small communities, I'm thinking of rural communities in Nevada that do not have official assessors' maps. They just use the recorded events.

Senator KERRY. Well, if you can give us any thoughts on it, I think the current structure is, frankly, as broad as we can try to get at it. We're open to any other thoughts about how we can be more effective about it. In the course of the next week or so, if you can deal with Staff, let's try to do that.

Ms. BOWKER. I think that some of your provisions for the provision that you have in title VI for publication of a compendium on a semi-annual basis of the map changes, that's going to be very helpful. And also publication of the map changes as they occur, that's going to be very helpful to lenders who want to stay up-todate, because up to now, there's no way to get that information. It goes to a building official in a local community who may be, in a rural place, a dog catcher also, as well as the floodplain manager, you know, and there's no way for lenders to be able to pick up that information.

Mr. AUSTIN. I'd like to just comment on that. She's exactly right. One suggestion that I think that we may have in our written comments is that to deliver this information to the lender and to the borrower, we have suggested that possibly when an area is remapped, that it be indicated on their tax bill in some form, either a yes or no, or the property has been included in the last year in a remapping, just as an attention getter, so that the borrower knows. And also that tax bill is delivered to the lender. That is one

method by which it possibly could be delivered. It's just a suggestion.

Senator KERRY. Again, I think Ms. Bowker's observation is accurate. I mean some communities could handle that, and others obviously would not be able to. But it's worthy of trying to factor into our thinking to see how we might be able to facilitate that.

One last question before we shift, which we must do to the next panel because of time. But can any of you involved in the lending process, mortgage bank or otherwise, suggest how one might deal with this non-regulated entity, how you bring them under the sweep, and what is the supervisory mechanism for that?

Anybody have a-other than the fact and you've made a very telling point, Mr. Austin, and we've noted it in our approach, which is that the vast majority of non-regulated institutions are dealing with Fannie Mae and Freddie Mac.

Mr. AUSTIN. And FHA/VA.

Senator KERRY. And FHA/VA. And therefore must come into compliance under that, so you're really dealing with a far smaller percentage of people who are outside in that, quote, non-regulated area. That's a very telling point, because it doesn't leave you that much of a package.

The question is how, if you wanted to, do you deal fairly with that component that still remains outside, and what's the supervisory mechanism? Any thoughts? Maybe it's something you want to think about?

Mr. ENGELSTAD. Well, Senator, we've thought about it, and the only option we came up with, the one you've already mentioned, has its own problems as far as requiring the individual homeowner. Senator KERRY. Right. We're going to look at that a little further and see what happens on it.

Ms. BOWKER. I think, I worked in a disaster center, and your suggestion about denying disaster relief to someone who has not obtained flood insurance when they've been given sufficient notice, I think it would be tough to do in the height of a disaster, just because the records and, you know, the information isn't there.

Senator KERRY. Let me give you an example of how very simply the record could be. I mean, somebody's got to sit down at a closing when they purchase their home, and we're making this prospective. This is for all future actions. And since it's going to be escrowed, you're in a situation where, just as you sign occupancy permits and you have a host of other requirements at closing, I mean it doesn't have to be that complicated.

Now I know some people are going to say, oh, my God, you know, another form of closing. But the fact is you really could very easily have sufficient notice right then and there, and people have to become responsible or non-responsible as a homeowner. And you sign, you know, I waive my rights or I acknowledge that I'm required to have it, and so forth.

Ms. BOWKER. How does that piece of paper get to the disaster assistance center, though? That's the problem when you're in the middle of a disaster and the press is there, and you know, we saw days and days and days of what went on in the Midwest and our hearts went out to them.

If you have somebody, big brother sitting there going, well, you know, I don't think it'll fly, you know, just because it doesn't work real well when you're in the middle of a disaster.

Mr. STAMPER. Senator, if I could just come back to one question you asked earlier. On one hand, the perception that a relatively small percentage of people living in the flood zones have flood insurance, yet both Bob and I are saying that our lenders, we believe, are substantially in compliance.

It may be very consistent that 100 percent of the lenders are getting their borrowers flood insurance, yet you still have very small levels of borrowers in flood zones that are covered by flood insurance for a couple of reasons. One in almost half of homeowners don't have a mortgage. Based on our own portfolio, we'd guess that 5 to 10 percent of the mortgages were originated before 1973 and are not covered by the insurance requirements.

Then there's a whole host of technical reasons about insurance requirements, why someone might be exempted. For example, FEMA issues letters to individual borrowers exempting them. Properties that are on the boundary line are exempted. Properties that are in coastal barrier areas are exempted.

Senator KERRY. I understand that, and you're absolutely correct. It's a very important point, which is why I think where we've landed is the most sensible and appropriate place with the minimal intrusion, but the maximum capacity to expand participation.

Mr. STAMPER. But if the issue is increasing the number of homeowners in flood zones that have flood insurance, it seems like there are other areas to push on; most notably, homeowners that don't have mortgages. That seems like the biggest area.

Senator KERRY. We're exploring that, and I think it's an issue of sort of one step at a time. That's clearly an issue on the table, but it is not one that necessarily, even under the original 1973 intent of Congress, has to come under this particular step. But it's something we've got to look at.

Thank you all very much. We will take each and everyone of your comments and suggestions under advisement and work on them in the next week before the Full Committee meets.

If we could have the next panel come forward. Beth Millemann, Kathleen McCauley, Rebecca Quinn, Christophe Tulou, Pat Campbell-White, Thomas "Tommy" Thompson, and Peter Fallon.

Folks, I really need to invite and implore your super cooperation here on the time, if we can. Your full testimonies are part of the record. They will be read. They are going to be a significant part of our work, post this hearing, but I do ask you to try to keep to the 5 minutes, because I've got to wrap up around 11:30 a.m., and I want to have time for a little bit of questioning.

If we could start.

OPENING REMARKS BY SENATOR CAROL MOSELEY-BRAUN

Senator MOSELEY-BRAUN. Hi.

Senator KERRY. Senator, how are you.

Senator MOSELEY-BRAUN. Fine, thank you.

Senator KERRY. You want to make a comment?