Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or the other members may have.

TESTIMONY OF MARGARET (PEGGY) BOWKER, P.E.

CHAIR OF THE NATIONAL FLOOD DETERMINATION ASSOCIATION

The National Flood Determination Association (NFDA) is pleased to testify today regarding S. 1405 the, "National Flood Insurance Reform Act of 1993."

Flood zone determination companies offer specialized services to lenders by reviewing the 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 our clients with sufficient information to provide a borrower with notice regarding flood insurance requirements to complete the loan and the availability of insurance within the community.

Our organization represents a broad spectrum of the flood determination industry and includes members who have been in the flood determination business for more than fifteen years, as well as more recently formed businesses. Our membership ranges from large national corporations to small regional companies. We formed this organization two years ago to explore matters of common interest and to provide a vehicle for expressing the opinions of our industry as a whole.

We would like to commend Senator Kerry and his staff as well as the other Senators and their staffs for the formulation of S. 1405. We especially appreciate the opportunity given us to provide input during the drafting of this bill and to testify here today. We feel that it is extremely important that provisions of the current law be strengthened to assure greater compliance. The fiscal impact of recent catastrophic events in the Midwest on disaster relief requirements would have been lessened considerably if all of the properties which were located within special flood hazard areas had been insured.

The NFDA strongly supports the intent of the legislation which is before us today. In our collective experience, we have developed a first-hand knowledge of the many lenders in the U.S. who have made a good faith effort to comply with the current law; and also, with those who have been less diligent. We believe that the National Flood Insurance Program will benefit from measures which are proposed in S. 1405. The majority of our comments will be addressed to Title II Compliance and Increased Participation as requested.

SECTION 202

ESCROW OF FLOOD INSURANCE PAYMENTS

We commend the requirement that premiums for flood insurance be paid to an escrow account. This provision will help assure that flood insurance is retained for the term of the loan if the property remains flood prone. It should help to increase the policy base. Currently some borrowers are taking out a policy to close a loan and are subsequently dropping the coverage.

SECTION 203 NOTICE REQUIREMENTS

Subsections a and b. We favor the current 10 day notice guidelines rather than the proposed language. The current practice requires notice of information on the flood prone status of property securing a loan be delivered to a borrower ten days in advance of close of escrow (or prior to the close of escrow in transactions with a shorter time frame). The proposed regulation does not provide the consumer with the protection of the current practice. We do not believe that notice at the closing table will provide sufficient time for a borrower to obtain the required insurance, or to make the decision not to buy.

Subsection c Participating Communities. We believe this portion of S. 1405 to be unnecessarily burdensome to local communities and that it will achieve little. Under this provision communities would be required to notify property owners and lenders of map changes. We believe few property owners would notify their lenders that they are required to purchase flood insurance. Community officials charged with the implementation of National Flood Insurance Program regulations would have little knowledge of all the lenders or servicers who have real estate interests in their community. Tax bills are sent to departments which impound funds for tax payment. If notices are sent to these departments, lenders or servicers will have to set up a separate system to route these notices to the proper compliance or insurance departments. We believe that this requirement places an unnecessary burden on the community and on lenders and servicers. If lenders subscribe to obtaining the compendium proposed to be published by the Director in Title VI, Section 604(h), they will be made aware of the changes on a more timely basis. We would also suggest that

the current practice of FEMA publishing flood elevations in a local newspaper when changes become effective, be expanded or modified to present a map of the affected area. This would present the new information in a more straightforward way than the publication of elevations which mean little to the lender or the property owner. SECTION 204 PLACEMENT OF FLOOD INSURANCE

(e)(2). The proposed review by the Director of contested determinations will create an enormous amount of work for FEMA. Our collective experience shows that a majority of property owners who have purchased flood prone property and who have had no previous knowledge of its flood prone status, will often protest the requirement to purchase flood insurance. The Director's office, and most of the FEMA regional offices, have neither the staff nor the resources to respond to a large number of requests for determinations. An appeals mechanism already exists in the Letter of Map Amendment process.

SECTION 205 STANDARD HAZARD DETERMINATION FORM

(a)(b)(c). We believe that a requirement for standard data elements could satisfy compliance objectives and eliminate the need for printing yet another government form. These data elements should be required and maintained for all loans, not just those for properties in a special flood hazard area. These data elements should also be allowed to be maintained in electronic media, provided they are readily accessible.

(d) Guarantees. We support the requirement for guarantee of information. We believe that the scope and nature of the guarantees contemplated should be set forth in the legislation, or developed by the Director in consultation with lenders and the flood determination industry. A guarantee could mean as little as a refund of the cost of a determination if an error was made. Most reputable firms will, at a minimum, guarantee damages up to the limit available under a flood policy to a property owner who is damaged, and is located in a special flood hazard area that has been erroneously determined to be outside of the hazard area.

(e) Reliance on Previous Determinations. The NFDA opposes this provision of S. 1405 which allows a lender to rely on any determination made within five years. This would presume changes made to maps within the five year period are insignificant. This also may allow reliance on information produced by parties which are no longer in business, such as appraisers, S & L's, surveyors, etc. In addition, most reputable determination companies have quality control procedures which prevent them from issuing determinations which are in error. On-going quality control procedures, however, may sometimes detect an error which has been made, and a new determination is issued superseding the first. Under this provision a lender might rely on the first document for five years, especially if the second were not properly filed. A second case might be with a lender which subscribes to a "life-of-loan" service. Under this scenario, a determination is issued and a year later the map is revised, and the flood status of the parcel changes. A second determination is issued. Upon reviewing the file, a purchaser sees only the first determination and it is less than five years old and it is accepted as valid. In view of these very real possibilities, we urge the deletion of this entire subsection.

SECTION 207 PENALTIES AND CORRECTIVE ACTIONS

(f) Civil Penalties. We support the initiation of civil penalties as one tool to achieve better compliance with current and proposed regulations. Subsection (3), however, is unclear. It appears that an institution would be able to buy and hold loans which are not in compliance with this act and will not be held liable. If that is not the intent, some clarification may be required at least in the report language. If it is the intent, it appears to be counterproductive to the goals of the bill and should be reconsidered.

The following are items which were proposed in previous legislation and we urge your consideration of inclusion into the current bill.

The requirement for flood insurance should not be able to be waived. Perhaps this is implicit in the intent of the bill; however, we would urge some specificity in the bill's language. Lenders occasionally waive requirements for some insurances; in those cases, a lender makes a business decision to self-insure. In order that the program function as intended, we urge the prohibition of waivers.

A provision allowing the lender to charge a borrower a reasonable fee for the costs of determining whether a property lies within a special flood hazard area should be included in this bill. In some cases, State or local laws do not allow this. In other cases, interpretation of Federal rules has caused agencies to disallow this pass through. We favor the following language:

Not withstanding any other Federal or State law, any lender may charge the borrower a reasonable fee for the costs of determining whether the improved real estate or mobile home securing the loan is located in an area of special flood hazards, if such determination is made pursuant to the making, increasing, extending, or renewing of a loan.

The following comments on other sections of S. 1405 are offered in support of the goal of achieving greater compliance.

TITLE III COMMUNITY RATING SYSTEM

We support this provision especially because it promotes awareness of flood hazards. The program also encourages communities to go beyond the minimums set and will contribute to the overall strength of the National Flood Insurance Program. SECTION 604 UPDATING OF FLOOD INSURANCE MAPS

(g) Notification. We strongly support the requirement that all changes to maps be published in a timely manner. Currently there is no way to obtain this information except from individual communities. This lack of centralized distribution makes it difficult, if not impossible, to make determinations based upon the most current data. We would suggest, however, that these changes become effective on or after the date of publication rather than thirty days prior.

(h) Availability. We strongly support this provision to publish on a semi-annual basis, changes which have been made to maps in a compendium. We urge that this provision be expanded to require specific dates for publication, and that it include a listing of all communities and their current map dates and program information, e.g. regular or emergency program, participating, suspended or non-participating. SECTION 605 TECHNICAL MAPPING ADVISORY COUNCIL

We strongly support the formation of this council and appreciate the opportunity to be included in its membership. We have been meeting with the FEMA staff on mapping issues since our organization began. As some of the primary users of the maps, we believe we can offer valuable technical assistance for FEMA's program. As I noted earlier, the NFDA supports S. 1405 and encourages your consideration of our suggested revisions and additions. We appreciate this opportunity for input and we will remain available to provide any clarification of our position or other input that you may require.

STATEMENT OF ROBERT J. ENGELSTAD

SENIOR VICE PRESIDENT FOR MORTGAGE AND LENDER STANDARDS

FEDERAL NATIONAL MORTGAGE ASSOCIATION

Mr. Chairman, my name is Robert Engelstad. I am Fannie Mae's Senior Vice President for Mortgage and Lender Standards. I appreciate the invitation to discuss S. 1405, the National Flood Insurance Reform Act of 1993, with emphasis on compliance with the flood insurance program. While Fannie Mae favors certain provisions of this bill, particularly the clarifications with respect to the required placement of flood insurance on existing loans when the Federal Emergency Management Agency (FEMA) remapping places properties in a floodplain, we believe that the provisions requiring new regulatory procedures would not address the underlying problem, would add costs for all parties, and would unnecessarily start the "Balkanization" of the regulatory oversight system Congress established just last year.

Fannie Mae is a privately-owned corporation with a Federal charter. Our sole business is to support residential housing by making a secondary market for mortgages. Fannie Mae is both the largest American investor in mortgages and a major issuer of mortgage-backed securities secured by properties for low-, moderate- and middle-income families. In 1992, the company purchased $257 billion of mortgages from 1,700 financial institutions throughout the country, serving 2.9 million families. In the first six months of 1993, Fannie Mae financed $121 billion in mortgages for an additional 1.3 million families. Fannie Mae, Freddie Mac and other private players have greatly expanded the sources of funds for home mortgages by linking the capital and mortgage markets. The secondary market has provided millions of families a reliable supply of credit at lower cost.

The recent growth in the secondary market results from our housing finance system becoming increasingly integrated into the Nation's and the world's capital markets. As that has occurred, the presence of Fannie Mae and Freddie Mac has become even more important to home buyers, enabling them to compete with large corporations in accessing funds and assuring them a supply of affordable credit. Housing's

continued access to capital markets depends on investors remaining confident about the quality of the American home mortgage, including appropriate insurance coverage of all types. If the integrity of the home mortgage is questioned, Fannie Mae and other mortgage lenders will face a difficult task in attracting mortgage funds which in turn will curtail the availability of affordable money to home buyers. Flood insurance is increasingly a part of this picture because of the heightened public awareness of flood dangers and of the cost of flood damage that has followed on the recent floods in the Midwest.

My testimony will focus on three areas today:

• general principles of Fannie Mae's underwriting and the procedures we use to avert or curtail to the greatest extent possible any losses to Fannie Mae and to borrowers from insufficient flood insurance coverage;

⚫ the existing law with respect to flood insurance and the impact of the proposed changes;

• our general support for statutory clarification coupled with the reasons for our opposition to additional regulations.

GENERAL PRINCIPLES UNDERLYING FANNIE MAE'S UNDERWRITING

Before reviewing Fannie Mae's specific underwriting guidelines relating to flood insurance, I would like to define the basic principles that guide our underwriting, which play a critical role today.

Fannie Mae's guidelines on flood insurance are part of the extensive underwriting standards we have established for loans we will buy from primary lenders. Rather than underwriting every loan purchased, we delegate underwriting and approval of our loan purchases to the originating lender. Our contracts with lenders that sell or service these loans require them to warrant that each loan sold to Fannie Mae complies with our guidelines and with all applicable local and Federal laws governing mortgage lending. We enforce the guidelines and assure the integrity of our purchases through lender monitoring programs, quality control underwriting reviews, and the lender's contractual obligation to repurchase loans, or indemnify us for losses, if the warranties are breached.

This concept of "delegated" underwriting enables Fannie Mae to process efficiently the large volume of loans that we buy. The ability to process this volume in a way that minimizes administrative cost while maximizing investment quality underlies our ability to provide liquidity to the primary market. That liquidity, in turn, is crucial to our mission of supporting homeownership by lowering the cost of mortgage credit.

Our guidelines are designed to reflect sound underwriting principles that will maintain investor confidence in our mortgage securities and in the company itself. Our guidelines also address legislative requirements that affect the primary mortgage lender. We continually review and monitor our guidelines to ensure that they fully support local, State and Federal laws relating to the mortgage transaction. In addition, we issue announcements periodically to make changes to our guidelines or send letters to remind lenders about particular aspects of our requirements. Fannie Mae's Flood Insurance Guidelines

Fannie Mae looks to its lenders to oversee and to accept responsibility for ensuring that loans meet our underwriting standards. This includes securing necessary flood insurance coverage. Our underwriting guidelines address this in several ways. 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-areas designated as A, AE, AH, AO, A1–30, A–99, V, VE or V1-30 on flood hazard boundary or flood insurance rate maps. Flood insurance must generally be in the form of the standard policy issued by members of the National Flood Insurers Association.

We will waive our flood insurance requirement if:

⚫ the property improvements are not in the Special Flood Hazard Area, even though part of the property may be; or

• the mortgagor obtains a letter from FEMA stating that its maps have been amended so that the property improvements are no longer in a Special Flood Hazard Area.

Identification of Special Flood Hazard Areas

Fannie Mae's property appraisal standards require the appraiser to determine whether the property is located in a Special Flood Hazard Area identified by FEMA. We recently changed the appraisal form in order to improve the quality of the information. Previously, the appraiser indicated whether the property is in a Special Flood Hazard Area and, if so, provided specific information from the FEMA map.

With the change, appraisers are required to note the FEMA map information for all appraisals, regardless of whether the property is located 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 appraiser's determination or another source, we clearly hold the lender accountable for the accuracy of the determination and, if applicable, for obtaining required flood insurance. Coverage Amount

The minimum amount of flood insurance required for mortgages on one-to-fourfamily properties, individual PUD units, and individual town house or row house condominium units is the lower of:

• the minimum amount required, under the terms of the coverage, to compensate for any damage or loss on a replacement cost basis (which is usually 80 percent of the insurable value of the improvements) or the unpaid balance of the mortgage if the replacement cost coverage is not available for the type of building insured;

or

⚫ the maximum insurance available under the appropriate National Flood Insurance Administration program.

Unless a higher maximum amount is required by State law, we allow a maximum deductible clause equal to the lesser of $1,000 or 1 percent of the policy face

amount.

Escrow Requirements

Generally, the loans purchased by Fannie Mae have requirements for placing part of the borrower's monthly payment into an escrow deposit account so that funds will be available to pay taxes, mortgage insurance premiums, hazard and flood insurance premiums, and other special assessments.

Although the lender may occasionally waive the escrow deposit account requirement for VA or conventional mortgages, Fannie Mae still holds the lender responsible for the timely payment of the taxes and insurance premiums. If the borrower fails to pay the taxes or does not keep the hazard and flood insurance in force, we require the lender to advance its own funds to pay the outstanding bills and begin collecting monthly escrow deposits from the mortgagor to pay future bills.

Errors and Omissions Coverage

We require all lenders that sell or service our loans to secure protection under an errors and omissions insurance policy. This policy protects the lender against negligence, errors, or omissions by its staff related to matters such as providing and maintaining flood insurance that meets our requirements. It also benefits borrowers indirectly.

Thus, if the lender fails to obtain flood insurance at loan origination—when it was required or fails to renew the flood insurance (or to ensure that the mortgagor has done so), any flood loss would be covered by this insurance up to the aggregate limit of coverage. If a borrower defaulted on an uninsured property because it was damaged by flood, the lender's errors and omissions insurance policy would pay the lender the loan balance, making the lender whole for the defaulted loan amount.

Similarly, if the borrower obtained a judgment against the lender for failing to maintain flood insurance coverage for which it was collecting escrow deposits, the lender could file against its errors and omissions policy for the amount of the property damage.

If Fannie Mae had bought the loan in this example, we would require the lender to repurchase the loan from us with the insurance proceeds. Fannie Mae Quality Control Program

Through our mortgage underwriting reviews, our lender operation reviews, and the contractual obligations of our lenders to remedy mortgage deficiencies, Fannie Mae effectively enforces its policy of holding lenders accountable for assuring proper flood insurance coverage, both when the loan is originated and through the time it remains a Fannie Mae investment. To monitor lender compliance with Fannie Mae requirements, our regional offices perform underwriting reviews that include surveying legal documents, insurance documents, the underwriting review of a borrower's credit and the underwriting review of the property appraisal. Our quality control review system is based on a statistical sampling method that provides Fannie Mae with a 95 percent confidence level. It involves a random selection (which predicts the behavior of the whole population by looking at a small percentage of the portfolio), plus supplemental discretionary sampling. Most of the reviews take place