oversight

Flood Insurance: Information on the Mandatory Purchase Requirement

Published by the Government Accountability Office on 1990-08-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

          E
      c
  *                 United   States   General   Accounting   Office
                    Fact Sheet for Congressional
GAO
                    Requesters



August    1990
                    FLOOD INSURANCE
                    Information on the
                    Mandatory Purchase
                    Requirement




                 RESTRICTED --Not      to be released outside the
                 General Accounting Of25ce unless specifically
                 approved by the Office of Congressional
                 Relations.
GAO                   United States
                      General Accounting  Office
                      Washington, D.C. 20548

                      Resources, Community,        and
                      Economic Development         Division

                      B-237877

                      August 22,199O

                      Congressional Requesters

                      In response to your requests, we are providing information on compli-
                      ance with the mandatory flood insurance provision of the Flood Disaster
                      Protection Act of 1973, as amended. This act, among other things,
                      directs certain federal regulatory agencies, such as the Federal Deposit
                      Insurance Corporation and the Office of the Comptroller of the Cur-
                      rency, to issue regulations requiring member lending institutions to
                      ensure that certain properties in special flood hazard areas (SFHA)~
                      securing a loan be insured against flood damage. The insurance is
                      designed to provide an alternative to disaster assistance.

                      This fact sheet addresses the views of the Federal Emergency Manage-
                      ment Agency’s (FEMA) Federal Insurance Administration (FIA)-which
                      manages the National Flood Insurance Program-regulatory         agencies,
                      and lenders on issues related to compliance with the mandatory flood
                      insurance provision (see sec. 2); the level of compliance in certain areas
                      of Texas and Maine (see sec. 3); and efforts to increase compliance (see
                      sec. 4). Section 1 of this report provides background information on the
                      flood insurance program.


                          and the regulatory agencies disagree about the level of compliance
Views on Compliance   FIA
                      with the mandatory flood insurance provision. FIA estimates that about
                      11 million properties are located in SFHAS. The act, however, does not
                      require that all properties in SFHAS be covered by flood insurance. Only
                      those properties in SFHAS secured by federally regulated or insured loans
                      are required to have flood insurance. FIA estimates that 1.4 million poli-
                      cies are in force in SFHAS and concludes that the small number of policies
                      indicates that noncompliance with the flood insurance requirement may
                      be substantial.

                      In contrast, cognizant regulatory agencies, such as the Federal Deposit
                      Insurance Corporation and the Federal Reserve System, reported at a
                      National Flood Insurance Program reauthorization hearing that noncom-
                      pliance is not a major problem. They said that most violations of flood
                      insurance regulations by the lending institutions are technical matters,
                      such as the lack of adequate documentation in a mortgage loan file.

                      ‘The Federal Emergency Management Agency defines an SFHA as land in the floodplain within a
                      community subJect to a l-percent or greater chance of flooding in any given year.



                      Page 1                     GAO/RCEDSO-141FS      The Mandatory   Flood Insurance   Requirement
                       B237877




                       Officials of FIA, regulatory agencies, and lending institutions also raised
                       a number of issues they believe affect compliance with the mandatory
                       flood insurance provision, such as the cost of insurance.


                       We obtained information on all SF’HApersonal residence properties for
Level of Compliance    which disaster assistance was requested for two disasters in two states,
With Flood Insurance   Maine and Texas. We estimate that in Maine and Texas about 22 percent
Program in Certain     and 79 percent, respectively, of these properties for which flood insur-
                       ante was required were not covered. Lenders cited various reasons why
Areas of Maine and     these properties were not insured as required, including the following:
Texas                  (1) the properties were identified as in SFHAS,but this fact was inadver-
                       tently overlooked, so the lenders did not require flood insurance; (2) the
                       properties were incorrectly classified as not being in SFHAS, or were not
                       classified at all, and therefore the insurance was not required; and (3)
                       policies lapsed on properties that originally were covered by the
                       required flood insurance when the loan was made.


                       To help improve compliance, FIA has historically provided information
Efforts to Increase    on the flood insurance requirement to the regulatory agencies and
Compliance             lender associations. For example, in October 1989, FIA held its third
                       annual meeting with regulatory agencies, which concentrated on
                       lenders’ enforcement of the mandatory insurance. Further, FIA officials
                       said they provided a limited scope list to the Comptroller of the Cur-
                       rency in September 1989, with (1) the names of the lenders having loans
                       on SF’HA properties that are uninsured against floods and (2) the names
                       of borrowers whose policies have lapsed. FIA plans to issue more com-
                       plete lists once comments from the Comptroller of the Currency on the
                       limited scope list are addressed. The lists will then be updated and sent
                       periodically to all of the regulatory agencies.

                       According to regulatory agency officials, they intend to follow up with
                       those lenders we reviewed in Maine and Texas that did not require flood
                       insurance. Their purpose is to ensure that SFHA properties securing loans
                       are insured. Lenders told us that within the last year they have paid
                       more attention to complying with the flood insurance requirement by
                       initiating such activities as developing procedures to ensure that the
                       insurance requirement is reviewed prior to each closure.




                       Page 2                GAO/RCEl%SQl4lFS   The Mandatory   Flood Insurance   Requirement
5237877




We examined federal legislation and regulations relevant to the manda-
tory flood insurance provision and discussed the subject with officials of
FEMAand selected lending institutions in Maine and Texas.

We relied on information that FEMAprovided on properties located in
SFHASin Maine and Texas to identify the extent and causes of noncom-
pliance. As agreed with your offices, we limited our review to these two
states because at the time we conducted our fieldwork, FEMAhad
obtained mortgage and SFHAinformation from disaster assistance appli-
cants in those states. We performed our work between April and
December 1989, in accordance with generally accepted government
auditing standards. More detailed information on our scope and method-
ology is presented in section 5.

We discussed the information in the report with officials of FIA, the Fed-
eral Deposit Insurance Corporation, and the Office of Thrift Supervi-
sion. The agencies agreed with the information presented. As requested,
we did not obtain official comments on this fact sheet.

Unless you publicly announce its contents earlier, we plan no further
distribution of this fact sheet until 30 days from the date of this letter.
At that time, we will send copies to interested parties and make copies
available to others upon request. If we can be of further assistance,
please contact me at (202) 275-5525. Major contributors to this fact
sheet are listed in appendix I.




John M. 01s Jr.
Director, Housing and Community
  Development Issues




Page 3                GAO/RCED&b141FS   The Mandatory   Flood   Immrance   Requirement
B237877




List of Requesters

The Honorable Donald W. Riegle, Jr.
Chairman, Committee on Banking,
  Housing, and Urban Affairs
United States Senate

The Honorable Alan Cranston
Chairman, Subcommittee on Housing
  and Urban Affairs
Committee on Banking, Housing,
  and Urban Affairs
United States Senate

The Honorable Walter B. Jones
Chairman, Committee on Merchant
  Marine and Fisheries
House of Representatives

The Honorable Ben Erdreich
Chairman, Subcommittee on
  Policy Research and Insurance
Committee on Banking, Finance
  and Urban Affairs
House of Representatives

The Honorable Thomas R. Carper
House of Representatives




 Page 4              GAO/RCElHO-141FS   The Mandatory   Flood hwame   Requirement
Page 6   GAO/RCELh!W141FS   The Mandabry   Flood   Insurance   Requirement
contents



Section 1                                                                                                     8
Background                Disaster Assistance Available From Sources Other Than                               9
                              Flood Insurance

Section 2                                                                                                    11
Views on Issues           FIA’s Views                                                                        11
                          Regulatory Agencies’ Views                                                         11
Relating to               Lending Institutions’ Views                                                        12
Compliance With the
Flood Insurance
Requirement
Section 3                                                                                                    14
Level of Compliance in Fe:;                                                                                  14
                                                                                                             14
Maine and Texas        Flood Insurance      Not Required for Many Properties                                 15

Section 4                                                                                                    17
Efforts to Increase the    ;~~~of;fi;gencies,
                                           Efforts                                                           17
                                                                                                             18
Level of Compliance        Lending Institutions’ Efforts                                                     18

Section 5                                                                                                    20
Scope and
Methodology
Appendix I                                                                                                   22
Major Contributors to
This Fact Sheet
Tables                     Table 3.1: Analysis of SFHA Personal Residence                                    15
                               Properties in Maine and Texas Disasters for Which
                               Application Was Made for Disaster Assistance and
                               Flood Insurance Was Required



                           Page 6                GAO/RCED90-14lFS   The Mandatory   Flood Insurance   Requirement
Contents




Table 3.2: Applicability of the Flood Insurance                                    15
    Requirement for SFHA Properties Under Our Review
    in Maine and Texas Disasters
Table 3.3: Analysis of SFHA Personal Residence                                     16
    Properties in Maine and Texas Disasters for Which
    Flood Insurance Coverage Was Not Required




Abbreviations

FDIC       Federal Deposit Insurance Corporation
FEMA       Federal Emergency Management Agency
FL4        Federal Insurance Administration
GAO        General Accounting Office
IIS        Individual and Family Grant Program
NFIP       National Flood Insurance Program
SBA        Small Business Administration
SFHA       special flood hazard area


Page 7               GAO/RCED9@14lFS   The Mandatory   Flood Insurance   Requirement
Section 1

Background


             The National Flood Insurance Program (NFIP) is a federal program that
             provides property owners with flood insurance. The NFIP is administered
             by the Federal Insurance Administration @IA), a component of the Fed-
             eral Emergency Management Agency (FEMA).The insurance is designed
             to provide an insurance alternative to disaster assistance. The NFIP was
             authorized by the National Flood Insurance Act of 1968 and became
             effective on January 28,1969. The program represented a new
             approach to assist victims of flooding by providing an opportunity for
             property owners to purchase, from the federal government, insurance
             protection for structures and contents exposed to flooding. From 1968
             until the adoption of the Flood Disaster Protection Act of 1973, the
             purchase of flood insurance was voluntary. However, after major
             flooding in 1972, it became evident that few property owners were
             purchasing flood insurance policies.

             The 1973 act made the purchase of flood insurance mandatory after
             March 1,1974, for (1) any federal loan or grant to be used for acquisi-
             tion or construction of a building or a mobile home in a special flood
             hazard area (WHA) of a community participating in the NFTP and (2) a
             loan secured by improved real property in an SF’HAof a participating
             community if the loan is made by a lending institution that is regulated
             or insured by the federal government. However, for loans made prior to
             March 1, 1974, flood insurance is not required.

             In order to be covered by a flood insurance policy, a property must be in
             a community that participates in the NFIP. To qualify, a community
             adopts and enforces floodplain management regulations to control pro-
             posed development in SFHAS,which FEMA defines as land in floodplains
             within communities subject to a l-percent or greater chance of flooding
             in any given year. The objective of the regulation is to ensure that such
             development will not aggravate existing flooding conditions and that
             new buildings will be protected from flood damage. Community partici-
             pation in the NFIP is voluntary. However, if a community chooses not to
             participate within 1 year after the SFHA has been identified, certain fed-
             erally guaranteed or insured loans are not available if the building used
             to secure the assistance is in an SFHA of the community. Almost all of the
             nation’s communities with serious flooding potential have joined the
             NFIP.




             Page 8               GAODKxlXt@141FS   The Mandatory   Flood Insurance   Requirement
                      Section 1
                      Background




                      The 1973 act states, in part, that each federal instrumentality respon-
                      sible for regulating or insuring lender institutions1 shall issue regulations
                      concerning the mandatory flood insurance program. These regulations
                      should direct them not to make, increase, extend, or renew any loan
                      secured by improved real estate or a mobile home located in an SFHA for
                      which flood insurance has been made available under the 1968 act
                      unless the building or mobile home and any personal property securing
                      such loan is insured for the term of the loan. The flood insurance must
                      cover an amount at least equal to the outstanding principal balance of
                      the loan or to the maximum limit of coverage made available for the
                      particular type of property under the act, whichever is less.

                      Each regulatory agency has written instructions to its member lending
                      institutions to this effect, and each has provided guidance to its exam-
                      iners directing them to verify compliance. The responsibility for
                      enforcing the mandatory purchase requirement rests with the regula-
                      tory agencies; FL4 has no direct role.


                      Disaster assistance may be available to SFHAproperty owners who have
Disaster Assistance   not purchased flood insurance. After a presidential declaration of a
Available From        major disaster, a range of assistance becomes available to eligible dis-
Sources Other Than    aster victims, including flood victims who own uninsured properties in
                      WHAS. Types of assistance available include grants from FEMA’SIndi-
Flood Insurance       vidual and Family Grant Program (IFG) and disaster loans from the
                      Small Business Administration (SBA).

                      Currently, the 1% makes grants of up to $10,400 to individuals and fam-
                      ilies for unmet disaster-related necessary expenses and serious needs
                      not met by other disaster programs or insurance. The 1% grants may be
                      used for repairing and replacing personal property or vehicles and
                      housing repairs, among other things.

                      FEMA   does not require flood insurance as a prerequisite to obtaining an
                      11%grant. However, FEMA requires IFG grantees who were flood victims
                      and live in SFHAS to purchase flood insurance as a condition of obtaining
                      the grant. FEMA requires these grantees to maintain the flood insurance
                      policies for 3 years or until they move from the residence, whichever is

                      ‘The act lists these instrumentalities as the Board of Governors of the Federal Reserve System, the
                      Federal Deposit Insurance Corporation, the Comptroller of the Currency, the Federal Home Loan
                      Bank Board. the Federal Savings and Loan Insurance Corporation, and the National Credit Union
                      Administration. In August 1989, the Office of Thrift Supervision replaced the Federal Home Loan
                      Bank Board and the Federal Savings and Loan Insurance Corporation.



                      Page 9                       GAO/RCED9@141l%         The Mandatory    Flood   Insurance   Requirement
section 1
Background




less. IFG assistance has been denied to disaster victims who had not
maintained flood insurance as required by previous IFGgrants.

SBA makes low-interest   disaster loans to individuals and businesses to
repair or replace most uninsured property that is damaged. SBA assis-
tance is limited to $120,000 for individuals ($100,000 for real estate and
$20,000 for personal property) and to $500,000 for businesses. SBA will
make loans only for those considered capable of repaying them. SBA
requires its applicants to purchase and maintain flood insurance for the
full term of the loan for the insurable value of the property, regardless
of the amount of the SBA loan, if the property is located in an SFHA.
Applicants are not eligible for SBA disaster loans if, prior to the loss,
they have not purchased or maintained required flood insurance.




Page 10              GAO/RCED9@141FS   The Mandatory   Flood Insurance   IteWhment
Section 2

Views on IssuesRelating to ComplianceWith
the Flood InsuranceRequirement

                       FIA, regulatory agency, and lending institution officials raised a number
                       of issues in our discussions with them concerning compliance with the
                       mandatory flood insurance provision.


                       FIA has about 2.1 million flood insurance policies in force, of which
FIA’s Views            about 1.4 million are for properties located in SFHAS, and concludes that
                       a large number of properties located in SFHAS that are required to be
                       insured by current law are not insured. FIA officials base their belief on
                       the fact that in 1987, 11 million properties were located in SFHASand
                       although many may not be required to be covered by flood insurance,
                       1.4 million policies seems to be too few.

                       On another matter, according to a special assistant to the Administrator,
                       FIA, one area of concern is loans sold in the secondary mortgage market.’
                       According to the official, changes in the mortgage loan industry in
                       recent years have resulted in much greater activity, with mortgage loans
                       being sold and resold in the secondary market. He thought that this
                       increased activity may increase the potential for administrative opera-
                       tions-such as keeping mortgage insurance in force-to be less efficient
                       and result in lapsed insurance.


                       Stating an opinion in contrast to Ftis views on levels of compliance, reg-
Regulatory Agencies’   ulatory agencies reported, during the May 1989 NFIP reauthorization
Views                  hearings, that for the most part, lenders complied with the mandatory
                       flood insurance requirement. A Federal Deposit Insurance Corporation
                       (FDIC)official, for example, reported that while over the last 3 years,
                       from 34 to 38 percent of the lenders examined were found to be in viola-
                       tion of flood insurance regulations, the violations generally were tech-
                       nical in nature, such as the lenders’ not maintaining adequate
                       documentation in the loan files. According to the agency, in about 95
                       percent of the cases examined in the last 3 years, the properties were
                       covered by the required flood insurance. Over 3,000 Fmc-supervised
                       institutions were examined in 1988. Another regulatory agency, the Fed-
                       eral Reserve System, reported that of the lenders examined for compli-
                       ance in 1988,83 percent (530 of 639 banks) had no violations of flood
                       insurance regulations and that the majority of violations cited involved


                       ‘The secondary mortgage market is the market for buying and selling existing mortgage loans or
                       securitws backed by mortgage loans The sale of such loans and securities returns funds to the loan
                       originator or lender, creating hquidity and allowing the lender to make additional loans or otherwise
                       reuse the funds.



                       Page 11                       GAO/RCED90-141FS       The Mandatory     Flood Insurance   Requirement
                        Section 2
                        Views on Issues Relating     to Compliance   With
                        the Flood   Insurance   Requirement




                        the lenders’ failure to document adequately their determination of
                        whether or not flood insurance was required.

                        Regulatory agency officials also identified problems they are encoun-
                        tering that, in their view, impede full compliance with the requirement.
                        According to one regulatory agency official, many homebuyers in SFHAS
                        find flood insurance premiums too expensive, so they let the policies
                        lapse. Compliance would improve, he said, if flood insurance premiums
                        were subsidized, especially for people at lower income levels.

                        According to several regulatory agency officials, flood insurance rate
                        maps2 are difficult to read, not always accurate, and expensive to main-
                        tain They stated that FIA should improve the maps. Another official
                        suggested that procedures be established to require FIA to determine
                        whether a property is or is not in an SFHA.

                        Several regulatory agency officials said that compared with unregulated
                        lenders, which can also make loans for properties in SFHAS, regulated
                        lenders are at a competitive disadvantage because of the flood insurance
                        requirement. According to the officials, the Flood Disaster Protection
                        Act of 1973 should require all lenders to comply with the mandatory
                        flood insurance purchase requirement, not just the federally regulated
                        lenders.


                        Frequently echoing points made by regulatory agency officials, a
Lending Institutions’   number of lenders identified problems they have in complying with the
Views                   purchase requirement and suggested ways to improve the flood insur-
                        ance program. Lenders remarked on their difficulties with the flood
                        insurance maps, indicating that reading them is difficult, particularly
                        for rural areas or areas near SFHA boundaries, and the maps are often
                        inaccurate. One lender said the requirement would be easier to admin-
                        ister if the final responsibility for determining whether a property is in
                        an SFHA would not rest with the lender. According to the interviewee,
                        someone with more expertise than the lender in reading the flood maps
                        should make the determination. Lenders also commented that flood
                        insurance is expensive (in May 1990, the national average annual pre-
                        mium was $276). Also, according to the lenders, limits on the amount of
                        coverage available is a problem, especially for expensive properties
                        located near the ocean. Furthermore, according to the lenders, because

                        ‘A flood insurance rate map shows the SFHAs in a community, mcluding boundaries, elevations. and
                        msurancc nsk zones. The maps are prepared by FIA.



                        Page 12                         GAO/RCED-90141IYS   The Mandatory   Flood Insurance   Requirement
Section 2
Views on Issues Relating to Compliance   With
the Flood Insurance Requirement




borrowers can go to unregulated lenders and obtain a loan without
having to purchase flood insurance, regulated lenders are at a competi-
tive disadvantage.




Page 13                     GAO/RCED+O-141FS    The Mandatory   Flood Insurance   Requirement
Section 3

Level of Compliancein Maine and Texas


              Following a major disaster in Maine in early April 1987, FEMAfound that
              a large number of applicants for disaster assistance did not have flood
              insurance. The large number of uninsured properties prompted FEMA'S
              Region I (Boston) to perform a special analysis to determine why these
              properties in SFHASwere not covered by flood insurance.

              At the time we initiated our review, FEMAhad completed its analysis of
              the Maine disaster and had obtained mortgage and SFHA information on
              properties affected by a major disaster in Texas in July 1989. Therefore,
              we used the information available from FEMAto determine the extent of
              compliance with the flood insurance requirement and reasons for any
              noncompliance. FEMAofficials said they now routinely obtain mortgage
              and SFHAinformation from applicants seeking disaster assistance.


              On April 9, 1987, the President of the United States declared that a
Maine         major disaster existed in Maine because of flooding. FEMAsubsequently
              determined that 613 of the disaster victims who applied for assistance
              owned personal residences located in SFHAS and that about 500 of these
              properties were not covered by flood insurance.

              We analyzed information on 600 of the personal residences FEMAidenti-
              fied and found that 147 properties located in SFHASshould have been
              covered by flood insurance. Of this number, 114 (78 percent) were
              insured when they were flooded, while 33 (22 percent) were not.

              The lending institutions FEMAidentified for each uninsured property
              cited various reasons why the properties had not been insured against
              floods as required. Reasons given included the following. The lender (1)
              determined that the property is in an SFHAbut inadvertently overlooked
              this fact and did not require flood insurance at loan closing (11 loans);
              (2) erroneously classified the property as not being in an SFHA,or did not
              classify it at all, and therefore did not require flood insurance (11
              loans); and (3) required the flood insurance at the time the loan was
              made, but the policy later lapsed (11 loans). (Table 3.1 provides an anal-
              ysis of SFHA properties in both Maine and Texas for which flood insur-
              ance was required.)


              On July 18, 1989, the President declared that a major disaster existed in
Texas         Texas because of flooding. FEMAlater determined that 314 of the dis-
              aster assistance applicants owned property in SFHAS. We analyzed infor-
              mation on 271 of the properties that FEMAidentified and found that 43


              Page 14              GAO/RCELM@141FS   The Mandatory   Flood Insurance   Requirement
                                          Section 3
                                          Level of Compliance   in Maine and Texas




                                          properties located in SFHASwere required to be covered by flood insur-
                                          ance. Of this number, 9 (21 percent) were insured when they were
                                          flooded, and 34 (79 percent) were not.

                                          Reasons cited by lending institutions as to why the properties were not
                                          insured varied. The most frequently cited reason was that the lender
                                          erroneously classified the property as not being in an SFHA or could find
                                          no documentation in the file to indicate whether an SFHAdetermination
                                          had been made (27 loans). Other reasons were that the lender neglected
                                          to require the flood insurance at loan closing even though the lender
                                          identified the property as in an SFHA (2 loans) and that the property was
                                          covered by the required flood insurance at closing, but the policy later
                                          lapsed (5 loans).

Table 3.1: Analysis of SFHA Personal
Residence Properties in Maine and         Properties required     to be covered              Maine                           Texas
Texas Disasters for Which Application     by flood insurance                            Number    Percent               Number    Percent
Was Made for Disaster Assistance and      Unmsured                                             33            22                  34        79
Flood insurance Was Required
                                          Insured                                             114            78                   9        21
                                          Total                                              147            100                  43       100




                                          Flood insurance coverage is not required for all properties in SFHAS.
Flood Insurance Not                       Although our review of flood insurance compliance was limited to
Required for Many                         lenders that are federally regulated or insured, of the residential proper-
Properties                                ties located in WHAS for which disaster assistance applications had been
                                          filed, 76 percent in Maine and 84 percent in Texas did not have to be
                                          insured against floods. (See table 3.2.)

Table 3.2:   Applicability of the Flood
Insurance    Requirement for SFHA                                                            Maine                           Texas
Properties    Under Our Review in Maine   Prooerties   in SFHAs                         Number    Percent               Number    Percent
and Texas     Disasters                   Required to be covered    by flood
                                          Insurance                                           147            24                  43            16
                                          Not required to be covered
                                          by flood Insurance                                  453            76                 228            84
                                          Total                                              600            100                 271       100


                                          Most of the properties for which flood insurance was not mandatory
                                          were not subject to the purchase requirement because they had no mort-
                                          gage or had mortgages with unregulated lenders. Flood insurance cov-
                                          erage is also not required for properties in an SFHA of a community that



                                          Page 16                      GAO,/RCEDSO-141F’S   The Mandatory     Flood Insurance    Requirement
                                       !3ectlon 3
                                       Level of Compliance   in Maine and Texas




                                       does not participate in the National Flood Insurance Program or proper-
                                       ties that have mortgages that predate the flood insurance legislation.
                                       Table 3.3 provides an analysis of properties for which flood insurance
                                       was not required.

Table 3.3: Analyrir of SFHA Personal
Residence Properties in Maine and      Properties not required to be                       Maine                            Texas
Texas Disasters for Which Flood        covered by flood insurance                     Number    Percent            Number        Percent
Insurance Coverage Was Not Required    Had no mortgage                                    363         80                21                 9
                                       Mortgaged before flood insurance
                                       rate map became effective                           36             8                  0          0
                                       Mortgaged with unregulated lender                   26             6                184         81
                                       Mortgaged prior to requirement                      19             4                  4          2
                                       Identified by lender as not in an
                                       SFHA                                                 9             2                 10             4
                                       Was uninsurable                                      0             0                  4             2
                                       Located in nonparticipatlng
                                       community                                            0             0                  5          2
                                       Total                                              453           100                228       loo




                                       Page 16                     GAO/RCED-90141FS     The Mandatory     Flood Imwrance    Requirement
Section 4

Efforts to Increasethe Level of Compliance


                FIA, regulatory agencies, and lending institutions have ongoing and
                planned activities to help ensure compliance with the mandatory flood
                insurance provision.


                FIA does not have a legislatively mandated role or responsibility to
FIA’s Efforts   enforce compliance but has taken action to help increase the level of
                compliance. FIA regularly coordinates with the federal regulatory agen-
                cies and lender associations to provide the constituents of both with
                information and educational material on the mandatory purchase
                reouirement. In October 1989, FEMApublished FIA'S revised Mandator-v
                Purchase of Flood Insurance &idelmes, designed to provide informa:
                tion to regulatory agencies and lenders. Also in October 1989, FIA held
                its third annual meeting with the regulatory agencies, this year dis-
                cussing ways to increase enforcement of the mandatory purchase
                requirement. In November 1989, FIA sponsored its third NFIP Biennial
                Conference, which provided an opportunity for lenders; regulatory
                agencies; insurers; and federal, state, and local governments to discuss
                flood insurance issues and share experiences and ideas on the NFIP. FEMA
                also regularly conducts workshops to educate mortgage lenders about
                the NFIP and to provide technical assistance, for instance, on how to
                determine (1) whether flood insurance is required and (2) the level of
                coverage.

                Recently, FIA has taken additional actions to help increase compliance.
                In September 1989, in a pilot project of limited scope, FIA identified flood
                insurance policies that have lapsed and provided this information to the
                Office of the Comptroller of the Currency, which, as a member of the
                Federal Financial Institutions Examination Council, is currently
                reviewing the data to determine whether additional information is
                needed. I FIA received the Office’s comments in June 1990 and expects to
                issue the first report to the appropriate regulatory agencies after it
                addresses the comments. FLA plans to update this data periodically. Also,
                after Hurricane Hugo, FEMA collected information from disaster assis-
                tance applicants on affected properties in SFHAS that are not covered by
                the required flood insurance, and in December 1989, FIA provided this
                information to certain regulatory agencies. According to FIA officials, the
                regulatory agencies, in order to help ensure that flood insurance policies
                are obtained and maintained on lenders’ mortgages, intend to follow up

                ‘The Council was established in 1979 as a formal interagency body empowered to prescribe uniform
                principles. standards, and report forms for the federal examination of financial institutions and to
                make recommendations to promote uniformity in the supervision of financial institutions.



                Page 17                      GAO ‘RCED90-14lFS       The Mandatory    Flood Insurance   Requirement
                        Section 4
                        Efforts to Increase   the Level of Compliance




                        with the lenders on cases in which borrowers do not have the required
                        insurance. FIA is also developing an appraiser workshop to assist
                        appraisers in understanding the NFIP, which FIA officials said should be
                        operational by October 1990.


                        Regulatory agencies’ efforts to improve compliance with the flood insur-
Regulatory Agencies’    ance purchase requirement include training their examiners and keeping
Efforts                 lenders informed about the requirement. They do the latter by sending
                        advisory letters, press releases, and news announcements-all   pro-
                        viding information on flood insurance. In January 1990, some of the reg-
                        ulatory agencies provided their examiners and lenders with FEMA’S
                        recently issued Mandatory Purchase of Flood Insurance Guidelines and
                        clarified related record-keeping requirements.

                        According to an official of the Office of the Comptroller of the Currency,
                        the Office intends to review the files of lenders that did not require
                        flood insurance on properties flooded during Hurricane Hugo and deter-
                        mine why the insurance was not required. If a lender did not require the
                        flood insurance at closing, the lender will be responsible for ensuring
                        that the policy be issued, according to the official.

                        The Financial Institutions Reform, Recovery, and Enforcement Act of
                         1989 was enacted in August 1989. Its purpose, among other things, was
                        to reform the federal deposit insurance system and enhance the regula-
                        tory and enforcement powers of federal regulatory agencies. The act
                        also expands and increases penalties, such as civil money penalties, reg-
                        ulatory agencies may impose on lenders that do not comply with federal
                        statutes or regulations, including the flood insurance requirement. This
                        action is consistent with suggestions by the Federal Financial Institu-
                        tions Examination Council. Prior to passage of this act, penalties and
                        fines to encourage compliance had not been established specifically for
                        lenders that did not comply with the flood insurance requirement.


Lending Institutions’   We interviewed loan officers or other officials of lending institutions in
                        Maine and Texas on the mandatory flood insurance requirement. Sev-
Efforts                 eral lenders said that they are paying more attention to complying with
                        the mandatory flood insurance legislation than they did in the past.
                        They admitted that in the past, lenders did not strictly observe the flood
                        insurance requirement. However, with recent congressional interest and
                        increased flooding, they view the requirement more seriously.



                        Page 18                       GAO/RCED-90141FS   The Mandatory   Flood Insurance   Requirement
Section 4
JXforta to Increase   the Level of Compliance




Some lenders in Maine and Texas said that they try to comply with the
flood insurance provision, citing either that they are required to or that
they desire to protect their collateral. Lenders are developing proce-
dures to help ensure that they review the flood insurance requirement
prior to loan closing. They are also sending their employees to FIA’s
lender seminars. In addition, some lenders are trying to ensure compli-
ance by escrowing flood insurance premiums from the borrowers’
accounts.

Some lenders told us they use private companies to provide flood insur-
ance information and services. These companies audit lenders’ loan
portfolios to determine which loans are on properties located in SFHAS.
These companies can perform an array of additional services for
lenders, including notifying borrowers of the flood insurance require-
ment, collecting flood insurance policy premiums, offering flood insur-
ance coverage, and imposing coverage on borrowers who fail to comply
with the lenders’ requirements.




Page 19                       GAOiRCED-SO-141FS   The Mandatory   Flood Insurance   Requirement
Section 5

Scopeand Methodology


             We examined the federal legislation and regulations pertaining to the
             mandatory flood insurance provision and relevant FEMA documentation.
             We discussed this subject with officials of FEMAand selected lending
             institutions in Maine and Texas. We interviewed officials of the cogni-
             zant regulatory agencies and examined flood insurance regulations pro-
             vided to their member lending institutions and the guidance provided to
             their examiners. We reviewed a limited number of lender examination
             reports a

             FEMA now routinely obtains mortgage and SFHA information       from appli-
             cants seeking disaster assistance, but at the time we initiated our
             review, FEMA had mortgage and SFHA information only on properties
             affected by two major disasters in Maine and Texas. Therefore, we lim-
             ited our review to the affected properties in SFHAS in these two states.
             FEMAobtained, either from the disaster assistance applicant or through a
             title search, the name of the applicant’s lender. The Maine data identi-
             fied whether the property was covered by flood insurance; the Texas
             data did not. Because FEMA had determined whether each applicant lives
             in an SFHA, this data yielded lists of mortgaged properties in SFHAS in
             Maine and Texas-properties       potentially not in compliance with the
             mandatory flood insurance requirement.

             The data FEMA provided included only information on personal residence
             properties for which application for disaster assistance was made. We
             limited our review to this information. The data did not include informa-
             tion on those properties in SFHAS in Maine and Texas for which disaster
             assistance was not requested, and we did not attempt to develop this
             information. As a result, information in this report does not necessarily
             apply to other types of properties covered by the flood insurance legis-
             lation Also, because of the limited geographical area of our review, the
             information cannot be extrapolated to other areas or the nation as a
             whole.

             We reviewed FEMA'S data that identified the number of disaster assis-
             tance applicants’ properties in SFHAS. We then contacted about 70
             lenders in Maine and Texas and determined possible reasons why these
             properties were uninsured. Because we could not determine compliance
             with the flood insurance requirement regarding loans about which
             lenders were unable to provide information! we excluded them from our
             compliance estimates. In some cases, lenders had closed loan files and
             were unable to reconstruct whether an SFHA determination had been
             made. Because we excluded these loans, the total number of properties



             Page 20              GAO/RCED!W141FS   The Mandatory   Flood   Insurance   Requirement
Section   5
Scope and Methodology




that should be insured against floods may be greater than our analysis
indicates.

Because we do not have audit access to lending institutions’ loan files,
we were unable to verify independently whether and how the lenders
made SFXAdeterminations and whether they required flood insurance.
Your offices agreed that additional work, beyond that done in Maine and
Texas, was not necessary.

We performed our work between April and December 1989, in accor-
dance with generally accepted government auditing standards.




Page 21                 GAO/RCJ3DBO-141FS   The Mandatory   Flood I~urance   Requirement
Appendix I                                                                                            .-
Major Contributors to This Fact Sheet


                        Frank V. Subalusky, Assistant Director
Resources,              Paul W. Bryant, Assignment Manager
Community, and          Margaret C. Earman, Evaluator-in-Charge
                        Charles B. Hessler, Advisor
Economic                John H. Skeen, III, Writer-Editor
Development Division,
Washington, D.C.




(068260)                Page 22             GAO/RCED-KM%141FS The Mandatory   Flood Insurance   Requirement
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