Issues: Flood Insurance

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Flood Insurance

Issue

The National Flood Insurance Program (NFIP) continues to be in need of reform and in need of a new structure for regulatory implementation.

Position Statement

ABA supports efforts by the Federal Emergency Management Agency (FEMA), the Administration, and the Congress to reform the NFIP. Concerns about the actuarial soundness of the NFIP, the ever-increasing cost to the U.S. Treasury of providing federal disaster relief to the uninsured, and a host of complex mapping, environmental, and floodplain management issues necessitate a wholesale reform of the NFIP. ABA believes that a necessary predicate to this reform must be the recognition that tying the mandatory purchase of flood insurance to a mortgage—and charging financial institutions with its enforcement—has failed to ensure adequate NFIP participation to the detriment of the viability of the NFIP. Thus, we urge that any reform effort end the system's dependence on bank enforcement of NFIP coverage in favor of the establishment of a new framework that promotes market options, increases the availability and affordability of coverage for all at-risk properties, and eliminates compliance burden in favor of safe and sound risk management controls. With respect to the latter, and in response to the January 18, 2011 Executive Order on Improving Regulation and Regulatory Review, ABA has urged the federal banking agencies to review the complexity and burden of compliance with flood insurance regulations as banks are increasingly required to become involved with complex insurance and flood mapping determinations.

Explanation

Ensuring participation in the National Flood Insurance Program has been a continuing challenge. From 1968 until the adoption of the Flood Disaster Protection Act of 1973, the purchase of flood insurance was voluntary and few property owners purchased flood insurance policies. The 1973 Act introduced the mandatory purchase requirement, requiring federally regulated lending institutions to ensure that a loan secured by improved real property located in a specially designated flood hazard area is covered by a flood insurance policy for the life of the loan. Nevertheless, multi-billion dollar flood losses in the Midwest in 1993 demonstrated that compliance remained low, and, a primary objective of the National Flood Insurance Reform Act of 1994 was to increase participation by strengthening the mandatory purchase requirement. These efforts, however, disregard the fact that less than 50% of eligible properties are subject to a mortgage; thus, bank enforcement of NFIP participation, however strong, is inherently limited.

ABA supports comprehensive reform to make flood insurance coverage more accessible, and to place the NFIP on a more financially and administratively sound foundation. By doing so the system going forward should also address the following matters:

Avoid barriers to housing finance due to flood insurance unavailability as a result of lapses to NFIP authorization.
Encourage regulatory acceptability of gap and blanket coverage as permissible means of both controlling mortgage portfolio risks and meeting individual property coverage standards.
Enable more private sector insurance options, including allowing a wider range of multi-peril policies, to satisfy flood coverage requirements and to better protect homeowners and lien holders in line with their respective exposures.

The Congressional authorization of the National Flood Insurance Program will expire at midnight on September 30, 2011. In anticipation of the debate about NFIP reauthorization and the future of the national flood insurance strategy, ABA has been an active participant in the discussions sponsored by FEMA about options for reform of the NFIP in an effort to ensure a sound national flood insurance strategy. As stated above, in written comments to FEMA, ABA has urged that any reform effort end the system's dependence on bank enforcement of NFIP coverage in favor of the establishment of a new framework that promotes market options, increases the availability and affordability of coverage for all at-risk properties, and eliminates compliance burden in favor of safe and sound risk management controls.

Questions? Please contact Joe Pigg for more information.