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# Legislative Bulletin.................................................September 27, 2007

**Contents:**

**H.R. 3121**---Flood Insurance Reform and Modernization Act

H.R. 3121---Flood Insurance Reform and Modernization Act

(*Rep. Waters, D-CA*)

**[Order of Business]{.underline}**: The bill is scheduled to be
considered on Thursday, September 27^th^, likely subject to a structured
rule. Amendments made in order under the rule will be summarized in a
separate RSC document.

**[Background]{.underline}**: The National Flood Insurance Program
(NFIP) was created by Congress in 1968 to provide insurance as an
alternative to direct federal disaster assistance for individuals living
in flood-prone areas. According to the Financial Services Committee, the
NFIP is the largest single-line property insurer in the nation,
providing flood insurance coverage for 5.4 million consumers. NFIP
coverage only applies in cases of mass weather-induced flooding, not in
individual instances of, for example, a pipe bursting in one home.

For more information on the NFIP, visit this website:
<http://www.floodsmart.gov/floodsmart/pages/index.jsp>.

**[Summary]{.underline}**: H.R. 3121 would adjust and expand the
National Flood Insurance Program (NFIP). Highlights of the bill are as
follows:

-   Expresses a variety of findings, including:

    -   "flooding has been shown to occur in all 50 States, the District
        of Columbia, and in all territories and possessions of the
        United States; and

    -   "the national flood insurance program (NFIP) is the only
        affordable and reliable source of insurance to protect against
        flood losses."

-   Requires the Government Accountability Office (GAO) to report to
    Congress on the effects of extending the mandatory flood insurance
    purchase requirement to [all]{.underline} properties located in a
    flood hazard area, regardless of whether the mortgage on the
    property is insured by the federal government; and requires GAO to
    report on flood coverage for pre-FIRM properties, as well as on the
    effects of extending the mandatory purchase requirement to
    properties protected by dams and levees.

> [NOTE:]{.underline} The term "pre-FIRM" means a structure that was not
> constructed or substantially improved after the later of December 31,
> 1974 or the effective date of the initial Flood Insurance Rate Map
> (FIRM) published under section 1360(a)(2) of the National Flood
> Insurance Act of 1968 for the area in which such structure is located.
> In 1974, the first FIRM was issued, to set different rates based on
> location (and propensity of flooding). Many of the "pre-FIRM"
> properties suffer from periodic repeat flooding losses. According to
> the Federal Emergency Management Agency (FEMA), close to 90% of Severe
> Repetitive Loss Properties (SRLPs) currently enjoy subsidized flood
> insurance rates from the NFIP.

-   Requires the phase-in of "actuarial" rates for NFIP coverage (i.e.
    rates more reflective of the real value of a property and the risk
    of a flood) for pre-FIRM nonresidential properties and non-primary
    residences, beginning on January 1, 2011. This phase-in would not
    apply to multifamily rental properties with four or more dwelling
    units or rentals that are the primary residence of a tenant.

-   Waives the normal 30-day waiting period for flood insurance coverage
    to take effect when a policy is purchased within 30 days of the
    purchase or transfer of the involved property.

-   Increases from \$350 to \$2,000 the fine levied against
    federally-regulated lending institutions for each failure to enforce
    mandatory flood insurance purchase requirements.

-   Increases the annual cap on fines for institutions from \$100,000 to
    \$1 million, but waives this cap for institutions that were assessed
    a penalty of \$1 million in any three of the last five years and for
    institutions that make a good faith effort to comply with mandatory
    flood insurance purchase requirements (or for violations that are
    not material in nature).

-   **Expands the NFIP, beginning June 30, 2008, to make
    federally-backed wind-damage insurance coverage available to NFIP
    participants.** Participants would have the option of purchasing
    combined flood-or-wind coverage ('multiperil" coverage) or remain
    with just flood insurance. Premiums for multiperil coverage would
    have to be charged at actuarial rates and be based on risk, so that
    the program would collect enough premiums to pay reasonably
    anticipated wind-damage claims. Duplicative coverage (having flood
    insurance AND multiperil insurance) would not be allowed.

> [NOTE]{.underline}: The wind coverage would be triggered by damage
> resulting from "any hurricane, tornado, cyclone, typhoon, or other
> wind event."

-   Provides that multiperil claims not be subject to differentiating
    between flood damage and wind damage.

-   Makes multiperil coverage available only where local governments
    agree to adopt land use and control measures designed to minimize
    wind damage, in addition to the existing flood program requirements
    for flood plain management.

-   Sets multiple peril [residential]{.underline} policy limits at
    \$500,000 for single-family dwellings, \$500,000 for each separate
    dwelling unit in a multi-unit structure, and \$150,000 per dwelling
    unit for contents and living expense increases from loss of
    residence.

-   Sets multiple peril [nonresidential]{.underline} policy limits at
    \$1,000,000 for any single structure and \$750,000 for contents and
    business interruption (based on previous financial records and
    expectations of profits).

-   Prohibits the NFIP from offering new multiperil policies or renew
    existing multiperil policies during any period in which the NFIP
    borrows money to pay multiperil policy claims.

-   Increases the maximum coverage limits for flood insurance policies,
    as follows:

    -   From \$250,000 to \$335,000 for residences;

    -   From \$100,000 to \$135,000 for residential contents; and

    -   From \$500,000 to \$670,000 for nonresidential properties.

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-   Requires each renewal or new contract for flood insurance to include
    coverage for at least \$1,000 for living expenses following a flood
    event (with the option to purchase more coverage).

-   Requires residential NFIP participants to be given the option to
    purchase actuarially-priced coverage (i.e. coverage with risk-based
    premiums) for flood losses in basements, crawl spaces, and other
    enclosed areas under buildings that are not covered by primary flood
    insurance.

-   Requires commercial NFIP participants to be given the option to
    purchases actuarially-priced business interruption coverage for
    flood losses (including losses at multifamily rental properties).

-   Requires residential and commercial NFIP participants to be given
    the option to purchase full-replacement-cost contents coverage.

-   Increases the annual limitation on NFIP premium increases from 10%
    to 15%.

-   Increases the NFIP's borrowing authority from the U.S. Treasury from
    \$20.78 billion to \$21.50 billion.

-   Requires that the Federal Emergency Management Agency (FEMA, the
    agency that implements the NFIP) report to Congress, within six
    months after enactment of this legislation, on how it intends to
    repay, within ten years, all funds borrowed, including amounts
    previously borrowed but not repaid.

> **[NOTE]{.underline}:** **The NFIP currently owes about [\$18
> billion]{.underline} to the U.S. Treasury**, mainly because of the
> 2005 hurricane season. The Financial Services Committee asserts that
> the NFIP has expressed doubts about its ability to repay such loans.

-   Requires FEMA, upon request of a state insurance commissioner, to
    participate without fees in a state disaster claims mediation
    program for the non-binding mediation of flood insurance claims.
    Participation in the mediation program (the allowable extent of
    which is detailed in the legislation) would not affect the contract
    or tort liability of any involved party, or the exclusive
    jurisdiction of the federal courts to hear disputes involving the
    NFIP.

-   Requires FEMA to report annually to Congress on the financial status
    of the NFIP.

-   **Creates a new \$250 million competitive grant program** (over five
    years) for local communities that encourage homeowners to purchase
    flood insurance, where those homeowners are not legally required to
    do so, and in general, educate all residents about the benefits of
    flood insurance and flood risk mitigation. The federal share of
    activities under this program could not exceed 75%.

-   Requires FEMA to report to Congress, within 60 days of this bill's
    enactment, a description of its marketing and outreach efforts to
    educate consumers on the benefits of obtaining flood insurance.

-   Extends by three years (through the end of FY2012) the pilot
    program, which was originally created in 2004, to mitigate severe
    repetitive loss properties.

-   Adds demolition and rebuilding as an allowable activity under the
    Flood Mitigation Assistance (FMA) program. Also, the per-state and
    per-community caps on FMA would be lifted to allow FEMA some
    flexibility in distributing FMA funds, and FEMA would be prohibited
    from increasing flood insurance policy premiums to cover FMA.

-   Directs GAO to report to Congress within one year on suggested
    methods to increase participation of low-income families in the
    NFIP.

-   Instructs mortgage lenders who make federally related mortgages, as
    part of their required good-faith estimates of the amount or range
    of charges the borrower is likely to incur for specific settlement
    services, to include in each such estimate a conspicuous statement
    that:

> \--says that flood insurance coverage for residential real estate is
> generally available under the NFIP (whether or not the real estate is
> located in a flood-prone area);
>
> \--provides an NFIP telephone number and website address; and
>
> \--notes that the escrowing of flood insurance premiums is required
> for many loans under section 102(d) of the Flood Disaster Protection
> Act of 1973.

-   Reiterates the current-law requirement that FEMA, within 90 days of
    enactment, establish an appeals process for flood insurance claims.

-   Provides \$2.4 billion over six years for the continuation of
    federal mapping of floodplains, as detailed in the bill, in
    conjunction with the newly reestablished Technical Mapping Advisory
    Council. Map updates would have to give priority to the areas
    affected by Hurricanes Katrina and Rita.

-   Requires FEMA to provide floodplain map change information
    (including flood elevation changes) to affected communities, and
    requires a notice in local newspapers of map changes, a description
    of the appeals process, and contact information for an appeal.

-   Requires the revising of certain documents and forms to include
    easy-to-understand language.

-   Authorizes "such sums as may be necessary" to employ additional
    staff necessary to carry out all of the responsibilities required by
    this bill.

-   Extends from 60 days to 180 days the deadline for filing the proof
    of loss associated with a flood insurance claim.

-   Extends the sunset date of the NFIP from September 30, 2008 to
    September 30, 2013.

**[RSC Bonus Facts]{.underline}**: FEMA states that the NFIP incurred
liabilities estimated to total at least \$23 billion as a result of the
2005 Gulf Coast hurricanes, exceeding the \$2.2 billion in premiums
earned annually and its then-\$1.5 billion borrowing authority from the
Treasury (which Congress increased twice to account for fast- rising
claims). The \$23 billion in Hurricane Katrina/Rita claims is about
one-and-a-half times the \$15 billion the NFIP paid out in claims
between its creation in 1968 through 2004. Since 1981, the NFIP has had
to borrow money from the Treasury [14 times]{.underline} to keep
running, including borrowing more than \$100 million [10
times]{.underline} to keep running. *(Source: CRS)*

**[Committee Action]{.underline}**: On July 19, 2007, the bill was
referred to the Financial Services Committee, which, one week later,
marked up the bill and ordered it reported to the full House by a vote
of 38-29.

**[Possible Conservative Concerns]{.underline}**: Some conservatives
have expressed concerns about this bill's expansion of the NFIP in to
wind-damage coverage. Since the NFIP is already about \$18 billion in
debt---debt that may not even be repaid---these conservatives have
asserted that now is not the time to expand NFIP's (and thus the
taxpayer's) liabilities. Additionally, wind-damage is already covered
under many homeowner's insurance policies in the private market, thus
this addition of wind-damage coverage to the NFIP would circumvent the
successes of the private market. Any such displacement of the private
sector would ultimately lead to fewer choices for consumers at higher
prices.

Some conservatives continue to be concerned that the NFIP, whether
expanded or not, dampens the financial and common-sense disincentives to
build homes in flood-prone areas by making flood insurance artificially
more available than it otherwise would be. While this legislation does
include an important provision to address this situation (requiring
actuarial rates for pre-FIRM properties), it delays the implementation
of this fix until 2011 and simultaneously grows the NFIP by adding the
option of wind-damage coverage.

Furthermore, some conservatives have expressed concerns about the
addition of optional coverage for basements and crawl spaces, for much
the same reasons as above---unwise expansion of a financially strapped
program and dampening of disincentives to build in floodplains.

**[Administration Position]{.underline}**: The Administration is
expected to express concerns about H.R. 3121 in its Statement of
Administration Policy (SAP) to be released this afternoon.

**[Cost to Taxpayers]{.underline}**: CBO finds that H.R. 3121 would
increase mandatory spending (i.e. increased borrowing authority for the
NFIP) by \$725 million in FY2009. Furthermore, the bill would increase
revenues by \$1 million each year, beginning in FY2008. Lastly, the bill
would increase authorizations by \$451 million in FY2008 and by a total
of \$2.371 billion over the FY2008-FY2012 period.

**[NOTE]{.underline}:** Unless fixed in the rule for H.R. 3121, **this
legislation would violate
[PAYGO](http://thomas.loc.gov/cgi-bin/query/F?c110:1:./temp/~c110lRmC6V:e32404:)**,
since it yields a net increase in mandatory spending.

**[Does the Bill Expand the Size and Scope of the Federal
Government?]{.underline}**: Yes, the bill would create one new program
and expand the government's financial exposure under the NFIP.

**[Does the Bill Contain Any New State-Government, Local-Government, or
Private-Sector Mandates?]{.underline}**: Yes, the good-faith-estimate
provision described above would be a private-sector mandate, as
confirmed by CBO.

**[Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax
Benefits/Limited Tariff Benefits?]{.underline}**: The Financial Services
Committee, in [House Report
110-340](http://www.congress.gov/cgi-lis/cpquery/R?cp110:FLD010:@1(hr340)),
asserts that, "H.R. 3121 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in clause 9
of rule XXI."

**[Constitutional Authority]{.underline}**: The Financial Services
Committee, in [House Report
110-340](http://www.congress.gov/cgi-lis/cpquery/R?cp110:FLD010:@1(hr340)),
cites constitutional authority in Article I, Section 8, Clause 1
(relating to the congressional power to promote the general welfare of
the United States) and Clause 3 (relating to the congressional power to
regulate interstate commerce).

**[Outside Organizations]{.underline}**: Organizations that have
expressed concerns with, or are publicly opposing, this legislation
(primarily because of the addition of optional wind-damage coverage)
include:

-   American Insurance Association

-   Association of State Floodplain Managers

-   Citizens Against Government Waste

-   Club for Growth

-   Consumer Federation of America

-   Financial Services Roundtable

-   National Association of Insurance Commissioners

-   National Association of Mutual Insurance Companies

-   National Association of Professional Insurance Agents

-   National Flood Determination Association

-   Property Casualty Insurers Association of America

-   Reinsurance Association of America

**[RSC Staff Contact]{.underline}**: Paul S. Teller,
<paul.teller@mail.house.gov>, (202) 226-9718