The National Flood Insurance Programs
Mandatory Purchase Requirement:
Policies, Processes, and Stakeholders
March 2005
Richard J. Tobin and Corinne Calfee 
American Institutes for Research
1000 Thomas Jefferson St., NW
Washington, DC 20007
EVALUATION OF THE NATIONAL FLOOD INSURANCE PROGRAM
This Evaluation is comprised of a series of reports prepared by the American Institutes for Research (AIR) and selected subcontractors under a contract managed by AIR.  These reports assess questions identified and prioritized by a steering committee about the National Flood Insurance Program.  Individual reports will be posted on the FEMA website as they are finalized.  The website URL is http://www.fema.gov/nfip/nfipeval.shtm.  The reports in the Evaluation are:
The Evaluation of the National Flood Insurance Program  Final Report  
American Institutes for Research and Evaluation Advisory Committee
Assessing the Adequacy of the National Flood Insurance Program's 1 Percent Flood Standard.
Galloway, Baecher, Plasencia, Coulton, Louthain, and Bagha, Water Policy Collaborative, University of Maryland.
Assessing the National Flood Insurance Programs Actuarial Soundness. Bingham, Charron, Messick and Kirschner, 
Deloitte Consulting.
Costs and Consequences of Flooding and the Impact of the National Flood Insurance Program.  Sarmiento and Miller, Pacific Institute of Research and Evaluation.
Developmental and Environmental Impacts of the National Flood Insurance Program: A Review of Literature. Rosenbaum, University of Florida.
The Developmental and Environmental Impact of the National Flood Insurance Program:  A Summary Research Report. Rosenbaum, University of Florida.
An Evaluation of Compliance with the National Flood Insurance Program Part A:  Achieving Community Compliance.  Monday, Grill, Esformes, Eng, and Kinney, American Institutes for Research. 
An Evaluation of Compliance with the National Flood Insurance Program Part B:  Are Minimum Building Requirements Being Met?  Mathis and Nicholson, Dewberry.
Evaluation of the National Flood Insurance Programs Building Standards. Jones, Coulbourne, Marshall, and Rogers, Christopher Jones and Associates.
Managing Future Development Conditions in the National Flood Insurance Program.
Blais, Nguyen, Tate, Dogan, ABSG Consulting; and Mifflin and Jones. 
The National Flood Insurance Programs Environmental Reviews:  An Assessment of FEMAs Implementation of NEPA and Executive Order 11988. Rosenbaum, University of Florida.
The National Flood Insurance Programs Mandatory Purchase Requirement:  Policies, Processes and Stakeholders. Tobin and Calfee, American Institutes for Research.
The National Flood Insurance Programs Market Penetration Rate: Estimates and Policy Implications. Dixon, Clancy, Seabury, and Overton, RAND Corporation.
Performance Assessment and Evaluation Measures for Periodic Use by the National Flood Insurance Program. Miller, Langston, and Nelkin, Pacific Institute of Research and Evaluation.
State Roles and Responsibilities in the National Flood Insurance Program. Mittler, Morgan, Shapiro, and Grill, American Institutes for Research.
TABLE OF CONTENTS
Acronyms	iii
Executive Summary	iv
Background	1
History of the mandatory purchase requirement	4
National Flood Insurance Act of 1968	8
Flood Disaster Protection Act of 1973	9
Effects of the 1973 National Flood Insurance Act	10
National Flood Insurance Reform Act of 1994	12
Studies of the mandatory purchase requirement	14
Context for the mandatory purchase requirement	18
Flood insurance	18
The housing market	21
The lending industry	29
Statutory requirements for regulated lenders	32
Flood determinations	32
Provide information on flood insurance requirements	40
Require flood insurance at loan origination	43
Escrow funds for flood insurance	45
Life-of-loan coverage	45
Forced placement of flood insurance	46
Challenges to compliance	50
Flood insurance during construction	50
Letters of map change	51
Multiple loans on a single property	52
Multiple structures securing a single loan	53
Flood insurance for condominiums	53
Buildings in violation of state or local laws	54
Selling or transferring loans	56
Grandfathering	57
Manufactured homes	60
Penalties for noncompliance	63
Monitoring lenders compliance	66
Farm Credit Administration	67
Examination procedures	67
Infractions	68
Federal Deposit Insurance Corporation	68
Examination procedures	68
Infractions	70
Federal Reserve Board	71
Examination procedures	71
Infractions	72
National Credit Union Administration	73
Examination procedures	73
Infractions	74
Office of the Comptroller of the Currency	75
Examination procedures	75
Infractions	77
Office of Thrift Supervision	78
Examination procedures	78
Infractions	79
Government-sponsored enterprises	81
Fannie Mae and Freddie Mac	81
Flood insurance requirements	82
Loan servicing	84
Monitoring and compliance	85
Farmer Mac	86
Federal agency lenders and grantees	88
Department of Housing and Urban Development	88
Flood insurance requirements	88
Grants	89
Loans	90
Department of Veterans Affairs	91
Flood insurance requirements	92
Loan guarantees	93
Direct loans	94
Government National Mortgage Association	94
Rural Development, Rural Housing Service	95
Flood insurance requirements	95
Rural Development, Rural Utilities Service	97
Rural Development, Rural Business and Cooperative Service	97
Small Business Administration	98
Flood insurance requirements	98
Loan servicing	100
Monitoring and compliance	101
FEMAs roles and responsibilities	102
Recommendations	105
Congress	105
FEMA	109
FEMA and the federal entities for lending regulation	114
The FFIEC	114
Federal entities for lending regulation	114
Federal agency lenders	116
Department of Agriculture	116
Department of Veterans Affairs	116
Farmer Mac	116
References	121
Acronyms
AIR		American Institutes for Research
CBRS		Coastal Barrier Resource System
CIDR		Compliance Information and Document Request 
CMP		Civil Money Penalty
CRA		Community Reinvestment Act
CRS		Community Rating System
DHS		U.S. Department of Homeland Security
Fannie Mae	Federal National Mortgage Association
Farmer Mac	Federal Agricultural Mortgage Corporation
ERR		Environmental Review Record
FCA		Farm Credit Administration
FCS		Farm Credit System
FDIC		Federal Deposit Insurance Corporation
FEMA		Federal Emergency Management Agency
FFIEC		Federal Financial Institutions Examination Council
FHA		Federal Housing Administration
FIA		Federal Insurance Administration
FIRM		Flood Insurance Rate Map
FRB		Board of Governors of the Federal Reserve System
Freddie Mac	Federal Home Loan Mortgage Corporation
GAO		General Accounting Office
Ginnie Mae	Government National Mortgage Association
GSE		Government-sponsored enterprise
HUD		U.S. Department of Housing and Urban Development
IG		Office of Inspector General (FEMA)
LODR		Letter of Determination Review
LOMA		Letter of Map Amendment
LOMR		Letter of Map Revision
MPPP		Mortgage Portfolio Protection Program
NCUA		National Credit Union Administration
NFDA		National Flood Determination Association
NFIP		National Flood Insurance Program
OCC		Office of the Comptroller of the Currency
OFHEO	Office of Federal Housing Enterprise Oversight
OPA		Otherwise Protected Areas
OTS		Office of Thrift Supervision
RHS		Rural Housing Service
SBA		Small Business Administration
SFHA		Special Flood Hazard Area
SFHD		Standard Flood Hazard Determination
USDA		U.S. Department of Agriculture
VA		U.S. Department of Veterans Affairs
WYO		Write-Your-Own Company
Executive Summary
Through the National Flood Insurance Program (NFIP), which was created in 1968 and 
which the Federal Emergency Management Agency (FEMA) administers, the federal 
government seeks to reduce the risk, loss, and expense associated with flooding.  The program 
offers flood insurance to property owners and renters in communities that participate in the 
program by adopting and enforcing ordinances to reduce future flood risks.  Certain property 
owners in Special Flood Hazard Areas (SFHAs) in these communities are required to purchase 
and retain flood insurance for the life of their mortgage loans, and this is called the mandatory 
purchase requirement.
Three categories of property owners are required to purchase flood insurance. These 
include those 
? who obtain loans from federally regulated lending institutions and whose loans are 
secured by improved real estate or a manufactured home.
The federal entities for lending regulation, which include the Board of Governors of the 
Federal Reserve System, the Farm Credit Administration, the Federal Deposit Insurance 
Corporation, the National Credit Union Administration, the Office of the Comptroller of 
the Currency, and the Office of Thrift Supervision, are responsible for monitoring 
compliance with the requirement among regulated lenders. Much of this report discusses 
the agencies implementation of their responsibilities.
  
? whose loans are secured by improved real estate or a manufactured home and whose 
loans have been purchased by the Federal National Mortgage Association (Fannie Mae) 
or the Federal Home Loan Mortgage Corporation (Freddie Mac); and,
? property owners who receive federal financial assistance for acquisition or construction 
purposes in SFHAs in communities that participate in the NFIP.   
The Small Business Administration and the Departments of Agriculture, Housing and 
Urban Development, and Veterans Affairs are the agencies that typically provide such 
assistance. 
The amount of insurance that must be purchased depends on several factors, primarily the 
amount of financial assistance or the outstanding principal balance of the loan and the maximum 
amount of insurance available through the NFIP.  Homeowners can purchase up to $250,000 in 
coverage for their homes through the NFIP; up to $500,000 in coverage is available for 
nonresidential buildings.  In both instances coverage is also available for the contents of these 
buildings.
This study focuses on the practices and procedures associated with the purchase 
requirement and examines each of the mandatory-purchase categories just described. Although 
the requirement is seemingly straightforward (and statutorily imposed), the interpretation and 
application of the requirement varies.  Such variation is not unexpected - standards and methods 
differ from one agency to another as do their approaches to similar issues.  
The mandatory purchase requirement has evolved since its inclusion in the Flood Disaster 
Protection Act of 1973 as have the responsibilities of the agencies charged with monitoring 
compliance.  With the passage of the National Flood Insurance Reform Act of 1994, for 
example, Congress required regulated lenders to force place flood insurance on property owners 
who are obligated to purchase flood insurance but who are not adequately insured.  Similarly, the 
1994 act provides the federal entities for lending regulation with authority to impose civil money 
penalties on lenders that are found to have a pattern or practice of committing violations of the 
requirement.  
Past studies of the mandatory purchase requirement have found mixed levels of 
compliance, although compliance appears to have increased considerably since the passage of 
the 1994 act.  In addition to changes in the legislation that have spurred increased levels of 
compliance, the regulatory agencies have increased the rigor of their examinations of regulated 
lenders and these lenders have, in turn, increased their familiarity with requirement.  In almost 
one hundred instances, the federal regulatory agencies have imposed civil money penalties on 
lenders that have violated the requirement.  Typical violations include a lenders failure to 
determine whether a building or a manufactured home is located in a SFHA, failure to require 
the purchase of flood insurance when a property is in a SFHA, and failure to escrow premiums 
for flood insurance when other fees are also placed into escrow.
Although there appears to be widespread familiarity with the procedural requirements 
among most regulated lending institutions (as well as among nonregulated lenders that also sell 
loans in the secondary market to Fannie Mae or Freddie Mac), several issues represent 
challenges to compliance and would benefit from change or clarification, including:  
? the time at which flood insurance is required during construction; 
? the advisability of exempting some property owners from the mandatory purchase 
requirement;
? multiple loans on a single property or structure;
? multiple structures securing a single loan;
? insurance requirements for condominiums;
? buildings in violation of state or local laws;
? selling or transferring loans;
? the special characteristics associated with the purchase and placement of manufactured 
homes; and
? grandfathering, which permits some property owners to pay insurance premiums that are 
not commensurate with the risk of flooding they face.
These and several other issues can be addressed through changes in the NFIPs policies, 
practices, or regulations.  Other recommended changes will require revisions to the legislation 
governing flood insurance.  The most desirable changes include:
? an increase in the maximum federal flood insurance available to the same amount as the 
maximum amount of a conforming loan that Freddie Mac or Fannie Mae can purchase 
(i.e., $359,650 in 2005);
? annual automatic adjustments in the maximum coverage available through the NFIP to 
coincide with changes in the maximum dollar amount of conforming loans that Freddie 
Mac or Fannie Mae can purchase;
? a requirement that the minimum amount of coverage in place for a loan subject to the 
mandatory purchase requirement be at least equal to the replacement value of a building 
or manufactured home or to the maximum limit of coverage made available through the 
NFIP with respect to the particular type of property, whichever is less, even when the 
principal balance of a loan is less than the replacement value; and,
? the development of a system that permits a comprehensive and ongoing assessment of the 
level of lenders and borrowers compliance with the mandatory purchase requirement.  
This system should identify levels of compliance at loan origination as well as when 
renewal of coverage is required.
This study was completed by the American Institutes for Research (AIR) an independent, 
not-for-profit corporation contracted by FEMA to lead and manage a comprehensive evaluation 
of the NFIP.  The evaluation is examining many issues related to the NFIP, such as the 
programs actuarial soundness, its developmental and environmental impacts, and compliance 
among participating communities with the NFIPs requirements.  The evaluations ultimate goal 
is to improve the programs effectiveness.  The present reports primary audience is the agency, 
which seeks to improve its understanding of the policies and procedures employed by the 
agencies and institutions responsible for implementing and monitoring compliance with the 
mandatory purchase requirement.  Although the agency does not have a primary role in 
enforcing the requirement, FEMA does have a direct interest in high levels of compliance, which 
promote the programs key objectives.
Thanks are due to the many people who assisted in the studys completion, including 
representatives of FEMA, the Office of Federal Housing Enterprise Oversight, each of the 
federal entities for lending regulation, Freddie Mac and Fannie Mac, and several federal agency 
lenders.  These representatives graciously answered many questions, and most thoroughly 
reviewed two drafts of the present report. All but a few of those invited to review the report did 
so and provided extensive comments.  When appropriate, the text was modified to reflect the 
comments received.  AIRs Kristen Yarber and Jennifer R. Anderson also supported the reports 
completion. 
If industry can successfully flood American homes with overpriced soft drinks with no 
nutritional value sold primarily on the basis of taste, then the National Flood Insurance Program 
should be able to market its insurance, which promotes safety and security of life, with relative 
ease.
Adapted from Buckle and Fleming (2001)
Background
Floods are the most costly and common natural disaster in the United States.  They strike 
in all states and can happen at any time, as too many unfortunate victims have learned.  Floods in 
the United States caused an average of about $6 billion in damages per year between 1955 and 
1999 (University of Colorado 2001).  Floods kill about 100 people each year, and all states, save 
three, experienced flood-related deaths between 1989 and 1999. 
Through the National Flood Insurance Program (NFIP), the federal government seeks to 
reduce the risk, loss, and expense associated with flooding.  The program was created with the 
passage of the National Flood Insurance Act of 1968 and revised in 1973, 1977, 1994, and 2004.  
The Mitigation Division of the Federal Emergency Management Agency (FEMA), part of the 
U.S. Department of Homeland Security, administers the program, which has three primary goals.  
First, the NFIP seeks to indemnify individuals for flood losses through flood insurance.  Second, 
the NFIP attempts to reduce future flood damages through mitigation and states and 
communities implementation of floodplain management regulations.  Third, the NFIPs 
activities seek to reduce federal expenditures for disaster assistance and flood control.
The NFIP offers flood insurance to property owners and renters in communities that 
participate in the NFIP by adopting and enforcing ordinances to reduce future flood risks.  When 
a community agrees to reduce potential flood losses and participates in the program, the NFIP 
offers flood insurance to protect community members buildings and their contents against these 
losses.  The task of identifying and mapping flood-prone areas informs communities and 
residents within them that they are at risk of flooding (i.e., that they are within Special Flood 
Hazard Areas or SFHAs).   Certain property owners in these areas in participating communities 
are required to purchase and retain flood insurance for the life of their mortgage loans or federal 
grants, and this is called the mandatory purchase requirement. 
Property owners subject to the requirement include those: 
1. Who obtain loans from federally regulated lending institutions and whose loans are 
secured by improved real estate or a manufactured home.
The National Flood Insurance Reform Act of 1994 defines a regulated lending institution 
(referred to as a regulated lender in this report) as any bank, savings and loan 
association, credit union, farm credit bank, federal land bank association, production 
credit association, or similar institution subject to the supervision of a federal entity for 
lending regulation.  These entities include the Board of Governors of the Federal 
Reserve System (FRB), the Farm Credit Administration (FCA), the Federal Deposit 
Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the 
Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision 
(OTS).  Lenders not subject to regulation by one or more of these entities are referred to 
as nonregulated lenders in this report although another federal agency, such as the 
Federal Trade Commission, may regulate or supervise them for other purposes.
Loans from regulated lending institutions are deemed to be designated loans if they are 
secured by a building or manufactured home that is located or to be located in a SFHA in 
which flood insurance is available through the NFIP (U.S. Department of the Treasury et 
al. 1996).  This definition is unique to the agencies flood insurance regulations.
2. Whose loans are secured by improved real estate or a manufactured home and whose 
loans have been purchased by the Federal National Mortgage Association (Fannie Mae) 
or the Federal Home Loan Mortgage Corporation (Freddie Mac).  Although both are 
private, shareholder-owned companies, Fannie Mae and Freddie Mac are federal agencies 
for purposes of flood insurance and are often referred to as government-sponsored 
enterprises (GSEs).
3. In addition to the two categories of loans just noted, property owners who receive federal 
financial assistance for acquisition or construction purposes in SFHAs in communities 
that participate in the NFIP are also subject to the mandatory purchase requirement. 
According to the 1994 Reform Act, these purposes include any form of financial 
assistance which is intended in whole or in part for the acquisition, construction, 
reconstruction, repair, or improvement of any publicly or privately owned building or 
mobile home, and for any machinery, equipment, fixtures, and furnishings contained or 
to be contained therein, and shall include the purchase or subsidization of mortgages or 
mortgage loans but shall exclude assistance pursuant to the Disaster Relief and 
Emergency Assistance Act(other than assistance under such Act in connection with a 
flood).
This study focuses on the practices and procedures associated with the mandatory purchase 
requirements and examines each of the categories just described. 
	To complete the study, FEMA contracted with the American Institutes for Research 
(AIR), an independent, not-for-profit corporation.  AIR examined applicable legislation and its 
legislative history as well as reports and guidelines from the government agencies and GSEs with 
responsibility for or interest in the mandatory purchase requirement.  In addition, AIR met with 
representatives of these agencies and GSEs.  When scheduling these meetings, AIR asked to (and 
did) meet with the agency or GSE staff most knowledgeable about the requirement.  A few 
interviews were conducted by telephone.  To ensure the reports accuracy, detailed notes were 
taken at each meeting, and summaries then prepared.  In many instances these summaries were 
provided to those interviewed with a request that they review the accuracy of the summary.  This 
report reflects the notes and agency-reviewed summaries of these meetings and interviews.  In 
addition, each agency was offered an opportunity to review one or more drafts of this report, as 
was the National Insurance Lenders Council.  All but a few of those invited to review the report 
did so and provided extensive comments.  When appropriate, the text was modified to reflect the 
comments received.
	AIR also met with selected staff of federal agencies regional and district offices, lending 
institutions in communities that participate in the NFIP and in communities that do not, flood 
determination companies, sellers of private flood insurance not affiliated with the NFIP, and 
Write-Your-Own (WYO) companies that sell insurance through the NFIP.  The latter are 
licensed property and casualty companies that also sell other forms of insurance, such as hazard 
and automobile insurance.  Many large insurance companies and their agents write flood 
insurance.  They market flood insurance, sell and issue policies under the company name, and 
arrange for the adjustment, settlement, payment, and defense of claims.  They also retain a 
portion of the policy premiums to cover their expenses and to compensate their agents but do not 
assume any financial risk (Office of Inspector General 1993).   Data on federal flood insurance 
policies are from the NFIPs Bureau and Statistical Agent, which operates Bureaunet, a web-
based database that contains information on all NFIP policies and claims since 1978.
	Although the mandatory purchase requirement is seemingly straightforward (and 
statutorily imposed), the interpretation and application of the requirement varies.  This occurs for 
several reasons.  On the one hand, standards and methods can differ from one agency to another 
as do their approaches to similar issues.  As one study (Banking Agency Offices of Inspector 
General 2002) has noted, differences in the agencies examination methods arise from different 
characteristics of the agencies, applicable laws or regulations, relationships with state authorities, 
and the nature, size, and type of institution being examined.  On the other hand, the agencies 
subject to the requirement do not always coordinate their efforts or share timely information.  
Each agency is also responsible for its own compliance with the requirement.  Some are unaware 
of how other agencies with similar lending-related functions implement identical mandates.  
Moreover, no agency or institution has overall responsibility for overseeing or monitoring 
compliance with the requirement.  Although there are agencies, such as FEMA, that might 
suitably fill a coordinating or monitoring role, none currently do so.
History of the mandatory purchase requirement
Three main legislative efforts have shaped the mandatory purchase requirement.  The 
National Flood Insurance Act of 1968 (P.L. 90-448) created the NFIP and enabled property 
owners to purchase flood insurance voluntarily.  The Flood Disaster Protection Act of 1973 (P.L. 
93-234) revised the earlier law to make the purchase of flood insurance mandatory for certain 
property owners.  Finally, the National Flood Insurance Reform Act of 1994 (P.L. 103-325) 
made adjustments to the requirement in an effort to improve its effectiveness.   Table 1 
summarizes changes in the requirement.
TABLE 1: Summary of legislative changes, 1968-94
Legislation
Topic
National Flood 
Insurance Act of 1968
Flood Disaster Protection Act of 
1973
National Flood Insurance Reform 
Act of 1994
Availability of 
flood insurance
Available in 
participating 
communities.
Available in participating 
communities.
Available in participating 
communities.
Purchase of 
flood insurance 
Voluntary.
Mandatory for certain property 
owners:
a) building or manufactured home in 
or to be located in a SFHA in a 
participating community and receiving 
a loan from a regulated lender.;
b) building for which any federal 
financial assistance is used for 
acquisition or construction of a 
building or a manufactured home in a 
SFHA of a community participating in 
the NFIP 
Mandatory for certain property 
owners:
a) building or manufactured home in 
or to be located in a SFHA in a 
participating community and receiving 
a loan from a regulated lender;
b) building or manufactured home in 
or to be located in a SFHA in a 
participating community and whose 
loan is purchased by Fannie Mae or 
Freddie Mac;
c)  building for which any federal 
financial assistance is used for 
acquisition or construction of a 
building or a manufactured home in a 
SFHA of a community participating in 
the NFIP;
Amount and 
length of 
coverage 
required
Elective amount up to 
the replacement cost of 
improvements on the 
structure or the 
maximum amount of 
flood insurance 
available, whichever is 
lower.
Elective length of 
coverage.
Coverage of contents 
not required.
Replacement cost for the structure 
having received nonloan federal 
financial assistance for the life of the 
structure.
Amount of loan outstanding on 
structures having received federal 
financial assistance in form of a loan, 
for the life of the loan.
Amount of loan outstanding on 
structures having received loan from a 
regulated lender, for the life of the 
loan.
Coverage of contents not required 
unless used as collateral for the loan.
Replacement cost for the structure 
having received other federal financial 
assistance for the life of the structure.
Amount of loan outstanding on 
structures having received federal 
financial assistance in form of a loan, 
for the life of the loan.
The lesser of the principal loan balance 
outstanding or the maximum amount 
of flood insurance available on 
structures secured by a loan from a 
regulated lender, for the life of the 
loan.
Coverage of contents not required 
unless used as collateral for the loan.
Coverage limits 
available
Residential coverage 
under premiums 
subsidized by the 
federal government 
limited to $17,500 per 
single-family residence 
and $30,000 for per 
two-to-four-family 
residence.
Nonresidential 
coverage under 
premiums subsidized 
by the federal 
government limited to 
$30,000 plus $5,000 
for each small business 
occupant of a 
commercial structure. 
Additional coverage at 
actuarial rates available 
for total coverage up to 
twice the subsidized 
limits.
Coverage limited to $35,000 for 
single-family residences (and $10,000 
for contents) in communities in the 
NFIPs Emergency Program in the 48 
adjacent states and $185,000 for such 
residences (and $60,000 for contents) 
in the NFIPs Regular Program.1    
Nonresidential coverage limited to 
$100,000. 
Coverage for churches limited to 
$100,000 and $100,000 aggregate 
liability for contents related to any 
single structure.
Residential coverage limited to 
$250,000 for single-family and 
multifamily dwelling units.  Coverage 
for contents limited to $100,000 per 
building or unit.
Nonresidential coverage, including 
that for churches, limited to $500,000 
per building.  Coverage for contents 
limited to $500,000.
Nonparticipating 
communities
Ineligible for flood 
insurance.
Ineligible for federal flood insurance.
Ineligible for federal financial 
assistance for construction or 
acquisition in a SFHA.
Ineligible for loans in SFHAs from 
regulated lenders. 2
Ineligible for federal flood insurance.
Ineligible for federal financial 
assistance for construction or 
acquisition in a SFHA.
Eligible for loans in SFHAs from 
regulated lenders. Such lenders must 
notify borrower whether the structure 
will be eligible for disaster assistance 
due to a flood (P.L. 95-128, 1977).
Responsibilities 
of regulated 
lenders
Not applicable.
Require flood insurance for buildings 
or manufactured homes located in the 
SFHA of a participating community.
Ensure that flood insurance is 
maintained on such structures for the 
life of the loan.
Determine whether the building or 
manufactured home is, or will be, 
located in a SFHA.
Complete a hazard determination form.
Provide notice of availability of flood 
insurance to borrower, lending 
institution, and loan servicer.
Require flood insurance for structures 
located in SFHAs of a participating 
community.
Ensure that flood insurance is 
maintained for the life of the loan.
Escrow for flood insurance if other 
mortgage-related expenses are required 
to be escrowed.
Force place flood insurance in the 
event of nonrenewal or insufficient 
coverage.
Federal banking  
regulators
Not applicable.
Board of Governors of the Federal 
Reserve System (FRB) 
Federal Deposit Insurance Corporation 
(FDIC)
Office of the Comptroller of the 
Currency (OCC)
National Credit Union Administration 
(NCUA)
Federal Home Loan Bank Board
Federal Savings and Loan Insurance 
Corporation
FRB 
FDIC
OCC
NCUA
Office of Thrift Supervision (OTS)3
Farm Credit Administration (FCA)
Lender 
examination 
process
Not applicable.
None specified.
Federal regulators must develop 
substantially similar examination 
processes through collaboration and 
cooperation with the Federal Financial 
Institutions Examination Council 
(FFIEC).
Sanctions for 
noncompliance
Not applicable.
None specified.
Civil money penalties against 
regulated lenders and government-
sponsored enterprises. 
Federal agencies 
providing 
financial 
assistance
None specified.
Financial assistance for acquisition or 
construction purposes prohibited in 
SFHAs unless the building or 
manufactured home and any personal 
property to which such financial 
assistance relates is covered by flood 
insurance for the life of the loan.
Financial assistance for acquisition or 
construction purposes prohibited in 
SFHAs in nonparticipating 
communities after July 1, 1975.
Federal agencies that make direct loans 
cannot make, increase, extend, or 
renew any loan secured by improved 
real estate or a manufactured home in a 
SFHA in a participating community 
unless the building of manufactured 
home and any personal property 
securing the loan has flood insurance 
for the term of the loan.
Involvement of 
Fannie Mae and 
Freddie Mac
None specified. 
(Freddie Mac not 
established until 1970).
None specified (although both Fannie 
Mae and Freddie Mac required flood 
insurance on properties in SFHAs in 
participating communities at least from 
the early 1990s).
Secondary-market purchases subject to 
the mandatory purchase requirement.
Purchase of mortgages on structures in 
SFHAs in nonparticipating 
communities prohibited.
FEMA 
responsibilities4
Administer the NFIP.
Administer the NFIP.
Issue regulations as may be 
necessary to implement the purpose 
of the legislation.
Administer the NFIP.
Issue regulations as may be 
necessary to implement the purpose 
of the legislation.
Create standard flood hazard 
determination form.
Notify borrower, loan servicer, and 
mortgagee 45 days before a flood 
insurance policy expires.
Collect information from lenders about 
changes in loan servicing and 
mortgagee agreements.5 
1  The Emergency Program, created in 1969, provides limited amounts of subsidized flood insurance during the period prior to 
completion of a communitys Flood Insurance Study, which serves as the basis for the development of a Flood Insurance Rate 
Map.
2 The Housing and Community Development Act of 1977 (P.L. 95-128) removed this prohibition.
3 The OTS assumed the responsibilities of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance 
Corporation in 1989.
4 The Department of Housing and Urban Development (HUD) administered the NFIP until FEMA was created in April 1979.
5 FEMA has assigned responsibility for this function to the WYO companies that sell NFIP insurance. 
SOURCE: National Flood Insurance Act of 1968 (P.L. 90-448), Flood Disaster Protection Act of 1973 (P.L. 93-234), Housing 
and Community Development Act of 1977 (P.L. 95-128), and National Flood Insurance Reform Act of 1994 (P.L. 103-325).
National Flood Insurance Act of 1968
With the passage of the National Flood Insurance Act of 1968, the Congress changed the 
federal governments role in flood disasters.  Before 1968, the federal government provided 
funds for flood control projects and disaster assistance to flood victims.  Flood control projects 
divert the flow of water away from development and control water for use in irrigation and 
hydroelectric plants.  Despite these efforts, flood losses escalated, and the government paid 
increasing sums in disaster assistance. 
The 1968 act moved from flood control to a policy of interdependent mitigation and 
insurance programs.  The new policy, which the Department of Housing and Urban 
Development (HUD) would implement, was meant to promote insurance to indemnify 
individuals against flood loss, reduce future flood losses by effective floodplain management, 
and reduce federal expenditures for disaster assistance and flood control.
The mitigation effort sought to encourage communities to develop floodplain 
management ordinances that reduce the impact of flooding.  When communities adopt and 
implement ordinances that are compliant with the NFIPs requirements, they are eligible to 
participate in the program.  The act also grants the NFIP authority to provide insurance for 
improved real estate or manufactured homes (and for their contents) in such communities.  
The federal government offered flood insurance because such insurance had been 
unavailable at a reasonable price in the private market due to the geographic concentration and 
the catastrophic nature of floods.  The government had also determined that supporting such an 
insurance program (through subsidies and insurance claims) would be less expensive than 
continuing to pay for disaster assistance.  The government thus initiated an effort to map flood 
hazards to provide geographical data for floodplain management and actuarial data for flood 
insurance rates.
The act provided authority for the federal government to offer both subsidized and 
unsubsidized flood insurance, which property owners could purchase voluntarily.  Subsidized 
insurance is available to property owners of structures in SFHAs constructed before the 
publication of Flood Insurance Rate Maps (FIRMs) and the delineation of SFHAs on the 
assumption that these owners did not have sufficient information before building or purchasing 
their properties to know that they would be located in flood-prone areas.  The actuarial rates for 
many of these flood-prone structures would have been prohibitively expensive, thus discouraging 
the purchase of insurance by highly vulnerable property owners and similarly deterring 
communities participation in the NFIP.  In contrast, owners of buildings constructed or 
improved on or after the effective date of the FIRM or after December 31, 1974 (whichever is 
later) are eligible only for unsubsidized insurance.  Congress determined that these property 
owners have sufficient information at their disposal (through flood hazard mapping) to know that 
they are assuming greater flood risk by purchasing or building in a SFHA.
Flood Disaster Protection Act of 1973
In the four years following the implementation of the National Flood Insurance Act, few 
communities joined the NFIP, and few property owners purchased flood insurance.   By 1973, 
about 2,200 of an estimated 21,000 flood-prone communities had joined the NFIP, and about 
95,000 flood policies were in force.   The properties covered by these insurance policies 
comprised a small proportion of the eligible buildings in identified SFHAs in participating 
communities.  The Congress and HUD consequently concluded that voluntary 
participationyields too few subscribers.   
Congress noted that federal expenditures on flood disaster assistance continued to 
increase at an alarming rate after the 1968 act because of ongoing development in floodplains.  
Congress also determined that the availability of nondisaster federal assistance contributed to 
undesirable patterns of land use, as did the availability of funds from lending institutions.  
Finally, Congress also expressed concern about the vulnerability of federally funded 
development in the floodplain and for the assets of regulated lenders whose portfolios contained 
loans secured by properties in the floodplain.
The Flood Disaster Protection Act of 1973 addressed the low participation rates by 
establishing the mandatory purchase requirement and prohibited regulated lenders from making, 
increasing, extending, or renewing any loan secured by improved real estate or personal property 
located in a SFHA unless the secured building and any personal property securing the loan are 
covered by flood insurance for the term of the loan.   The amount of coverage required must be 
at least equal to the lesser of the loans outstanding principal balance or the maximum limit of 
coverage available through the NFIP.  The requirement was not retroactive: flood insurance was 
not required on properties for which loans were made prior to March 1, 1974 unless such loans 
were increased, extended, or renewed.
Congress included six regulatory agencies in its definition of federal instrumentalities 
responsible for the supervision, approval, regulation, or insuring of banks, savings and loan 
association, or similar institutions: the FRB, the FDIC, the OCC, the NCUA, the Federal Home 
Loan Bank Board, and the Federal Savings and Loan Insurance Corporation.   
The 1973 act also utilized the existing structure of federal financial assistance to increase 
the number of flood policies covering properties in SFHAs.  The act imposed the mandatory 
purchase requirement on properties for which any federal financial assistance is used for 
acquisition or construction of a building or a manufactured home in a SFHA of a community 
participating in the NFIP.
Congress encouraged community participation in the NFIP with indirect incentives: it 
improved opportunities for property owners in participating communities relative to those in 
nonparticipating communities.  The law disqualified property owners in nonparticipating 
communities from receiving federal financial assistance for acquisition or construction purposes 
in a SFHA.   The law also prohibited regulated lenders from making, increasing, extending, or 
renewing any loan secured by improved real estate or a manufactured home in a SFHA in 
nonparticipating communities.  These prohibitions supposed that a community would act in its 
residents best interests by enacting and enforcing floodplain management ordinances to join the 
NFIP and thereby qualify its property owners for federal funding and regulated lending.   
Congress divided authority for implementing the 1973 act among the secretary of the 
Department of Housing and Urban Development, the directors of the federal agencies 
administering relevant financial assistance, and federal bank regulatory agencies.   The act 
authorized the secretary to issue regulations as may be necessary to carry out the purpose of this 
Act and the heads of the other federal bank regulatory agencies to issue rules and regulations 
to govern the carrying out of the agencys responsibilities under this Act. 
Effects of the 1973 National Flood Insurance Act
As FEMA has since noted, because flood insurance was available only in communities 
participating in the NFIP, the result of the 1973 act was a great increase in the number of 
participating communities and in the number of policies in force.  Indeed, by 1977, about 15,000 
of the estimated 21,000 flood-prone communities were participating in the NFIP and 
approximately 1.2 million policies were in force at the end of that year.
In that year, however, Congress removed one of the indirect incentives for community 
participation in the NFIP through the so-called Eagleton Amendment (P.L. 95-128).  The 
amendment eliminated the prohibition against regulated lenders issuing loans in nonparticipating 
communities and replaced it with a requirement that regulated lenders notify purchasers or 
lessees of property located in a SFHA whether federal disaster relief assistance would be 
available in the event of a flood disaster.   Removing the prohibition against regulated lending 
in nonparticipating communities initiated the situation that now exists in which regulated lenders 
may make conventional loans in nonparticipating communities and may do so without requiring 
flood insurance.   Nonetheless, lenders retain the option to require their borrowers in 
nonparticipating communities to obtain flood insurance, which must be issued by private 
insurers.  The NFIP cannot provide flood insurance in communities that do not participate in the 
program.  
The 1977 legislation did not remove the prohibition against federal financial assistance in 
nonparticipating communities, but it did amend the definition of financial assistance for 
acquisition or construction purposes to exclude all disaster assistance unless flood-related.  The 
exclusion of nonflood-related disaster assistance from the definition meant that flood insurance 
would no longer be required as a condition for a federal loan to repair damage in a community 
that suffered a disaster unrelated to flooding.   The Federal Insurance Administration (FIA) 
issued further clarification of the definition in 1978.  Through a notice in the Federal Register, 
the FIA (1978a) indicated that financial assistance for acquisition or construction purposes 
means any form of financial assistance which is intended in whole or in part for the acquisition, 
construction, reconstruction, repair, or improvement of any publicly or privately owned building 
or mobile home, and for any machinery, equipment, fixtures, and furnishings contained or to be 
contained therein.  A separate notice (FIA 1978b) stated that federal financial assistance 
includes loans, grants, guarantees, and similar forms of direct and indirect assistance from 
Federal agencies.
Congress revisited the NFIP in the late 1980s, largely because FEMA reported that only 
14 percent of structures in SFHAs were covered by flood insurance and because more than 20 
percent of flood insurance policies were not renewed annually (U.S. House of Representatives 
1990).  These numbers suggested but did not confirm noncompliance with the mandatory 
purchase requirement because the uninsured structures may have had neither mortgages from 
regulated lenders nor received federal financial assistance for acquisition or construction. 
National Flood Insurance Reform Act of 1994
In response to concerns about compliance with the Flood Disaster Protection Act, the 
Congress passed the National Flood Insurance Reform Act in 1994.  The legislation clarified and 
strengthened the mandatory purchase requirement to increase compliance, which would in turn 
better indemnify individuals for flood losses through insurance and reduce federal expenditures 
for disaster assistance.  The 1994 act also imposed additional responsibilities on regulated 
lenders and secondary market entities involved in mortgage loan transactions.  
First, the definition of federal entities for lending regulation was expanded to include 
the Farm Credit Administration, thereby increasing the number of lending institutions subject to 
the requirement. Also, Fannie Maes and Freddie Macs purchases of mortgages in the secondary 
market became subject to the revised requirement as of September 23, 1995. 
With two exceptions, lenders are also still required to ensure that flood insurance is 
maintained during the life of the loan.  The 1994 law exempts regulated lenders from requiring 
flood insurance on: a) loans with an original principal balance of $5,000 or less and with a 
repayment term of one year or less; and, b) on state-owned properties covered by self-insurance 
satisfactory to FEMAs director.  Thirteen states, including Florida, Georgia, Iowa, Kentucky, 
Maine, New Jersey, New York, North Carolina, Oregon, Pennsylvania, South Carolina, 
Tennessee, and Vermont, have approval to self-insure their buildings and contents.
Several lender responsibilities did not change in the 1994 act.  Regulated lenders must 
still require flood insurance for improved real estate or manufactured homes in or to be located in 
a SFHA in participating communities.  The minimum amount of required coverage is still the 
lesser of the amount of the loan principal outstanding or the maximum coverage available under 
the NFIP.   
Second, Congress also gave lenders and servicers of loans the authority to purchase flood 
insurance on behalf of the owners of properties in SFHAs in communities that participate in the 
NFIP for which, at the time of loan origination or any time during the term of the loan, the 
property is not adequately insured. This change is important because it provides regulated 
lenders with the legal authority to purchase flood insurance on behalf of recalcitrant borrowers 
who are required to have flood insurance for the life of their loans. 
Third, and in a further significant change, Congress provided for enforcement of the 
purchase requirement by specifying the role of the federal entities for lending regulation.  The act 
mandates that the agencies examine lending institutions compliance with the act as part of 
existing examination processes.  As a result of this mandate, the agencies developed uniform 
flood-related examination procedures after consultation and coordination with the Federal 
Financial Institutions Examination Council (FFIEC).   The application of these procedures is 
discussed below.
Fourth, the 1994 law also created a Flood Insurance Interagency Task Force to ensure 
compliance among federally regulated lenders, GSEs, and federal agencies providing financial 
assistance for construction or acquisition of property in SFHAs.  The Task Force included 
representatives from FEMA, HUD, the VA, the FCA, the FFIEC, Freddie Mac, Fannie Mae, the 
Rural Housing Service, the Small Business Administration (SBA), and the Office of Federal 
Housing Enterprise Oversight (OFHEO).   The Task Force, which submitted its final report to 
the Congress in September 1998, had five duties: a) to recommend standardized enforcement 
procedures; b) to study possibilities for federal entities to assist in ensuring compliance with the 
mandatory purchase requirement; c) to study compliance among federal agencies; d) to 
recommend enforcement and compliance procedures for federal agencies; and, e) to study fees 
paid to companies for determining whether a property is located in a SFHA. 
The Task Force (1998) report was notably modest in its recommendations related to the 
mandatory purchase requirement.  The Task Force developed a list of enforcement best practices 
and recommended that the GSEs and the federal regulatory agencies consider implementing 
these practices.
Finally, the 1994 act created a series of procedural steps that lenders must follow to 
ensure effective implementation of the mandatory purchase requirement.  Before discussing 
these steps, however, it is first useful to consider the context in which the purchase requirement 
operates.
Studies of the mandatory purchase requirement
	Prior research has sought to reconcile the number of flood insurance policies written each 
year with much higher estimates of the number of properties that are presumed to be subject to 
the requirement.  This research has identified several core debates about mandatory purchase 
without resolving the central issue: what are the rates of compliance with the requirement and 
how well does it achieve its objectives?  
	In the first of these studies, the General Accounting Office (GAO) reported on the 
mandatory purchase requirement in 1990 and concluded that FEMAs perception of substantial 
noncompliance differed from lenders and federal regulatory agencies belief that compliance 
was not a problem.  As an illustration, FEMA estimated that there were 11 million households in 
SFHAs that could be covered by flood insurance in 1987, though not necessarily through 
mandatory purchase, but that there were only 1.4 million policyholders among them (U.S. House 
of Representatives 1990).   The GAO (1990) described federal regulatory agencies and lenders 
reporting several factors that impede[d] full compliance with the requirement.  According to 
the GAO, the lack of readability, lack of accuracy, and the expense of maintaining FIRMs 
complicated lenders compliance.  In the GAOs opinion, the expense of flood insurance 
discouraged borrowers from renewing their coverage.  Finally, complying with the mandatory 
purchase requirement allegedly put regulated lenders at a competitive disadvantage to 
nonregulated lenders (such as private mortgage companies) who were not subject to the 
requirement or the expenses associated with it.  
	The GAO also described postdisaster studies from Maine and Texas that examined why 
flood-disaster victims who owned personal residences and had applied for disaster assistance had 
not previously been covered by flood insurance.  Among the 147 properties located in SFHAs in 
Maine, the GAO found that 78 percent were in compliance with the mandatory purchase 
requirement.  In contrast, only 9 of 43 properties in SFHAs in Texas that should have had flood 
insurance did so.  
It is of corollary interest that over 75 percent of all the property owners who applied for 
federal disaster assistance in the two states were not subject to the requirement primarily because 
the owners had mortgages from nonregulated lenders.  These data indicate that fewer than one in 
four properties that flooded were subject to the requirement.  There are no accurate, 
comprehensive data indicating the proportion of properties that are subject to the requirement, 
but data like these from Maine and Texas suggest that compliance could have been high but that 
the number of flood insurance policies purchased as a result of the requirement was far lower 
than the number of structures located in SFHAs.
The study had several weaknesses.  The GAO excluded loans for which a lender was 
unable to provide data so the proportion of properties that should have been covered by flood 
insurance may have been greater than reported.  The GAO also noted that it conferred only with 
FEMA and lenders about the loans in its sample.  Thus, the GAO did not know whether 
applicants for disaster assistance had received federal financial assistance to acquire or construct 
their homes.  Property for which such federal financial assistance had been obtained would also 
be subject to the mandatory purchase requirement and was clearly not covered by flood 
insurance because the owners of such property were applying for disaster assistance.   
A second GAO study examined compliance after floods occurred in New York and New 
Jersey in 1992.  Data on mortgages were obtained from 752 homeowners without flood 
insurance in SFHAs who applied for disaster assistance in the two states (GAO 1993).  Of these 
homeowners, 31 percent had mortgages from federally regulated lenders and were required to 
have flood insurance.  The remainder, who were not required to have flood insurance, either did 
not have a mortgage (65 percent) or had a mortgage from an nonregulated lender (4 percent).  
Although the GAOs analysis was preliminary, it explained that erroneous flood determinations 
and poor enforcement were the primary causes of the noncompliance.
To determine the extent of compliance, FEMA examined applications for disaster 
assistance from 1,549 victims of a flood in August 1998 in northern Vermont (FEMA Region I 
1999).  Only 2 percent of the applicants had flood insurance, but most were not in SFHAs.  Of 
those in SFHAs, 84 percent did not have flood insurance.  More important, of those with no 
insurance, 45 percent had mortgages from a federally regulated lender and should have had 
insurance.  These noninsured property owners received nearly $500,000 in federal disaster 
assistance. 
Geotrac, a flood determination company, found in 1999 that one-quarter to one-third of 
flood-damaged properties in Grand Forks, North Dakota required to have flood insurance were 
not covered.  In fact, however, a re-analysis of the Geotrac data indicates that more than one-
third of the properties either did not have flood insurance or had an inadequate amount of flood 
insurance.  Thus, more than one-third of the properties were likely to have been noncompliant 
with the mandatory purchase requirement at the time of the study.  Another privately funded 
study examined data from two counties in Kentucky after flooding in 1999 (GAO 2003a).   
Among homes with mortgages issued after 1994, 52 percent had flood insurance.  Again, 
however, it is not clear what percentage of all the homes in the study were subject to the 
requirement.
FEMAs Office of Inspector General (2000) studied opportunities to enhance compliance 
with the mandatory purchase requirement in 16 communities in ten states in 2000.  The inspector 
general (IG) found that many structures in floodplains in these communities did not have flood 
insurance, but that many of these structures were exempt from the requirement because they had 
no mortgage or ones from nonregulated lenders.   The study found an overall noncompliance 
rate of 10 percent, but this rate was affected by a sampling procedure that included a 
disproportionate number of structures in coastal areas, which typically have high rates of 
compliance.  As a consequence of this biased sample, the IG declared its expectation that the 
national level of noncompliance would be much greater than found in its sample.
Further, the IG did not determine whether property owners had received federal financial 
assistance for construction or acquisition on the flood-prone properties.  The IG subtracted the 
number of properties securing mortgages from nonregulated lenders and the number of 
properties without mortgages, assuming that these properties were not subject to the mandatory 
purchase requirement.  In fact, these properties would be subject to the requirement if their 
owners had received federal financial assistance for construction or acquisition.
	
	The GAO (2002) revisited the mandatory purchase requirement and determined that 
differences in the types of data collected accounted for the differences in perspective on 
compliance between FEMA and the federal agencies.  These agencies routinely gather 
nonstatistical (and, therefore, not necessarily representative) samples from which they have 
found few violations with the requirement.  Conversely, FEMA routinely gathers data on 
originations and expirations of flood insurance policies and receives anecdotal evidence from 
individuals with knowledge of the program.
 
	Analyzing data on new mortgages, new flood insurance policies, and from the 1990 
census, the GAO (2002) concluded that major noncompliance at loan origination is not a 
problem.  The GAO focused on 471 census tracks in which almost all of the properties are 
located in SFHAs.  For most of these flood-prone areas, more insurance policies were purchased 
than mortgages originated in 1999.  Although the overall pattern of compliance appeared to be 
high in the communities studied, the GAO did find some communities in which the number of 
new mortgages exceeded the number of new flood insurance policies issued in the same year.  
This finding suggests localized problems with compliance. 
	
	The methodology in this GAO report did not assess compliance directly because it 
compared the number of new mortgages with the number of new insurance policies.  The study 
did not match the new mortgages with the new insurance policies to determine whether they 
covered the same properties.  For example, a concerned property owner not subject to the 
requirement who nonetheless purchased flood insurance in 1999 would cancel the 
noncompliant action of a property owner who did not acquire flood insurance for a loan subject 
to the mandatory purchase requirement.  Only overlaps that mask noncompliance are possible 
under this methodology, so the study may have underestimated noncompliance.  It is unclear 
whether the study included loans insured privately, loans from nonregulated lenders for which 
federal financial assistance had been provided, or properties covered by lender- or force-placed 
insurance, which is discussed below.  
	The GAO also discussed the challenges inherent in a definitive compliance study.  The 
GAO observed the difficulty associated with collecting accurate, nationwide, property-specific 
data on mortgages, flood zone determinations, and flood insurance policies.  The GAO noted the 
ongoing disagreement about which entities have authority and responsibility for addressing 
compliance, requiring information, and managing information.  The report combined the 
activities and authority necessary for comprehensive, ongoing compliance assessment with those 
necessary for a one-time compliance assessment.  The resources and information management 
systems required for the two options are different.  
Although the GAOs 2002 assessment concluded that noncompliance with the mandatory 
purchase requirement at loan origination is not a problem, the GAO relied on the same data a 
year later (GAO 2003a) to conclude that the extent of noncompliance is unknown.  The GAO 
cited several regional studies that found low overall participation rates, namely low proportions 
of eligible properties in SFHAs covered by flood insurance. As suggested above, low 
participation rates do not necessarily translate into low compliance because not all property 
ownersies in SFHAs are required to have flood insurance.
Context for the mandatory purchase requirement
Providing context for the mandatory purchase requirement assists in understanding its 
scope and potential impact.  For example, most NFIP policies cover residential property and 
most mortgages are liens against residential property. This report thus focuses on the requirement 
as it relates to residential rather than commercial property.  Further, the structure of the housing 
market means that although most homes were built before the requirement became effective, 
most residential properties are subject to it because most are mortgaged and most mortgages 
originated after the requirement was amended in 1994.  Finally, the majority of homeowner debt 
for properties in SFHAs is subject to the requirement due to the lending structure and secondary 
market for home loans.
Flood insurance
	
About 4.56 million federal flood insurance policies were in force as of December 31, 2004 (see 
Table 2).  Ninety-five percent of these policies covered residential properties.  Within the 
residential category, nearly 69 percent of policies covered single-family residences and 20 
percent covered condominiums.  Given this overwhelming preponderance of residential policies, 
the most appropriate context for the mandatory purchase requirement is the residential housing 
market.
More than two-thirds of all policies cover properties in A zones, which designate areas 
subject to the 1 percent annual chance flood.  A zones are typically adjacent to rivers, streams, 
and lakes although such zones are also designated in coastal areas, landward of V zones, which 
are coastal areas subject to high velocity wave action.  Less than 2 percent of NFIP policies 
cover properties in V zones.  A and V zones comprise the SFHAs covered by the mandatory 
purchase requirement.   In contrast and in most instances, policies covering properties in B, C, 
and X zones are purchased voluntarily.    
TABLE 2: Number and percentage distribution of NFIP policies in force, by selected characteristics, as of 
December 31, 2004
Selected characteristics
Number in force
Percent
Overall
4,558,696
100.0
Zone
A Zone1
3,126,364
68.6
V Zone1
83,946
1.8
B, C, and X Zones
1,320,108
29.0
Other2
28,278
0.6
Occupancy
Residential
4,347,131
                                 95.4
Single-family
3,129,856
68.6
2-4 family
156,977
3.4
Other residential
138,274
3.0
Condominium3
922,175
20.2
Nonresidential
211,414
4.6
1 Not all flood insurance policies for properties located in A and V zones are purchased to comply with the mandatory 
purchase requirement; policies can be purchased voluntarily.
2 Includes policies sold through the Emergency Program, records on which the zone code is missing or invalid, and in D 
zones, which are areas in which FEMA has not made an assessment of a flood hazard but where flooding is considered 
possible.
3 Residential Condominium Building Association Policies.
SOURCE: FEMA, Bureaunet.  Data accessed on March 9, 2005.
Table 3 provides selected median housing costs for owner-occupied units.  In mid-2004, 
the median annual cost of flood premiums for residences in an A zone was $424 while the 
median annual cost for homes in a V zone was $1,182.  The A -zone premium was about $100 
less than the median hazard insurance premium (as of 2003), each of which comprised about 4 
and 5 percent of total housing costs, respectively.  The V- zone premium represented about 11 
percent of total housing costs, when the increased total cost was considered.
In addition, it is important to note that the rates shown in Table 3 reflect the composite of 
annual average rates for pre-FIRM and post-FIRM structures.  The latter include those built in 
compliance with the NFIPs building requirements, typically after a communitys entry into the 
NFIP and after completion of a FIRM.  Rates for compliant, post-FIRM structures are 
significantly lower than for comparable pre-FIRM structures, which are those constructed before 
base flood elevations were determined for a community and often without knowledge that a 
building was in a floodplain. 
TABLE 3: Comparison of selected annual housing costs for owner-occupied units, 2003
Expense
Dollars
Percent of total 
housing costs
Total
$10,840
Median annual residential mortgage payment for principal and interest
8,508
78.5
Median annual real estate tax burden
1,368
12.6
Median annual hazard insurance premium
540
5.0
Average annual residential NFIP policy premium1
424
3.9
A Zone2
446
4.1
V Zone2
1,182
10.9
1 Includes policies in flood zones other than A and V.  Most of these policies are purchased voluntarily because the 
mandatory purchase requirement usually applies only to properties in A and V zones.
2 Not all flood insurance policies for properties located in A and V zones are purchased to comply with the mandatory 
purchase requirement; they can be purchased voluntarily. Annual average policy premiums are from 2004.
SOURCE: U.S. Department of Commerce (2004c), Table 2-13 and FEMA, Bureaunet, accessed August 2, 2004.
The data in Table 4 demonstrate that several variables affect premiums for flood 
insurance.  The average premium for structures in V zones, where the velocity of floods can 
damage these structures, is significantly higher than those for structures in A zones, which are 
likely to experience rising water without the same velocity.  Property owners in B, C, and X 
zones, all of which are outside of SFHAs, have the highest amounts of coverage for buildings 
and their contents, perhaps because it is also the least expensive.  In other words, property 
owners who seemingly have the least need for flood insurance have the most coverage.
Average premiums for residential buildings and their contents are lower than for 
nonresidential buildings: $394 versus $1,299 in November 2004 (the amount of coverage 
available for residential buildings is lower than the amount available for nonresidential 
buildings).  Single-family homes in A zones have average premiums of $460 whereas 
condominium units have average premiums of $136 for similar coverage, although policyholders 
in condominiums typically purchase significantly lower amounts of coverage for their contents.  
Coverage amounts vary as well.  The average residential policy provides $129,529 in building 
coverage whereas the average nonresidential policy provides $223,123. 
Table 4: Comparison of average NFIP  premiums and coverage amounts, November 2004
Selected characteristics
Average
 premium1
Average building 
coverage
Average contents 
coverage 
Overall
$459
$133,882
$28,900
Zone1
A Zone2
488
130,246
22,939
V Zone2
1,285
134,494
19,109
B, C, and X Zones
339
144,381
44,127
Other3
470
34,121
2,845
Occupancy
Residential
394
129,529
26,855
Single-family
460
139,212
35,415
2-4 family
493
126,353
18,174
Other residential
503
97,699
20,698
Condominium4
136
102,029
2,447
Nonresidential
1,299
223,123
70,821
1 Includes the federal policy fee, which is used to defray some of the NFIPs administrative expenses.
2 Not all flood insurance policies for properties located in A and V zones are purchased to comply with the mandatory 
purchase requirement; policies can be purchased voluntarily.
3 Includes policies sold through the Emergency Program, records on which the zone code is missing or invalid, and in D 
zones, which are areas where FEMA has not made an assessment of a flood hazard where flooding is considered 
possible.
4 Residential Condominium Building Association Policies.
SOURCE: FEMA, Bureaunet. Computed from data accessed on January 25, 2005.
The housing market
Americans can choose from many housing options.  People can buy or rent their homes, 
live in detached houses or large apartment buildings, and choose between old and new 
residences.  The housing choices that individuals make shape the housing market on which the 
mandatory purchase requirement depends.  
Table 5 shows the percentage distribution of total occupied housing units, by type of 
housing.  In mid-2004, the homeownership rate among Americans was 68 percent.  In other 
words, almost seven in ten residences are owner-occupied.  Seventy percent of homes are single-
unit residences, 23 percent are part of multi-unit residences, and 6 percent are manufactured 
homes. 
As of 2003, more than half of American residential units had been constructed before 
1975 (see Table 6), meaning that many residential units were constructed before FIRMs were 
completed and before the adoption of building codes emphasizing flood safety and protection. 
TABLE 5: Total occupied housing units, by type of housing, 2003
Total
Number
Percent
 
Owner-
occupied
Renter-
occupied
Homeownership 
rate
Total
105,842,000
100
72,238,000
33,604,000
68.0
Type of structure and number of units
Detached, single unit
67,753,000
64.0
59,642,000
8,111,000
88.0
Attached, single unit
6,272,000
5.9
3,679,000
2,593,000
58.7
2 to 4
8,474,000
8.0
1,426,000
7,048,000
16.8
5 to 9
5,135,000
4.9
501,000
4,634,000
9.8
10 to 19
4,468,000
4.2
485,000
3,983,000
10.9
20 to 49
3,294,000
3.1
389,000
2,905,000
11.8
50 or more
3,592,000
3.4
601,000
2,991,000
16.7
Manufactured home or trailer
6,854,000
6.5
5,514,000
1,340,000
80.4
Select other categories (may be included above)
Cooperative
558,000
0.5
378,000
180,000
67.7
Condominium
4,722,000
4.5
3,416,000
1,305,000
72.3
NOTE: Detail may not sum to totals due to rounding.
SOURCE: U.S. Department of Commerce (2004c), Table 1A-1.
TABLE 6: Total occupied housing units, by year of construction, 2003
Number
Percent
Total
105,842,000
100.0
2000 to 20041
5,228,000
4.9
1995 to 1999
7,922,000
7.5
1990 to 1994
6,344,000
6.0
1985 to 1989
7,936,000
7.5
1980 to 1984
6,641,000
6.3
1975 to 1979
10,876,000
10.3
1970 to 1974
9,598,000
9.1
1960 to 1969
13,781,000
13.0
1950 to 1959
11,933,000
11.3
1940 to 1949
7,098,000
6.7
1930 to 1939
5,432,000
5.1
1920 to 1929
4,750,000
4.5
1919 or earlier
8,304,000
7.8
Median year constructed
1971
 
1 The survey used the category 2000-2004 even though it was performed in 2003.
NOTE: Detail may not sum to totals due to rounding.
SOURCE: U.S. Department of Commerce (2004c), Table 1A-1.
The mandatory purchase requirement utilizes the market for home mortgages to reach 
property owners who may be at risk for flooding.  Table 7 demonstrates the scope of the home 
mortgage market.  At least 63 percent of all owner-occupied residences in 2003 were mortgaged 
or had a home equity loan on them.   A smaller proportion, 42 percent, of manufactured homes 
had liens against them.  These data do not include nonowner-occupied residences, which 
comprise about 32 percent of the total housing units and which may also be subject to the 
mandatory purchase requirement.
Of these mortgages, the majority were originated after the effective date of the mandatory 
purchase requirement: more than 98 percent of mortgages existing in 2003 were originated in 
1974 or later (see Table 8).  A negligible proportion of mortgages on manufactured homes were 
originated before the requirement became effective.  Further, at least half of the existing 
mortgages were originated after 1994, when the present purchase requirement became effective.  
More than 85 percent of mortgages on manufactured homes originated after 1994.
It is useful to consider how many home sales occur each year according to the types of 
financing homebuyers opt to use because the origination of mortgages for home sales are a 
primary trigger of the mandatory purchase requirement.  (Refinancing, second mortgages, and 
home equity loans also trigger the requirement.)  Nearly 7.2 million new and existing homes 
were sold in 2003.  This represents an increase since 1988, particularly between 1994 and 2003.  
In fact, among all owner-occupied housing units, 24 percent were acquired in 2000 or later, and 
another 24 percent were acquired between 1995 and 1999 (U.S. Department of Commerce 
2004c).
TABLE 7: Number and percentage distribution of owner-occupied residences, by ownership status and type of 
residence, 2003
 
Total owner-occupied units1
 
Manufactured homes
Ownership Status
Number
Percent
 
Number
Percent
Total
72,238,000
100
5,514,000
100
No mortgage, owned free and clear
25,020,000
34.6
3,100,000
56.2
Regular and/or home-equity mortgage and reverse mortgage
45,471,000
62.9
2,319,000
42.1
Line of credit not reported
1,700,000
2.4
 
95,000
1.7
1 Includes manufactured homes.
NOTE: Detail may not sum to totals due to rounding.
SOURCE: U.S. Department of Commerce (2004c), Table 3-15. 
TABLE 8: Number and percentage distribution of mortgages, by year of mortgage origination, 2003
 
Total owner-occupied units1
 
Manufactured homes
Year of origination
Number
Percent
 
Number
Percent
Total
43,677,000
2,290,000
2000 to 20042
23,739,000
54.3
1,016,000
44.3
1995 to 1999
10,343,000
23.7
 939,000
41.0
--------------------------Changes to mandatory purchase requirement became effective------------------------------
1990 to 1994
4,595,000
10.5
231,000
10.1
1985 to 1989
2,249,000
5.1
  61,000
2.7
1980 to 1984
   889,000
2.0
24,000
1.0
1975 to 1979
1,013,000
2.3
13,000
0.6
 -------------------------------------Mandatory purchase requirement initiated-------------------------------------------
1970 to 1974
486,000
1.1
 2,000
0.1
1960 to 1969
363,000
0.8
4,000
0.2
Median 
2000+
1999
1 Includes manufactured homes.
2 The survey used the category 2000-2004 even though it was performed in 2003.
NOTE: Detail may not sum to totals due to rounding.
SOURCE: U.S. Department of Commerce (2004c), Table 3-15. 
Between 1988 and 2003, conventional loans were used to finance the majority of home 
sales (see Figure 1).   Further, conventional loans represented an increasing proportion of the 
housing market during the same period.  It is difficult to know how many conventional loans are 
subject to the mandatory purchase requirement because the Bureau of the Census does not collect 
data on the number of mortgages made by regulated versus nonregulated lenders or ask 
homebuyers whether their mortgages have been sold in the secondary market.  Indeed, most 
homeowners probably do not know whether their loans have been sold; at most, they will know 
whether the servicing has been transferred, which may or may not be concurrent with a sale of 
the loan.  Even if the Census Bureau had such data, it would not know which loans are subject to 
the purchase requirement without corresponding information about which structures are or are 
not in SFHAs.
Other financing options include cash payment, which is not subject to the mandatory 
purchase requirement, and federal financial assistance for acquisition or construction, which is.  
The proportion of loans sold via federal financial assistance from the Department of Veterans 
Affairs (VA), the Federal Housing Administration (FHA), or the Rural Housing Service (RHS) 
diminished between 1988 and 2003 (see Figure 1).  Loans associated with federal financial 
assistance for structures in SFHAs are always subject to the mandatory purchase requirement 
whereas conventional loans are subject to the requirement only if they are originated by a 
regulated lender or purchased by Fannie Mae or Freddie Mac.  As a consequence, the proportion 
of loans subject to the mandatory purchase requirement decreased.  The number of loans that the 
government was required to monitor (i.e., loans for which federal financial assistance was 
issued) diminished whereas the number of loans required to be monitored by private industry, 
which is supervised and examined by the government, grew. 
	
Home prices vary in relation to the type of financing used at purchase.  The median price 
of new homes purchased with conventional loans is higher than that of new homes purchased 
with cash, which is higher than the median price of new homes purchased with federal financial 
assistance.  Figure 2 illustrates that home prices rose between 1988 and mid 2004.  In 1995, the 
median price of new homes purchased with conventional loans was $145,000.  This median price 
was significantly below $250,000, the maximum amount of coverage available through the NFIP 
for residential properties since 1994.  In other words, for the half of all new homes sold with 
conventional loans that cost more than $145,000, it is likely that many were still under the 
$250,000 ceiling.  In 2004, however, the median sales price of new homes with conventional 
loans had increased to $237,200, revealing that many homes are worth more than the $250,000 
ceiling.   This is less of an issue for home owners that received federal financial assistance.  The 
median price for new homes purchased with VA-guaranteed loans was $149,400 in 2004.  The 
comparable amounts for FHA-insured loans and RHS-guaranteed loans were $128,800 and 
$102,100, respectively.
According to the Bureau of the Census, nearly 17 million owner-occupied residential 
housing units, or almost 24 percent of the total, had an estimated value of $250,000 or more in 
2003 (Table 9).   Although these units can meet the mandatory purchase requirement, some 
portion of these units cannot be insured adequately unless a supplemental flood policy is 
purchased from a private insurer.  Table 9 outlines the distribution of owner-occupied residential 
units by purchase price and their estimated value in 2003.  The data in the table reflect a 
significant difference between purchase price and value, with the latter much higher.  Mortgages 
are based on the purchase price of homes, so that data also suggest that some of the value in 
Americans homes is underinsured should they be damaged by floods. 
TABLE 9: Distribution of owner-occupied residential units by purchase price and value, 2003
Purchase Price
Value
 Owner-occupied residential
Number
Percent
Number
Percent
     Total1
64,154,000
100.0
72,238,000
100.0
Up to $29,999
14,270,000
22.2
4,714,000
6.5
$30,000 to $59,999
12,013,000
18.7
6,049,000
8.4
$60,000 to $99,999
13,068,000
20.4
13,867,000
19.2
$100,000 to $149,999
10,187,000
15.9
14,266,000
19.7
$150,000 to $199,999
6,246,000
9.7
9,989,000
13.8
$200,000 to $249,999
3,116,000
4.9
6,358,000
8.8
Under NFIP coverage limit, subtotal
58,900,000
86.1
55,243,000
76.5
                        ----------------------------------------NFIP flood insurance coverage limit-----------------------------------------
             $250,000 to $299,999
1,785,000
2.8
4,561,000
6.3
          $300,000 or more
3,469,000
5.4
12,434,000
17.2
At or above NFIP coverage limit, subtotal
5,254,000
8.2
16,995,000
23.5
1 For purchase price only, total excludes units with no purchase price reported.
NOTE: Detail may not sum to totals due to rounding.
SOURCE: U.S. Department of Commerce (2004c), Table 3.14.
Regulated lenders must require that borrowers subject to the mandatory purchase 
requirement retain flood insurance to the lesser of the balance of the loan outstanding or to the 
maximum coverage available ($250,000).   The balance of the loan outstanding (current value of 
the loan) often represents only a portion of a mortgaged propertys value.   Borrowers reduce 
their mortgage balances while property typically appreciates in value.  Inflation exacerbates the 
difference in loan amount and property value.  Table 10 illustrates the distribution of homes by 
the current amount of the home loan as a percentage of their total value.  Eighty-seven percent of 
loans secured by owner-occupied home were for less than 90 percent of the property value in 
2003.  Sixty-eight percent of loans secured by owner-occupied manufactured home were for less 
than 90 percent of the property value.  Due to the considerable equity that many homeowners 
have, the minimum amount of required flood insurance may be less than the value of the 
structure, thus exposing many equity-rich homeowners in SFHAs to significant risk.
TABLE 10: Number and percent of mortgages, by current value of loan as percent of value, 2003
Total owner-occupied units1
 
Manufactured homes
Current value of loan as percent of total value
Number
Percent
 
Number
Percent
Total
43,680,000
100.0
2,289,000
100.0
Less than 39 percent
12,802,000
29.3
465,000
20.3
40 to 79 percent
20,868,000
47.7
618,000
27.0
80 to 89 percent
4,365,000
10.0
185,000
8.1
90 to 99 percent
3,097,000
7.1
227,000
9.9
100 percent or more
2,548,000
5.8
794,000
34.7
Median percentage
58.7
 
 
83.3
 
1 Includes manufactured homes.
NOTE: Detail may not sum to totals due to rounding.  Mortgages include home-equity loans.
SOURCE: U.S. Department of Commerce (2004c), Table 3-15. 
Lenders must also require that borrowers subject to the mandatory purchase requirement 
retain flood insurance for the life of the loan.  Table 11 shows the distribution of home loans by 
the term of the loan at loan origination.  Mortgages are generally long term: nearly 64 percent of 
home loans for owner-occupied units are originated with terms of 28 years or more.  Mortgages 
on manufactured homes are of a shorter duration: almost 60 percent of such loans are for 22 or 
fewer years.
TABLE 11: Number and percent of primary mortgages by term of loan at origination or assumption, 2003
Total owner-occupied 
units1
Manufactured homes
 
Number
Percent
 
Number
Percent
Total
43,677,000
100.0
2,289,000
100.0
Less than 8 years
1,197,000
2.7
192,000
8.4
8 to 12 years
1,521,000
3.5
  
225,000
9.8
13 to 17 years
8,979,000
20.6
589,000
25.7
18 to 22 years
2,824,,000
6.5
364,000
15.9
23 to 27 years
1,113,000
2.5
151,000
6.6
28 to 32 years
27,048,000
61.9
754,000
32.9
33 years or more
  806,000
1.8
11,000
0.5
Variable
189,000
0.4
3,000
0.1
Median (in years)
29
 
 
20
 
1 Includes manufactured homes.
NOTE: Detail may not sum to totals due to rounding.  
SOURCE: U.S. Department of Commerce (2004c), Table 3-15. 
		
Despite the length of home loans at origination, the actual duration of most mortgages is 
much shorter.  As interest rates declined to near-record lows in recent years, millions of 
Americans refinanced their mortgages.  Refinancing represented more than two-thirds of the 
value of all mortgage obligations in 2003. The median age of refinanced home loans decreased to 
less than two years in the second quarter of 2004 from about four years in 1997 (see Figure 3).  
Actual loan lengths are short because many borrowers relocate or refinance their properties 
frequently.
The Llending industry
	Mortgage lending is a fast-growing industry.  As shown in Figure 4, the total mortgage 
debt in the United States increased to $9.4 trillion in 2003 from $3.8 trillion in 1990.  Residential 
mortgage debt grew to $7.7 trillion from $2.9 trillion over the same period.  Commercial 
mortgage debt grew to $1.5 trillion from $821 billion.  Farm mortgages increased to $132 billion 
during the same period.  Clearly, residential mortgage lending is a large industry.  Such lending 
represents more than 80 percent of all mortgage debt in the United States.
Several kinds of lending institutions issue these mortgages (see Figure 5).  For the 
purposes of mandatory purchase, there are two categories -- regulated and unregulated 
institutions.  Regulated institutions are supervised by one or more of the federal regulatory 
agencies and include commercial banks, savings institutions, credit unions, and farm credit 
system institutions.  There are several kinds of commercial banks, depending on their size, 
charter (state or federal), and membership in the Federal Reserve System.  The OCC supervises 
national banks.  The FRB supervises state-chartered banks that are members of the Federal 
Reserve System.  The FDIC supervises state-chartered banks that are not members of the Federal 
Reserve System.  The OTS supervises savings institutions, which are primarily involved in the 
extension of credit through mortgages.  For purposes of mandatory purchase, the NCUA 
supervises federally chartered credit unions and state-chartered, federally insured credit unions.
Several kinds of lending institutions issue these mortgages (see Figure 5).  For the 
purposes of mandatory purchase, there are two categories  regulated and nonregulated 
institutions.  Regulated institutions are monitored by one or more of the federal entities for 
lending regulation and include commercial banks, savings institutions, credit unions, and farm 
credit system institutions.
There are several kinds of commercial banks, depending on their charter (state or federal) 
and membership in the Federal Reserve System.  The OCC regulates all national banks.  The 
FRB supervises state-chartered banks that are members of the Federal Reserve System as well as 
all bank and financial holding companies.  The FDIC regulates state-chartered banks that are not 
members of the Federal Reserve System.  The OTS is the primary regulator of all federal and 
many state-chartered savings banks and savings and loan associations, which are primarily 
involved in the extension of credit through mortgages.  The FCA supervises the Farm Credit 
System.  For purposes of mandatory purchase, the NCUA supervises federally chartered credit 
unions and state-chartered, federally insured credit unions.  In addition, each of these agencies 
has concluded that the mandatory purchase requirement is applicable to subsidiaries of regulated 
lending institutions (U.S. Department of the Treasury et al. 1996)
Nonregulated institutions, which are typically private mortgage companies, are not 
regulated by the federal regulatory agencies for their lending practices.   Mortgages from these 
nonregulated lenders are not subject to the requirement (unless these mortgages are subsequently 
sold to Fannie Mae or Freddie Mac or issued by subsidiaries of regulated lenders).
FIGURE 5: Regulatory structure of lending institutions*
	
Most mortgages are subject to the requirement either because a regulated lender has issued them 
or because they have been sold on the secondary market to Fannie Mae or Freddie Mac.  The 
Department of Commerce collects information on lending activity from the federal regulators, 
but the information does not yield data on nonregulated lending activity.  Fannie Mae and 
Freddie Mac know the number of loans they purchase.  What is not known is the number they do 
not purchase and the proportion of the loans not purchased that nonregulated lenders originated.  
It is thus difficult to determine the proportion of all mortgages that are subject to the mandatory 
purchase requirement.  
The Federal Reserve System tabulates total outstanding mortgage debt in the United 
States by the holder of the debt.  Regulated lenders, the federal government, Fannie Mae, and 
Freddie Mac hold most of the mortgage debt in the United States.  For properties in SFHAs in 
participating communities, nearly all of this debt is subject to the mandatory purchase 
requirement.  Entities subject to the requirement held at least $1.1 trillion of mortgage debt in 
1980 (or at least 77 percent) and a similarly high percentage of the $9.4 trillion in mortgage debt 
in 2003. 
Statutory requirements for regulated lenders
Regulated lenders are private lending institutions that are regulated by one or more of the 
federal regulatory agencies.  These lenders include commercial banks, savings institutions, credit 
unions, and farm credit institutions.  In the process of issuing or holding mortgageloans, these 
lenders are required to take the following actions to comply with the mandatory purchase 
requirement:
? Determine whether a loan is secured by any improved real estate or manufactured home 
in a SFHA and then complete a Standard Flood Hazard Determination form to record this 
determination and, if applicable, specify the type of flood hazard zone within which the 
improved real estate or manufactured home is or will be located.
? Provide notice of the availability of flood insurance and any other information FEMA 
considers necessary to the borrower and any loan servicers involved with the loan when 
the property is in a SFHA.  
? Ensure that flood insurance is maintained for the life of the loan on buildings or 
manufactured homes that are, or will be, located in a SFHA where insurance is available 
through the NFIP and force place such flood insurance on the property if necessary after 
providing the borrower opportunity to renew and retain it.  
? Place premiums collected from the borrower for flood insurance into escrow if the lender 
also requires that payments for taxes, insurance premiums, fees or other charges must be 
placed in escrow.
Although these requirements may appear to be straightforward, such is not the case in 
terms of their implementation.  The requirements bind the federal entities for lending regulation 
as well as all regulated lenders and the third parties that assist them in achieving compliance, but 
the interpretation of the requirements varies considerably.  In turn, the requirements complexity 
and misinformation about them can frustrate even well-intentioned efforts to comply with them.  
As the president of the National Lenders Insurance Council (Moye 2004) observed, the 
mandatory purchase requirement creates an adverse selection process fraught with perplexing, 
inconsistent and sometimes unworkable rules that create seemingly endless customer service and 
compliance issues.  The following discussion offers some explanation for this conclusion.
Flood determinations
Prior to the closing of a mortgage loan, regulated lenders are required to determine 
whether any improved real estate (or any portion of it) or a manufactured home securing the loan 
is or will be located in a SFHA.   In all instances, lenders, or the third-party vendors with whom 
they contract, are required to complete a Standard Flood Hazard Determination (SFHD) form to 
record the results of a determination.   Lenders are further obligated to retain a copy of the form 
for the life of the loan and to be able to produce a copy upon request by an examiner of their 
federal regulatory agency.  The form records the determination and identifies the flood hazard 
zone within which the building or manufactured home is or will be located.  
Although the completed form specifies whether a structure is or is not in a SFHA, the 
form does not indicate a buildings elevation relative to the base flood elevation.  In some 
instances, therefore, when a SFHD form indicates that the building is in a SFHA, the lender will 
require flood insurance even when a building is well above the BFE.  Through the use of Letters 
of Map Amendment or Letters of Map Revision, the obligation to purchase flood insurance can 
be eliminated, but borrowers or developers must be informed about the procedures associated 
with these letters and obtain elevation certificates from licensed surveyors before applying for 
the amendments or revisions.
In addition, to facilitate compliance with the mandatory purchase requirement, the form 
must also include information on the status of the community in which the building or 
manufactured home is located.  Although NFIP coverage is not available in communities 
suspended from the NFIP or in those that have declined to participate in it, lenders are obligated 
to complete a SFHD form for properties in those communities. 
Once a determination form has been completed, the determination can be used for seven 
additional years when a borrower increases, extends, or renews a loan secured by improved real 
estate with the original lender.  A new determination is required if the FIRM has been revised or 
updated since the initial determination.  It is unclear, however, how a lender could confirm that 
no map changes had taken place in the prior seven years without obtaining a new hazard 
determination.  Similarly, a new flood determination is required when the property owner 
refinances a loan or obtains a home equity loan or second mortgage from a lender other than the 
one that obtained the initial determination, regardless of the interval since the original 
determination.  In contrast, a lenders purchase of a loan does not create an obligation to obtain a 
flood hazard determination, even if one has never been conducted (U.S. Department of the 
Treasury et al. 1996; FFIEC 1997).   In contrast, if Fannie Mae or Freddie Mac purchase a loan, 
the affected lender has a continuing obligation to the GSE to have flood insurance in place if the 
home is in a SFHA. 
To complete determinations, lenders can maintain paper FIRMs for their lending 
jurisdiction and use in-house staff to read them, access FIRMs at FEMAs website, or contract 
with a flood zone determination company.  Using paper FIRMs involves locating the address of 
the property on street maps before locating the structure on FIRMs, which often do not plot 
many streets.  Street maps and FIRMs are unlikely to use the same scales, so moving between 
maps entails familiarity with FIRMs and flood zones.  When a building is located on or near the 
boundary of a SFHA, the lender may need to ascertain the exact placement of the building to 
determine whether it is located in a SFHA. 
Institutions with large geographic lending areas may face challenges when using paper 
FIRMs.  They do not include information about Letters of Map Amendment or Map Revision, so 
it is unlikely that a lender doing manual flood determinations would know whether the property 
of interest had been subject to a map amendment or revision.  As the Independent Community 
Bankers of America (2004) contends, it is often difficult to assess whether a particular property 
is located in a flood hazard zone since flood maps are not easily accessible and are not always 
current.
	Lenders can obtain flood determinations from companies in the private sector.  Using an 
external vendor for flood determinations involves sending the property address to a flood 
determination company, usually electronically.  To process determinations quickly, most 
determination companies have developed detailed databases that combine information from 
FIRMs, changes in these maps that affect single properties, and data from other sources, such as 
local tax maps, into an automated process.  When addresses are transmitted electronically and 
when the determination process is automated, a flood hazard determination can be completed and 
returned to a lender in minutes.  Among flood determination companies that responded to a 
survey for the National Flood Determination Association (NFDA), 82 percent of their business 
was transacted electronically in fiscal year 2002 (as opposed to less than 55 percent in 1999). 
Their median automatic hit rate in 2002 was just over 84 percent.   Despite this rate, a 
previous survey conducted for the NFDA in 2000 found that 5 of 23 companies completed all of 
their determinations manually.
When AIR asked, some lenders did not know what processes their flood determination 
vendors use to make determinations.  In fact, some lenders believe that their vendors visit each 
property to complete a determination, which is unlikely, given the small profit margins 
associated with individual determinations.
Several factors influence lenders decisions about how to make flood determinations.  
Paper flood maps require storage space and human capacity to interpret them.  Institutions that 
lend over large regions may be disinclined to use paper FIRMs because they require a large 
number of FIRMs, and staff must be familiar with large geographic areas.  Cost is another factor.  
Flood determination companies can charge according to volume, thus reducing the cost of each 
determination as the number of determinations increases.  Lending institutions that extend few 
loans may then incur larger per-determination costs than do lending institutions that extend many 
loans.
As many as 100 or more companies provide flood determinations.  Many provide 
determinations for limited geographic areas, such as for a single state.  The largest firms provide 
determinations for most or all states and for the District of Columbia, Guam, Puerto Rico, and 
the Virgin Islands.  The relative technological sophistication of flood determination companies 
varies considerably as does the number of determinations that each firm completes each year.  A 
few flood determination companies complete several million determinations each year, 
encompassing all states, while smaller firms may provide a few thousand (or even fewer) 
determinations covering limited parts of a single state.
Prior to the development of the flood-determination industry (and prior to the 1994 
Reform Act), lending institutions themselves typically made determinations about a propertys 
location relative to a SFHA.  As the FIA (1978b) once explained, in some instances, FIRMs 
may not be clear enough to permit lending institutions to decide with certainty whether or not 
property ins located in SFHAs.  As a consequence, the FIA 
determined that a lenders decision made in the exercise of due diligence and good faith 
as to the location of a property, which is the subject of a loanwill be final and 
sufficient to comply with the [1973] Act.  In such instances where a good faith finding 
has been made by a lender or its agentsuch finding as to the location of a property shall 
be final with respect to such property, regardless of any subsequent contrary conclusion 
by any person, agency, or body, and regardless of any change of ownership of the 
property or status of the loan or transaction, provided [that] the map upon which the 
original finding was based is still in effect and remains unrevised as to the property in 
question.
Much has changed.  Most regulated lenders now depend on flood determination 
companies, but as a result of the 1994 Reform Act lenders can do so only to the extent [such a 
company] guarantees the accuracy of the information.  What constitutes this guarantee is not 
consistent among companies.  Although all information provided on the SFHD form must be 
guaranteed, the consequences of providing incorrect information are unclear but possibly 
detrimental.  Some companies limit their liability to refunds for insurance premiums paid when a 
structure is not in a SFHA but incorrectly declared to be in one. 
In other instances, companies may cover actual flood losses up to the limits of an NFIP 
policy when they have made an erroneous determination that a building is not in a SFHA but the 
building subsequently suffers damage from a flood (at or less than the magnitude of the 1 percent 
annual chance flood).  Still other companies do not limit their liability to that associated with 
NFIP policies.  These differences suggest the desirability of developing standards for what 
constitutes an adequate guarantee.  To date, however, neither FEMA nor the federal regulatory 
agencies have proposed such standards or what constitutes an adequate guarantee of the 
information.
	For several reasons, including ongoing remapping, the methods used to make the 
determinations, and the need to be aware of amendments to FIRMs, different flood determination 
companies may not agree on whether a building is in a SFHA or whether a building in a SFHA is 
in an A or in a V zone with its higher premiums for flood insurance.   
To estimate the percentage of structures in flood-prone areas, AIR collected data on 
approximately 94 million flood determinations performed for lending institutions between 1997 
and 2003 by seven flood determination companies all of which provide determinations in all 
states.  If the lenders complied with the requirements of the 1994 Reform Act, the determination 
companies guaranteed the accuracy of each of their determinations.  The data, found in Appendix 
1, suggest that slightly more than 5 percent of all residential properties in the United States are in 
SFHAs.  Among the states, about one-quarter of such properties in Florida and Louisiana are in 
SFHAs.  Fourteen states and the District of Columbia have 2 percent or fewer of their properties 
in SFHAs. 
	Of equal interest, AIR found considerable variation among the seven determination 
companies in their assessments of the percentage of properties in each state that are in SFHAs.  
In Florida, as an illustration, one company estimated that 34.3 percent of residential properties 
are in SFHAs; another company estimated that percentage to be 24.7.  Part of the explanation for 
the differences is that the companies may not provide determinations in all parts of a state.  One 
companys lending clients may be concentrated in northern Florida whereas the clients of 
another determination company may be concentrated in southern Florida.
	Having lending clients in different parts of the same state provides the most likely 
explanation for the differences, but still other data underscore the fact that flood determinations 
may be as much art as science.  As part of an internal portfolio review in 2002, Fannie Mae 
randomly selected 9,500 loans in its portfolio and then asked four flood determination companies 
to indicate whether the buildings associated with these loans were inside or outside of SFHAs.  
All four firms agreed on the determinations for 3,001 addresses.  For 2,784 of these addresses (or 
29 percent), all four companies agreed that the properties were inside or outside of SFHAs.  The 
four companies also agreed that the location of another 217 properties (2 percent) was 
indeterminable.  One or more companies disagreed about the location or the ability to determine 
the location of 3,261 properties (34 percent).  For the remaining 3,238 loans (34 percent), no 
three firms were able to agree that the properties were inside, outside, or indeterminable.  
	At the least, these data suggest that many property owners are told they are in SFHAs 
when they are not while others are told that they are outside of these areas when they actually are 
in them.  The differences among the companies and the errors in some determinations suggest 
the need to assure the accuracy of flood determinations, especially when they are the basis for 
decisions about whether borrowers will be required to purchase flood insurance.
Are Lenders and Borrowers Interests Protected Outside of SFHAs?
	The mandatory purchase requirement is restricted to properties in SFHAs, thus emphasizing the 
importance of accurate FIRMs.  If these maps accurately portray areas that are prone to flooding, then 
damages associated with floods equal to or less than the 1 percent standard should be limited to buildings 
and their contents within SFHAs.  If, in contrast, FIRMs are not as accurate as is desirable and property 
owners are therefore informed incorrectly that they face a low risk of flooding, then floods equal to or less 
than the 1 percent standard may cause considerable damage outside of SFHAs.  In such instances, 
property owners outside of SFHAs may be at risk of floods of a magnitude less than the 1 percent 
standard, and failure to require flood insurance may be unwise.
	Which of these situations best explains what occurs?  An examination of flood insurance claims 
provides at least a partial answer.  FEMA maintains a record of all claims since 1978.  If SFHAs 
accurately identify areas of high risk, then a majority of claims should originate from within these areas.  
Several eastern states display exactly this pattern.  About 64 percent of all NFIP policyholders in Virginia 
are located in SFHAs, but 76 percent of all claims from 1978 until mid-2004 were filed by policyholders 
in these areas.  Similar patterns are found in Delaware, Rhode Island, and North and South Carolina.  In 
these states flooding occurs exactly where it is expected - in SFHAs.
	Across the United States and within many states, however, a different pattern emerges.  For all 
states (plus the District of Columbia, Puerto Rico, and the Virgin Islands), almost 69 percent of all NFIP 
policies are in SFHAs, but 64 percent of claims are from these areas.  A more dramatic pattern emerges in 
more than a quarter of the states.  In 13 states, the District of Columbia, and the Virgin Islands, more than 
half of all claims have been from policyholders outside of SFHAs.  At the extreme, 52 percent of 
policyholders in Utah are in SFHAs, but 82 percent of all claims in the state originated from outside these 
areas.  In Arizona, less than 22 percent of policyholders are outside of SFHAs, but they have generated 
over 56 percent of the claims. 
             As one insurance executive (Goodwin 2004) has hypothesized, when flooding occurs outside of 
SFHAs, the level of damage and impact is typically more extreme than for similar events inside SFHAs.  
Data from many states support this conclusion.  In 21 states and Puerto Rico, the average claim payment 
from 1978 to mid 2004 was larger outside of SFHAs than in high-risk A zones.  In New Jersey, the 
average claim in X zones was almost 35 percent higher than in A zones ($11,260 versus $8,393).  In ten 
states and Puerto Rico, average claims were higher in low-risk X zones than in coastal, high-risk V zones 
despite premiums for coverage in V zones that are more than four times higher than in X zones for 
comparable amounts of coverage.  The average X zone claim payment in Texas was $15,359 compared 
with $6,257 in V zones. High claims outside of SFHAs may be due to a lack of preparation, low 
awareness, and the absence of any required flood-related construction standards.
            These findings suggest that large numbers of uninsured losses occur outside of SFHAs and large 
numbers of uninsured properties are at risk.  More important, these data also bring into question the 
wisdom of exempting property owners outside SFHAs from the mandatory purchase requirement when 
many of them face at least as much risk as owners within SFHAs.  Informing property owners that they 
are outside of SFHAs may encourage a false sense of security, exempt them from a communitys flood-
related building standards, and discourage them from buying flood insurance when doing so would be 
desirable.  Finally, the data underscore the importance of FEMAs map modernization program, which 
should improve the delineation and understanding of areas at high risk of flooding.
           (Readers should be aware of at least two caveats regarding the data discussed in this text box.  On 
the one hand, some flood-prone properties are not in officially designated SFHAs because they are in 
areas that have not been mapped.  There is not enough money to assess the flood risk in every part of the 
United States, so some watercourses susceptible to flooding may not be included in SFHAs.  On the other 
hand, administrative grandfathering, which is discussed below, permits some policyholders in SFHAs to 
pay premiums associated with areas outside of SFHAs.  FEMA is not able to distinguish readily which 
structures are administratively grandfathered.  The consequence is that some insurance claims that appear 
to be from outside of SFHAs are actually from claimants within SFHAs.)    
	An issue related to flood determinations involves the tracking of loans over their life.  
The mandatory purchase requirement imposes obligations on lenders to ensure that flood 
insurance is in place at any time during the term of a loan secured by improved real estate 
when that real estate is in a SFHA in a participating community.  Flood insurance is thus 
required even when the SFHA designation is identified after a loan closes (FEMA 1999).
To address the possibility that a communitys status may change or that map revisions 
will move buildings into or out of SFHAs (or from an A zone to a riskier V zone or vice versa), 
many flood determination companies offer life-of-loan service.  For a small additional fee, 
often no more than $5 per determination, the companies will monitor the status of a loan and 
inform the lender or its loan servicer whenever the relative location of a loan or its community 
status has changed.   Lenders are permitted to charge borrowers a reasonable fee for the cost of 
the life-of-loan service (as well as for the original determination).
Some companies also offer transferability, which accommodates changes in loan 
servicers or the sale of a loan in the secondary market. An informal survey of flood 
determination companies suggests that about 90 percent of lenders use life-of-loan service, but 
the characteristics of the service vary among companies.
Despite the obligation to ensure that flood insurance is in place during the life of a loan in 
a SFHA, the 1994 Reform Act does not require life-of-loan tracking with transferability, does not 
require lenders to monitor changes in FIRMs or community status, and does not require lenders 
to make hazard determinations at any time other than when making, increasing, extending, or 
renewing a loan.  The absence of these obligations has not prevented some flood determination 
companies from claiming incorrectly that lenders must monitor map changes or have life-of-loan 
tracking.  As an illustration, a brief search on the Internet found these erroneous assertions 
among the websites of several flood determination companies:
Lenders are required to monitor existing loans for possible changes in flood zone status 
that may occur when the Federal Emergency Management Agency (FEMA) re-maps or 
re-designates special flood hazard areas.
The 1994 Reform Act requires that lenders must monitor loans to ensure that flood 
insurance is continued for the life of the loan and that changes in Flood Insurance Rate 
Maps be reflected in the requirement for insurance and the amount of premiums paid.
Lenders are required to track flood zone determinations against post-origination map 
changes. If during the life of a loan, the flood insurance rate map changes, showing the 
structure in a Special Flood Hazard Area (SFHA) when it previously was not, lenders 
have to require that the borrower get flood insurance.
The 1994 Reform Act declared that all lenders are required to have a life of loan 
determination on all closed and portfolio loans.
Life-of-loan service is not required, but it is increasingly popular among lenders.  The 
NFDAs surveys of its members indicate that the average number of life-of-loan certificates per 
respondent was about 5.1 million in fiscal year 1999.  By 2002, this average had increased to 
nearly 10.7 million per respondent.
FEMAs current map modernization program has important implications for the 
mandatory purchase requirement and for the desirability of life-of-loan tracking.  During the 
modernization program, which will cost about $1 billion, FEMA will increase the accuracy of 
FIRMs and increase their ease of use.  In addition, however, FEMA expects that the completion 
of new FIRMs may add thousands of additional communities to the NFIP and place tens of 
thousands of properties into newly designated SFHAs.  Similarly, the mapping initiative is likely 
to expand the boundaries of existing SFHAs, thus relocating thousands and even tens of 
thousands of properties into the expanded SFHAs.  For these reasons, map modernization may 
exacerbate the levels of noncompliance with the mandatory purchase requirement because 
lenders are not presently required to monitor changes in FIRMs or a communitys status in the 
NFIP.
The federal regulatory agencies (U.S. Department of the Treasury et al. 1996) 
acknowledge that Congress intended the flood insurance purchase requirements to be applicable 
at origination, or any time thereafter during the life of the loan when the institution determines 
that the security property is located in an area having special flood hazards.  Despite this 
requirement, the agencies do not consider remapping to be a trigger or tripwire event that 
mandates lenders to assess whether properties within their loan portfolios have been moved into 
or out of SFHAs as a result of the remapping.  In the agencies words, the 1994 Reform Act 
does not require lenders to monitor for map changes, and the agencies will not impose such a 
requirement by regulation (U.S. Department of the Treasury et al. 1996). 
These agencies (FFIEC 1997) and FEMA (1999) agree that if a lender becomes aware 
during the life of a loan that flood insurance is required because of remapping or a change in a 
communitys status, then flood insurance must be purchased, even after a loan has closed.  What 
constitutes a lenders awareness of a buildings changed status is unclear.  For example, FEMA 
publishes a Compendium of Flood Map Changes in the Federal Register every six months.   
The 1994 Reform Act requires FEMA to make available at no cost copies of each compendium 
to federal agency lenders, to the federal entities for lending regulation, and to the states and 
communities that participate in the NFIP.  FEMA (1999) recommends that lenders review their 
loans located within geographic areas affected by changes in the compendia.  
Whether such reviews occur and whether the compendium also creates awareness 
among lenders is unclear.  Few lending institutions maintain an internal capacity to determine 
which properties are inside or outside of SFHAs.  Moreover, the federal regulatory agencies do 
not require lending institutions (or their loan servicers) to monitor map changes or to review the 
semiannual compendia, so there is no perceived need for lenders to do so or penalty for failing to 
do so.   In addition, many in the lending industry consider the Compendium to be of little value 
because it does not provide information at the property level.  Despite this concern, both Fannie 
Mae and Freddie Mac require lenders that sell loans to or service loans for the GSEs to make 
themselves aware of changes in FIRMs and to take appropriate action as these changes occur.  
This requirement creates a powerful incentive for such lenders and servicers to use flood 
determination companies that provide life-of-loan determinations.
For lenders with life-of-loan flood determinations, their flood determination companies 
also provide notice of the consequences of map revisions.  According to ten companies that 
responded to surveys conducted for the NFDA, 17.1 million of their life-of-loan certificates were 
affected by map revisions between 1999 and 2002. Of this number, the status of about 1.3 
million properties changed as a result of a map revision over the same period.  The actual 
number of changes is likely to have been much higher because only about one-third of the 
NFDAs membership responded to the surveys.  Moreover, many flood determination 
companies, albeit smaller ones, were not among those surveyed.
The flood legislation also does not require regulated lenders to review their loan portfolios 
either retroactively or prospectively to ensure compliance with the mandatory purchase 
requirement.  FEMA (1999) has encouraged lenders to conduct such reviews to identify 
uninsured or underinsured risks.  In contrast, the federal regulatory agencies (U.S. 
Department of the Treasury et al. 1996) have noted that none of the flood-related 
legislation that affects lenders prescribes portfolio reviews as a required means to 
determine whether security property is adequately covered by flood insurance, even in 
instances in which lenders are found to have inadequate systems in place to ensure 
compliance or when lenders are significantly exposed to the risks for which flood 
insurance is designed to compensate.
Provide information on flood insurance requirements
When regulated lenders determine that a loan on improved real estate or a manufactured 
home is or will be located in a SFHA, these lenders are required to provide borrowers and the 
servicers of the loan with written notice: a) that the building or manufactured home is located in 
a SFHA; b) of the mandatory purchase requirement; c) of the availability of flood insurance 
through the NFIP; and, d) any other information that the director of FEMA considers necessary.  
This information must be provided a reasonable period in advance of the signing of the 
purchase agreement, lease, or other documents involved in the transaction.  The lending 
institution is further required to retain a receipt of the notice by the purchaser and the loan 
servicer for as long as the lender owns the loan.
The federal regulatory agencies have interpreted the reasonable period requirement 
flexibly, but they do note that a borrower should receive notice timely enough to ensure that (1) 
The borrower has the opportunity to become aware of the borrowers responsibilities under the 
NFIP; and (2) where applicable, the borrower can purchase flood insurance before completion of 
the loan transaction (U.S. Department of the Treasury et al. 1996).  The agencies added, 
however, that they generally continue to regard ten days as a reasonable time interval for 
notification of borrowers.   Notice to loan servicers is typically required as promptly as 
practicable after a lender provides notice to the borrower but no later than the time the bank 
provides other similar notices to the servicer concerning hazard insurance and taxes (U.S. 
Department of the Treasury et al. 1996).
Borrowers are expected to use the information to purchase flood insurance, as required, 
prior to closing their loans.  Each of the federal entities for lending regulation provide sample 
forms of notice of special flood hazards and availability of federal disaster relief assistance (see, 
for example, U.S. Department of the Treasury et al. 1996).  
For borrowers to purchase flood insurance, they must contact an insurance agent or WYO 
company that can provide coverage.  Many insurance agents are not familiar with flood 
insurance and have little or no experience providing information about it to prospective 
purchasers.  According FEMA, more than 3,000 communities that participate in the NFIP had no 
policyholders in late 2004, and an additional 7,000 communities had ten or fewer policyholders.  
Such communities may not have many insurance agents who are knowledgeable about flood 
insurance or have much experience with it.
Although flood insurance is available in all flood zones, including those outside of the 
areas of highest risk, some property owners have been told that they cannot purchase flood 
insurance because their homes are in SFHAs.   Others are told that they are not eligible for 
coverage because their homes are not in SFHAs.  As one experienced representative of the 
lending industry noted to AIR, If insurance agents knew as little about auto and homeowners 
insurance as they do about flood, they would not keep their jobs long.
Complaints about agents lack of familiarity with flood insurance reached a peak after 
Hurricane Isabel hit the eastern seaboard in September 2003.  In a report that reviewed the 
response to Isabels victims in Baltimore, Maryland, Larsen, Benoit, and Ewing (2004) cite 
repeated instances in which policyholders complained of wide frustration with the lack of 
familiarity insurance professionals had with the flood program.Agents and their insurers may 
view the possibility of severe and widespread flooding as so remote as to not justify the time 
needed to become familiar with the policy and its coverage.  As a result, the authors 
recommended that FEMA develop rigorous training requirements for agents and their insurance 
affiliates. 
In response to such concerns, the Flood Insurance Reform Act of 2004 requires FEMA to 
establish minimum education and training requirements for all insurance agents who sell flood 
insurance policies by the end of 2004.  As the U.S. Senates (2004) report on the legislation 
commented, while the training requirements should not be burdensome, they should ensure that 
insurance agents have a thorough understanding of the NFIP.  This may be a problematic 
assignment for FEMA because state insurance regulators, not the agency, establish training and 
licensing requirements for insurance agents within each state.  Furthermore, the training 
requirement may discourage some insurance agents from selling flood insurance.
When insurance agents are available to sell flood insurance, they must know whether the 
building that secures the loan is or is not in a SFHA and, if it is, in which flood zone.  The SFHD 
form includes this information and also indicates the availability of federal flood insurance, but 
lenders are not required to provide copies to their borrowers or their insurance agents.  When 
FEMA developed the standard form in 1995, the draft instructions proposed that lenders 
provide a copy of [the] completed form to an insurance agent (FEMA 1995a).
The final version of the form, published a few months later, changed this wording in an 
important way.  Although FEMA had declared that the form provides most of the information 
that an insurance agent needs to write a flood insurance policy, the agency revised the 
instructions to indicate that lenders may provide a copy of the form to insurance agents 
(FEMA 1995b).   In addition, despite noting that having a copy of the form would be useful to 
the customer (FEMA 1995b), the current instructions do not mention or even suggest that 
lenders provide borrowers with copies of the completed SFHD form.  Similarly, the federal 
regulatory agencies have declared that lenders are neither required nor prohibited from 
providing the borrower with a copy of the form (FFIEC 1997).
FEMAs IG (2000) believes there is merit in requiring lending institutions to provide the 
form to insurers or insurance agents and has recommended that the agency work with federal 
regulatory agencies to develop such a requirement.  Others agree.  FEMA once solicited 
suggestions from its partners and customers about how the NFIP can be improved.  One 
suggestion (FEMA 2000) was that lenders provide borrowers and insurance agents with copies 
of flood zone determinations to facilitate the writing of policies.  FEMA responded to the 
suggestion by declaring that it would encourage federal regulatory agencies to encourage lenders 
to provide the determinations to borrowers.  In fact, however, FEMA has chosen not to do so. 
When borrowers or their insurance agents do not have access to lenders determination 
forms, conflicting determinations and additional expense for borrowers are possible.  To obtain a 
properly rated flood insurance policy, borrowers must know the zones in which their properties 
are located.  Absent a copy of the determination form from a lender, borrowers (or, more likely, 
their insurance agents) must obtain a separate determination.   With scores of flood 
determination companies, an insurance agent is likely to obtain a determination from a company 
other than the one the lender used.  The two determinations may conflict, thus creating a 
situation in which a lender insists that flood insurance is required whereas the insurance agent 
may disagree completely (or with respect to the zone in which the building is located).   Unless 
the borrower successfully challenges the lenders determination, that determination is definitive 
for purposes of deciding whether flood insurance is required.
Require flood insurance at loan origination
Lenders must require flood insurance on improved real estate or manufactured homes 
that are, or will be, located in a SFHA in communities that participate in the NFIP.  Regulated 
lenders are prohibited from making, increasing, extending, or renewing any designated loan 
unless the real estate or manufactured home securing the loan is covered by flood insurance for 
the term of the loan.  Neither the law nor any regulations specify how borrowers must 
demonstrate that they have obtained the required coverage.  As a consequence, lenders accept 
various forms of proof of coverage, ranging from a copy of the policys declaration page 
showing the amount of coverage, a paid receipt for a policy, and, apparently, a range of other 
proofs.
As noted earlier, such coverage must be in an amount at least equal to the lesser of:
? The outstanding principal balance of the loan; or
? The maximum limit of coverage made available through the NFIP with respect to the 
particular type of property.
Lenders interpret the coverage requirements in different ways.  Some lenders require that 
borrowers retain flood insurance to the value of the property or to the maximum coverage, 
whichever is greater.   Some lenders require insurance to the full balance of a loan, even when 
part of the loan covers land.  At least one large lender requires its borrowers to maintain flood 
insurance coverage in the same amount as their hazard or homeowners insurance.  Other lenders 
require the amount of flood insurance required for purchase in the secondary market.  More 
common, still other lenders allow property owners to retain the coverage they initially acquired 
at the time of purchase despite increases in property values and replacement costs.  Such levels 
of insurance comply with the mandatory purchase requirement and protect the lenders interest, 
but they do not provide suitable coverage for the property at risk. As a consequence of this legal 
practice, coverage that is inadequate relative to the value of a home is common, at least 
according to reviews that Fannie Mae and Freddie Mac conduct of loans in their portfolios.  
In the event of a flood, the NFIP provides reimbursement for full replacement costs (up to 
the total amount of insurance available) for only two types of risk  condominiums covered by a 
Residential Condominium Building Association Policy and single-family principal residences.  
For the latter, if the amount of the coverage is less than 80 percent of the replacement cost, the 
NFIP will pay no more than the greater of the actual cash value of the cost to repair or the 
proportion of the cost based on the amount of the coverage divided by the amount that represents 
80 percent of the replacement cost.   As a consequence, although a property owner may have at 
least as much insurance as is legally required, such as full coverage for the amount borrowed, 
there is a coinsurance penalty if the property is insured for less than 80 percent of the 
replacement cost.   
Some regulated lenders believe that they are at a competitive disadvantage relative to 
nonregulated lenders.  The former require a flood determination, which increases their loan-
closing fees, and they must require flood insurance when appropriate, which is unpopular among 
some borrowers.  If this is the case, it seems that nonregulated lenders would attempt to preserve 
their alleged advantage and not complete flood determinations.  In fact, however, Fannie Mae 
and Freddie Mac purchase large numbers of loans, including loans from nonregulated lenders.  
Such lenders must comply with the mandatory purchase requirement so they will require a flood 
determination if they expect to sell the loan to Fannie Mae or Freddie Mac.  
Some officials believe that borrowers who obtain loans that are not sold to Fannie Mae or 
Freddie Mac or do not meet their standards are borrowers who are probably least able to afford 
flood losses without insurance.  Loans that do not meet the GSEs standards are usually 
considered to be subprime.  The borrowers are often people with poor or no credit histories and 
with low incomes. This situation provides reason to find ways to spread coverage to loans made 
by nonregulated lenders.
Escrow funds for flood insurance
	Regulated lenders must escrow funds for flood insurance (if required and purchased 
through the NFIP) for loans on residential improved real estate if these lenders also require 
escrow funds to cover other expenses such as property taxes or hazard insurance.   When a 
building is of mixed use and is part residential and part commercial, the buildings primary 
purpose determines whether the escrow requirement applies (FEMA 1999).  A slightly different 
rule applies to condominium buildings.  They are not considered residential, and thus subject to 
the escrow requirement, unless at least 75 percent of the floor area is residential (FEMA 2005). 
FEMA and the federal regulatory agencies disagree about whether escrow accounts are 
required for loans on multifamily dwellings of five or more units.  FEMA (1999) believes that 
such units are not subject to the escrow requirement.  The federal regulatory agencies insist that 
such units are subject to the requirement (e.g., U.S. Department of the Treasury et al. 1996, 
FFIEC 1997; OCC 1999; OTS 2001).  In turn, FEMA (1999) has encouraged lenders to impose 
the escrow requirement on nonresidential loans, but the federal regulatory agencies do not 
believe they have the legal authority to do so (U.S. Department of the Treasury et al. 1996).
Life-of-loan coverage
	Regulated lenders are required to ensure that borrowers retain flood insurance for the life 
of the loan.  There are at least two ways that lenders ensure that borrowers do so: lenders can 
track borrowers retention of flood insurance or contract the responsibility to third-party loan 
servicers, which typically rely on (or are also) flood determination companies.  Such vendors 
provide several services such as tracking hazard and flood insurance premiums to ensure that 
they are up-to-date, processing loan payments, providing customer service, completing the 
forced-placement processes for hazard and flood insurance, escrowing funds for property taxes 
and insurance, and paying property taxes and insurance premiums from the escrowed funds.  
Lenders determine how many of these services to contract for and how many different vendors to 
use.  Some lenders perform all the required functions themselves, others use a single vendor for 
all services, and still others use multiple vendors. 
	Regardless of what procedures are involved with the tracking of flood insurance, 
retention of policies among those obligated to have flood insurance is a continuing concern.  As 
the GAO (2003a) concluded, data to determine whether insurance is retained over the life of 
loans are unavailable, and this issue remains unresolved.  The GAO (2002) similarly noted 
FEMAs concern that significant noncompliance problems exist with the retention and renewal 
of policies.  FEMA (2004) estimates that as many as 500,000 policyholders cancel or do not 
renew their policies each year.  Many of these cancellations or nonrenewals are appropriate, but 
some unknown portion of them also include property owners who remain subject to the 
mandatory purchase requirement and who are obligated to retain flood insurance for the life of 
their loans. 
	 
Forced placement of flood insurance
At any time during the life of a designated loan, if there is no evidence of flood insurance 
or in instances in which coverage is less than the minimum amount required for a building or a 
manufactured home, the 1994 Reform Act requires lenders or their loan servicers to purchase the 
insurance on behalf of the property owner after notification to the borrower that insurance is 
required.   The amount that must be force placed is equal to the difference between the amount 
of coverage in place and the lesser of the outstanding principal balance or the maximum 
coverage available through the NFIP (U.S. Department of the Treasury et al. 1996).   When 
calculating the amounts of insurance required, the value of the land can be deducted from the 
overall value of the secured property (FEMA 1999).  Forced placement is not intended for use 
when a lender makes, increases, extends, or renews a loan because such loans are not permitted 
unless flood insurance is already in place.   
To address situations in which there is no coverage when it is required, lenders and 
servicers have several options.  First, regulated lenders (as well as federal agency lenders) are 
obligated to refuse to extend a loan until the building or manufactured home that secures the loan 
is covered by flood insurance.  Second, if a loan complies with the purchase requirement at 
origination but later is not in compliance, lenders can purchase a Standard Flood Insurance 
Policy (SFIP) for the property if the property owner has not done so (FEMA 1999).  To do so, 
however, lenders or loan servicers must have information about the property so that it can be 
rated properly.  
There are disparate perspectives about the feasibility of acquiring the information needed 
to force place a Standard Flood Insurance Policy.  On the one hand, property owners who never 
had a policy or who have cancelled or not renewed their policies are unlikely to provide the 
information necessary to write a SFIP, so purchasing such policies for the property owner may 
be impractical from a lenders perspective and is unlikely to occur often. Requiring lenders to 
initiate the information-gathering process needed to rate a recalcitrant owners property would, 
in many instances, be unduly burdensome for the lender, especially in instances in which the 
property owner and lender (or servicer) are in different states.  On the other hand, most lenders 
will have an appraisal of the property that contains much of the information required to obtain a 
rating  with the exception of a buildings elevation, a crucial piece of information in 
determining the proper rate.
Third, lenders and servicers can force place coverage through the Mortgage Portfolio 
Protection Program (MPPP).  FEMA created the MPPP in 1991 to facilitate lenders and 
servicers efforts to ensure that affected property owners have coverage when no or only limited 
underwriting information is available. 
Due to a lack of information and, therefore, an unknown level of risk, policies purchased 
through the MPPP are almost always more expensive than are Standard Flood Insurance 
Policies.   As FEMA (2000) explains, the rates for MPPP policies are high to discourage forced 
placement.  For example, as of May 1, 2005, using a SFIP, owners of post-FIRM, single-family 
residences with more than one floor and no basement or enclosure in an A zone paid base rates 
as low as $.24 per $100 for the first $50,000 of building coverage and an additional $.08 per 
$100 for coverage in excess of $50,000.  In contrast, using the MPPP, the lowest base rate for a 
property in an A zone would have been $2.40 per $100 for the first $50,000 of building coverage 
and an additional $1.20 per $100 for coverage in excess of $50,000.  In a V zone, rates for the 
MPPP increase to $3.70 per $100 of building coverage.  The MPPP is not intended for use at 
loan origination, but this restriction is not universally respected.
As of December 31, 2004, there were 3,926 MPPP policies in force.  The average annual 
premium was about $1,264, and the average building coverage was about $65,400.  In contrast, 
for all federal flood insurance policies, the average annual premium at the same time was about 
$440, for which the average building coverage was approximately $134,000.
Prior to force placing flood insurance, lenders or servicers must notify borrowers of: a) 
the requirements of the Flood Disaster Protection Act of 1973; b) the flood zone location of their 
property; c) the statutory requirement for flood insurance; d) the fact that the lender has no 
evidence of their having flood insurance; e) the amount of coverage required; and, f) the 
opportunity to obtain a SFIP.  If borrowers fail to purchase flood insurance within 45 days of this 
notification, lenders or servicers can purchase a SFIP for the mortgaged property or use the 
MPPP and, in either case, impose the costs of premiums and fees incurred on the borrower. 
Most of the WYO companies that offer SFIPs do not also offer policies through the 
MPPP.  In the words of one WYO representative, the administrative and record-keeping burdens 
associated with the MPPP are unduly onerous.  In addition to the notifications, some insurers 
perceive NFIP policies to be difficult to cancel (e.g., such as when a property owner switches to 
a SFIP from a forced-placed policy issued through the MPPP). 
 
Force-placed coverage through the NFIP is effective on the date the application is 
completed and the premium is paid.  MPPP policies cannot be renewed, but they can be rewritten 
each year following the notification procedures just described.  
In instances in which a borrower has coverage through the NFIP, but it is less than the 
minimum amount the law requires, lenders and servicers who wish to comply with the 
mandatory purchase requirement must use private insurance to increase their borrowers 
coverage.  Only one NFIP policy can be issued per residential structure or manufactured home, 
so the MPPP cannot be used in conjunction with a SFIP.  
 Some insurers, such as Lloyds of London, offer private flood insurance that can be 
purchased and lender placed at any time.  With private insurance there is typically no gap in 
coverage between the expiration of an NFIP policy and the imposition of the force-placed 
coverage.  Such a gap exists when a lender wants to place flood insurance through the MPPP.  
Although NFIP policies expire on the last day of each one-year policy term, coverage continues 
during a 30-day grace period after a policys expiration.  FEMA assumes that policies will be 
renewed and thus grants policyholders 30 days after expiration to submit the premiums 
associated with renewal, but the 1994 Reform Act prohibits the forced placement of federal flood 
insurance until 45 days after a policys expiration.  This anomaly creates a 15-day period in 
which no coverage is available through the NFIP.  In the words of one representative of a 
national lending institution, the 15-day gap in coverage is a dominant reason that his bank 
eschews use of the MPPP in favor of lender-placed, private insurance, which can be effective 
immediately after the NFIP coverage is cancelled or not renewed.  FEMA (2004) agrees and 
would prefer a change in the flood insurance legislation to eliminate what it calls the 
unacceptable exposure gaps that the program currently presents.
Private insurance can be used in lieu of coverage through the NFIP at loan origination, to 
provide additional coverage when the value of a property exceeds the amount of coverage 
available through the NFIP, or when a lender or servicer deems that coverage through the NFIP 
is not commensurate with the value of the property or the laws requirements for coverage.  
Private insurance can also be used in areas where NFIP coverage is prohibited, such as in 
communities that are suspended from participation in the NFIP due to their failure to adopt or 
enforce floodplain management regulations and in units of the Coastal Barrier Resource System.  
The Coastal Barrier Resources Act of 1982, as amended, restricts most federal expenditures and 
financial assistance, including federal flood insurance, and any form of loan, grant, guarantee, 
insurance, payment, rebate, subsidy, or any other form of direct or indirect federal assistance in 
parcels within the Coastal Barrier Resource System, including Otherwise Protected Areas 
(OPA).   Flood insurance is permitted in OPA, regardless of the date of construction, if the 
building or structure is used in a manner consistent with the purposes for which the area is 
protected. 
Some national lenders appear to use private insurance exclusively when their borrowers 
are required to have flood insurance but fail to retain adequate coverage.  According to one 
insurance company, it can provide coverage for a lenders portfolio for such borrowers with only 
minimal information, namely the flood zone in which the property is located; whether it is 
residential or commercial; the propertys address; the borrowers name, and his or her loan 
number.  This company indicated that one of the lenders with whom it works routinely requests 
private, lender-placed insurance for 300 to 400 properties per week.  FEMA (2004) estimates 
that private insurers may force place as many as 100,000 to 200,000 policies each year. These 
policies insure compliance with the mandatory purchase requirement, but they also account for 
as much as 20 to 40 percent of the NFIPs annual loss of policies. 
Force-placed insurance is intended primarily to protect buildings, which represent the 
borrowers collateral, but some lenders place additional coverage for the contents of these 
buildings.  Lenders may do so if the contents serve as collateral for a portion of the loan or 
because such placement is explicitly permitted by the loan documents.  Lenders that elect this 
approach may be trying to discourage law suits from victims of flooding who might claim that 
force-placed coverage on buildings protects lenders interests but not the borrowers interest in 
the contents.  Such a justification is less likely today than in the past because the standard loan 
documents now in use are explicit about the lenders right to place insurance that does not cover 
a borrowers interests. Policies issued as part of the MPPP provide coverage to both the lender 
and to the borrower.
Challenges to compliance
	In addition to the processes and procedures described in the previous section, lenders 
must also deal with issues that are not as clear as they might be or that otherwise produce 
confusion, at least among some borrowers, lenders, and insurance agents.  In turn, these issues 
may complicate lenders efforts to comply with the mandatory purchase requirement and federal 
agencies monitoring of compliance.
Flood insurance during construction
The flood insurance legislation requires that improved real estate be insured when it is 
in a SFHA in a participating community and when it is secured by a loan from a regulated 
lender, when the loan is sold to Fannie Mae or Freddie Mac, or when it has been acquired with 
federal funds.  The flood insurance legislation defines improved real estate as real estate upon 
which a building is located.  The NFIP defines a building as a structure with two or more 
outside rigid walls and a fully secured roof, that is affixed to a permanent site and that is 
principally above ground.  FEMAs Flood Insurance Manual (FEMA 2005) is similarly explicit 
in noting that Insurance may be written only on a structure with two or more outside rigid walls 
and a fully secured roof that is affixed to a permanent site while FEMAs (2002a) Program 
Description notes that eligibility for flood insurance requires two solid walls and a roof. 
These statements suggest that flood insurance is not required at least until construction is 
well underway and perhaps even close to completion because a fully secured roof and solid walls 
are required.  In fact, however, FEMA encourages and permits flood coverage during 
construction.
The issue with respect to such coverage is the date that insurance is required and the 
amount of required coverage.  FEMA (1993, 1999) stipulates that flood insurance must be 
purchased at loan origination in an amount to meet the mandatory purchase requirement based on 
the eventual value of the property to be constructed.  The effective date of such coverage is the 
time construction begins, which can be interpreted to mean the date that building materials are 
delivered to the site.  In other words, coverage is not delayed until a building has two walls and a 
roof.  FEMAs Mandatory Purchase of Flood Insurance Guidelines (FEMA 1999), which is 
probably the most common source of information for lenders on the topic, indicate that coverage 
can also be arranged for materials to be used for construction and delivered to the site prior to 
construction.
FEMAs Flood Insurance Manual (FEMA 2005), which is the primary source of 
information on flood insurance for agents, specifies that insurance is available for buildings in 
the course of construction but does not indicate when such coverage should or must commence.  
The Manual does imply, however, that coverage can begin after construction has started.   For 
condominiums under construction, coverage is not possible through a Residential Condominium 
Building Association Policy (RCBAP) until a condominium association has been created and at 
least two units have been sold.
In addition, the Manual stipulates the materials or supplies intended for use in 
construction, alteration, or repair cannot be insured unless they are contained within an enclosed 
building on the premises or adjacent to the premises.  Given FEMAs definition of a building, 
these materials can be insured only if they are in a structure affixed to a permanent site.  This 
may not be FEMAs intent because storage areas for building materials often are not situated 
permanently at a building site. 
The federal regulatory agencies agree that insurance must be purchased at loan 
origination if the building will be in a SFHA in a participating community, but the amount of 
coverage required appears to vary from FEMAs perspective.  As an illustration, the OCC (1999) 
and OTS (1999) note that insurance must be purchased to keep pace with construction (as 
opposed to purchasing full coverage at the time of loan origination).
Regardless of the perspective, some lenders and insurers are uncertain how to apply the 
requirements for mandatory purchase during or immediately before construction. FEMA (1999) 
has indicated that elevation figures derived from construction drawings should be the basis for 
determining premiums during construction, but many agents, according to one FDIC official, 
will not write the insurance until after a slab is poured and a true elevation can be obtained 
based on actual construction.  As this official observed, We have found this problem in certain 
areas of Florida, where the practice exists among virtually all the insurance agents, despite 
FEMAs guidance to the contrary.  In other instances, developers are required to obtain insurance 
when a loan is made but there is no building to insure for 90 days or more. This may happen 
when the loan is for acquisition, development, and construction.  This situation means that there 
are policyholders with no risk paying premiums on buildings that do not yet exist.   
At the 2004 National Flood Conference, one representative of an insurance company that 
writes thousands of flood policies each year related her experience that many policies are not 
written on new construction until the first floor of the building is completed.  One lender 
reported that her bank requires flood insurance for new construction only when the building is 
framed in.  A representative of one of FEMAs regional offices stated that insurance must be 
in place, not at loan origination, but at the first draw of funds.  Still another FEMA official said 
that the best approach would be to allow the federal regulatory agencies to decide among 
themselves what insurance requirements they would impose on construction.   In short, 
clarification of and common agreement on the requirements for insurance during construction are 
highly desirable.
Letters of map change
	
Other than changing entire FIRMs, FEMA has two processes for removing properties 
from SFHAs.  Once removed, they are no longer subject to the mandatory purchase requirement 
if loans associated with these properties are from federally regulated lenders.  From another 
perspective, however, the only reason to employ these processes is to avoid the purchase 
requirement.
To accommodate instances in which the lowest ground touching a single structure is 
naturally at or above the base flood elevation, FEMA can issue a Letter of Map Amendment 
(LOMA) when a property owner provides evidence, and FEMA verifies, that a structure was 
incorrectly placed in a SFHA.  LOMA can thus be seen as technical corrections. 
	Developers can apply for Letters of Map Revision - Based on Fill (LOMR-F) when they 
use human--made or earthen fill to raise the lowest ground touching a structure so that this 
ground is at or above the base flood elevation.   FEMA allows the placement of fill as long as 
there is not more than a one-foot increase in the base flood elevation at any point within the 
community that permits construction with fill.   Although a community must confirm that the 
area subject to the LOMR-F will be reasonably safe from flooding, Thisthe regulations 
governing  provision isLOMR-F do not address or consider  notable for its lack of consideration 
of potential impacts in downstream communities.  LOMR-F, which can be used for entire 
developments, are notablypotentially controversial because they alter natural terrain. and,   
according to sSome experts, believe that LOMR-F transfer risk from one area to another because 
they reduce storage capacity and can create obstructions that channel flood waters or prevent 
their dissipation.  In the opinion of one such expert (Thomas 2000), LOMR-F impose significant 
cost burdens on other communities and property owners in SFHAs who, unaware, accrue the 
transferred flood risk without receiving protection from or compensation for the additional risk.  
Due to such concerns, Thomas characterizes LOMR-F as bad public policylike a cancer 
eating at the foundation of the NFIP. 
	In addition to concern about the potential downstream impacts of LOMR-F, others have 
expressed apprehension about potential detrimental impacts on the natural and beneficial values 
of floodplains.  As an example, the Department of Agriculture (1988) states that filling 
floodplains is inconsistent with preservation of these values.  Executive Order 11988, Floodplain 
Management, directs federal agencies whenever they construct in floodplains and wherever 
practicable, to elevate structures above the base flood level rather than filling in land (Office of 
the President 1977).
Similar concerns are widely shared.  As one senior NFIP official (Pasterick 1998) has 
commented, because the primary purpose for requesting a Letter of Map Change is to excuse 
the owner from purchasing flood insurance, the entire LOMC process represents a rather 
shortsighted attitude toward the value of insurance as well as an under appreciation of the flood 
peril.  The number of requests for letters of map change places this comment in perspective.  In 
1993, there were approximately 2,800 such requests (Pasterick 1998).  By 1997, this number had 
increased to about 11,000 and then almost quadrupled to 43,000 in fiscal year 2002.
Multiple loans on a single property
	When flood insurance is required because a mortgagors structure is located in a SFHA in 
a participating community, a lender must ensure that the amount of insurance in place meets the 
laws minimum requirements.   If a borrower has only a single loan, the single lender can 
monitor compliance with these requirements directly or through a loan servicer.
	In contrast, compliance can be hampered when there are two or more loans (e.g., a home 
equity loan or a second mortgage) from different lenders on a single property.   Each lender is 
responsible for insuring that coverage is in place, but the lender with the junior lien does not 
necessarily know the amount of coverage in place on the senior lien.  Likewise, the holder of the 
first mortgage may not be aware of the second mortgage or be willing to share information with 
the second lender.  Furthermore, the senior lien holder may incorrectly consider the coverage 
amounts to meet the laws requirements. 
Only one NFIP policy is permitted per property, so the subordinate lien holder is unable 
to require the property owner to obtain an additional NFIP policy, and the lien holder is similarly 
prohibited from using the MPPP to force place coverage should that be necessary because the 
initial lender did not require an adequate level of coverage (FEMA 2000).  Under some 
circumstances, these constraints can lead to a situation in which a subordinate lien holder is 
required to force place coverage for the total balance of all loans on a property, using private 
insurance, even when the amount of the second loan represents only a small portion of the 
aggregate balance of all loans.  The alternative is to refuse to grant the loan if the borrower does 
not obtain additional coverage.
Multiple structures securing a single loan
	In some situations, notably with agricultural buildings, several structures may provide the 
collateral for a single loan from a regulated lender. Borrowers can purchase a separate policy for 
each building, and FEMA permits borrowers to insure nonresidential buildings with a single 
policy that lists the individual buildings (FCA 2003).  Nonetheless, determining the value of a 
farm structure for purposes of flood insurance may be difficult, and borrowers and lenders may 
be unsure how much coverage is required when the structures are spread over large geographic 
areas.  In such instances, structures may be in several communities, not all of which participate 
in the NFIP.  Insurance through the NFIP is not available in nonparticipating communities.  In 
these cases, the FCA (2003) has taken the position that the amount of insurance required depends 
on the principal amount of the loan, the value of the buildings located in participating 
communities, and the amount of insurance available through the NFIP.
Flood insurance for condominiums
The NFIP offers coverage for condominiums through its Residential Condominium 
Building Association Policy.  This master policy provides coverage for the common areas of 
residential condominiums as well as individual units within the condominium and is issued in the 
name of the condominium association.   Owners of units within a condominium can obtain 
separate coverage (by purchasing a Dwelling Policy) for their units, but the coverage is in 
excess of the associations policy and can only supplement coverage provided through a 
RCBAP.
	A person who obtains a mortgage from a regulated lender to purchase a condominium 
unit in a SFHA in a participating community is required to obtain flood insurance for that unit, 
but the amount of insurance required may be confusing to the lender and the borrower when an 
RCBAP is in place.  When making loans, lenders work with borrowers, not condominium 
associations.  It may be the case, therefore, that the lender and the borrowers insurance agent are 
unsure of the coverage required or already available through a RCBAP.  Furthermore, although 
FEMA (1999) notes that an owner of an individual unit can use the RCBAP to demonstrate proof 
of coverage, that coverage may not be sufficient to meet the mandatory purchase requirement.  In 
such instances, FEMA recommends that a lender request the borrower to ask the condominium 
association to increase its coverage, but the association is not obligated to do so (or even 
obligated to purchase or retain any flood insurance), thus frustrating the lender and the borrower.  
FEMA strongly encourages condominium associations, as part of their property insurance 
responsibilities, to purchase flood insurance, to protect its buildings in SFHAs, and to do so in 
amounts that will provide insurance to value. Although the NFIP's mandatory flood insurance 
purchase requirement does not directly apply to such associations unless they have mortgage 
loans from lending institutions under the jurisdiction of the flood legislation, the requirement 
does apply to all individual unit owners with such mortgages. As such, FEMA believes that by 
purchasing sufficient flood insurance coverage condominium associations both help their unit 
owners fulfill their flood insurance requirements and satisfy their own property insurance 
responsibilities.  FEMA believes it has no regulatory responsibility for the mandatory purchase 
requirement, so it looks to the federal agencies with such authority to promote the purchase 
requirement in condominium associations by encouraging regulated lending institutions to seek 
such compliance through those associations exercising their overall property insurance 
responsibilities on behalf of their unit owners.
	Despite these well-intentioned efforts, the Mandatory Purchase of Flood Insurance 
Guidelines (FEMA 1999) for insuring condominiums are difficult for lenders (and insurers) to 
understand and apply in the opinion of representatives of their industries.  For example, a lengthy 
conversation ensued at a presentation on coverage for condominiums at a recent meeting of the 
American Bankers Association about appropriate coverage for condominiums.  The panelists, 
presumably chosen for their knowledge and expertise, were in conflict over adequate coverage 
amounts.  Moreover, lenders attending the meeting suggested still other variations on the 
requirement, and FEMA (2000) has received repeated requests for clarification and 
simplification of the requirements for condominiums.
Buildings in violation of state or local laws
	Section 1316 of the National Flood Insurance Act of 1968 prohibits the sale of federal 
flood insurance for any property that FEMAs director finds has been declared by a duly 
constituted state or local zoning authority or other authorized public agency to be in violation of 
State or local laws, regulations, or ordinances which are intended to discourage or otherwise 
restrict land development or occupancy in flood-prone areas.  
	Although the number of properties that have been declared in violation is small, the use 
of the provision can complicate efforts to comply with the mandatory purchase requirement in 
several ways.  First, there is some misunderstanding about whether regulated lenders and federal 
agency lenders can make loans to owners of these so-called 1316 properties.  FEMA (1999) 
twice notes that lenders can make conventional loans for these properties, thus implying that 
federal agency lenders, such as the VA, cannot guarantee or insure loans for these properties.  In 
fact, despite FEMAs position to the contrary, there is no restriction on federal agency lenders 
involvement with loans for 1316 properties, although private insurance would be required (see, 
for example, U.S. Department of Veterans Affairs 1996).  Nonetheless, because these properties 
are in violation of state or local ordinances and are notably susceptible to flood damage because 
of their noncompliance, some might suggest that these properties should not be eligible for loans 
from regulated lenders or financial assistance from federal agency lenders.
	Second, neither lenders nor flood determination companies have access to data on 1316 
properties.  Property owners are not required to inform prospective buyers that a property is 
ineligible for federal flood insurance and few, if any, communities require official property 
records to note this lack of eligibility.  As a result, a flood hazard determination company can 
complete a SFHD form indicating that a property is in a SFHA in a participating community and 
thus requires flood insurance.  Under these circumstances, the instructions for the SFHD form 
direct the company to indicate on the form that federal flood insurance is available because the 
community participates in the NFIP.   Completion of the form should prompt the lender to 
inform the borrower that flood insurance is required on the property.
That notification will be appropriate and legally proper.  Nonetheless, if the borrower 
receives a copy of the SFHD form from the lender, the borrower will be informed incorrectly 
that federal flood insurance is available.  The same situation will occur if the borrowers 
insurance agent obtains a separate flood determination.  Although federal flood insurance is not 
available, the mandatory purchase requirement still applies.   In addition, the federal regulatory 
agencies (e.g., OCC 1999; OTS 2001) do not indicate that 1316 properties are ineligible for 
federal flood insurance.
	Third, insurance agents do not have direct access to FEMAs database on 1316 
properties, so agents may write and issue an NFIP policy to a borrower, who, in turn will use that 
policy to demonstrate compliance with the mandatory purchase requirement to a lender, which 
will then make the loan.  WYO companies do have access to information on 1316 properties.   
When agents submit completed applications to their insurance companies, FEMA requires them 
to compare the applications with the agencys list of these properties.   
Compliance with this screening requirement is mixed.  Some companies are 
conscientious; others are less so.  Due to the latter companies, FEMA also screens all new 
policies against its list of 1316 properties and occasionally identifies some that have federal flood 
insurance.  The matching process may be problematic. It requires that the property address that 
the insurance agent provides be the same as or nearly identical to the address in FEMAs 
database of 1316 properties (Office of Inspector General 2002).  Inconsistent address 
information is a recurring problem with the NFIPs records and one not amenable to an easy 
solution because FEMA must depend on insurance agents and companies to provide correct and 
complete addresses.
When FEMA identifies a 1316 property with federal flood insurance, the agency must 
notify the insurance company that the policy is invalid and will be cancelled.  In turn, the 
company must notify the agent, who must notify the borrower, who would be expected, but not 
required, to inform the lender, who would then notify its loan servicer if one is used.  FEMA 
(1999) has alerted lenders to the possible problem with 1316 properties but does not tell them 
how to avoid or resolve the problem except to discourage issuance of the loan.
	A 1316 property can have its eligibility for federal flood insurance restored when the 
violations have been corrected and the 1316 declaration rescinded.  There is currently no process 
or procedure in place to ensure that lenders are informed of the rescission.
Selling or transferring loans
Most large lenders use loan-servicing companies to collect payments from borrowers and 
perform other administrative functions.  These companies are responsible under their contracts 
with lenders for insuring that real estate taxes are paid and that insurance is in place.  Payment 
for these obligations is typically made by the borrower as part of the monthly installment and 
accumulated in escrow accounts by the servicer, which then remits these funds to the taxing 
authority and insurers on an annual or semiannual basis.
It is common in the lending industry to sell loans, not only to the GSEs but also to other 
lending institutions.  In addition, loan portfolios can be transferred to different lending 
institutions when one acquires or merges with another.  When transfers or sales of loans occur, it 
is common for the loan servicer to change as well; changes of servicers can also be made even 
when the owner of the loan does not change.  It is not unusual for a single loan to be sold several 
times, with each sale introducing a new servicing vendor.  To address these changes, the 1994 
Reform Act requires regulated lenders (and subsequent regulated lenders who become owners 
and their servicers) to inform the director of FEMA or the directors designee, within 60 days, 
whenever a loan is made, increased, extended, renewed, sold, or transferred.  Similar notification 
is also required whenever there is any change in the servicer of a loan.  FEMA has designated the 
insurance provider as the agencys designee to receive these notices.  
As FEMA (1999) explains, this notification process makes the insurer aware of the 
identity of the party (i.e., the owner of a loan or its servicer) who is supposed to receive mailings 
about the impending expiration of a flood policy, the need for renewal, and, possibly, the need to 
force place coverage.  Furthermore, the requirement is intended to combat what FEMA (1999) 
calls the high nonrenewal rate that occurs after the first year of the loan.
	When this notification process works well, the insurance providers, primarily the WYO 
companies, know which vendors are servicing their policyholders.   Interviews with insurance 
companies and lenders suggest, however, that the process does not work as well as intended.  As 
one insurance company explained to AIR, When a mortgage is sold, it is often lost in the wind 
because the company does not know whom to contact when borrowers do not retain flood 
insurance.  In other instances, the new owner of a loan does not inform the insurance provider 
of the purchase of the loan or may not be informed that a borrower is insured.  The loans new 
owner may then force place coverage without knowing whether insurance is already in place.  
Furthermore, although FEMA is not supposed to receive the notices of change in servicers, it 
often does.   
	In contrast to the seemingly widespread problems with the notification process that may 
result in a lack of required coverage when the loan or servicing is sold or transferred, the 
procedural requirements may also create unnecessary redundancy.  The law requires that the 
directors designee be informed of the identity of the loan servicer when certain events occur 
even when there is no change in servicer or the owner of the loan.  This can occur when a 
borrower increases, extends, renews, or refinances a loan with the original lender.  In such a 
situation, the lender must again inform the WYO of the servicers identity even when the 
servicer has not changed.  
Grandfathering
	As noted earlier, FEMAs map modernization initiative will update, revise, or publish 
new FIRMs for thousands of communities.  These changes may change the risk zones in which 
buildings are located.  As a result of a map change, for example, a home formerly in a low-risk X 
zone may now be in an A zone.  Similarly, a building previously in an A zone may now be in a V 
zone. When a lender obtains a flood determination, it is based on the FIRM in effect at the time 
the determination is obtained, not necessarily at the time of construction.  In the examples just 
cited, a lender would require flood insurance based on the location of the properties after the 
maps had changed (assuming that the buildings are located in participating communities).  
In both instances the property owners premiums would be expected to increase due to an 
increased exposure to risk.  This reflects a fundamental premise of the insurance industry, 
namely that policyholders should pay premium rates that are commensurate with the risks they 
face.
In fact, however, regardless of a change in risk exposure, FEMA administratively created 
grandfather rules that permit property owners who are remapped to benefit from the rating for 
the former flood zone (or to use the rating in the new zone if it is more favorable) in two 
circumstances.  First, despite map changes that identify higher risks, existing policyholders can 
renew their policies based on the former zone as long as they retain continuous coverage and the 
building has not been altered in a way that places the buildings lowest floor below the BFE on 
the applicable FIRM.  
Second, property owners who built in compliance with the FIRM or BFE in effect at the 
time of construction can use the rates applicable at the date of construction and obtain coverage 
for the first time before the map change is effective as long as the building has not been 
substantially improved or altered in a way that places the buildings lowest floor below the BFE 
on the applicable FIRM.   Property owners must provide documentation to the insurance 
company that substantiates the buildings compliance with the FIRM at the time of 
construction.   
In both situations, the administrative grandfathering continues as long as the property 
owner renews the policy, which can be assigned to subsequent owners of the property.
Legislative grandfathering applies to certain buildings in units of the Coastal Barrier 
Resources System and Otherwise Protected Areas.  The Coastal Barrier Resources Act of 1982 
and the Coastal Barrier Improvement Act of 1990 prohibit insurance coverage through the NFIP 
on buildings constructed or substantially improved after an areas designation as a unit in the 
CBRS.  In contrast, buildings constructed or permitted and under construction before such 
designation and those not substantially improved after designation are eligible for coverage.  
Continuous or uninterrupted coverage is not required to obtain or initiate coverage.   Portions of 
approximately 400 participating communities in 21 states, Puerto Rico, and the Virgin Islands 
are in the CBRS, OPA, or both.
As just noted, once an area is included in a CBRS unit, federal flood insurance is 
prohibited on all new construction and on buildings that are substantially improved.  In spite of 
this prohibition, privately owned properties in these areas have been and continue to be insured 
through the NFIP.  The GAO (1992) identified 952 residences in five CBRS units.  Of these 
units, the GAO sampled 250, of which 42 had federal flood insurance.  Salvesen (2003) reported 
that more than 100 NFIP policies had been issued erroneously in one CBRS unit in North 
Carolina.  More recent analyses by AIR, in 2005, found several federally insured properties in 
one of these units (i.e., in Bethany Beach, Delaware).  The number of residences in this CBRS 
unit increased to 201 in 2000 from 74 in 1992 and from only two in 1982 (GAO 1992; Salvesen 
2003).  
Each year, according to FEMAs database on policies in force, insurance agents 
improperly write hundreds of policies for properties in CBRS units.  FEMA successfully 
identifies many of the properties as being ineligible for federal flood insurance, but the WYO 
companies (or their agents) that provided the policies are not always prompt in canceling them.  
For other properties in the CBRS, FEMA may not be aware that their owners are insured through 
the NFIP.    
Grandfathering can complicate lenders and borrowers efforts to assure that proper 
coverage is in place (or is in place when it should not be, such as for buildings in the CBRS 
constructed after inclusion in the system).   From the perspective of insurance companies and 
their agents, grandfathering increases their workloads without a commensurate increase in their 
commissions. To assemble the data needed to justify administratively grandfathering a property, 
an insurance agent must know the exact date of construction and have access to previous FIRMs 
(and, in some instances, their predecessors, Flood Hazard Boundary Maps).  FEMA asserts that 
communities maintain map repositories that provide access to outdated FIRMs, but this a 
problematic claim.  Participating communities are not required to retain outdated FIRMs or 
Flood Hazard Boundary Maps, and many do not.  A representative from FEMAs Map Service 
Center indicated that it can assist an insurer in determining the existence of superseded FIRMs 
but is typically unable to provide such FIRMs to insurers or their agents. 
The NFIPs system for identifying grandfathered properties further compounds the 
situation.  The NFIPs application for flood insurance does not provide an insurance agent the 
opportunity to indicate that grandfathering is the basis for the rates applied or for an agent to 
indicate that a building is eligible for flood insurance despite its location in the CBRS.  In 
addition, without knowledge that administrative grandfathering is the basis for the premiums 
charged, claims adjusters may incorrectly believe that buildings have been improperly rated, thus 
causing problems for grandfathered policyholders after they have filed a claim due to damages 
from a flood.
FEMA recognizes the difficulty in understanding and managing administrative 
grandfathering but is uncertain how best to address this situation.  On the one hand, some agency 
officials believe that policyholders who built in compliance with the NFIPs requirements should 
not be charged higher premiums because of changes to FIRMs.  On the other hand, in addition to 
complicating efforts to ensure compliance with the mandatory purchase requirement, other 
officials concede that administrative grandfathering results in different premium rates for 
policyholders facing the same risk. The issue of grandfathered properties is so complex that 
FEMA is unable to determine its extent and, according the FEMAs IG (1995), the agencys 
recordkeeping system does not provide easy access to the information needed to verify that 
grandfathering was used in calculating the premium. As one senior NFIP official noted, 
administrative grandfathering will continue to be a nightmare.  FEMAs IG (1995) 
recommended that the agency assess the impact of eliminating administrative grandfathering 
and, if feasible, begin phasing it out.  FEMA responded to this recommendation by noting its 
consideration of alternatives to its grandfathering rules, but no major changes in the rules have 
resulted.  
Manufactured homes
Manufactured homes are an increasingly important segment of the housing market in 
rural, nonmetropolitan areas, especially in the southern United States.  These homes represented 
about 35 percent of all homes built in these areas between 1995 and 2004. Manufactured homes 
occupy land in SFHAs at a rate similar to or even greater than that of traditional site-built homes.  
In some areas, restrictive zoning laws have meant that manufactured homes are located on the 
least desirable lands and, as one organization (IllinoisProBono 2004) has noted, this often 
makes mobile home owners desperate to find and keep whatever lot they can get.  For many of 
these owners, the consequence is that they live in flood-prone areas.
According to the U.S. Department of Commerce (2004c), about one in four manufactured 
homes was within 300 feet of a body of water in 2003.  Despite this proximity to water, 
manufactured homes, which are potentially subject to the mandatory purchase requirement, 
appear to be insured against floods at lower rates than other kinds of home, at least according to 
FEMA.  This occurs for several reasons.  Manufactured homes are eligible for federal flood 
insurance only when they are on permanent foundations and meet specific requirements for 
anchoring.  Many manufactured homes may not meet these requirements.  
In addition, many owners of manufactured homes are never in a position to trigger the 
requirement.   Manufactured homes are often financed through companies that are not federally 
regulated for purposes of flood insurance.  This may occur when manufactured home dealers 
arrange the financing for their customers, in much the same way as an automobile purchase.  A 
survey conducted by the Foremost Insurance Group (2002) found that 41 percent of 
manufactured home residents had purchased homes from dealers.  Additionally, several 
companies that produce manufactured homes have their own finance divisions.  According to 
one outdated estimate (Housing Assistance Council 1996), finance companies provided 73 
percent of all financing for manufactured homes in 1993.  These companies can offer the 
advantage of quick approval, which may appeal to customers with weak credit histories.  In rural 
areas where few banks or credit unions are located, finance companies may also be the most 
readily available source of financing.  
Furthermore, many loans for manufactured home are ineligible for sale on the secondary 
mortgage market.  Buyers of manufactured homes have traditionally used personal property 
loans, also known as chattel loans, as opposed to conventional mortgages.   This situation stems 
from the early history of manufactured homes as truly mobile units.  To be eligible for 
conventional loans, manufactured homes must be treated as real estate as opposed to personal 
property.  In many situations, manufactured homes can be considered to be real estate if they are 
located on the owners private property.  According to one recent survey (Foremost Insurance 
Group 2002), approximately half of manufactured homes are located on the owners private 
property, but many of these owners use personal property loans rather than mortgages (Genz 
2001).  In many states, however, manufactured homes cannot be classified as real estate, 
regardless of the ownership of the land (Apgar et al. 2002).   Of the 138,000 new manufactured 
homes placed in the United States in 2003 more than 60 percent were titled as personal property 
compared with 33 percent titled as real estate (U.S. Department of Commerce 2003).  It is likely 
that some portion of the latter have had their title changed to real estate. 
Even in instances in which manufactured homes are eligible for classification as real 
estate, regulated lenders may be reluctant to provide mortgages.  Owners of manufactured homes 
are significantly more likely to default on their loans than are owners of conventional homes 
(Genz 2001).  Moreover, when finance companies provide loans for the purchase of 
manufactured homes, loan-to-value ratios well over 100 percent are common (Genz 2001).  Such 
ratios promote rapid depreciation and can discourage traditional lenders from offering long-term 
mortgages.
Those who wish to purchase manufactured homes are eligible for federal loan guarantees, 
but such opportunities are rarely pursued.  In 2000, for example, the Rural Housing Service 
originated fewer than 900 loans for manufactured homes.  HUDs Title I manufactured home 
loan program, which can be used for personal property loans, had only 377 loans in 1999 (Genz 
2001).  Similarly, although the VA guaranteed over 1.5 million home loans from fiscal year 1997 
through fiscal year 2001, only 13 of these loans were for manufactured homes.  This number 
may underestimate the actual number of loans issued for manufactured homes because lenders 
may not classify the loans as such.
All of these conditions contribute to a situation in which many owners of manufactured 
homes, while often vulnerable to flooding, are often not subject to the mandatory purchase 
requirement.  While some owners may find this desirable, owners of manufactured homes are 
typically less affluent and have lower incomes than do owners of conventional homes, meaning 
that the former may be less able to recover quickly, if at all, from the consequences of flooding. 
Penalties for noncompliance
The Flood Disaster Protection Act of 1973 did not provide federal regulatory agencies 
with authority to impose penalties on lenders that did not comply with the acts requirements.  
With the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989, however, the agencies were given authority to impose civil money penalties (CMP) on 
lenders that do not comply with any federal law, rule, or regulation, including the flood 
legislation.  The 1989 law did not mention the 1973 flood legislation, and no CMPs were 
imposed on any lenders as a result of violations of that law.
  
With the passage of the 1994 National Flood Insurance Reform Act, however, the federal 
regulatory agencies are now required to impose CMPs administratively when they identify a 
pattern or practice of committing violations of the acts requirements.  A CMP is required 
when a regulated lender fails to:
 
? notify borrowers (and the servicers of their loans) in writing that the structures or 
manufactured homes to be purchased are in SFHAs and of the requirement that they 
purchase flood insurance;
? require flood insurance when it is required;
? escrow payments for flood insurance when the lender also requires the escrowing of other 
expenses (e.g., for fees, taxes, or for hazard insurance); and,
? purchase flood insurance on behalf of borrowers if at any time during the life of their 
loans insurance less than the federal minimum is in place.
In addition to these four violations, the federal regulatory agencies also have authority, 
derived from the Federal Deposit Insurance Act, to impose CMPs when other violations are 
detected.    One such example involves the failure to complete a SFHD form (FDIC 2001b).  
Despite identifying the violations that are subject to a CMP, the 1994 Reform Act does not 
define what constitutes a pattern or practice, and the federal regulatory agencies have declined to 
provide a definition (U.S. Department of the Treasury et al. 1996). 
The 1994 legislation imposed a limit on CMPs of $350 for each violation, with a 
maximum total of $100,000 against any single institution in a calendar year.   As a result of the 
Federal Civil Penalties Inflation Adjustment Act of 1990, as amended by the Debt Collection 
Improvement Act of 1996, however, agencies with authority to impose CMPs are required to 
adjust them for inflation at least every four years, with the first adjustment required no later than 
October 23, 1996. 
Agencies implementation and interpretation of this requirement have not been consistent 
(GAO 2003b).  The FDIC, FRB, OCC, and OTS retained the $350 per violation limit per 
violation when they adjusted their flood-related CMPs in 1996 (1997 for the OCC) but increased 
the maximum total per calendar year to $105,000.  In 2000, the four agencies again retained the 
limit of $350 per violation but increased the calendar year limit to $115,000.  The NCUA made 
its initial adjustment for flood-related violations for inflation in 2000, and OFHEO followed in 
2001.   Both entities raised the per-violation limit to $385 and the annual limit to $110,000.  The 
FDIC, FRB, NCUA, OCC, and OTS again adjusted the amount per violation and the annual 
maximum CMP in late 2004.  The Farm Credit Administration is adjusting its flood-related 
CMPs to $385 per violation with an annual limit of $110,000.  This intended adjustment should 
be completed in 2005.  Table 12 summarizes the CMPs that each agency can impose when it 
detects a pattern or practice of committing violations of the Flood Disaster Protection Act. 
Table 12:  Maximum allowable civil money penalties by agency, as of March 1, 2005
Maximum penalty
 
Agency
Per violation
Per calendar year
Date of last adjustment
   FDIC                                                 
$385
$125,000
October 2004
FRB
$385
$125,000
September 2004
FCA
$350
$100,000
None1
NCUA
$385
$120,000
October 2004
OCC
$385
$125,000
November 2004
OFHEO
$385
$110,000
December 2001
OTS
$385
$125,000
November 2004
1 The FCA anticipates that its initial inflation-related adjustment of civil money penalties for violations related to flood insurance 
will occur in 2005.
	Differences in the maximum amounts of CMPs are seemingly matched by differences in 
their application.  As just noted, neither the law nor the federal regulatory agencies define a 
pattern or practice of committing violations.  Each of the agencies experiences with CMPs are 
discussed below, but it is worthwhile to note considerable variation in the frequency with which 
the agencies impose CMPs as well as with their total value.  
	Through December 2004, the federal regulatory agencies had imposed CMPs on 95 
lending institutions, but the FDIC accounted for 60 percent of these CMPs.  The large number of 
FDIC-initiated CMPs may reflect the number of lending institutions it regulates. 
All but three of the 95 CMPs were issued after 2000.  All of the agencies except the FCA 
and the NCUA have issued a CMP for a pattern or practice of violating the flood legislation.  
CMPs have been issued in 26 states and Puerto Rico, but the largest number has been in Missouri 
(12), Indiana (11), and Arkansas (7).  Lenders in these states, plus Florida, Nebraska, and 
Oklahoma, account for half of all CMPs.  No flood-related penalties have been imposed in any 
state west of Colorado or South Dakota or in any of the New England states (except for 
Massachusetts).  The average total penalty in 2001 was about $5,250, but this average increased 
to more than $9,300 in 2003, due primarily to the single largest penalty  $56,800  ever 
imposed.  For 2004, the average was about $8,800. The average for all 95 flood-related CMPs 
was about $6,800.  Almost two-thirds of these CMPs were for $5,000 or less, and about one of 
five was for $10,000 or more.  The smallest CMPs were for $800.
	Although a few enforcement orders specify the nature and number of violations 
committed, most orders do not.  An examination of the orders that do specify the violations 
indicate that their number and seriousness is often not a good indicator of the total CMP.  As an 
illustration, the OTS imposed a penalty of $3,850 on a bank in Kentucky in early 2004 for failure 
to purchase insurance on two loans, failure to provide notice on six loans, and failure to prepare 
and maintain SFHD forms on three loans.  The FDIC, in contrast, issued a CMP of $2,150 to a 
bank in North Carolina in 2002 for failure to purchase insurance on two loans, failure to 
complete flood determinations on 51 loans, and failure to use the SFHD form for 139 loans.  
Monitoring lenders compliance 
Federal financial regulators monitor compliance with the mandatory purchase 
requirement.  The Farm Credit Administration (FCA), Federal Deposit Insurance Corporation 
(FDIC), the Board of Governors of the Federal Reserve System (FRB), National Credit Union 
Administration (NCUA), Office of the Comptroller of the Currency (OCC), the Office of Thrift 
Supervision (OTS) oversee the policies and processes that regulated lenders use to comply with 
the requirement.
For each of these agencies, monitoring compliance with the mandatory purchase 
requirement is one of many oversight responsibilities associated with ensuring that lenders 
conduct business in a safe and sound manner and honor consumers rights.  In addition to 
monitoring compliance with the flood insurance requirements, the agencies also monitor 
compliance with the Truth in Savings Act, the Truth in Lending Act, the Fair Housing Act, the 
Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Equal Credit Opportunity 
Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the 
Community Reinvestment Act, the Expedited Funds Availability Act, and the Electronic Funds 
Transfer Act among others.  This long but incomplete list suggests that the flood insurance laws 
and rules cannot be the sole or even the primary concern of the agencies that monitor lending 
institutions.  Indeed, given multiple, competing demands, these agencies must allocate fixed 
resources to a wide range of responsibilities.   As a consequence, the context under which the 
federal regulatory agencies operate must be considered when addressing the adequacy of 
monitoring regulated institutions for compliance with their flood-related obligations.
As an illustration, in addition to strengthening the mandatory purchase requirement, the 
1994 Flood Insurance Reform Act required the FCA to promulgate flood insurance regulations 
for the first time and for the other five agencies to revise their existing regulations on flood 
insurance.  Equally important, the 1994 act required the FDIC, FRB, OCC, and OTS to make 
uniform all regulations covering common statutory or supervisory policies.  All six of the 
agencies subsequently addressed their flood insurance regulations with this obligation in mind.
	In collaboration with the FFIEC the six agencies thus issued a joint final rule in the 
Federal Register (U.S. Department of the Treasury et al. 1996) that discussed their common 
understanding of the 1994 act and how regulated lenders should implement the revised 
requirement.  In nearly identical wording, the final rule also provided the specific regulations 
applicable to regulated lenders.  In turn, the regulatory agencies also developed checklists for 
their examiners (e.g., FRB 1997) specifying the issues related to flood insurance that should be 
reviewed during examinations of these lenders.  The agencies checklists are similar and 
typically require examiners to review the following: 
1. Verify that adequate controls exist to ensure that lenders comply with flood-
insurance requirements.
2. Determine whether lenders perform required flood determinations for loans 
secured by improved real estate or manufactured homes affixed to permanent 
foundations.
3. Determine whether lenders require flood insurance in the correct amount for 
designated loans.
4. Determine whether lenders provide the required notices to the borrower, servicer, 
and to the director of FEMA whenever flood insurance is required as a condition 
of the loan.
5. Determine whether lenders require flood-insurance premiums to be escrowed 
when flood insurance is required on a residential building and funds to cover 
other charges associated with the loan are required to be escrowed.
6. Determine whether lenders comply with the forced-placement provisions.
7. Initiate corrective action when policies or internal controls are deficient or when 
violations of law or regulation are identified.  
Due to the similar examination procedures and issues reviewed by examiners for each of the six 
agencies, the following discussion describes what is different or distinctive in application or 
interpretation. 
Farm Credit Administration
The Farm Credit Administration (FCA) monitors the safety and soundness, including 
compliance with the mandatory purchase requirement, of the 110 banks, associations, and 
service corporations of the Farm Credit System (FCS).  FCS institutions lend to farmers, 
ranchers, aquatic producers and harvesters, agricultural processing entities, farm-related 
businesses, rural homeowners, agricultural cooperatives, and rural utilities.  These borrowers 
face unique needs with regard to the requirement, to which the FCS institutions became subject 
in 1996.  The FCA also regulates the Federal Agricultural Mortgage Corporation (Farmer Mac), 
but Farmer Mac is not subject to the mandatory purchase requirement.  
Examination procedures
	
	FCA examiners use a statistical sample of an institutions portfolio, including loans that 
were originated before the examination period, to determine specific compliance measures.  The 
examiner ensures that flood determinations are correctly prepared on the SFHD form and that the 
institution relies on a previous determination only if the previous determination was completed 
within seven years and the property is not in a community that has been remapped.  The 
examiner must also review the contract between the institution and the flood determination 
company, if used.  The FCA estimates that more than half of the institutions it regulates rely on 
third parties to conduct flood determinations.
	Using the sample of loans, the examiner also assesses whether sufficient insurance was 
obtained prior to loan closing and is maintained for the life of the loan.  Unlike other regulatory 
agencies, the FCA includes a requirement that the examiner note how the institution complies 
with SBA, VA, and FHA prohibitions against lending for properties in a SFHA in 
nonparticipating communities, if the institution makes loans guaranteed or insured by these 
agencies.  
	The examiner determines whether the institution complies with the regulations governing 
the mandatory purchase requirement as they apply to the institution, borrower, servicer (if 
applicable), and insurance company (if applicable).  
	The escrow requirement is largely inapplicable to FCS loans because such loans are 
usually for commercial loans, which are not subject to the escrow requirement. 
The FCA notes that there are several ways in which the mandatory purchase requirement 
does not consider the particular needs of FCS institutions.  Farm structures are often not 
adversely impacted by a flood.  Farmers might simply have their barns cleaned out during a 
flood, without experiencing damage or loss.  Also, agricultural properties tend to have old, 
existing structures of nominal value, but high replacement cost.  Such structures would not be 
replaced if they were lost or damaged by flooding, yet the borrower is required to retain flood 
insurance coverage for them.  It can be difficult as well to determine the insurable value of farm 
buildings of this nature.
 
Infractions
At the end of the examination, the examiner gives written and oral presentations of the 
findings to the institutions board of directors.  If the examiner finds a pattern or practice of 
noncompliance with the mandatory purchase requirement, the FCA must assess a CMP on the 
institution.  Through 2004, however, the FCA had not imposed any CMPs for a pattern or 
practice of violations of the requirement.  
The FCA tracks the number of violations of flood insurance regulations each year (FCA 
2002a, 2002b, 2004).  The number of such violations decreased to 51 in fiscal year 2003 from 
about 140 in fiscal year 1999.  The most common violation is the failure to complete a SFHD 
form.  The second most common violation is the failure to require flood insurance.  This 
logically follows from the most common violation.  If flood determinations are not completed, 
neither lenders nor borrowers may know whether insurance is required.  Overall, about 90 
percent of the violations the FCA identifies are in one or both of these two categories.  Similarly, 
in a typical year about 90 percent of the violations result in corrective actions by the institutions; 
the remainder do not require such action due to the nature of the violation.	
Federal Deposit Insurance Corporation 
	The Federal Deposit Insurance Corporation (FDIC) directly examines and supervises 
approximately 5,300 banks and savings banks, or more than half of all the institutions in the U.S. 
banking system.  The FDIC is the primary regulator of state-chartered institutions that do not join 
the Federal Reserve System.
Examination procedures
The FDIC conducted approximately 1,800 compliance and/or Community Reinvestment 
Act (CRA) examinations during 2003.  In general, the compliance and CRA examination 
intervals for an FDIC-regulated financial institution are based on the institutions asset size and 
the compliance and CRA ratings assigned at its most recent examination.
	The FDICs compliance examinations blend both risk-focused and process-oriented 
approaches.  By focusing on risk, information gathered about a financial institution is used to 
direct the corporations resources to those operational areas with higher degrees of risk.  
Concentrating on the institutions internal control infrastructure and methods, or the process 
used to ensure compliance with federal consumer protection laws and regulations, acknowledges 
that the ultimate responsibility for compliance rests with the institution and encourages 
examination efficiency.
Initially, the FDIC sends a Compliance Information and Document Request (CIDR) to 
banks selected for an examination.  Using the material provided in response to the CIDR, the 
scope of an examination is preliminarily established prior to entering the financial institution.  
The scope is refined as a result of discussions with the banks management, its compliance 
officer, and its internal auditor.  For example, the scope of the compliance review may be limited 
due to a finding that reliable procedures and controls are in place.  In contrast, the review may be 
expanded because of a finding that necessary internal procedures or controls are lacking or that 
violations are present.  
Through this risk-focused, process-oriented approach, the examiner identifies and 
quantifies compliance risk; assesses the institutions compliance infrastructure and methods for 
identifying, monitoring, and controlling compliance risk;  and determines the transaction testing 
needed to assess the integrity of a banks compliance management system.  The number of 
transactions selected and the type of sampling used is relative to the perceived risk and the need 
to assess the level of compliance in an activity or function.  
Under examination procedures issued in 2003 (FDIC 2003), the agencys compliance 
examiners conduct transaction testing in a focused manner.  If a review of a lenders compliance 
with the mandatory purchase requirement is appropriate, the examiner will typically obtain a list 
of loans secured by properties in SFHAs, including loans issued prior to the FDICs most recent 
assessment of compliance.  In some instances, as well, the FDIC will also obtain a list of 
properties from an outside vendor to avoid relying on an institutions potentially flawed 
determinations of which properties are inside or outside of SFHAs.  The examine will typically 
review a sample of loan for compliance, but examiners can require a lender to conduct a 
complete a review of its entire portfolio if problems are found within the sample of loans initially 
reviewed.
	The examiner also looks at the contract between the institution and the flood 
determination companies, if any, that are used.  The institution must have procedures in place to 
ensure that the companies financial condition is reviewed at least annually. The contract must 
provide a guarantee of the vendors work and contain provisions to resolve disputes relating to 
determinations, to allocate responsibility for compliance, and to address which party will be 
responsible for penalties incurred for noncompliance. 
	A component of the mandatory purchase requirement that the FDIC does not monitor 
relates to remapping.  The FDIC has no codified definition of what constitutes awareness and 
does not monitor whether institutions require flood insurance if they become aware (apart from 
at loan origination) that a property has been remapped into or out of a SFHA.
Infractions
When the examiner finds a pattern or practice of noncompliance with the mandatory 
purchase requirement, the examiner will discuss the finding with the institutions management 
and will contact the FDICs appropriate regional director.  If the regional director concurs with 
the examiner, the FDICs head office is contacted.  At this point, legal staff may be included in 
the review.  The FDIC will then levy CMPs when a pattern or practice of noncompliance is 
confirmed.  The FDIC does not record what proportion of infractions lead to penalty charges. 
The FDIC (2001b) has written guidance about CMPs for flood insurance violations.  This 
guidance notes that the term pattern or practice is not defined in the 1994 Reform Act and 
indicates that a finding of whether violations are part of a pattern or practice is based on many 
considerations which are typically unique to the case at hand.  The FDIC thus determines the 
amount of a CMP on a case-by-case basis. 
Should a pattern or practice of violations be found, the FDIC uses a sliding scale to 
determine the penalty per violation.  The lowest amount, $100 or less per violation, is intended 
for first occurrences (except for failure to notify borrowers that their properties are in SFHA and 
that they will be required to purchase flood insurance) and where the bank is cooperative and 
quickly addresses the violations, and when they result from a reasonable misunderstanding 
rather than negligence or willful misconduct.   Fines of approximately $200 per violation are 
appropriate for first occurrences of a failure to notify or to obtain insurance when the bank is 
cooperative, diligently institutes corrective measures, and when the violations result from a 
misunderstanding.  The largest per-violation penalties, ranging from $200 to $350, are intended 
for repeat violations, instances of widespread noncompliance, violations that significantly affect 
the banks borrowers, or negligent or willful misconduct.
The FDICs Inspector General sampled FDIC-regulated banks and savings banks 
between January 1997 and March 1998 and found that 47 percent of these banks had flood 
insurance-related violations during that period (FDIC 1999).   In 2002, the FDIC conducted 
1,839 compliance examinations, of which 475 institutions (26 percent) had significant violations 
related to flood insurance.  In 2003, the percentage of FDIC-regulated banks cited for such 
violations declined to 19 percent (i.e., 355 of 1,833 banks examined).  
Between August 2000, when the FDIC issued its first flood-related CMP, and December 
2004, the FDIC imposed 58 CMPs for a pattern or practice of violations of the Flood Disaster 
Protection Act.  This number is significantly higher than the combined total of the other five 
regulatory agencies.  The FDICs CMPs have ranged from $800 to $43,700; nearly 70 percent 
have been for less than $5,000.  The FDIC was unable to provide an estimate of costs associated 
with issuing a CMP but agreed that the administrative costs associated with a CMP often greatly 
exceed the amount of the penalty, in many instances by ten or more times.  For some of the 
smaller penalties, the cost-to-penalty ratio is probably substantially higher.   
Due to the current statutory requirements, the FDIC does not believe it has discretion to 
obtain corrective action through other means when a pattern or practice of violations of the 
mandatory purchase requirement is discovered.  Nonetheless, enforcement actions, regardless of 
the amount of the CMP, carry stigma that lending institutions want to avoid, at least in the 
FDICs opinion.  
Federal Reserve Board 
The Board of Governors of the Federal Reserve System (FRB) monitors state-chartered 
commercial banks that are members of the Federal Reserve System.  There are about 1,000 such 
banks, the majority of which have assets of less than $500 million.
Examination procedures
The FRB conducts risk-focused consumer compliance examinations that direct resources 
to the areas of a state member bank with the greatest compliance risk, while reducing regulatory 
burden by limiting the review of areas having low compliance risk.  Risk-focused supervision 
relies on performing risk assessments and tailoring supervisory activities to fit a banks risk 
profile.  Vital to such a program is the expectation that each state-member bank will manage its 
own compliance risk effectively.  Thus, risk-focused supervision emphasizes the appropriateness 
of an institutions processes for identifying, measuring, monitoring, and controlling its risk 
exposure.  Examiners evaluate the effectiveness of an institutions program for managing its 
risks, particularly the oversight provided by the board of directors and senior management, the 
consumer compliance program structure, policies and procedures, compliance audits/reviews, 
internal controls, and training.  The examiners evaluation of the consumer compliance risk 
management program serves as the foundation for the consumer compliance examination.
In addition to compliance ratings from prior examinations, an institutions size 
determines the frequency with which the FRB examines it.  Banks with a satisfactory compliance 
history and with assets of more than $250 million are examined every two years.  Since the 
passage of the Financial Modernization Bill in 1999, small banks with a satisfactory compliance 
history and assets of less than $250 million, are examined every four or five years.  Institutions 
with an unsatisfactory compliance history are usually examined every 12 months.  The FRB uses 
a midterm monitoring system between examinations of small banks.  The FRBs 1999 report to 
Congress reported slightly different periods between examinations: it reported a 36-month 
interval for small institutions with a satisfactory compliance history and a 24-month interval for 
large institutions with a satisfactory compliance history. 
Examiners exercise their discretion in selecting appropriate sampling techniques, looking 
at the past one or two months of loan originations.  Limiting the scope of the origination period 
means that the sample reflects the institutions current practices.  The FRB could not estimate the 
approximate sample size used.
The FRB assesses whether flood determinations were completed before loans were 
originated.  Most of the FRBs member institutions use flood determination companies.  To 
examine the accuracy of flood determinations, examiners will review the vendors process for 
verification instead of checking each flood determination.  The FRB has also experimented 
with software to determine accuracy of flood determinations, but it found that the software did 
not have recent map information (FRB 1999).  However, if the examiner notices that the 
institution is doing in-house flood determinations rather than using third-party vendors, the 
examiner is likely to require the bank to review and validate that process.
In addition, examiners pull a special sample of loans secured by property located in 
SFHAs.  The FRB could not estimate the approximate sample size used.  Examiners use this 
sample to determine the adequacy of flood insurance at loan origination and check to determine 
whether flood insurance is being required for the life of the loan, beyond loan origination, taking 
particular care to check that flood insurance is renewed as necessary.  
 
Infractions
In the event that violations are detected, the examiner discusses the findings with the 
institutions management to determine appropriate corrective actions.  By the time the examiner 
leaves the site, the management is aware a problem exists.  After the examination, the FRB 
reviews the banks corrective action plan and ensures that the bank has taken the proposed 
actions.  In later examinations, examiners confirm that these actions have been taken.  Between 
1997 and 1999, corrective actions generally included retaining flood insurance on non- or 
underinsured properties, strengthening management oversight of the mandatory purchase 
requirement, further review of the loan portfolio to ensure that flood policies are current, 
expanding existing procedures, and implementing staff training.
The FRB finds only a small percentage of the institutions it examines to have 
unsatisfactory compliance with the mandatory purchase requirement.  During 1997-99, the FRB 
(1999) reported 223 institutions with violations of the mandatory purchase requirement.  The 
most common violation was the failure to use the SFHD form - 142 institutions violated this 
requirement a total of 696 times.  The second most common violation was failure to require 
flood insurance where available; this violation was reported in 71 institutions 116 times.  The 
FRB issued the first CMP for a flood-related violation in June 1999.  
 Through 2004, the FRB had issued 20 CMPs for flood-related violations.  Of these, 
seven were for $10,000 or more, and nine were for less than $5,000.  
The FRB considers several factors in determining a reasonable assessment amount for a 
CMP, including the size of the bank, the cause of pattern or practice of noncompliance, the 
number and frequency of violations, past history of violations, prior precedents at the Board, and 
any information it receives from the bank in mitigation of the CMP.  The FRB cannot estimate 
the cost of issuing a CMP, but concurs that issuing a CMP is more costly than the revenue 
generated.  It should be noted that CMPs, as with other public enforcement actions, are believed 
to act as a deterrent to future violations not only to the bank subject to CMPs but also to the 
industry.  
National Credit Union Administration 
The National Credit Union Administration (NCUA) supervises and insures about 5,400 
federally chartered credit unions.  The NCUA also insures about 3,300 state-chartered credit 
unions that state regulatory agencies supervise.  
Examination procedures
	
	The NCUA examines credit unions, on average, every 18 months.  Examinations are risk-
focused, and the NCUA uses several variables to determine how often to examine individual 
institutions and what requirements to emphasize in the examination.  Major personnel, policy, or 
portfolio changes can trigger more frequent examinations.  Credit unions with high capital and 
steady management are generally examined less often, while less stable credit unions (often 
those with less capital), receive more frequent examinations.  The amount of time spent on 
examinations varies with asset size and the institutional complexity.  An examination of a small 
credit union may take a single examiner a few days whereas a larger credit union may take a 
team of examiners several weeks.
 Examiners begin a review with an initial assessment of risk, which can survey a credit 
unions policies and procedures for originating loans.  If the credit union has a tickler system for 
renewing all insurance, including flood insurance, then the examiner generally determines that 
there is little risk of noncompliance with the insurance requirement.  In these cases, the examiner 
would follow risk-focused examination procedures and, if the examiner determines the risk to be 
low, would probably not look closely at a sample of loans for compliance with the requirement.
Then, examiners select a sample of loans from the institutions portfolio.  The sample 
depends on the type of loan products the institution offers (residential or commercial), whether 
the institution has implemented any new programs during the examination period, and whether 
the institution has any new policies.  Although not a selection criterion, if the examiner 
determines that significant flood risk exists in an institutions lending area, the examiner would 
perform a review of flood insurance in the loan files sampled.  If the credit union previously 
wrote off several loans due to flood loss, the examiner would likely look at flood insurance 
issues.
When the examiner reviews a sample of loans, the sample generally includes only loans 
that originated since the previous examination.  Examiners may review loan files or policies and 
procedures that were found deficient in the prior examination to ensure that appropriate changes 
were initiated.  Therefore, in most cases, the NCUA examines whether an institution requires 
flood insurance beyond loan origination when the examiner had previously identified flood 
insurance concerns. 
Examiners are required to perform examination procedures related to the mandatory 
purchase requirement based on the examiners risk assessment.  The examination objectives 
include checking that properties in SFHAs are covered by flood insurance.  
The coverage and internal control procedure entails an examiners review of the ways 
in which a credit union determines whether improved real estate or manufactured homes are or 
will be located in a SFHA; verifying that this process is accurate; and determining if the 
communities in which the properties in SFHAs are located participate in the NFIP (NCUA 
2004).  The NCUA does not have a standard procedure for checking the accuracy of flood 
determinations.  
In the property and determination requirements procedure, the examiner verifies that a 
credit union prepares the flood determination forms correctly and that it only relies on a 
previous determination if it is not more than seven years old, is recorded on the SFHD form, and 
is not in a community that has been remapped.  This process clarifies the requirement that 
federally regulated lenders need not complete a duplicate flood determination form if the 
property has not been remapped.  It is unclear how the lender would know whether a property 
had been remapped without looking at the maps and thereby completing another flood 
determination.  The NCUA requirement is more logical because it would be possible to 
determine whether a community had been remapped without completing another flood 
determination on a given property.
The NCUAs Examiners Guide (NCUA 2002a) does not discuss remapping.  The 
NCUA reports that credit unions are unlikely to read the Federal Register and are thus unlikely 
to be aware of changes to FIRMs included in FEMAs semiannual Compendium of Flood Map 
Changes.  The NCUA staff do not recommend that FEMA remedy this communication gap by 
notifying all credit unions before remapping exercises occur.  The NCUA suggests that such 
communication might overwhelm credit unions, particularly small institutions.  Instead, it might 
be useful for FEMA to notify specific credit unions when there are map changes in their lending 
area. 
The NCUA uses locally based examiners and believes these examiners are familiar with 
the lending areas of local institutions.  As such, the NCUA believes that these the examiners are 
likely to notice discrepancies in flood certification or notice something that merits attention 
within a credit union or among various credit unions in the community in which the examiner 
lives and works.
Infractions
If noncompliance with the mandatory purchase requirement is found, the NCUA brings 
its concerns to the credit unions attention.  If there are other large problems, problems related to 
the requirement may be dealt with informally until the larger problems are solved.  If the credit 
unions management does not make adequate, timely changes to address the noncompliant 
pattern or practice, the NCUA will alert the credit unions board of directors to the problem.  If 
the board of directors does not implement appropriate change, the NCUA can issue a document 
of resolution, which is an official agreement as to what the credit union will do to achieve 
compliance.
If the document of resolution is unsuccessful, the NCUA can take administrative action, 
including cease and desist orders or CMPs.   Through 2004, the NCUA had not imposed any 
CMPs for noncompliance with the mandatory purchase requirement.  As a consequence, the 
NCUA was unable to estimate how long the process of issuing a CMP might require.
Office of the Comptroller of the Currency 
The Office of the Comptroller of the Currency (OCC) charters, regulates, and examines 
monitors approximately 2,000 national banks, which are financial institutions with federal 
charters.  All federally chartered banks are members of the Federal Reserve System.  Overall, the 
OCC supervises institutions that hold more than 56 percent of the total assets of the U.S. banking 
system (OCC 2003).
Examination procedures
Similar to the FRB, OCC examiners conduct risk-based consumer compliance 
examinations of OCC-regulated institutions, which include some of the largest financial 
institutions in the United States.  OCC supervision focuses on the banks ability to manage risk 
properly.  Using the Core Assessment standards, examiners draw conclusions about the 
adequacy of a banks risk management systems.  When risks are high, when activities, products, 
and services are more complex, or when significant issues or problems are identified, examiners 
will expand the scope of their supervisory activities to ensure that a banks management has 
appropriately identified, measured, monitored and controlled risk.  However, the extent of the 
additional supervisory activities will vary based on the impact of those activities, products, 
services or significant issues may have on the overall risk profile or condition of the bank.  When 
examiners assess consumer compliance risk management systems related to the mandatory 
purchase requirement, they consider a banks policies, processes, personnel, and control systems.  
A banks risk management system would be deemed deficient if any one of these areas is 
unsatisfactory. 
The OCC examines the institutions it supervises every 12 to 18 months.  The size, 
compliance rating, and risk assessment of an institution are contributing factors in determining 
the frequency and thoroughness of those reviews.  Most banks subject to the OCCs oversight 
have internal and external audits that assess their compliance with regulations, including the 
mandatory purchase requirement.  The largest 25 banks regulated by the OCC have resident 
OCC examiners that are assigned to work full-time at these financial institutions.  This enables 
the OCC to maintain an ongoing program of risk assessment, monitoring, and communications 
with bank management and directors. 
Flood insurance reviews are part of every OCC consumer compliance examination.  
Examiners review prior examination results, consumer complaints against the institution, 
findings from internal and external audit reports, and minutes of compliance-related meetings of 
boards of directors.  Examiners consider the types of products or services the institution offers, 
the volume and complexity of products or transactions occurring, the banks location and market 
area, changes in processes (i.e., forms, contracts, software programs, etc.), changes in the 
institutions policies, processes, personnel, or controls, and other factors that could affect 
compliance with the regulatory requirements. These findings help the OCCs examiners to 
determine the banks potential strengths and weaknesses in complying with consumer laws, 
including the mandatory purchase requirement, and the banks aggregate risk and direction of 
risk (i.e., increasing or decreasing).
 The OCC expects that the banks it regulates will have policies that address the 
mandatory purchase requirement that include responsibilities of key personnel, a training 
program, a process for responding to changes in laws and regulations, and the roles of audit and 
compliance reviews.  
Based on the risk assessment, examiners use discretion in outlining their supervisory 
strategy.  Examiners select a sample size based on the banks overall risk profile to determine the 
banks level of compliance with the mandatory purchase requirement.  For example, less than 
satisfactory audit results, policies, processes, or controls may result in larger sample sizes.  
Examiners typically select a sample of at least ten loans that include at least five commercial and 
five residential.  If, for example, an audit identified weaknesses in the banks identification of 
commercial properties located in SFHA, the examination focus and loan samples selected would 
likely include loans on commercial properties located outside SFHAs.  If flood insurance 
renewals were identified as high risk, the loan sample would likely include designated loans that 
were at least two years old.  The sample includes loans that are over one year old.  This enables 
examiners to determine whether borrowers obtain flood insurance at loan inception and whether 
borrowers renew their flood insurance throughout the life of their loans. 
The institutions regulated by the OCC commonly use flood determination companies to 
determine whether a property is located inside or outside a SFHA.  Examiners do not verify the 
accuracy of each determination, but rather review the vendors policies and procedures.  The 
OCC does not use the flood determination software that other regulators use because the 
software is not considered more reliable than other software used by OCC-regulated banks.  
Although a rare occurrence, if a bank uses maps to determine properties location relative to 
SFHAs, the examiner will verify the accuracy of the determinations by checking the maps.
The OCC expects that a bank will monitor its loan portfolio to determine if secured 
properties have been moved into or out of a SFHA.  The OCC also confirmed that if a bank does 
not have life-of-loan service and if no tripwire event occurs that triggers the mandatory purchase 
requirement, a bank should have sufficient internal controls in place to ensure that the property is 
adequately insured against floods.  Life-of-loan flood determination services may or may not 
inform the bank, but OCC-regulated banks are not required to monitor changes in FIRMs.
The OCC does not monitor the number of force-placed policies, but does include in its 
bank examinations whether the bank force places flood insurance as required.  According to the 
OCC, the force-placed process does not always work as intended.  In some instances force-
placed coverage of flood insurance is not imposed immediately after the 45-day notification and 
waiting period.  National banks report that they are open to risk in the 45 days between notifying 
a borrower that flood insurance has lapsed and force placing a new policy.  Further, the OCC 
noted that differences between the requirements of the NFIPs MPPP and private force-placed 
insurance are confusing to some banks.  Moreover, private force-placed insurance is usually less 
restrictive than is the NFIPs.  Questions are frequently asked of the OCC about the proper 
procedures to follow when force-placed coverage is required.
Infractions
If the examiner finds that a bank has failed to obtain or maintain adequate flood insurance 
coverage on designated loans, the OCC may direct a bank to conduct a regulated review of its 
loan portfolio to determine the extent of the problem.  If examiners identify noncompliance with 
the mandatory purchase requirement, they cite violations and determine the root cause of the 
violations.  The cause may be the result of an isolated problem or an errant loan officer.  
Conversely, the violation could represent a noncompliant policy.  The examiner determines 
whether an instance of noncompliance represents a pattern or practice.
A pattern or practice is defined subjectively but includes situations in which there is no 
policy for requiring flood insurance, there is significant repetition of violations, or if the 
institutions internal policies, procedures, or internal controls are deficient.  If the examiners 
identify a root cause indicating a compliance risk to the bank (for example, similar violations 
cited during the last examination, deficient internal controls, a weak compliance management 
system, or poorly trained staff, among others things), the examiners will expand the sample to 
determine the extent of the problem. 
At the conclusion of the examination, the examiner must identify actions needed to 
correct violations or weaknesses and discuss these with the institutions management.  The 
examiner must also determine whether CMPs or other enforcement actions should be 
recommended in light of violations of the mandatory purchase requirement.  Like the FDIC, the 
OCC may assess CMPs for violations in addition to those specifically identified in the 1994 
Reform Act.
The OCC does not track how much it costs or how long it takes to execute a CMP.  Most 
of the work occurs at the district level and it requires months to complete.  Through December 
2004, the OCC had assessed 11 CMPs, including one for $56,800 in late 2003, the largest CMP 
ever issued for a violation of the mandatory purchase requirement by any federal regulatory 
agency.
The OCC has conducted a horizontal review of compliance with the mandatory purchase 
requirement, across various institutions, as it has deemed necessary.  For example, after 
Hurricane Floyd in 1999, the OCC (2000) examined retention of flood insurance at several 
national banks whose loan portfolios included security properties in North Carolina.  This review 
found that most banks had satisfactory compliance management systems and levels of 
compliance with the requirement.  The OCC found that either the large number of uninsured 
properties as reported by FEMA did not involve loans extended by institutions regulated by the 
OCC or the properties associated with these loans were not located in SFHAs.
Office of Thrift Supervision
As of March 31, 2004, the Office of Thrift Supervision (OTS) regulated 923 federally 
chartered thrift institutions, which include savings banks and savings and loan associations. In 
2003, the thrift industry accumulated over $806 billion in mortgage originations.
Examination procedures
OTS conducts compliance examinations using a risk-focused, top down approach.  OTS 
applies the interagency FFIEC-approved flood insurance examination procedures when assessing 
compliance with the mandatory purchase requirement.  The OTS is integrating its safety and 
soundness reviews as well as its compliance reviews into a single examination.
Under the combined safety and soundness and compliance examination schedule, savings 
associations are examined every 12-18 months.  The OTS examines small institutions less 
frequently than it does large institutions.  The length of the examinations also varies with an 
institutions size and rating.  For example, it may take two people two weeks to conduct a 
compliance review of the smallest institutions and more time for larger institutions.   Examiner 
assignments rotate so that the same examiners do not always examine the same institutions.
OTS examinations are planned or scoped by evaluating the institutions business 
operations and identifying the compliance risk ramifications of those operations.  Next, the 
examiner evaluates the adequacy of the institutions compliance management program by 
conducting an assessment of an institutions policies and processes to determine whether the 
policies are in compliance with applicable regulations and statutes and whether the processes in 
place to ensure compliance.  The examiner follows up on the results of past examinations.  For 
example, if there had been an issue of noncompliance with the mandatory purchase requirement, 
the examiner would ensure that appropriate changes have been made.  The examiner also 
identifies the institutions internal monitoring system and evaluates whether that system is 
appropriate for the operational complexity and compliance risk of the association.  From the 
results of these initial procedures, the examiner determines what, if anything, to examine more 
closely.  If the policies, procedures, or internal monitoring system suggest potential gaps in 
compliance for the risk inherent in the associations particular operations, the examiner will 
continue the examination with these gaps in mind. 
The examiner might select a sample of loans to evaluate for compliance with the 
mandatory purchase requirement.  An examiner applies the OTS sampling guidance to test for 
performance in the specific area warranted by the analysis done during the scoping and initial 
examination procedures.  Examiners have latitude to determine the sample size to best enable a 
reasonable conclusion about the adequacy of the compliance performance being tested.  If the 
examiner selects a sample, it is usually drawn from the period since the last examination.  When 
evaluating compliance with requirements to obtain initial flood insurance, a sample is taken of 
loans originated during the period.  When the examination scoping focuses on risk of 
nonrenewal, the sample is drawn from loans in the institutions servicing portfolio.  This allows 
examiners to tailor their review to the deficiency suspected as a result of the initial examination 
process.  Where there is general concern about compliance performance, the sample can include 
loans representing different stages of the flood insurance process. 
When the examiner selects a sample, it is used to evaluate all relevant compliance issues, 
not just those associated with the mandatory purchase requirement.  When asked if OTS 
examiners make an effort to include properties in SFHAs in this sample, the staff responded with 
a weak yes.  The decision is dependent on the risk ramifications of the institutions business 
operations and the record of compliance management controls.  Given the relatively small 
proportion of properties located in SFHAs, a judgmental sample under the OTS guidance is more 
likely to select properties that will test for compliance with the mandatory purchase requirement 
when an examiner identifies such a risk.
The OTS (2002) republished its long-standing self-assessment guidance for institutions.  
The latest version of this guidance clarifies overall compliance requirements, helps institutions 
prepare for examinations, and promotes comprehensive internal compliance.   The OTS staff 
noted that this guidance recognizes that institutions must tailor their compliance programs to 
their size, operational complexity, product diversity, and staffing resources.  Therefore, smaller 
institutions with traditional business plans are likely to have less sophisticated self-assessment 
programs than larger, more complex institutions.  
OTS examiners do not check loans made in remapped communities to determine if 
secured properties have moved into or out of a SFHA because institutions are not required to 
monitor changes in FIRMs or make flood determinations except when making, increasing, 
extending, or renewing a loan.  The OTS also confirmed that in the absence of an event that 
triggers the mandatory purchase requirement, a bank might not know that a property should be 
insured against floods.  Life-of-loan flood determination services may or may not inform the 
bank, but OTS-regulated institutions are not required to monitor changes in FIRMs.  The OTS 
also noted that use of the Federal Register to report changes in FIRMs is an ineffective means of 
notifying lending institutions of remapping.
Infractions
When isolated instances of noncompliance are identified, they are documented in the 
examination work papers and brought to managements attention for corrective action.  If an 
examiner finds a pattern or practice of noncompliance in an institution, the examiner 
documents the issue, brings it to the attention of the institution, and requests that the institution 
remedy the violation and change its policies or processes or to otherwise correct the cause of the 
deficiency.  In most instances, this is sufficient to effect change in the institution.  If change does 
not occur, the OTS initiates other supervisory action that might entail a meeting with the 
institutions board and a written agreement with the institution to correct deficiencies.  The OTS 
usually initiates the CMP process only after these steps fail to address an issue of 
noncompliance.  The OTS prefers to address compliance without unnecessarily escalating an 
issue to a CMP.
The OTS issued its first CMP related to the mandatory purchase requirement in June 
2001.  Through December 2004, the OTS had issued five additional CMPs for violations of the 
flood-insurance legislation.  The OTS does not track the cost of issuing the penalties, of which 
all but one has been for less than $4,000. 
Government-sponsored enterprises
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac purchase and securitize mortgages from both regulated and 
nonregulated lenders.  Doing so replenishes lenders funds so that they can continue to extend 
credit for home loans.  Fannie Mae purchased $1.35 trillion of single- and multifamily mortgages 
in 2003; Freddie Mac purchased about $750 billion in that year.  Conventional, fixed-rate loans 
for single-family residences (with a conforming loan limit of $359,650 in 2005) represent the 
overwhelming majority of these purchases (OFHEO 2004).   In addition to the purchase of 
conventional loans, the GSEs also purchase loans that the FHA insures or that the VA or the 
RHS guarantee.  In total, the two GSEs own or guarantee, in the form of mortgage-backed 
securities, more than 40 percent of the total U.S. residential mortgage debt outstanding.  Due to 
their large role in the residential mortgage market, Fannie Mae and Freddie Mac effectively 
establish industry standards for all residential loans that the originator does not intend to retain in 
its portfolio (U.S. Department of the Treasury et al. 1995). 
FHA-insured, VA-guaranteed, and RHS-guaranteed loans are all subject to the mandatory 
purchase requirement upon origination, regardless of their subsequent purchase by Fannie Mae 
or Freddie Mac.  Neither GSE is technically required to ensure that conventional mortgages 
purchased in a SFHA in a participating community must have flood insurance.  In contrast, the 
law requires the GSEs to implement procedures reasonably designed to ensure that, for any 
loan that is secured by improved real estate in a SFHA in a participating community and that is 
purchased by Fannie Mae or Freddie Mac to have flood insurance for the life of the loan.  In 
other words, the GSEs are required to implement procedures, but the end result is the purchase of 
flood insurance for improved real estate and manufactured homes in SFHAs in participating 
communities.
Two publications outline Fannie Maes relations with its lenders.  The Selling Guide 
(Fannie Mae 2002a) describes the policies regarding the sale of mortgages for one- to four-
family dwellings to Fannie Mae.  The Servicing Guide (Fannie Mae 2002b) contains the 
requirements for servicing all Fannie Mae-owned or -securitized mortgages on one- to four-
family dwellings.  Sellers are lenders before a sale to Fannie Mae has occurred.  Sellers may 
become servicers when a sale is completed, or they may transfer servicing contemporaneously 
with the sale of the loans.  When Fannie Mae purchases a loan, the responsibility for servicing 
that loan remains with the original lender or with a servicer contracted by the lender.  Fannie 
Mae and Freddie Mac do not service the loans in their portfolios nor those that they securitize.  
Freddie Macs policies on its flood insurance requirements are addressed in its Single-Family 
Seller/Servicer Guide and its Multifamily Seller/Servicer Guide (Freddie Mac 2004b, 2004c).
OFHEO is responsible for assessing whether the two GSEs have procedures in place to 
ensure that loans they buy have flood insurance when it is required.  OFHEO is authorized to 
impose CMPs on Fannie Mae or Freddie Mac if it finds a pattern or practice of purchasing loans 
in violation of procedures established pursuant to the National Flood Insurance Reform Act, 
notably those associated with the mandatory purchase requirement.   OFHEO examined Fannie 
Maes and Freddie Macs compliance with these requirements three times in the 1990s and 
subsequently issued reports to Congress in 1996, 1998, and 2000.  In each instance, OFHEO 
concluded that the GSEs had adopted and were appropriately implementing suitable flood 
insurance procedures.
 
Flood insurance requirements
In accordance with the 1994 Reform Act, both Fannie Mae and Freddie Mac require that 
a SFHD form be completed or available for all properties before they will purchase the 
mortgages associated with these properties.  These forms must be available for inspection by the 
GSE that purchased the mortgage.  Furthermore, property owners in A and V zones in 
participating communities must have flood insurance before either GSE will purchase their 
mortgages.	
In contrast to the minimum flood-insurance requirements included in the 1994 Reform 
Act, both Fannie Mae and Freddie Mac impose different and often more stringent requirements.  
For example, the minimum amount of flood insurance required by Freddie Mac is:
? the higher of the unpaid balance of the mortgage or 80 percent of the replacement cost of 
the insurable improvements on the mortgaged property, but
? not to exceed the lower of 100 percent of the replacement cost of the insurable 
improvements or the maximum amount of insurance available from the NFIP. 
Fannie Mae requires the lower of:
? 80 percent of the replacement cost of the structure, or
? the maximum amount of insurance available from the NFIP. 
The differences between the statutory requirements and those of the GSEs have at least 
two important consequences.  First, loans sold to either Fannie Mae or Freddie Mac may require 
property owners to purchase (or have force placed) additional flood insurance beyond the 
minimum required under the 1994 act.  As an illustration, an owner of a single-family residence 
in a SFHA with a replacement cost of $150,000 and an unpaid mortgage balance of $80,000 
would be in compliance with the laws minimum requirements with $80,000 of flood insurance.  
If the loan were sold to either GSE, the minimum required coverage would be $120,000.  A 
second property owner with an unpaid mortgage balance of $200,000 and a structure with a 
replacement cost of $350,000 would be in compliance with the laws requirements with 
$200,000 in coverage, but this amount would increase to $250,000 if the loan were sold to either 
GSE.
The GSEs require what are typically higher coverage limits because NFIP policies do not 
fully protect borrowers against a partial loss if their policies cover less than 80 percent of the 
replacement cost of the improvements (OFHEO 2001b; FEMA 2005).  To illustrate, if a home is 
insured for $30,000 but has a replacement cost of $100,000, the NFIP would cover only 30 
percent of flood damages, even if the damages totaled less than $30,000.  
Second, despite the GSEs coverage requirements, they may be exposed to some risk 
because the NFIP coverage limit ($250,000 for single-family residences) is less than the 
conventional loan limit (i.e., $359,650 in 2005) of mortgages for single-family loans that the 
GSEs are authorized to purchase.  It should be noted that a propertys market value includes the 
value of the land, structures, and other improvements, but flood insurance is not required (and 
not available) to cover the value of the land.  With the increase in the loan limit to $359,650 in 
2005, the gap between this limit and the maximum amount of NFIP coverage (i.e, $250,000) has 
also increased. 
For Fannie Mae, condominium units that are in high rises or otherwise vertical units do 
not require individual flood insurance policies, but they must be covered by flood insurance.  
The lender must verify that the communal governing body maintains coverage.  The amount of 
coverage must be equal to the lesser of 100 percent of the insurable value of each insured 
building or the maximum coverage available.  If an owners association refuses to obtain such a 
Residential Condominium Building Association Policy through the NFIP, a separate policy must 
be obtained for each dwelling unit that secures a mortgage owned by a GSE.   Cooperative units 
do not require individual flood insurance policies because their occupants do not own the units in 
which they live.
Freddie Mac will purchase mortgages on condominium units only if the association 
insures to the full replacement value of all improvements.  If a condominium associations 
governing documents require individual unit owners to retain individual flood policies, Freddie 
Mac requires that the condominium association also retain flood insurance on all insurable 
common elements for 100 percent of their replacement cost.  If the condominium association 
insures all common areas and individual units under a single policy, all improvements must be 
covered to 100 percent of the replacement cost of the condominiums insurable value. 
Staff members at Freddie Mac are concerned about the NFIPs policies on 
condominiums.   Freddie Macs flood insurance requirements for one- to four-unit properties 
apply to individual residential units in condominiums where the governing documents obligate 
unit owners to insure building components within their respective units while their condominium 
association insures all remaining insurable common elements for 100 percent of their 
replacement cost.  If all insurable common elements, including building components within 
individual units, are insured under a policy issued to a condominium association, such policys 
building limit must be maintained at 100 percent of the replacement cost of the condominiums 
insurable value.  Freddie Mac questions the value of an exclusion found in the loss assessment 
coverage provided under NFIP policies purchased optionally by individual unit owners.  Such 
policies cover insured unit owners prorated share of an assessment levied by their condominium 
association following a flood loss but only when the association is not insured for flood losses.  
In contrast, if the association has a policy but it is for less than 80 percent of the replacement 
cost, the policy would not cover the loss assessment levied on the insured unit owners.    
Freddie Mac and Fannie Mae have substantially similar policies regarding flood 
insurance for mortgages in nonparticipating communities.  Mortgages on properties located in a 
SFHA in such communities are not eligible for purchase by Fannie Mae.  Fannie Mae delegates 
responsibility for monitoring changes in community status to the lenders and requires that they 
routinely monitor changes in this status.  If a community is suspended subsequent to Fannie 
Maes purchase of a mortgage, the loan servicer must work with its borrowers to obtain private 
flood insurance on affected properties so that they continue to be covered by flood insurance. 
Freddie Mac will purchase mortgages on properties in nonparticipating communities, but 
only if the properties are not in SFHAs. As a consequence, Freddie Mac will not purchase a 
mortgage on a property in a SFHA in such communities even when the property owner carries 
private insurance.  Freddie Mac will acquire loans in unmapped communities, but only if there is 
not strong evidence that a flood hazard exists (for example, a property could not have recently 
been flooded). If a community is suspended from participation after a lender has issued the loan, 
the loan servicer must work with its borrowers to obtain private flood insurance on affected 
properties so that they continue to be covered by flood insurance.
Loan servicing
Although Fannie Maes or Freddie Macs purchase of a mortgage can trigger the 
mandatory purchase of flood insurance, responsibility for compliance with their respective flood-
insurance requirements remains with lenders or loan servicers, even after loans have been sold or 
securitized.  Both GSEs require that flood insurance be maintained for as long as a mortgage (on 
a property in a SFHA) is outstanding or as long as the property is in a SFHA, whichever is less.  
In contrast to the procedures the federal regulatory agencies use, the GSEs require lenders and 
loan servicers to track any remapping that places a property into a SFHA after a mortgage is 
purchased.  Servicers must maintain up-to-date data and take appropriate actions to require flood 
insurance if it becomes necessary. 
Fannie Mae requires flood insurance coverage for a mortgage if the remapping of a flood 
zone results in the property being in a SFHA (even though no flood insurance would have been 
required when the mortgage was originated).  Fannie Mae further requires its lenders and their 
loan servicers to ensure that the properties that secure mortgages are protected by flood insurance 
when required, with no lapses of coverage for any reason. Thus, Fannie Mae holds its servicers 
responsible for the timely payment of the flood insurance premiums.  If a borrower fails to pay a 
premium, the servicer must advance its own funds to pay the past-due premium (or to obtain 
substitute coverage, if necessary).  
Freddie Mac gives lenders 120 days to ensure that flood insurance has been purchased on 
the properties when buildings are remapped into SFHAs.  Lenders must force place insurance if a 
borrower refuses to secure suitable coverage.   
 
For both Fannie Mae and Freddie Mac, if flood insurance coverage for a mortgage meets 
the requirements initially, but later the coverage requirement increases but the policy amount 
remains unchanged, then the lender or servicer must work with the borrower to obtain the 
additional coverage.  If a borrower refuses to obtain the additional coverage, that coverage must 
be force placed.  In these instances, the lender has the discretion to force place flood insurance to 
a level that qualifies the loan for sale to the GSE.  Finally, Fannie Mae and Freddie Mac require 
loan servicers to monitor the maximum level of flood insurance available under the NFIP.  If the 
coverage limit is raised, servicers are required to increase coverage of properties for which 
coverage had been limited by the prior maximum level.   
Monitoring and compliance
Fannie Mae has never experienced a loss due to uninsured flood damage.  It has three 
institutional structures in place to ensure that the loans it purchases are in compliance with its 
flood insurance requirements.  First, it conducts operational and underwriting reviews to assess 
the overall underwriting quality of the loans delivered by its lenders.  These reviews may identify 
loans that are required to have flood insurance but do not.  Second, Fannie Mae reviews a sample 
of foreclosed loans and loans that have suffered early payment default.  Again, this review 
process may detect a lack of compliance among lenders.  Third, it completes an annual portfolio 
review to evaluate compliance with the insurance requirement among servicers.  This review 
requires the servicer to select a sample of loans from its portfolio and send this sample to four 
flood determination companies.  The properties that are determined to be in a SFHA by all four 
companies are referred to the respective servicers to validate that there is appropriate flood 
insurance coverage. 
These monitoring efforts may duplicate what federal regulators do because they also 
monitor regulated lenders compliance with the mandatory purchase requirement.  It is important 
to remember, however, that the GSEs also purchase loans from nonregulated lenders that the 
federal regulatory agencies do not monitor.  For these reasons, the GSEs depend on their own 
procedures to monitor compliance of the lenders with whom they work. 
Fannie Mae finds high compliance with the mandatory purchase requirement among its 
seller/servicers.  It infrequently encounters a loan that does not have flood insurance when it is 
supposed to, and it does not often detect a pattern of noncompliance or any systemic issues 
related to noncompliance with the requirement.  In contrast, Fannie Mae does find many loans 
that are underinsured according to its standards.  Representatives of Fannie Mae believe that this 
occurs because some lenders are reluctant to force place insurance on underinsured loans due to 
concern that doing so would jeopardize their relations with their customers.
Fannie Maes staff identified several potential improvements to the NFIP.  They 
suggested that the insurance limit is too low: it should change over time, as does the 
conventional loan limit.  The MPPP should reflect the prevalence of underinsurance, and lenders 
should be able to force place a second NFIP policy on a property that is underinsured.  Finally, 
map modernization needs to be completed in order for flood determinations to be accurate and 
effective tools.
Freddie Mac has two primary processes in place to monitor lenders compliance with the 
mandatory purchase requirement: quality control and on-site auditing.  Through the first process, 
Freddie Mac reviews a sample of defaulted and performing loans each month for compliance 
with the requirement.
Reviewers examine documentation in the loan files, some of which flood determination 
companies provide or validate. If the properties are in SFHAs, Freddie Mac determines whether 
flood insurance to the required coverage amount has been purchased and retained on the 
property.
During on-site audits, Freddie Mac examines a lenders portfolio. This examination can 
occur at any point in the relationship with the lender.  Freddie Mac uses four flood zone 
determination companies to check a single lenders portfolio. The first vendor selects properties 
from the portfolio that may be in a SFHA and provides the list of properties to three other 
vendors. If any one vendor determines that a property is outside of the SFHA, the property is 
removed from the examination pool. Freddie Mac then checks the group of properties that all 
four vendors agree are located in SFHAs for flood insurance. This process minimizes 
disagreements with lenders when the lenders private appraiser places a property outside of the 
SFHA.  The on-site audit also includes a review of a lenders processes for ensuring placement 
of flood insurance when necessary. 
When Freddie Macs auditors discover that required insurance is lacking on loans it 
purchased, it directs the affected lenders to repurchase the loans.  In most cases, however, the 
problem is the lenders failure to provide proof of insurance, and they typically address the 
problem.  Freddie Mac has never suffered a financial loss because of a flood. 
Staff members at Freddie Mac are concerned that some questions they ask FEMA about 
flood insurance requirements are not answered.  Freddie Mac also identified several potential 
improvements that could be made to the NFIP.  Freddie Mac would like the Congress to 
strengthen the NFIP requirements for mandatory purchase of flood insurance to resemble more 
closely the stringent requirements that Freddie Mac and Fannie Mae apply. Furthermore, Freddie 
Mac would like to see FEMA change policy language to include an inflation escalator clause in 
flood insurance (there is such a clause in other types of insurance).  Freddie Mac requires 
policies to be adjusted upward as warranted by increases in the insured dwellings replacement 
costs, to avoid the penalty imposed by the NFIP for a dwelling, which, at the time of a loss, is 
insured for less than 80 percent of its replacement cost.
Farmer Mac
	The Federal Agricultural Mortgage Corporation (Farmer Mac) is another GSE and 
purchases mortgage loans on the secondary market from agricultural lenders so that these lenders 
can continue to extend credit.  Loans purchased by Farmer Mac are not explicitly subject to the 
mandatory purchase requirement. 
	Farmer Mac is nonetheless involved with the requirement in two ways.  First, Farmer 
Mac purchases part-time farming loans and rural residence home loans, which can include a 
residence on a farm or in a rural area (Farmer Mac 2003).  These loans are purchased on Fannie 
Mae and Freddie Mac paper as a means to provide the information they need to comply with 
their underwriting requirements.
Second, Farmer Mac also purchases full-time farming loans from regulated lenders.  As 
with other loans from regulated lenders, borrowers are subject to the mandatory purchase 
requirement when all or part of the structure that secures their loan is within a SFHA.  Farmer 
Macs purchase of the loan would not affect this requirement.  In contrast, Farmer Mac does not 
require flood insurance on loans purchased from nonregulated lenders regardless of a propertys 
location. 
Federal agency lenders and grantees
Department of Housing and Urban Development
The Department of Housing and Urban Development (HUD) triggers the mandatory 
purchase requirement when it provides financial assistance for the acquisition, construction, 
reconstruction, repair, or improvement of properties in SFHAs.  HUD provides financial 
assistance through loan and grant programs.  Loan programs that trigger the requirement include 
but are not limited to mortgage insurance origination for single and multifamily homes and loan 
guarantees for Native American housing.  Grant programs that trigger the requirement include 
community development block grants to entitlement communities and block grants for housing 
for Native Americans.   
Flood insurance requirements
The department's environmental regulations as well as its regulations governing 
individual grant and loan programs cite the mandatory purchase requirement.  As a result of 
these regulations, HUD and the institutional recipients of its grants or loans are prohibited from 
providing any financial assistance for structures located in SFHAs within communities that do 
not participate in the NFIP.  Furthermore, except in emergencies, HUD cannot provide grants or 
loans for activities in floodplains unless the agency can demonstrate that no practicable 
alternatives exist outside the floodplain (U.S. Department of Housing and Urban Development 
2002a).  If flood-free sites are available within a community or housing market area, they are 
considered practicable.
For loans, loan insurance, or loan guarantees, HUD requires flood insurance coverage to 
the amount of the outstanding principal balance of the loan, even when the loan covers the value 
of the land. This policy is consistent with the laws requirements but inconsistent with FEMAs 
interpretation of the law.  The coverage must be maintained for the term of the loan. 
Flood insurance is not required on loans with an original principal balance of $5,000 or 
less that have a repayment term of one year or less, but grants of any amount trigger the 
mandatory purchase requirement.  Flood insurance is required for grants in an amount at least 
equal to the project cost (minus the estimated value of the land) or to the maximum limit of 
coverage available with respect to the particular type of building, whichever is less.   The lack 
of a threshold for grants is problematic and can lead to cases in which the cost of flood insurance 
for the project is more than the value of the grant.  Coverage must be maintained for the life of 
the structure regardless of any transfers of ownership (U.S. Department of Housing and Urban 
Development 2002b).
By law, flood insurance is not required on formula grants (i.e., community development 
block grants, emergency shelter grants, and HOME investment partnership grants) made to the 
states.  Flood insurance is also not required for any state-owned property that is covered under an 
adequate state policy of self-insurance.  Local governments and other organizations are not 
authorized to be self-insurers for flood insurance.  If a state agency has authority under state 
regulations, it may require a property owner to purchase and maintain flood insurance to protect 
the federal investment benefiting HUD-assisted properties in SFHAs.
In HUDs opinion, financial assistance for routine maintenance on buildings in SFHAs 
does not trigger the mandatory purchase requirement, notwithstanding the obligation to impose 
the requirement in the event of repair, reconstruction, or improvement of properties.  Routine 
maintenance is defined as an activity that does not add to a structures value, prolong its life, or 
add new uses to the structure (U.S. Department of Housing and Urban Development 2002b).  
Examples of routine maintenance include painting of interior or exterior walls, fixing gutters or 
floors, and replacing broken window panes or door locks.  
The mandatory purchase requirement does not differentiate between routine 
maintenance and other forms of reconstruction, repair, or improvement.   Nonetheless, 
HUD guidance advises that routine maintenance activities should be carefully distinguished 
from repair or improvement of any building in a SFHA to which the mandatory purchase 
requirement applies. 
Grants
Recipients of HUDs formula grants include states, cities, urban counties, Native 
American tribes, Alaska Native Villages, and the Department of Hawaiian Home Lands. 
Recipients of competitive grants include housing authorities and nonprofit organizations.
Grant recipients must submit an environmental certification of compliance and a request 
for the release of funds to obtain approval from HUD (or from the state agency administering the 
HUD program) prior to committing or expending HUD or non-HUD funds to the project.   A 
responsible entity (i.e., a local, tribal, or state government that assumes administrative 
responsibility for meeting HUDs environmental responsibilities) must complete all 
environmental and flood insurance determinations.  A responsible entity that oversees a project is 
required to make a flood determination as part of the environmental review it conducts.  If the 
structure is determined to be in a SFHA, then the responsible entity is also responsible for 
determining the amount of flood insurance that a property owner must purchase and maintain as 
a condition for approval of HUD assistance and for monitoring retention of the insurance.
 If the grant recipient is other than a responsible entity, a copy of the proof of purchase of 
flood insurance must be submitted to this entity, which must retain a copy in its environmental 
review record.  When HUD visits the grant recipient to monitor compliance with its 
environmental requirements, the agency also monitors for compliance with flood insurance 
requirements. 
The responsible entity documents its findings, including certification of compliance with 
the flood insurance requirements, in an Environmental Review Record (ERR), which it then 
makes available for public comment.  After doing so, the responsible entity must submit its 
request for release of funds to HUD.  Because the responsible entity has certified its compliance 
with federal laws (including requirements for the purchase of flood insurance) in the publicly 
available ERR, HUD does not require submission of the ERR, the flood determination, or proof 
of insurance as a condition of release of funds. 
	Responsible entities must track the retention of insurance through all transfers of 
ownership of the structures.  Responsible entities are supposed to receive notice of insurance 
renewal from insurance companies.  HUD field officers monitor the responsible entities through 
on-site audits.  During these on-site audits, HUD staff review a sample of ERRs created by the 
responsible entities.  According to HUD staff, field officers determine whether the responsible 
entity has established and is effectively maintaining a proof-of-purchase system to monitor 
whether property owners with HUD-assisted buildings in SFHAs are annually reviewing their 
flood insurance policies as part of in-depth monitoring. HUDs policies stipulate that its 
regional offices should monitor grantees by examining a sample of projects every five years, 
although constraints on time and resources occasionally prevent this frequency.
 For HUDs grant programs in which the department conducts environmental reviews, the 
department enforces the mandatory purchase requirement as a condition of approval of HUD 
assistance for buildings in SFHAs.  Flood insurance is required for all proposed assistance for 
property acquisition, disposition, construction, rehabilitation, repair, and improvement.
 
Many recipients of HUDs assistance are low-income people who may have difficulty 
affording flood insurance.  Nonetheless, the requirement to purchase flood insurance cannot be 
waived due to hardship.  In some cases, a portion of grant funds can be used to subsidize the 
purchase and maintenance of flood insurance for low-income owners of properties in SFHAs 
(U.S. Department of Housing and Urban Development 2002b).
Loans
Private lenders issue the loans initiated through HUDs loan programs.  HUD currently 
works with about 1,800 lenders, of which 700 to 800 are federally regulated. 
Lenders notify loan applicants if they qualify for HUD financing.  If the borrower 
chooses to use HUD financing, the lender contacts HUD, which supplies an appraiser to review 
the property securing the loan.  The appraiser conducts a flood determination as part of every 
appraisal.  These flood determinations are done with paper FIRMs in the appraisers portfolio.  
Some lenders acquire additional flood determinations from flood determination companies.  
Appraisers often flag properties suspected of being in SFHAs and the lender may then buy flood 
determinations for these properties from a flood determination company.  HUD requires that a 
borrower show proof of flood insurance as a condition of loan approval if the appraiser 
determines that the structure is in a SFHA.  HUDs decision as to whether flood insurance is 
required depends solely on the appraisers determination. 
HUD contracts with a third party to conduct field reviews of appraisals for properties on 
which HUD provides loan insurance or guarantees.  These examinations serve to audit both the 
appraisers and the lenders.  The examiners select a sample of appraisals and use maps and 
automated flood-mapping systems to verify the accuracy of the flood determinations done by 
HUD-approved appraisers.  Examiners can sample appraisals randomly or they can select a 
sample based on a trigger (e.g., they might select a sample of appraisals for properties on which 
loans were defaulted).  If an examiner finds errors in an appraisers portfolio, HUD can remove 
that appraiser from its list of approved appraisers.  As a part of the review process, the examiners 
also determine whether flood insurance was purchased for the properties they determine to be in 
SFHAs.
Lenders are responsible for monitoring the retention of flood insurance over the life of 
the loan.  If a borrower defaults on a loan and HUD finds that the borrower did not retain flood 
insurance, HUD can choose not to pay its guarantee and require the lender to indemnify the loan.  
In practice, however, representatives from HUD indicated that they are typically unaware as to 
whether flood insurance is retained unless a default occurs as a result of a flood.
Department of Veterans Affairs
The Department of Veterans Affairs (VA) provides direct loans to veterans and acts as a 
guarantor of home loans for veterans issued by private lenders.  The mandatory purchase 
requirement applies to all VA-related loans, including instances in which the department: a) acts 
as the guarantor of private-issued loans; b) purchases guaranteed loans from the original lender 
(in instances in which a veteran is unable to repay a loan); c) sells acquired properties to the 
public using vendee financing; d) issues direct home loans for Native Americans living on trust 
lands; or, e) issues direct loans to veterans with service-connected disabilities. 
Any veteran who completes service requirements established by the department is 
eligible to apply for a guaranteed loan for the purchase or improvement of a home or for the 
refinancing of an existing mortgage.  In fiscal year 2003, the VA guaranteed 508,000 loans 
valued at $65 billion.  Through January 2004, the VA had guaranteed about 17.4 million home 
loans since the programs inception in 1944.  The VA began fiscal year 2004 with 2.7 million 
active home loans reflecting amortized loans totaling $213.2 billion. The VA also provides 
grants to veterans with service-connected disabilities to finance the purchase, construction, or 
renovation of specially adapted housing.  In fiscal year 2003 the VA issued 550 such grants at an 
average of $40,000 per grant compared with 575 grants of the same average value the previous 
year.   
Flood insurance requirements
When guaranteeing loans or making grants, the VA is subject to the same flood-related 
requirements imposed on other federal agencies, such as HUD, that provide financial assistance 
for acquisition or construction in SFHAs.  As a consequence, VA cannot guarantee loans for the 
purchase of homes in SFHAs in communities that do not participate in the NFIP.   Likewise, the 
VA must also ensure that it does not provide any financial assistance, including loans, grants, 
insurance, or guarantees, for acquisition or construction purposes for properties in SFHAs in 
participating communities unless the recipient retains flood insurance for the life of the loan.  As 
well, the VA cannot make, increase, renew, or extend a loan on improved real estate or a 
manufactured home in a SFHA in a participating community unless the borrower retains flood 
insurance for the life of the loan.
Despite the identical flood-related requirements imposed on all federal agency lenders, 
the VAs interpretation and application of these requirements vary from those of other federal 
agencies.  For example, the VA does not allow the appraisal of properties (and thus VA-backed 
loans) in areas that are subject to regular flooding for whatever reason, including those not in 
SFHAs (U.S. Department of Veterans Affairs 2001).  It is not clear what regular flooding is or 
how an appraiser would know whether a property is subject to regular flooding (as opposed to 
irregular flooding).
The VA also prohibits appraisals of proposed or new construction in a SFHA when the 
elevation of the lowest floor is below the base flood elevation.  This is a stringent requirement 
because buildings with floors below the base flood elevation are eligible for federal flood 
insurance.  For purposes of determining premiums, a lowest floor can be up to 6 inches below 
the base flood elevation and be rated as if it is at this elevation.  Similarly, the NFIP permits 
construction of garages below the base flood elevation when they are properly vented.  Likewise, 
the NFIP permits enclosed spaces below the lowest inhabited floor, without penalty, when those 
spaces are used solely for building access, parking, or storage. The VA seemingly does not make 
these distinctions.
The VA requires that changes in flood maps be monitored and that its borrowers purchase 
flood insurance when their properties are remapped into SFHAs after their loans have been 
issued (U.S. Department of Veterans Affairs 1996).  The VA is expected to exert all reasonable 
effort and care to ensure that, when appropriate, Certificates of Reasonable Value contain the 
requirement to obtain flood insurance (U.S. Department of Veterans Affairs 1990).  Despite this 
requirement, it is the lenders responsibility to ensure compliance with the mandatory purchase 
requirement, and the VA will not guarantee a loan if the lender is unable to provide proof of 
flood insurance at loan origination.  Likewise, the VA can suspend a lender from participating in 
the VA-guaranteed loan program if it has been determined that the lender does not meet its 
flood-related responsibilities.  The VA rarely exercises this prerogative. 
The VA requires that flood insurance be purchased for all personal property securing VA 
loans. The security might include, in addition to the home, an additional structure owned by the 
borrower or contents such as appliances or carpets.  The VA may therefore require that the 
borrower purchase contents insurance in addition to building coverage.
The VA does not require flood determinations when loans are renewed, deferred, or 
refinanced.  The VA estimates that 60 percent of all of its loan activity involves one of these 
actions.
Loan guarantees 
A veteran applying for a VA-guaranteed loan first chooses a private lender to serve as the 
primary issuer of the home loan.  This lender can be a bank, savings and loan institution, 
mortgage company, or other type of lender; it can be either regulated or nonregulated.  The 
veteran informs the lender that he or she is eligible for a VA-guaranteed loan and the lender then 
contacts the VA and orders an appraisal of the property by a VA-approved appraiser.  The 
appraiser must provide a flood determination as part of the standard appraisal process.
Although lenders will receive copies of the appraisers flood determination, lenders will 
typically obtain their own flood determination because third parties are obligated to assume 
liability for the accuracy of the determinations and offer life-of-loan service.  VA appraisers 
offer neither.  The lender is responsible for ensuring that flood insurance is maintained on any 
structure in a SFHA that secures a VA-guaranteed loan.  This is true even when the VA appraiser 
incorrectly indicates that a structure is not in a SFHA (U.S. Department of Veterans Affairs 
2001).  
When the VA guarantees a loan, the lender is responsible for monitoring that insurance, if 
required, is maintained for the life of the loan. The lender is likewise required to monitor 
remapping and require insurance purchase for existing loans remapped into a SFHA.  The VA 
has a monitoring unit in Nashville that does site reviews of lenders.  The unit targets lenders 
making the most loans or lenders that the VA has identified as meriting attention.  Monitors 
review files and can recommend that a loan be termed egregious (i.e., that it should have never 
been approved).  The VA gives the lender the opportunity to take corrective action on the loan, 
but maintains that if an egregious loan goes bad within five years the lender should not contact 
the VA to provide its guaranteed funds.  If the VA had already given money to the lender, the 
VA can request that money be returned.  Problems with mandatory purchase requirement are 
seldom discovered. 
When a veteran is unable to maintain a VA-guaranteed loan, the VA can repurchase the 
loan back from the original lender.  The VA then takes responsibility for ensuring that flood 
insurance, if required, is retained for the life of the loan.  If the lender had an escrow account that 
includes funds for flood insurance, the VA continues that account.  In most instances, loans on 
acquired structures are less than five years old, so a new flood determination is not required.  The 
VA is considering changing its policy and may require a flood determination whenever the 
department acquires a loan.  This consideration stems from a desire to ensure that all 
determinations on VA-acquired properties include life-of-loan service.
Direct loans
When the borrower of a VA-guaranteed home loan defaults on the loan, the VA acquires 
the structure and sells it to the public. Between 50 and 90 percent of all such home sales are 
financed using vendee (seller) financing. Vendee financing involves a direct loan from the VA to 
the buyer, and such loans are subject to the mandatory purchase requirement.  The VA issues 
approximately 15,000 to 25,000 vendee loans each year.  
The VA also provides direct home loans to Native American veterans living on trust 
lands and direct loans to supplement grants to veterans that finance the purchase, construction, or 
improvement of homes adapted to accommodate service-connected disabilities.  Both of these 
direct loan programs are relatively small in scope.  The VA has issued about 260 direct loans to 
Native American veterans living on trust lands since the programs inception in 1992 (about 60 
percent of those loans were extended to native Hawaiians).  The VA issues about one direct loan 
per year for specially adapted housing.  The maximum value for a VA-direct loan is the lesser of 
the cost of the home or $80,000.  Homes eligible for direct home loans to Native American 
veterans living on tribal lands must be located in a tribal organization or other Native American 
group that has signed a memorandum of understanding with the VA.  The memorandum of 
understanding defines the conditions for participation in the direct loan program. 
When a veteran applies for a direct loan from the VA, the VA requires an appraisal 
including a flood determination conducted using FEMAs SFHD form.  The VA requires proof 
of flood insurance be submitted by the borrower as a condition of loan approval if the structure is 
in a SFHA.  Appraisers are directed to consult FEMAs Community Status Book to determine 
whether a community is participating in the NFIP. 
The VA often sells vendee loans on the secondary market.  The VA does not sell direct 
loans made to Native Americans living on trust lands or direct loans to veterans with service-
connected disabilities on the secondary market.  These loans remain in the VA portfolio and are 
maintained by a private servicer, which is responsible for monitoring the retention of flood 
insurance.  This servicer can force place insurance if the property owners do not maintain 
insurance on their own.  The VA does not require reports on the number of policies forced-
placed by the servicer or the source of force-place coverage and, therefore, does not know how 
frequently forced placement occurs.  The VA currently holds a portfolio of about 25,000 loans, 
but is not able to determine what percentage of these loans are in SFHAs.  
Government National Mortgage Association
	Ginnie Mae, part of the Department of Housing and Urban Development, is a GSE that 
guarantees the payment of principal and interest on mortgage-backed securities associated with 
federally insured or guaranteed loans, such as those insured by the VA, the FHA, the RFS, and 
HUDs Office of Public and Indian Housing.  Ginnie Mae has guaranteed more than $2 trillion in 
mortgage-backed securities.  In 2003, Ginnie Mae issued more than $215 billion in mortgage-
backed securities and securitized almost 93 percent of the FHA-insured and VA-guaranteed 
loans that were issued (Ginnie Mae 2003).  
	The loans Ginnie Mae guarantees are already subject to the mandatory purchase 
requirement.  These loans come from regulated as well as nonregulated lenders, all of which 
Ginnie Mae must approve as sellers (Ginnie Mae 2002).  Ginnie Mae does not regulate lenders 
for purposes of flood insurance.
	After flood disaster declarations, Ginnie Mae often issues a notice of buyout and 
forbearance.  It encourages lenders to provide forbearance to their borrowers whose property has 
been damaged by flooding (e.g., Ginnie Mae 2004).  Ginnie Mae offers financial assistance to 
lenders who can provide flexibility to their borrowers after flood disasters.
Rural Development, Rural Housing Service
 
The Rural Housing Service (RHS), part of the Department of Agriculture, provides 
grants, loans, and loan guarantees to individuals in towns and counties with fewer than 10,000 
people.  These funds are provided to purchase, construct, repair, and rehabilitate housing.  The 
RHS also provides grants, loans, and loan guarantees to communities with fewer than 20,000 
people.  These funds are provided so that a community can construct, enlarge, or improve 
community facilities for health care, public safety, and public services (RHS 2003).  These funds 
constitute federal financial assistance for construction and acquisition, so they are subject to the 
mandatory purchase requirement.  At the end of fiscal year 2002, the RHS had a portfolio of 
nearly 665,000 loans, with a value of about $41 billion.
 
Flood insurance requirements
	RHS grants, loans, and loan guarantees fall under several programs that each have 
different flood-insurance requirements and servicing practices.   The RHS provides direct loans 
for single-family housing and loan guarantees at below-market interest rates to low-income 
borrowers.  The RHS administers the program, but a private contractor services the loans.
Flood insurance must cover the lesser of the value of the loan amount or the structures 
replacement cost, except the estimated land cost, or the maximum limit of NFIP coverage.  If the 
federal financial assistance on a property is in the form of a loan, the amount of insurance 
required is the amount of the loan outstanding for the life of the loan.  A flood determination 
contractor completes flood determinations as well as life-of-loan determinations. 
For direct loans for single-family housing and loan guarantees, the RHS requires flood 
insurance if the structure is located in a SFHA, regardless of the loan amount (RHS 2003). Flood 
insurance must cover the lesser of the value of the loan amount or the structures replacement 
cost, except the estimated land cost, or the maximum limit of NFIP coverage.  If the federal 
financial assistance on a property is in the form of a loan, the amount of insurance required is the 
amount of the loan outstanding for the life of the loan.  The RHS will accept insurance provided 
only through the NFIP; private insurance is not acceptable (RHS 2003a, 2005), although this 
prohibition will likely be eliminated when the RHS revises its requirements for flood insurance.  
	The RHS program for direct loans and loan guarantees has at least two other distinctive 
insurance-related provisions.  First, the RHS prohibits loan guarantees in SFHAs unless there is 
no practical alternative (RHS 1995).  In contrast, such guarantees are permitted when the 
potential environmental impacts and feasible alternatives have been fully considered.
Second, the U.S. Department of Agriculture (1974) and the RHS (1995) prohibit the use 
of its financial assistance to purchase or substantially improve an existing dwelling (or a multi-
unit housing facility) unless the lowest inhabited space is above the base flood elevation.  This 
restriction applies to pre-FIRM buildings, most of which were constructed before base flood 
elevations were known.  In September 2003, the RHS granted a one-year waiver for guaranteed 
loans only that permitted the purchase of existing (but not new) single-family dwellings when 
their lowest inhabited space is below the BFE, but only in Oregon.  As the RHS (2003b) 
explained, Removal of the first floor elevation requirement will allow RHS to better serve rural 
residents who need to purchase homes or improve their existing homes.  As a consequence, 
however, the RHS inadvertently permits the purchase of existing, post-FIRM homes in Oregon 
built in violation of the NFIPs building requirements for construction in SFHAs.   These 
requirements mandate that such post-FIRM construction be at or above the base flood elevation.  
The RHS continued this waiver for fiscal years 2005 and 2006 (U.S. Department of Agriculture, 
Rural Development 2004), but anticipates that this provision will be altered when the 
Department of Agriculture amends its flood-related instructions.  
The RHS has contracted with a private vendor to obtain flood hazard determinations.  
The vendor also provides life-of-loan coverage.
The RHS servicing vendor requires flood insurance as necessary, establishes escrow 
accounts as appropriate (and escrow for flood insurance if an escrow account is created), 
monitors the retention of flood insurance, and force places flood insurance if the borrower fails 
to retain it.  As noted above, the RHS does not permit the use of private flood insurance, which 
means that only the MPPP can be used to force place coverage.  In turn, however, because the 
MPPP is not available for use when property owners are underinsured and already covered by a 
Standard Flood Insurance Policy, the RHS portfolio may include underinsured borrowers. 
The loan guarantee program for single-family housing allows middle-income borrowers 
to apply for loans from commercial lenders at market rates.  These lenders administer and service 
the loans.  The RHS periodically reviews the lenders with which it does business to ensure that 
they are complying with RHS policies, including the mandatory purchase requirement. 
Direct loans and loan guarantees for multifamily housing are available for entities to 
create housing for low- and moderate-income renters in rural areas.  For loans and loan 
guarantees, flood insurance is required if the property is located in a SFHA, regardless of the 
loan amount (RHS 2003a).  The amount and duration of the insurance required is the same as for 
single-family housing noted above.
Commercial lenders administer and service multifamily loan guarantees.  These lenders 
are responsible for the flood determinations and for establishing and maintaining escrow 
accounts as necessary. The RHS periodically reviews the lenders with which it does business to 
ensure that they comply with RHS policies, including the mandatory purchase requirement. 
	Finally, the RHS administers repair and rehabilitation loans and grants.  Grants are 
available to individuals 62 years old and older so that they can make their homes safer or more 
accessible.  The lifetime limit on grants is $7,500.  The RHS requires flood insurance if a grant 
improves a property located in a SFHA in a participating community and the amount of the grant 
is greater than $5,000, unless grant funds will be used to obtain the insurance (RHS 2003a).  It is 
not clear whether the exemption for grants of low value is legally permissible.  The National 
Flood Insurance Reform Act of 1994 exempts loans (but not grants) of less than $5,000 from the 
mandatory purchase requirement and, as noted earlier, HUD requires its grantees to maintain 
flood insurance regardless of the amount of the grant. 
	Loans are also available to individuals under 62 so that they can make their housing safer, 
more modern, or more accessible.  The maximum loan is about $20,000.  The RHS requires 
flood insurance if the property to which the loan will be applied is located in a SFHA in a 
participating community, regardless of the loan amount (RHS 2003b).  
Rural Development, Rural Utilities Service
	The Rural Utilities Service (RUS), formerly the Rural Electrification Administration, is 
also part of the Department of Agriculture.  The RUS provides insured and guaranteed loans to 
finance the construction and improvement of electric facilities in rural areas.  The RUS requires 
borrowers to obtain and retain flood insurance, either privately or through the NFIP, for the full 
value of buildings in flood hazard areas to the extent available and required by the flood 
insurance legislation.  In addition to coverage for buildings, the RUS also requires coverage for 
any machinery, equipment, fixtures, and furnishings contained in these buildings (U.S. 
Department of Agriculture 1999).
Rural Development, Rural Business and Cooperative Service
The Rural Business and Cooperative Service (RBS) is also part of the Department of 
Agriculture.  The RBS provides insured and guaranteed loans to finance the construction and 
improvement of businesses in rural areas.  The RBS requires borrowers to obtain and retain flood 
insurance, either privately or through the NFIP, for the full value of buildings in flood hazard 
areas to the extent available and required by the flood insurance legislation.  Coverage for 
contents is also required.
Small Business Administration
The SBA promotes the formation and growth of small businesses through directs loans 
and guarantees other loans to small businesses that are made and disbursed by private lenders.  In 
addition, when disasters occur, the SBA offers low-interest, long-term loans to individuals, 
businesses, and nonprofit organizations to repair damages caused by disasters.  The SBA can 
provide the disaster loans directly to the recipients or in participation with a financial institution. 
When financial institutions provide the loan, they close and service the loan, which, in turn, can 
be sold to other lenders.  SBAs disaster-related assistance is not dependent on presidential 
declarations that a major disaster has occurred; the SBA is also authorized to declare that a 
physical disaster has occurred.      
Flood insurance requirements 
For business loans, a loan recipient must obtain flood insurance prior to first 
disbursement of the loan when any building or manufactured home, machinery, equipment 
acquired, installed, improved, constructed, or renovated with proceeds of SBA financial 
assistance is located in a SFHA in a participating community.  Similarly, flood insurance is 
required when any portion of the collateral for an SBA loan includes improved real estate in a 
SFHA.  Coverage for contents is typically required when they are located on the ground floor. 
Applicants for disaster-related loans, even those not related to flooding, are likewise 
required to show proof of flood insurance prior to obtaining a loan if any portion of their 
property is in a SFHA in a participating community.   Evidence of purchase requires a copy of 
an issued policy or other proof of the coverage obtained.  If flooding caused damage to real or 
personal property, flood insurance is also required for applicants outside of SFHAs if the cause 
of the flooding would have been covered by federal flood insurance and the borrower owns the 
property.  In these situations, flood insurance is still required even when the flood-damaged 
property is not used as collateral for the loan.  Coverage is required on buildings (such as 
residences and businesses), their contents (personal property), and appurtenant structures.  
Disaster-related loans are not available to victims in SFHAs in communities that do not 
participate in the NFIP except if they must mandatorily or involuntarily relocate to an area 
outside of the SFHA.
Borrowers within SFHAs must maintain flood insurance for the full insurable value of 
the property (not to exceed the maximum insurance available through the NFIP) minus the value 
of the land on which the property is located for the life of the loan.   Private flood insurance is 
acceptable, but only if the community participates in the NFIP.  If borrowers fail to maintain 
required levels of coverage, it must be force placed using the procedures described earlier.  
Furthermore, applicants for loans are ineligible for SBA disaster assistance in any form for any 
subsequent disaster if they were legally required to maintain flood insurance for the life of the 
loan as a result of a previous SBA disaster loan and failed to do so (SBA 2004).  In addition, 
applicants are also ineligible for SBA assistance if they are required to have flood insurance 
because they have a mortgage from a regulated lender but do not have the insurance (except 
when an applicant can demonstrate that the lender did not provide the borrower with information 
on the mandatory purchase requirement or when the lender incorrectly informed the applicant 
that the damaged property was in a SFHA).
The SBA can also require additional flood insurance if it requires collateral other than or 
in addition to the damaged property.  For example, if the value of a damaged property is 
insufficient to collateralize a loan adequately, then the business owners personal property might 
be required as collateral.  Flood insurance would be required on this collateral if it were located 
in a SFHA.  Flood insurance can be required on such collateral when economic damage to the 
flood-damaged business has occurred even in the absence of physical damage.  If a flooded 
business is leased, the lessee is required to purchase contents insurance whether or not the 
flooded property is located in a SFHA. 
The process of determining whether a property is in a SFHA and whether an affected 
community participates in the NFIP depends on who issues the loan.  If a financial institution 
issues an SBA-guaranteed loan, that institutions policies dictate the procedures used.  When the 
SBA issues a loan, the agency conducts its own flood determinations using paper FIRMs.  The 
SBA does not use the services of flood determination companies in the belief that using 
determination companies is more expensive than are internal determinations.  
According to the SBAs Standard Operating Procedures for Loan Processing (SBA 
1999a), these FIRMs and a list of communities participating in the NFIP are available at the 
SBAs field offices.  After receiving an application for a disaster loan, for example, the SBA 
checks the list of participating communities and sends a loss verifier to the property to evaluate 
the damages and to determine whether the property is in a SFHA.  That determination is 
recorded on a SFHD form.  Reliance on paper FIRMs assumes that the maps are current and that 
loss verifiers can accurately locate all properties on the FIRMs.  In addition, the SBAs 
procedures assume that every field office has access to all LOMA and LOMR in the area for 
which the field office has responsibility, which is unlikely, and that the field offices routinely 
monitor FEMAs Compendium of Flood Map Changes as well as changes in communities 
status.  Furthermore, the loss verifier has no way of knowing whether a property is in violation of 
state or local laws, regulations, or ordinances that are intended to discourage or otherwise restrict 
land development or occupancy in flood-prone areas (i.e., a 1316 property).
Reliance on paper FIRMs and the non-use of flood determination companies also means 
that the SBA may not be aware of changes in FIRMs that place properties in SFHAs (or remove 
them from SFHAs) after loans are issued.  In other words, the SBA is seemingly unable to 
provide life-of-loans determinations, and its guidelines for loan servicing (SBA 1999b) do not 
address changes in FIRMs or in a communitys status in the NFIP.  Perhaps as a result of these 
concerns, the SBA is considering the outsourcing of its flood determinations.
Loan servicing 
	Although the SBA requires flood insurance for the life of the disaster loans it extends, it 
does not check whether borrowers retain flood insurance beyond loan origination for several 
reasons.  First, until recently the SBA outsourced the servicing of two-thirds of its loan portfolio.  
Since this outsourcing contract ended, the SBA has been servicing all of its loans internally.  
External servicing costs two to three times as much as internal servicing.  Nonetheless, the SBA 
is again considering outsourcing all loan servicing. 
	Second, the SBA sells some of its loans.  Although there is not the same secondary 
market for disaster loans as there is for home loans, the SBA sells many of its loans to banks and 
private companies.  Once a loan is sold, the responsibility for ensuring that the property owner 
maintains flood insurance is transferred to the loans buyer.  The SBA does not retain any 
records on loans after they are sold.  However, there is a written condition in all sales agreements 
that the purchaser of the loans and any subsequent purchasers are responsible for requiring that 
loan recipients maintain insurance to the levels that the SBA originally required.  The SBA does 
not monitor compliance with this requirement..  
	Third, the SBA does not actively track the flood insurance for the loans that it retains in 
its portfolio and services internally.  The SBA learns that a property owner has not retained 
adequate insurance if it happens to receive notification of cancellation of the flood policy from 
the insurance agent, if the borrower contacts the SBA with a request to change the terms of the 
loan (in which case the SBA would revisit the loan file), or if the borrowers property is again 
damaged by a flood and the borrower applies for another SBA disaster loan.  In the latter case, if 
the SBA learns that an applicant has failed to maintain the insurance required for the first loan, 
the borrower is ineligible for another disaster loan.  Despite this restriction, the SBA cannot 
check the status of flood insurance on the first loan if it has been sold.    
Although the SBA does not track flood insurance, the SBA has used forced placement on 
occasion.  Officers analyze situations requiring flood insurance on a case-by-case basis and use 
force placement only if it is financially sensible.  When the SBA does force place flood 
insurance, it uses private rather than federal flood insurance.  
The SBA does not require flood determinations beyond the initial determination so it 
does not track whether properties have been mapped into or out of SFHAs.  The SBA is 
uncertain how remapping has affected the property owners to whom it has already extended 
loans.  It would become aware of remapping only if a property owner notified the agency, which 
might happen when a property is removed from a SFHA.  
The SBAs data systems are property-specific and aspire to track property histories 
regardless of changes in ownership.  For example, if a repetitive loss property undergoes 
multiple changes in ownership, the SBA should remain aware of the propertys flood history.  
On certain occasions, a disaster-loan recipient may use an SBA loan to relocate out of a 
SFHA.  When this occurs, the SBA requires that a Notice of Disqualification be put on the 
deed to the flooded property.  The notice informs potential buyers that the property is not eligible 
for disaster assistance.  The SBA would not approve a loan application for a property with such a 
notice on the deed.  However, the SBA does not look at property deeds until after it has approved 
disaster loans, at which point it would be too late to renege on the loan approval.  
Monitoring and compliance
The SBA anticipates that high levels of compliance exist with its flood insurance 
requirements at loan origination but that compliance declines over the life of loans due to 
borrowers failures to renew insurance policies. 
FEMAs roles and responsibilities
FEMA does not have a central role in implementing the mandatory purchase requirement, 
but the agency does have opportunities to facilitate the processes associated with the 
requirement.  The legislation governing flood insurance provides FEMA with at least the 
following responsibilities, all of which can support the requirement.  First, the agency conducts 
or contracts for Flood Insurance Studies, which serve as the basis for the development of FIRMs 
and the delineation of Special Flood Hazard Areas.  Second, the agency accepts and acts on 
applications from communities to participate in the NFIP.  Third, FEMA provides flood 
insurance.  Finally, the Flood Disaster Protection Act, as amended, provides FEMA with the 
authority to issue regulations as may be necessary to carry out the purpose of the legislation.
Although this authority has not changed since 1973, FEMAs interpretation of this 
authority may have changed.  In 1978, as an illustration, the Federal Insurance Administration 
(then still part of the Department of Housing and Urban Development) published guidelines in 
the Federal Register on the mandatory purchase requirement for federal agencies and private 
lenders subject to the requirement. These guidelines (FIA 1978b) described the properties 
eligible for flood insurance, discussed when the purchase of flood insurance is required, and 
indicated the amount of insurance available.  
Most important, the guidelines interpreted the 1973 laws intent with respect to the 
mandatory purchase requirement and discussed how lenders should implement the law. The 
guidelines indicated that the mandatory purchase requirement applied not only at loan origination 
but also to the purchase of loan portfolios in the secondary market. This position contrasted with 
that of the FDIC, the FRB, and the OCC, which contended that the requirement did not apply to 
mortgages sold in the secondary market.  Similarly, the FIA declared that the burden of 
determining the location of the real property to be financed is on the lender and cannot be 
discharged merely by obtaining a self-certification from the borrower.  In both instances, the 
FIA specified what regulated lending institutions were obligated to do to ensure their compliance 
with the mandatory purchase requirement. 
In contrast to this perspective, the federal insurance administrator (cited in Office of 
Inspector General 2000) subsequently declared that the agency has only limited authority or 
responsibility for the enforcement of the mandatory flood insurance purchase requirement 
(emphasis added).  More recently, FEMA (2002a) asserted that FEMA administers the NFIP, 
[but] it has no responsibility or authority under either the 1973 act or 1994 act with respect to 
lender compliance with the Mandatory Flood Insurance Purchase Requirement  this 
responsibility falls on the Federal agency lender regulators and secondary-market purchasers 
though FEMA prepares guidance materials with respect to the NFIP and the Mandatory Flood 
Insurance Purchase Requirement (emphasis added).
In the words of one FEMA official, The question of what authority, if any, that FEMA 
should have regarding the enforcement of the mandatory purchase of flood insurance 
requirements, has been discussed and debated since the passage of the 1973 act.  The outcome of 
those discussions has always been the same: FEMA is not a regulatory agency in this area.  The 
intent of the Congress in both the 1973 act and the 1994 act seems clear on this matter: although 
FEMA has the authority to administer the NFIP, other federal agencies have the authority to 
administer the NFIPs mandatory purchase requirement. Congress has often raised questions 
about the enforcement of the mandatory purchase requirement, and the agency has provided its 
views.  Never, in FEMAs opinion, however, has the Congress provided FEMA the authority to 
enforce the requirement.  Likewise, FEMA has no explicit legal authority to assess lenders 
compliance or to impose any sanctions on lenders (or GSEs) that have violated the requirement.
Although there is no explicit statutory authority giving FEMA a role in the administration 
of the mandatory purchase requirement, other entities believe that FEMA can and should be 
more assertive in the implementation of the requirement.  As an illustration, the National 
Performance Review (Office of the Vice President 1993) recommended that FEMA should 
develop cost-effective proposals for enforcement of requirements for mandatory flood insurance 
in order to reduce the need for disaster assistance.  
More recently, FEMAs Office of Inspector General (2000) noted that the law does not 
place restrictions on the methods FEMA can use to enforce compliance with the mandatory 
purchase requirement. The IG encouraged FEMA to pursue innovative ways to address what it 
labeled as the compliance dilemma. We continue to contend, noted the IG, that FIA can, 
and should do more to assist other entities address the compliance issue.  In the IGs opinion, 
such assistance need not have a regulatory or enforcement component.
The IG provided several examples of how FEMA could promote compliance without 
assuming a regulatory or enforcement role.  For example, the IG (Office of Inspector General 
2000) recommended that the agency determine the extent to which lending institutions use flood 
determination companies that provide life of loan with transferability services.  The IG also 
suggested that FEMA could contribute to improved implementation of the mandatory purchase 
requirement by identifying structures that are remapped into SFHAs after loans are closed.  In 
both cases, FEMA contested the IGs claims that FEMA has the necessary authority or budget 
and asserted that any changes in current roles would require a clarification from Congress. 
The IG (Office of Inspector General 2000) further recommended that FEMA should 
examine the feasibility of legislative changes that would address nonregulated lenders as well as 
uninsured homeowners who do not have mortgages.  More than four years later, FEMA had not 
acted to implement this recommendation.  
The IG also offered several recommendations that would assist federal regulatory 
agencies in their efforts to promote compliance with the purchase requirement.  First, the IG 
suggested that FEMA should develop a methodology for periodically identifying cancelled 
policies and corresponding lending institutions.  Although FEMA once tried to develop and 
implement such a methodology, that effort was not successful and FEMA is not currently 
working to develop such a system.
Second, the IG also proposed that FEMA re-institute a process it had used routinely and 
successfully in the late 1980s and early 1990s.  At that time, FEMA collected information about 
mortgages and location in a SFHA from applicants seeking flood-related disaster assistance 
(GAO 1990).  Matching this information with data on which property owners did or did not have 
flood insurance, FEMA was able to determine the level of compliance with the mandatory 
purchase requirement in flooded areas as well as the extent and causes of noncompliance.  
Indeed, the IG declared that postdisaster compliance studies could be a significant step in 
identifying non-compliance, a topic of continuing concern, as the present report demonstrates.  
It is not clear why or when FEMA stopped collecting information on mortgages in 
SFHAs from applicants for disaster assistance.  Regardless of when the process was terminated, 
the IG (Office of Inspector General 2000) urged FEMA to determine the feasibility of adding 
several questions to the disaster assistance surveys so that information that would ascertain the 
level of compliance with the mandatory flood insurance purchase requirements could be 
obtained in postdisaster situations.  FEMA (2003) subsequently indicated to the IG that there 
had been no negotiation to add questions to the survey, and none are currently included. As the 
NFIPs staff has explained, however, a request was made to add relevant questions, but FEMAs 
Response and Recovery Directorate, which has responsibility for disaster assistance, opposed the 
request.
Recommendations
Consistent and effective implementation of the mandatory purchase requirement of the 
Flood Disaster Protection Act of 1973, as amended, is affected by the large number of agencies 
and institutions that are responsible for implementation as well as by the complexity of the 
requirement itself.  Without a single agency that exercises an oversight or monitoring role to 
promote consistency and compliance, the key actors have understandably adopted different 
approaches to as well as different interpretations of the same legislative language.  Different 
interpretations are not always undesirable, but they can be confusing.  Few people describe the 
federal flood insurance program as easily understood, as the present study of a small part of the 
program suggests.
The recommendations that follow are intended to promote consistency and effective 
implementation of the mandatory purchase requirement.  If the goal of the Congress is to reduce 
federal disaster assistance and to place some or all of the risk of living and working in 
floodplains on those who choose to do so, then there is much that can be done to achieve these 
goals through enhanced implementation of the requirement.
Many recommendations are feasible while others are less so.  For example, some people 
have suggested that all property owners in SFHAs with mortgages, whether from regulated or 
nonregulated lenders, should be required to purchase flood insurance.  Others argue that all 
property owners in these areas, including those without mortgages, should have that obligation 
imposed on them.  These may be desirable objectives, but there presently exists no structure or 
institutional arrangement to monitor compliance among those not now subject to the mandatory 
purchase requirement or to sanction their noncompliance. The compliance system now in 
operation has the virtue of relying on agencies and institutions, although created for other 
purposes, that can monitor compliance and impose sanctions for noncompliance, both of which 
are prerequisites for successful implementation.
  Among the recommendations that are feasible, improvements can begin with changes in 
the legislation that requires the purchase of flood insurance for certain property owners as well as 
with the agencies responsible for monitoring compliance. 
Congress 
Essential Actions
Mandatory Purchase Recommendation #1 (MP1): Increase the maximum federal flood insurance 
available to the same amount as the maximum amount of a conforming loan that Freddie Mac or 
Fannie Mae can purchase (i.e., $359,650 in 2005).
MP2:	Permit annual automatic adjustments in the maximum coverage available through the 
NFIP to coincide with changes in the maximum dollar amount of conforming loans that Freddie 
Mac or Fannie Mae can purchase. 
MP3:	Require federal flood insurance policies to contain an escalator clause (similar to standard 
hazard policies) to ensure that the amount of coverage is automatically adjusted when the 
replacement cost of the insured structure increases.
MP4: 	Eliminate the differences between federally regulated lenders, Fannie Mae, and Freddie 
Mac in the minimum insurance requirements that now exist for loans subject to the mandatory 
purchase requirement.  All loans subject to the requirement should have the same minimum 
requirements for flood insurance.
MP5: 	Require that the minimum amount of coverage in place for a designated loan be at least 
equal to the replacement value of a building or manufactured home or to the maximum limit of 
coverage made available through the NFIP with respect to the particular type of property, 
whichever is less, even when the principal balance of a loan is less than the replacement value.  
MP6: 	Revise the requirements pertaining to lenders notice of special flood hazard and 
availability of federal disaster relief.  Regulated lenders should be required to notify their 
borrowers in SFHAs in participating communities that:
Coverage provided through the NFIP for contents is separate from coverage for damage 
to their homes or businesses;
NFIP policies do not fully protect borrowers against partial loss or damage to their homes 
or businesses if these policies cover less than 80 percent of the replacement cost; and,
They may be eligible for exemption from the mandatory purchase requirement if their 
property is above the base flood elevation. 
MP7:	Prohibit, after a lenders notification that flood insurance is required, a property owners 
receipt of federal disaster assistance related to floods if insurance coverage for floods is less than 
75 percent of the minimum amounts of coverage required. 
MP8:	Specify that a regulated lenders purchase of a loan requires the completion of a SFHD 
form.
MP9:	Require that SFHD forms produced in conjunction with a regulated lenders making, 
increasing, extending, renewing, or purchasing of a loan inside of SFHAs in a participating 
community be given to borrowers as soon as practicable before such loans are made, increased, 
renewed, extended, or purchased.  This change will reduce borrowers costs, minimize or 
eliminate the need for insurance agents to obtain separate determinations, and emphasize 
borrowers location in areas of high risk for flooding.
Other High Priority Actions
MP10:	Require that SFHD forms produced in conjunction with a regulated lenders making, 
increasing, extending, renewing, or purchasing of a loan outside of SFHAs in a participating 
community be given to borrowers with information indicating that the purchase of flood 
insurance may be advisable because flooding is not limited to high-risk SFHAs and can occur 
almost anywhere.  This notification can indicate the availability of FEMAs low-cost Preferred 
Risk Policies for homeowners in areas of low to moderate risk.  
MP11:	Exempt loans from federally regulated lenders with an original outstanding principal 
balance of $10,000 or less and a repayment term of one year or less from the mandatory purchase 
requirement.  The present limit of $5,000 has not changed since 1994.
MP12:	Require flood insurance for all improved real estate and manufactured homes in SFHAs 
(with the exception of loans with an original outstanding principal balance of $10,000 or less and 
a repayment term of one year or less and for state-owned properties covered by self-insurance 
satisfactory to FEMAs director).   However desirable this recommendation may be, it cannot be 
implemented successfully in the absence of system to monitor compliance.  Such a system does 
not now exist.  
MP13:	Prohibit regulated lenders from making, increasing, renewing, extending, or purchasing 
loans for improved real estate or manufactured homes in SFHAs in communities that do not 
participate in the NFIP.  This change could replicate a similar provision (i.e., Section 202(b)) in 
the 1973 Flood Disaster Protection Act. 
MP14:	Require regulated lenders to monitor loans in their portfolios for changes in FIRMs that 
increase or decrease the size of a SFHA or changes in the status of a communitys participation 
in the NFIP.  
MP15:	Specify that such changes require a regulated lenders completion or revision of a SHFD 
form.
MP16:	Mandate that regulated lenders have procedures in place to require a borrowers purchase 
of flood insurance (or the forced placement of flood insurance, if necessary) within 90 days of a 
change to a FIRM that places improved real estate or a manufactured home in a SFHA at any 
time after a loan from a regulated lender is made, increased, renewed, extended, or purchased.
MP17:	Mandate that regulated lenders have procedures in place to require a borrowers purchase 
of flood insurance (or the forced placement of flood insurance, if necessary) within 45 days if a 
communitys initial entry into the NFIP or its removal from suspension from the NFIP places 
improved real estate or a manufactured home in a SFHA at any time after a loan from a regulated 
lender is made, increased, renewed, extended, or purchased.
MP18:	Require, for regulated lenders that use third-party vendors for flood determinations, life-
of-loan service with transferability for all designated loans.
MP19:	Prohibit regulated lenders that use flood determination companies from selling, 
purchasing, or securitizing loans that do not have life-of-loan flood determinations with 
transferability service.
MP20:	Require condominium associations in SFHAs in participating communities to purchase 
flood insurance at least equal to the lesser of 100 percent of the insurable value of each insured 
building or the maximum coverage available through the NFIP. 
MP21:	Require OFHEOs annual report to summarize its efforts and activities to ensure and 
monitor Freddie Macs and Fannie Maes compliance with the mandatory purchase 
requirement.   
Medium Priority
MP22:	Amend sections 102(a) and (b) of the Flood Disaster Protection Act of 1973, as amended, 
to clarify that the value of land associated with a loan cannot be insured.
MP23:	Strike the words at the time of origination or from section 102(a)(e)(1) of the Flood 
Disaster Protection Act of 1973, as amended.  These words imply that forced placement of flood 
insurance is appropriate at the time of loan origination, a position contrary to the preferences and 
interpretation of FEMA and the federal entities for lending regulation.
MP24:	Strike the words other than general or special revenue sharing or formula grants made to 
states from section 3(a)(3) of the Flood Disaster Protection Act of 1973, as amended.  States 
should not be encouraged or permitted to use federal funds to finance or promote development, 
acquisition, or construction in SFHAs unless such development, acquisition, or construction is 
appropriately insured against the risks of flooding. 
MP25:	Eliminate the requirement in section 1364(b) of the Flood Disaster Protection Act of 
1973, as amended, that the director of FEMA (or his designee) be informed of the identity of the 
loan servicer when a borrower with a designated loan increases, renews, or extends a loan with 
the original lender and there has been no change in the lenders loan servicer.
MP26:	Include, in section 102(f)(2) of the Flood Disaster Protection Act of 1973, as amended, a 
regulated lenders pattern or practice of failure to complete a SFHD form as a violation that is 
subject to a civil money penalty 
MP27:	Allow borrowers to use the SFHD form to confirm a buildings location if a designated 
loan is refinanced, increased, renewed, or extended with the original or a subsequent regulated 
lender and no map changes have occurred within seven years of the initial determination.
MP28:	Extend the escrow requirement, in section 102(d) of the Flood Disaster Protection Act of 
1973, as amended, to all loans associated with improved real estate and manufactured homes in 
SFHAs in communities that participate in the NFIP.  The requirement is now limited to 
residential improved real estate. 
MP29:	Reinstitute the requirement, included in section 529 of the 1994 Reform Act, that federal 
entities for lending regulation complete reports every two years that summarize their efforts to 
ensure compliance with the mandatory purchase requirement.  These reports should indicate the 
number of institutions examined, the number and types of violations identified, the number and 
amount of civil money penalties imposed, the number and type of violations associated with each 
civil money penalty, problems that regulated lenders encounter in implementing the mandatory 
purchase requirement, and suggestions for improving its implementation.  A similar reporting 
requirement should be imposed on federal agency lenders.  Although these agencies do not have 
the authority to impose civil money penalties, the agency reports should summarize their efforts 
to ensure compliance among recipients of federal grants and federally insured or guaranteed 
loans. 
MP30:	Require, for all regulated lenders deemed to have committed a pattern or practice of 
committing violations of section 102(f) of the Flood Disaster Protection Act of 1973, as 
amended, the chief executive officer to file annually a statement of full compliance with the 
mandatory purchase requirement with the appropriate entity for lending regulation until released 
from that obligation by that entity.
MP31:	Require the Farm Credit Administration to ensure the consistency of its flood-related 
policies and procedures with the principles and standards that the FFIEC has developed for the 
federal examination of regulated financial institutions.
MP32:	Consider whether the mandatory purchase requirement is appropriately sensitive to 
designated loans for agricultural buildings (but not for rural or farm residences).  Alternatively, 
Congress (and FEMA) should consider lower premium rates for agricultural buildings, reduction 
in fees for multiple agricultural buildings, higher deductibles on federal flood insurance for such 
buildings, and less costly alternatives for Letters of Map Amendment. 
MP33:	Establish a limit below which flood insurance is not required for federal grants.
 
FEMA
	FEMA should explore opportunities to exercise a leadership role in promoting 
compliance and in assisting the federal entities for lending regulation to meet their obligations 
related to flood insurance.  This role need not engage FEMA in a situation in which it regulates 
lenders or enforces compliance with the requirement.  As the following recommendations 
suggest, however, there is much that FEMA can do. 
Essential Actions
MP34:	Simplify the explanation of federal flood insurance, which is often perceived to be 
difficult to understand and interpret, thus discouraging some property owners in SFHAs from 
purchasing and retaining coverage.  The process of simplification should address the seeming 
inconsistency in FEMAs explanation of how the NFIP works, depending on the report or 
document examined.  The agencys explanations about when insurance is required during 
construction provide an example.
MP35:	Update and revise the Mandatory Purchase of Flood Insurance Guidelines (FEMA 1999) 
in collaboration with key stakeholders, including the federal entities for lending regulation, 
federally regulated lenders, insurance companies and brokers, flood zone determination vendors, 
and government-sponsored enterprises.  FEMA should ensure that the Guidelines address a 
specific audience, such as the lending community, rather than a generic audience.  The 
Guidelines should be simplified, should provide examples to illustrate requirements, and should 
be user-friendly. The Guidelines presently assume considerable familiarity with flood mapping 
and floodplain management.  If the Guidelines are intended to address the needs of regulated 
lenders, then entire sections can be deleted (e.g., the discussion of community-initiated map 
revisions) while other sections should be added.  As an illustration, the format should be 
amended to facilitate lenders explanation to borrowers why flood insurance is required (or 
recommended) due to a borrowers relative exposure to flood risk.
MP36:	Ensure the Guidelines accuracy and their consistency with the rules and procedures of 
federal lenders and the federal entities for lending regulation as well as with the agencys Flood 
Insurance Manual.  Revisions should address such topics as insurance during construction; 
escrow requirements for multifamily dwellings; loans in nonparticipating communities; coverage 
for condominiums; and the proper amount of civil money penalties that the federal regulatory 
agencies can impose.  The use of plain English for the Flood Insurance Manual is highly 
desirable.
MP37:	Revise the Standard Flood Hazard Determination form by:
Adding an explanation to the form of the various flood zones and the relative risk of 
flooding in each zone;
Eliminating the requirement for a lenders identification number;
Changing Block 5, Amount of Flood Insurance Required, to Minimum Amount of 
Flood Insurance Required;
Indicating the availability of federal flood insurance in all zones and that flooding is not 
limited or restricted to SFHAs;
Indicating the possible eligibility for administrative grandfathering; and
Indicating that federal flood insurance is available for most buildings and manufactured 
homes in participating communities (rather than being available for all buildings and 
manufactured homes in participating communities).
MP38:	Examine, as recommended by the agencys Office of Inspector General (IG 2000), the 
feasibility of legislative changes that would address nonregulated lenders and homeowners 
without flood insurance in SFHAs.  This review should assess the feasibility of requiring flood 
insurance in states where there is a high incidence of flooding and flood insurance claims outside 
of SFHAs.
MP39:	Eliminate Letters of Map Revision based on Fill (LOMR-F).  Their sole purpose is to 
avoid the mandatory purchase requirement, and they are inconsistent with the purposes of the 
National Flood Insurance Act, which is intended to guide the development of proposed future 
construction, where practicable, away from locations which are threatened by flood hazards.
MP40:	Comply with Section 7 of the Coastal Barrier Improvement Act of 1990 (P.L. 101-591) 
by certifying annually to the Department of the Interior that the NFIP is in compliance with the 
acts provisions, which limits the sale of federal flood insurance in CBRS units and in Otherwise 
Protected Areas after their designation.  
MP41: Ask flood determination companies, perhaps through the National Flood Determination 
Association, to provide either: a) copies of all SFHD forms that indicate a building or a 
manufactured home is in a unit of the Coastal Barrier Resources System (CBRS) or Otherwise 
Protected Area (OPA); or, b) a list of all such properties, including the street address, community 
name, and the date of the determination.  FEMA should seek updated information from the flood 
determination companies at least annually.  In turn, FEMA should compare the list of such 
properties with its record of policyholders.
MP42:	Provide federally regulated lenders, federal regulatory agencies, and government-
sponsored enterprises with real-time access to: a) a database of buildings and manufactured 
homes in CBRS and OPA that are legislatively grandfathered for purposes of federal flood 
insurance; and, b) a database of buildings and manufactured homes in CBRS and OPA that are 
ineligible for federal flood insurance because they were constructed after designation of the 
CBRS or OPA.
Other High Priority Actions
MP43:	Revise the Mortgage Portfolio Protection Program (MPPP), which was created as a 
means to force place insurance coverage on structures for which flood insurance is required.  The 
program is not competitive with private insurance and is administratively difficult to use.  
Although the MPPP is not intended to be competitive, the reason for requiring flood insurance is 
to have property owners share some of the financial risk associated with flooding through 
insurance.  The MPPP also does not accommodate situations in which a property owner has two 
or more loans from different regulated lenders or provide a solution to the problem of 
underinsurance, which may be a more serious problem than the absence of required coverage.  In 
particular, FEMA should:
Permit regulated lenders to use the MPPP to force place a second NFIP policy (with the 
total coverage not to exceed the maximum coverage permitted by law).  The NFIP 
currently has no means to assist the efforts of regulated lenders to comply with the 
mandatory purchase requirement when borrowers have coverage in amounts less than the 
minimum required by law.   
Identify and minimize the disincentives to lenders use of the MPPP.
Eliminate the 15-day gap in coverage that now exists when lenders force place coverage 
through the MPPP.  FEMA may be able to do so administratively by extending to 45 days 
from 30 days the grace period after expiration of a Standard Flood Insurance Policy.
Clarify that policies force placed through the MPPP are not eligible for the premium 
discounts associated with a communitys participation in the Community Rating System.  
This clarification should be included in the Mandatory Purchase of Flood Insurance 
Guidelines as well as the agencys Flood Insurance Manual.
MP44:	Clarify whether a regulated lender can force place a Standard Flood Insurance Policy on a 
designated loan.
MP45:	Collect information about mortgages and location in SFHAs from applicants seeking 
flood-related disaster assistance and add related questions to postdisaster assistance surveys. 
MP46:	Eliminate administrative grandfathering, beginning with severe repetitive-loss 
properties.   Terminate eligibility for administrative grandfathering upon any change in 
ownership of a building or manufactured home.  Eliminate all other administrative 
grandfathering within three to five years (if not already terminated by a change in ownership).
MP47:	Revise the application for federal flood insurance to indicate that, where applicable, 
premiums are based on administrative grandfathering.
MP48:	Develop and implement a record-keeping system that provides access to information 
needed to verify that administrative grandfathering was used to calculate a policyholders 
premiums for flood insurance.  The absence of information on administrative grandfathering 
compromises FEMAs ability to determine the NFIPs actuarial soundness, the consequences of 
remapping, and the extent to which insurance claims are for properties inside or outside of 
SFHAs.
MP49:	Consider how the Compendium of Flood Map Changes can better meet the needs of its 
intended users. For example, who are these users?  What are their needs?  How well are these 
needs addressed?  What obligations, if any, does publication of the Compendium impose on 
regulated lenders (e.g., does it create the awareness required for these lenders to review loans 
affected by these changes to ascertain the need for flood insurance or change sin existing 
coverage)? 
MP50:	Develop a procedure that permits federal agency lenders and insurance agents that sell 
federal flood insurance to be informed of properties duly declared to be in violation of State or 
local laws, regulations, or ordinances which are intended to discourage or otherwise restrict land 
development or occupancy in flood-prone areas and thus ineligible for federal flood insurance.
MP51:	Provide points to communities in the Community Rating System that facilitate public 
access to and awareness of properties duly declared to be in violation of State or local laws, 
regulations, or ordinances which are intended to discourage or otherwise restrict land 
development or occupancy in flood-prone areas and thus ineligible for federal flood insurance.  
Points might be awarded for providing relevant information on a communitys website or for 
requiring deeds to indicate that a building is not eligible for federal flood insurance.
MP52:	Provide the federal regulatory agencies with real-time access to data that would allow 
them to determine which buildings or manufactured homes are insured through the NFIP and 
which have had policies cancelled or not renewed.   To facilitate use of such data, FEMA must 
ensure and improve the accuracy of the addresses associated with each policy.  Faulty addresses 
are a common problem in FEMAs policy database. 
MP53:	Conduct a study to examine the implications and consequences of section 1364(b) of the 
Flood Disaster Protection Act of 1973, as amended.  This section requires regulated lending 
institutions and federal agency lenders to notify the director (or his designee) of changes in loan 
servicers.  FEMA has designated Write Your Own (WYO) companies to receive these 
notifications.  FEMA should: a) identify quantitative indicators that can be used to measure 
progress and success; b) determine whether the process works as intended; c) in consultation 
with the WYO companies, identify ways in which the process can be improved; and, d) assess 
whether and how the delegation to the WYO companies effectively promotes the NFIPs 
objectives.
Medium Priority
MP54:	Develop a flood insurance policy specifically addressed to the needs of owners of 
manufactured homes.  These owners are not as well served as they might be with the present 
Standard Flood Insurance Policy.
FEMA and the federal entities for lending regulation
High priority
MP55:	Develop a system that permits a comprehensive and ongoing assessment of the level of 
lenders and borrowers compliance with the mandatory purchase requirement.  This system, 
which FEMA should initiate, fund, and administer, should identify levels of compliance at loan 
origination as well as when renewal of coverage is required.  This system may require sharing of 
data among federal agencies.  FEMA and the FFIEC should identify any legislative changes that 
may be necessary to permit the sharing of the data required to implement the system proposed.
The FFIEC
MP56:	Revise and update the Interagency Questions and Answers Regarding Flood Insurance 
(FFIEC 1997).  When these questions and answers were issued, the FFIEC indicated that it 
intended to update them on a regular basis.  No updates have been issued.  Within the revised 
questions and answers:
Clarify that lenders cannot initiate the notification process associated with forced 
placement until an existing Standard Flood Insurance Policy has expired.
Clarify when flood insurance is required for buildings under construction in SFHAs.
Specify what constitutes the proof of coverage that borrowers must provide before a 
lender makes, increases, extends, renews, or purchases a loan.  The FFIEC may wish to 
replicate Freddie Macs (2004b) requirements. 
MP57:	Conduct a study that identifies differences and similarities in the federal regulatory 
agencies determination of what constitutes a pattern or practice of committing violations of 
section 102(f) of the Flood Disaster Protection Act of 1973, as amended.  In addition, the study 
should assess the impact of civil money penalties as a deterrent and determine whether the 
consequences justify the agencies administrative costs of the CMP process.  If the present 
maximum penalty per violation does not serve as an effective deterrent, the study should 
recommend the dollar amounts per violation that would do so.
MP58:	Establish minimum requirements for the guarantees associated with third parties 
completion of SFHD forms.  
Federal entities for lending regulation
Essential Actions
MP59:	Require regulated lenders to provide their borrowers with a completed SFHD form as 
soon as practicable before making, increasing, renewing, or extending a loan or at any other time 
a lender receives or completes a SFHD form that will affect borrowers premiums or their 
obligation to obtain flood insurance.
MP60:	Develop and implement during reviews of lenders loan portfolios a common procedure 
for assessing the accuracy of lenders flood determinations. The federal regulatory agencies may 
wish to consider procedures similar to those used by Freddie Mac or Fannie Mae.
MP61:	Establish minimum requirements for life of loan with transferability services for flood 
determination companies.  These requirements should address changes in flood zones; changes 
in community status; LOMA and LOMR; and the changes that require notification to regulated 
lenders.  The requirements could usefully include a provision that limits the need for notification 
of lenders to changes that might affect borrowers premiums for flood insurance.  Conversely, 
the requirements should preclude the need for flood determination companies to notify lenders of 
minor or inconsequential changes that will have no effect on premiums or coverage.
Other High Priority Actions
MP62:	Adopt a common policy on requirements for the purchase of flood insurance for owners 
of condominium units and specify clearly the amount of coverage required.  One goal of the 
requirements should be to facilitate lenders and insurance agents ability to explain and 
implement the mandatory purchase requirement. 
MP63:	Require that examination of lenders loan portfolios for purposes of flood insurance 
review a sample of loans issued prior to the previous examination to monitor for renewal of flood 
insurance on existing loans.
MP64:	Adopt a common definition of a pattern or practice of committing violations of section 
102(f) of the Flood Disaster Protection Act of 1973, as amended.  The goal should be a common 
understanding so that regulated lenders are subject to the same expectations about performance 
regardless of which agency oversees their compliance with the mandatory purchase requirement.  
The FDICs (2001b) guidelines on the topic can serve as a model for this common definition. 
MP65:	Inform regulated lenders and the agencies examination staffs that federal flood insurance 
is not available for properties duly declared to be in violation of State or local laws, regulations, 
or ordinances which are intended to discourage or otherwise restrict land development or 
occupancy in flood-prone areas.  
MP66:	Develop policies or procedures to address satisfactorily potential coverage problems 
when there are two or more loans on a building or manufactured home.  Secondary lien holders 
should not find themselves in a position where they must force place coverage for the value of all 
loans on a building when they hold only a portion of the value of these loans.
Medium Priority
MP67:	Adopt a clear and common explanation of: a) when flood insurance is required and its 
effective date before or during construction; and, b) the amount of insurance required during 
construction (e.g., coverage should be equivalent to the anticipated value of the structure prior to 
construction, increasing amounts of coverage as construction progresses, etc).
Federal agency lenders
MP68:	Prior to providing any federal financial assistance, use flood determination companies to 
provide flood determinations with life-of-loan service with transferability.  The life-of-loan 
service should include attention to changes in FIRMs, changes in a communitys participation in 
the NFIP, and Letters of Map Amendment. 
MP69:	Develop and implement a system to track loans and grants so that it is possible to monitor 
compliance with the mandatory purchase requirement for the life of the loan or grant.    
Department of Agriculture
MP70: Complete the revision of the departments internal instruction guidelines for flood 
insurance as soon as possible.  These guidelines, issued in 1974, are outdated.
 
Department of Veterans Affairs
MP71:	Clarify the meaning of regular flooding.
Farmer Mac
MP72:	Require flood insurance on loans its purchases from nonregulated lenders when property 
securing the loan is in a SFHA in a participating community.
Appendix 1: Percentage of flood determinations indicating location in a SFHA for selected flood 
determination companies, by state: 1997-2003
State
Firm 
A
Firm 
B
Firm 
C
Firm 
D
Firm 
E
Firm 
F
Firm 
G
 
Average 
percentage in 
SFHA
Alabama
4.90
4.01
4.68
4.34
12.06
1.89
3.34
4.34
Alaska
1.87
2.15
2.67
5.54
2.62
3.81
3.11
2.89
Arizona
3.70
2.73
3.59
5.24
2.09
2.66
2.88
3.05
Arkansas
4.12
3.34
5.41
5.82
2.49
3.51
2.77
3.55
California
4.47
3.38
6.29
6.68
2.48
3.49
3.18
3.77
Colorado
2.01
1.41
1.65
3.35
0.79
1.33
0.95
1.48
Connecticut
3.82
3.49
4.28
4.43
2.85
2.94
3.60
3.58
Delaware
6.92
8.50
7.87
10.13
6.35
8.51
6.04
8.05
District of Columbia
0.42
0.10
0.23
0.46
0.37
0.08
0.05
0.17
Florida
34.25
27.81
28.31
29.80
24.74
25.71
35.32
29.17
Georgia
3.34
2.74
3.69
4.19
2.47
3.19
1.63
2.93
Hawaii
8.40
8.50
7.81
32.81
11.24
8.29
6.43
8.41
Idaho
3.17
2.91
2.91
4.66
2.06
2.70
2.65
2.83
Illinois
2.34
2.10
2.22
3.23
1.27
2.46
1.72
2.18
Indiana
3.78
2.56
2.34
3.11
1.97
3.06
2.70
2.69
Iowa
2.00
2.04
2.93
2.95
1.29
2.30
1.96
2.17
Kansas
2.91
1.91
2.77
2.52
1.04
2.10
1.83
2.17
Kentucky
3.49
2.54
3.81
4.10
1.98
2.80
2.33
2.84
Louisiana
32.60
32.67
25.65
26.50
24.08
23.61
29.65
29.43
Maine
2.09
2.86
2.87
2.37
1.35
1.28
1.41
2.56
Maryland
3.26
2.85
2.59
4.58
2.60
2.79
1.91
2.84
Massachusetts
2.68
2.34
8.99
2.83
1.95
2.12
2.32
3.04
Michigan
2.24
1.73
2.21
2.03
1.22
1.54
1.29
1.88
Minnesota
1.00
0.88
1.42
2.19
0.43
1.01
0.60
1.03
Mississippi
8.01
6.97
6.62
8.10
5.95
6.47
5.02
6.79
Missouri
2.44
1.59
1.87
3.03
0.84
1.75
1.40
1.75
Montana
2.77
2.39
6.93
2.51
0.80
2.56
1.79
2.89
Nebraska
5.31
4.58
4.95
4.13
3.67
3.51
3.41
4.64
Nevada
3.53
2.58
4.51
3.59
1.34
3.09
2.69
3.01
New Hampshire
2.28
2.02
2.84
2.26
1.12
1.27
1.40
2.04
New Jersey
8.18
7.85
11.68
17.66
6.76
9.50
7.76
8.31
New Mexico
5.24
5.59
11.25
9.60
3.99
4.30
4.64
5.89
New York
3.56
3.13
4.46
3.49
3.51
3.49
3.29
3.41
North Carolina
4.53
4.55
4.15
4.60
2.50
3.69
2.14
4.24
North Dakota
6.69
4.31
4.61
4.60
3.54
3.89
4.25
4.71
Ohio
1.96
1.67
2.09
2.75
1.23
1.90
1.66
1.86
Oklahoma
4.01
2.25
2.06
3.02
1.26
2.43
2.31
2.38
Oregon
4.19
3.19
3.85
3.85
1.91
2.85
2.13
3.29
Pennsylvania
2.10
1.65
2.02
2.46
0.85
1.74
1.09
1.78
Rhode Island
4.20
3.30
5.09
4.68
3.00
3.36
3.19
3.65
South Carolina
15.27
11.34
11.91
11.26
8.20
12.98
7.69
11.86
South Dakota
2.83
2.82
9.74
2.70
0.69
2.39
2.51
4.04
Tennessee
2.41
1.78
2.06
4.73
1.09
1.96
1.27
1.89
Texas
5.45
4.55
5.67
9.59
3.90
4.23
3.80
4.65
Appendix 1: Percentage of flood determinations indicating location in a SFHA for selected flood 
determination companies, by state: 1997-2003, continued
State
Firm 
A
Firm 
B
Firm 
C
Firm 
D
Firm 
E
Firm 
F
Firm 
G
 
Average 
percentage in 
SFHA
Utah
2.56
1.19
3.84
2.09
0.56
1.18
0.87
1.80
Vermont
2.73
2.03
3.02
1.95
0.97
1.98
1.18
2.67
Virginia
3.18
3.36
2.88
7.56
1.89
2.90
2.49
3.19
Washington
2.43
1.98
3.18
4.00
1.11
1.83
1.40
2.03
West Virginia
7.28
5.52
4.09
6.17
4.12
3.94
7.10
5.37
Wisconsin
1.60
1.60
2.26
1.53
1.04
1.70
1.10
1.66
Wyoming
2.20
2.18
5.41
2.34
1.29
2.09
1.87
2.42
TOTAL
6.00
5.34
5.71
4.44
3.71
5.35
5.32
 
5.48
NOTE: Seven flood determination companies, all of which provide determinations in all states and the 
District of Columbia, provided the data in 2003. Not all companies provided data for all years.  The flood 
determination companies were asked to exclude determinations not associated with residential mortgages.
Appendix 2: Total flood determinations, total number of housing units, flood 
determinations as a percentage of total housing units, and estimated number of 
housing units in SFHAs.
State
Total 
determinations
Total 
housing 
units, 2002
Determinations 
as a percent of 
housing units
Estimated 
housing 
units in 
SFHAs
Alabama
1,163,824
2,014,536
57.77
87,452
Alaska
314,353
265,377
118.46
7,659
Arizona
2,366,149
2,328,720
101.61
71,105
Arkansas
528,826
1,202,028
43.99
42,689
California
13,979,128
12,507,767
111.76
471,361
Colorado
2,334,475
1,929,092
121.01
28,505
Connecticut
1,125,374
1,402,643
80.23
50,268
Delaware
273,847
352,031
77.79
28,338
District of Columbia
169,149
272,636
62.04
475
Florida
6,699,608
7,624,378
87.87
2,224,192
Georgia
2,878,198
3,487,088
82.54
102,245
Hawaii
340,364
470,512
72.34
39,569
Idaho
600,013
552,117
108.67
15,614
Illinois
4,241,496
4,981,258
85.15
108,682
Indiana
1,881,924
2,615,750
71.95
70,420
Iowa
760,607
1,257,184
60.50
27,319
Kansas
916,378
1,159,276
79.05
25,191
Kentucky
958,598
1,796,900
53.35
51,101
Louisiana
1,137,602
1,880,122
60.51
553,331
Maine
434,813
664,613
65.42
16,986
Maryland
2,141,389
2,197,126
97.46
62,297
Massachusetts
2,164,371
2,649,029
81.70
80,443
Michigan
3,432,575
4,331,986
79.24
81,327
Minnesota
2,100,182
2,132,632
98.48
21,971
Mississippi
750,498
1,195,133
62.80
81,143
Missouri
1,831,173
2,503,187
73.15
43,919
Montana
274,621
417,106
65.84
12,073
Nebraska
481,937
738,870
65.23
34,256
Nevada
984,076
901,597
109.15
27,158
New Hampshire
472,504
561,178
84.20
11,434
New Jersey
2,786,725
3,372,572
82.63
280,389
New Mexico
625,343
805,293
77.65
47,413
New York
4,443,090
7,754,508
57.30
264,269
North Carolina
2,771,293
3,707,129
74.76
157,281
North Dakota
148,663
294,165
50.54
13,869
Ohio
3,411,707
4,875,496
69.98
90,700
Oklahoma
956,967
1,541,518
62.08
36,734
Oregon
1,294,342
1,495,582
86.54
49,260
Pennsylvania
3,223,105
5,328,251
60.49
94,709
Rhode Island
338,336
443,761
76.24
16,185
South Carolina
1,332,604
1,825,531
73.00
216,440
South Dakota
217,841
332,360
65.54
13,441
Tennessee
1,615,135
2,519,825
64.10
47,506
Appendix 2: Total flood determinations, total number of housing units, flood 
determinations as a percentage of total housing units, and estimated number of 
housing units in SFHAs, continued.
State
Total 
determinations
Total 
housing 
units, 2002
Determinations 
as a percent of 
housing units
Estimated 
housing 
units in 
SFHAs
Texas
4,938,048
8,502,060
58.08
395,382
Utah
979,080
808,593
121.08
14,515
Vermont
514,458
299,570
171.73
7,992
Virginia
2,380,759
3,006,877
79.18
95,996
Washington
2,217,303
2,530,215
87.63
51,459
West Virginia
383,946
852,165
45.06
45,750
Wisconsin
1,666,662
2,386,848
69.83
39,522
Wyoming
152,079
227,941
66.72
5,522
TOTAL
94,049,393
119,302,132
78.83
6,532,027
NOTE: The total number of determinations represents the number of determinations 
completed by seven flood determination companies (from Appendix 1) between 1997-
2003. A housing unit is a house, an apartment, a mobile home or trailer, a group of rooms, 
or a single room that is occupied, or, if vacant, is intended for occupancy as separate 
living quarters. 
SOURCE: For total housing units, Bureau of the Census, Population Division, Table HU-
EST2002-01 - State Housing Unit Estimates.  Available at 
http://eire.census.gov/popest/data/household/HU-EST2002-01.php.  Accessed November 
17, 2003.
References
Apgar, William, Allegra Calder, Michael Collins, and Mark Duda. 2002.  An Examination of 
Manufactured Housing as a Community- and Asset-Building Strategy.  Cambridge, MA: Harvard 
University.  Available at 
http://www.jchs.harvard.edu/publications/communitydevelopment/W02-11_apgar_et_al.pdf
Banking Agency Offices of Inspector General. 2002. Joint Evaluation of the Federal Financial 
Institutions Examination Council.  Washington, DC: Office of Inspector General at the 
Department of the Treasury, FDIC, and FRB.  Available at http://www.treas.gov/inspector-
general/audit-reports/2002/oig02099.pdf
Buckle, Philip and Rob Fleming. 2001. Flood Insurance, is there a problem? Is there a 
solution?  Australian Journal of Emergency Management, 16(1): 1-4.  Available at 
http://www.ema.gov.au/agd/ema/emaInternet.nsf/Page/RWP09887172D1F56BE2CA256C75007
EA6B9?OpenDocument
Dodge, John. 2003. New Maps of Floods May Cost Business. The Olympian (Olympia, 
Washington), October 2.  Available at 
http://www.theolympian.com/home/news/20031002/southsound/114432.shtml
Fannie Mae. 2002a. Fannie Mae Single-Family Selling Guide.  Available at 
http://www.efanniemae.com/singlefamily/forms_guidelines/selling_ servicing/guides.jhtml#
________. 2002b. Fannie Mae Single-Family Servicing Guide.  Available at 
http://www.efanniemae.com/singlefamily/forms_guidelines/selling_ servicing/guides.jhtml#
Farmer Mac. 2003.  Farmer Mac: Financing Rural America.  Available at 
http://www.farmermac.com
FCA. 2002a.  Violations of Consumer, Borrower Rights, and Flood Insurance Regulations 
Identified in FY 2001 Examinations.  Available at 
http://www.fca.gov/__852565D30061447E.nsf/0/6952BF54DED6F1CF85256BA4004D2137?O
pen&Highlight=2,flood
________. 2002b.  Violations of Consumer, Borrower Rights, and Flood Insurance Regulations 
Identified in FY 2002 Examinations.  Available at
http://www.fca.gov/__852565D30061447E.nsf/0/01207BB31794220B85256CA2005B8BA1?O
pen
________. 2003.  FCA Examination Manual.  Available at http://www.fca.gov/examman.nsf
________. 2004.  Violations of Consumer, Borrower Rights, and Flood Insurance Regulations 
Identified in FY 2003 Examinations.  
http://www.fca.gov/apps/infomemo.nsf/59ab19ff3b724b73852569530076c529/18975aaa97cb74
ef85256e7e00545032?OpenDocument
FDIC. 1999.  Review of DCA Policy for Determining Examination Frequency, Scope, and 
Priority: Audit Report No. 99-013.  Available at http://www.fdic.gov/oig/a-rep99/99-013.pdf
________. 2001a. Summary of Flood Insurance Requirements, Financial Institution Letter 81-
2001.  Available at http://www/fdic/gov/news/news/financial/2001/fil0181a.html
________, Division of Compliance and Consumer Affairs. 2001b. Revised Guidance about 
Civil Money Penalties for Flood Insurance Violations.  Washington, DC: FDIC.
________. 2003.  Manual of Examination Policies.  Available at 
http://www.fdic.gov/regulations/safety/manual/index.html
FEMA. 1988a. Privacy Act of 1974; Proposed New Routine Use of Existing System of 
Records, Federal Register, 53: 28437-38, July 28.
________. 1988b. Privacy Act of 1974; Proposed New Routine Use of Existing System of 
Records; Correction Federal Register, 53: 2994X, August 9.
________. 1993. Federal Regulations and Instructions on Flood Insurance Compliance for 
Lenders and Servicers.  Washington, DC: FEMA.
________. 1995a. Standard Flood Hazard Determination Form, Federal Register, 60: 17758-
61, April 7.  Available at http://frwebgate1.access.gpo.gov/cgi-
bin/waisgate.cgi?WAISdocID=692698264636+1+0+0&WAISaction=retrieve
________. 1995b. Standard Flood Hazard Determination Form, Federal Register, 60: 35275-
84, July 6.  Available at http://frwebgate3.access.gpo.gov/cgi-
bin/waisgate.cgi?WAISdocID=69508227594+0+0+0&WAISaction=retrieve
________. 1999. Mandatory Purchase of Flood Insurance Guidelines.  Washington, DC: FEMA.  
Available at http://www.fema.gov/nfip/mpurfi.shtm
________. 2000. Call for Issues Status Report.  Washington, DC: FEMA.  Available at 
http://www.fema.gov/pdf/nfip/calliss.pdf
________. 2002a. National Flood Insurance Program Description. Washington, DC: FEMA. 
Available at http://www.fema.gov/doc/library/nfipdescrip.doc
________. 2002b. Disaster Assistance; Federal Assistance to Individuals and Households, 
Federal Register, 3411-26, January 23.  Available at http://frwebgate5.access.gpo.gov/cgi-
bin/waisgate.cgi?WAISdocID=693114129444+1+0+0&WAISaction=retrieve
________. 2003. Status of OIG Report #1-02-00 Recommendations.
________. 2004. Giving Growth a Boost. Watermark.  No. 1. Washington, DC: FEMA. 
Available at http://www.fema.gov/pdf/nfip/wm2004_1.pdf
________. 2005.  Flood Insurance Manual.  Washington, DC:  FEMA. Available at 
http://www.fema.gov/nfip/manual05_05.shtm
FEMA Region I. 1999. Vermont Lender Compliance with the Flood Disaster Protection Act of 
1973 and the Title V of the Riegle Community Development and Regulatory Improvement Act of 
1994. Boston, MA: FEMA Region I.
FFIEC. 1997.  Loans in Areas Having Special Flood Hazards; Interagency Questions and 
Answers Regarding Flood Insurance, Federal Register, 66: 39523-30, July 23.  Available at 
http://frwebgate3.access.gpo.gov/cgi-
bin/waisgate.cgi?WAISdocID=69645832414+38+0+0&WAISaction=retrieve
________. 2002.  About the FFIEC. Available at http://www.ffiec.gov/about.htm
FIA. 1978a. Mandatory Flood Insurance, Federal Register, 43: 7140-41, February 17.
________. 1978b. Mandatory Purchase of Flood Insurance, Federal Register, 43: 7142-48, 
February 17.
Flood Insurance Interagency Task Force. 1998.  Final Report to the United States Congress: 
Enforcement and Compliance Procedures Necessary to Carry Out the Provisions of the National 
Flood Insurance Reform Act.  Washington, DC: FIA.
Foremost Insurance Group. 2002.  Manufactured Homes: The Market Facts.  Available at: 
http://63.94.12.219/market_facts_2002/
FRB. 1997. Compliance Handbook. Flood Insurance: Examination Objectives and Procedures.  
Available at http://www.federalreserve.gov/boarddocs/rptcongress/flood/App_A.pdf
________. 1999.  A Report to the United States Congress on Compliance with the National 
Flood Insurance Program.  Available at 
http://www.federalreserve.gov//boarddocs/rptcongress/flood/default.htm
________.  Various years.  Flow of Funds Accounts of the United States.  Available at 
http://www.federalreserve.gov/releases/Z1/
Freddie Mac. 2004a.  Share of Cash-Out Home Refinancings Decreases in Second Quarter 
2004.  Available at http://www.freddiemac.com/news/archives/rates/2004/2qupb04.html
________. 2004b.  Single-Family Seller/Servicer Guide.  McLean, VA: Freddie Mac.
________. 2004c.  Multifamily Seller/Servicer Guide.  McLean, VA: Freddie Mac.
GAO. 1990.  Flood Insurance: Information on the Mandatory Purchase Requirement. 
GAO/RCED-90-141FS. Washington, DC: GAO.  Available at 
http://161.203.16.4/d23t8/142248.pdf
________. 1992.  Coastal Barriers: Development Occurring Despite Prohibitions Against 
Federal Assistance. GAO/RCED-92-115. Washington, DC: GAO.  Available at 
http://archive.gao.gov/d33t10/147342.pdf
________. 1993.  Flood Insurance: Information on Various Aspects of the National Flood 
Insurance Program. GAO/T-RCED-93-70. Washington, DC: GAO.  Available at 
http://161.203.16.4/d45t15/149957.pdf
________. 2002.  Flood Insurance: Extent of Noncompliance with Purchase Requirements is 
Unknown. GAO-02-396. Washington, DC: GAO.  Available at 
http://www.gao.gov/new.items/d02396.pdf
________. 2003a.  Flood Insurance: Challenges Facing the National Flood Insurance Program. 
Testimony before the Subcommittee on Housing and Community Opportunity, Committee on 
Financial Services, U.S. House of Representatives. GAO-03-606T. Washington, DC: GAO.  
Available at http://www.gao.gov/new.items/d03606t.pdf
________. 2003b. Civil Penalties: Agencies Unable to Fully Adjust Penalties for Inflation Under 
Current Law. GAO-03-409.  Washington, DC: GAO.  Available at 
http://www.gao.gov/new.items/d03409.pdf
Genz, Richard. 2001.  Why Advocates Need to Rethink Manufactured Housing. Housing 
Policy Debate, 12(2), 393-414.  Available at 
http://www.fanniemaefoundation.org/programs/hpd/pdf/hpd_1202_genz.pdf
Ginnie Mae. 2002.  Ginnie Mae Mortgage-Backed Securities Handbook. Available at 
http://www.ginniemae.gov/guide/guidtoc.asp?subTitle=Issuers
________. 2003.  Bringing Wall Street to Main Street for 35 Years: Annual Report 2003.  
Available at http://www.ginniemae.gov/about/ann_rep/annual_report03.pdf
________. 2004.  Memorandum for All Participants in Ginnie Mae Programs: Forbearance and 
Buyout Authorization for Loans in Areas Declared a Disaster by President Bush Due to 
Hurricane Charley and Tropical Storm Bonnie. Available at 
http://www.ginniemae.gov/apm/apm%5Fpdf/04%2D10.pdf?section=Search
Goodwin, Clive Q. 2004.  Insurance Alone is Not EnoughUnderstanding the Flood Hazard is 
the Key.  In Association of State Floodplain Managers and National Academies Disasters 
Roundtable, Reducing Flood Losses: Is the 1% Chance (100-year) Flood Standard Sufficient?  
Washington, DC.
Housing Assistance Council. 1996.  Manufactured Housing in Nonmetropolitan Areas: A Data 
Review. Available at http://www.ruralhome.org/pubs/hsganalysis/manufactured
IllinoisProBono. 2004. Mobile Homes: Regulation, Legislation and Use.  Available at 
http://illinoisprobono.org/index.cfm?fuseaction=home.dsp_content&contentID=626 
Independent Community Bankers of America. 2004.  EGRPRA Review of Consumer Lending 
Related Rules.  Letter to the Office of the Comptroller of the Currency, April 20.  Available at 
http://www.icba.org/sitesearch/sitesearch_pubfr.html
Kalaf, Stephen. 1998.  Using the Coastal Barrier Resources System Database, Watermark. 
Spring/Summer, p. 11.  Available at http://www.fema.gov/pdf/nfip/ss98.pdf
KRC Research & Consulting. 1999.  FEMA: Quantitative Evaluative Report IX. Washington, 
DC: FEMA.
Kunreuther, Howard.1978. Disaster Insurance Protection: Public Policy Lessons.  New York: 
John Wiley and Sons.
Larsen, Steven B., James Benoit, and Saul Ewing. 2004. Report to the County Executive of 
Baltimore County, Maryland on the Response to Flood Victims of Hurricane Isabel by Insurance 
Companies and Agencies of the State and Federal Government.  Available at: 
http://resources.co.ba.md.us/Documents/Executive/insurance_report040209.pdf
Moye, Michael. 2004.  Lenders and the 100-Year Base Flood.  In ASFPM Foundation, Gilbert 
F. White National Flood Policy Forum: Reducing Flood Losses: Is the 1% Chance (100-year) 
Flood Standard Sufficient?
NCUA. 2002a.  Examiners Guide: Consumer Compliance.  Available at 
http://www.ncua.gov/ref/examiners_guide/examguide.html
________. 2002b. NCUA Letter to Credit Unions, Letter No. 02-CU-04, Compliance with 
Federal Flood Insurance Requirements.  Available at http://ncua.gov/letters/2002/02-CU-04.pdf
________. 2004.  NCUA Letter to Credit Unions, Letter No. 04-CU-16, Compliance with 
Federal Flood Insurance Requirements.  Available at http://ncua.gov/letters/2004/04-CU-16.pdf
OCC.1999.  Flood Disaster Protection: Comptrollers Handbook for Compliance.  Available at 
http://www.occ.treas.gov/handbooks/flood.pdf
________. 2000.  FDPA Horizontal Review. Washington, DC: OCC.
________. 2003.  About the OCC.  Available at http://www.occ.treas.gov
Office of Inspector General. 1993.  Audit of Flood Insurance Reinspection Activities.  
Washington, DC: Office of Inspector General, FEMA.
________. 1995.  Audit of the Accuracy of Flood Zone Ratings.  Washington, DC: Office of 
Inspector General, FEMA.
________. 2000.  Opportunities to Enhance Compliance with Homeowner Flood Insurance 
Purchase Requirements.  Washington, DC: Office of Inspector General, FEMA.
________. 2001.  Coastal Barrier Resource System: FEMAs Management Controls Governing 
the Prohibition of Flood Insurance.  Washington, DC: Office of Inspector General, FEMA.
________. 2002.  Invalid Preferred Risk Policies Based on Loss History.  Washington, DC: 
Office of Inspector General, FEMA.
Office of the President. 1977. Floodplain Management, Federal Register, 42: 26951, May 24. 
Available at http://www.archives.gov/federal_register/codification/executive_order/11988.html
OFHEO. 1998.  FY 1998-2003 Strategic Plan. Washington, DC: OFHEO. Available at 
http://www.ofheo.gov/Media/Archive/docs/reports/strat98.PDF
________. 2001a. Flood Insurance, Federal Register, 66: 47563-66, September 12.  Available 
at http://frwebgate1.access.gpo.gov/cgi-
bin/waisgate.cgi?WAISdocID=694849271186+1+0+0&WAISaction=retrieve
________. 2001b. Flood Insurance, Federal Register, 66: 65097-102, December 18. Available 
at http://frwebgate3.access.gpo.gov/cgi-
bin/waisgate.cgi?WAISdocID=69719920+1+0+0&WAISaction=retrieve
________. 2004. Report to Congress.  Washington, DC: OFHEO.  Available at 
http://www.ofheo.gov/media/pdf/FINALREPORT61504.pdf
Office of the Vice President. 1993. FEMA03: Create Results-Oriented Incentives to Reduce the 
Costs of a Disaster.  National Performance Review.  Washington, DC: Office of the Vice 
President.  Available at http://govinfo.library.unt.edu/npr/library/reports/FEMA3.html
OTS.1999.  Overview of Laws and Regulations: National Flood Insurance Act.  Available at 
http://www.ots.treas.gov/docs/428009.pdf
________. 2001.  Compliance Handbook, Section 340, Flood Disaster Protection Act.  Available 
at http://www.ots.treas.gov/docs/48703.pdf
________. 2002.  Compliance: A Self-Assessment Guide.  Available at 
http://www.ots.treas.gov/DOCS/428000.PDF
Pasterick, Edward T. 1998.  The National Flood Insurance Program.  In H. Kunreuther and 
R.J. Roth, Jr. ed., Paying the Price: The Status and Role of Insurance against Natural Disasters 
in the United States.  Washington, DC: The Joseph Henry Press.  Available at 
http://books.nap.edu/books/0309063612/html/125.html#pagetop
PricewaterhouseCoopers. 1999.  Study of the Economic Effects of Charging Actuarially Based 
Premium Rates for Pre-FIRM Structures.  Executive summary available at 
http://www.fema.gov.pdf/nfip/execsumy/pdf
RHS. 1995. Rural Housing Loans. RD Instruction 1980-D. Available at 
http://www.rurdev.usda.gov/regs/regs_toc.html
________. 2002.  Rural Development Handbook.  Available at 
http://rdinit.usda.gov/regs/regs/pdf/1980d.pdf
________. 2003a. DLOS Field Office Handbook. Available at 
http://rurdev.usda.gov/regs/hblist.html
________. 2003b. Guaranteed Rural Housing Program (GRH) Program Exception Authority- 
First Floor Habitable Space Elevation Below the 100-Year Flood Plain Level. Oregon AN No. 
1255 (1940 and 426.2). 
________. 2005. Multifamily Housing Organization Handbook. HB-1-3560. Available at 
http://rurdev.usda.gov/rhs/mth/3560-Handbooks/3560_Handbooks.htm
Salvesen, David. 2003.  The Coastal Barrier Resources Act: An Analysis of Its Impact. 
Testimony before the House Committee on Resources, Subcommittee on Fisheries, 
Conservation, Wildlife, and Oceans. November 20.  Available at 
http://resourcescommittee.house.gov/108cong/fish/2003nov20/salvesen.htm
Small Business Administration.1999a.  Loan Processing. SOP 50-10(4). Available at 
http://sba.gov/library/soproom.html
________, Office of Financial Assistance. 1999b. Loan Servicing. SOP 50 50 4. Available at 
http://sba.gov/library/soproom.html
________, Office of Disaster Assistance. 2004.  Disaster Assistance Program.  SOP 50 30 5.  
Available at http://sba.gov/library/soproom.html
Thomas, Frank. 2000.  Presentation to Floodplain Management Forum.  In FEMA, Report of the 
Floodplain Management Forum, June 8, 2000.  Washington, DC.  Available at 
http://www.fema.gov/hazards/floods/libfmf.shtm
University of Colorado, Center for Science and Technology Policy Research. 2001.  Extreme 
Weather Sourcebook.  Available at http://sciencepolicy.colorado.edu/sourcebook/
U.S. Department of Agriculture.1974. National Flood Insurance. RD Instruction 426.2.  
Available at http://www.rurdev.usda.gov/regs/regs_toc.html
________. 1988.  Environmental Program, FmHA Instruction 1940-G.  Available at 
http://www.usda.gov/rus/water/ees/pdf/1940g.pdf
________. 1999. RUS Fidelity and Insurance Requirements for Electric and 
Telecommunications Borrowers, Federal Register, 64: 1-5, January 4. Available at 
http://www.usda.gov/rus/regs/regs/1788.pdf 
________, Rural Development. 2004. Guaranteed Rural Housing Program (GRH) Program 
Exception Authority- First Floor Habitable Space Elevation Below the 100-Year Flood Plain 
Level. Oregon AN No. 1273 (1940 and 426.2).  Available at 
http://www.rurdev.usda.gov/or/AN_PN.HTM
U.S. Department of Commerce. 2003.  Selected Characteristics of New Manufactured Homes 
Placed, by Region  2003.  Available at http://www.census.gov/const/mhs/Char03.xls
________. 2004a. Houses Sold by Type of Financing. Available at 
http://www.census.gov/const/soldfinca.pdf
________. 2004b. Median and Average Sales Price of Houses Sold by Type of Financing.  
Available at http://www.census.gov/const/pricefincq.pdf
________. 2004c.  American Housing Survey for the United States: 2003. H150/03.  
Washington, DC: Department of Commerce.  Available at 
http://www.census.gov/prod/2004pubs/H150-03.pdf
U.S. Department of Housing and Urban Development. 1996. Environmental Assessment and 
Compliance Findings for the Related Laws. Form HUD-4128. Washington, DC: HUD.  
Available at http://www.hudclips.org/sub_nonhud/cgi/pdfforms/4128.pdf
________. 2002a.  Floodplain Management: Relationship to Floodplain Management 
Regulations.  Washington, DC: HUD.  Available at: 
http://www.hud.gov/offices/cpd/energyenviron/environment/compliance/qa/floodplainmgmt.cfm
________. 2002b.  Flood Insurance Purchase: Relationship to Floodplain Management 
Regulations.  Washington, DC: HUD.  Available at: 
http://www.hud.gov/offices/cpd/energyenviron/environment/compliance/qa/floodinsurance.cfm
________. 2003.  Environmental Review Procedures for Entities Assuming HUDs 
Environmental Responsibilities, Federal Register, 68: 56115-31, September 29. Available at 
http://frwebgate4.access.gpo.gov/cgi-
bin/waisgate.cgi?WAISdocID=6956609025+0+0+0&WAISaction=retrieve
U.S. Department of the Treasury, Office of the Comptroller of the Currency and Office of Thrift 
Supervision, Federal Reserve Board, Federal Deposit Insurance Corporation, Farm Credit 
Administration, and National Credit Union Administration. 1995. Loans in Areas Having 
Special Flood Hazards Proposed Rule, Federal Register, 60: 53961-85, October 18.
______. 1996. Loans in Areas Having Special Flood Hazards, Federal Register, 61: 45683-
716, August 29.  Available at http://frwebgate4.access.gpo.gov/cgi-
bin/waisgate.cgi?WAISdocID=6957488775+0+0+0&WAISaction=retrieve
U.S. Department of Veterans Affairs. 1990. Flood Insurance. Circular 26-90-13. Washington, 
DC: Department of Veterans Affairs.  Available at 
http://www.warms.vba.va.gov/rescir/admin26/26_90_13.doc
________. 1996. Flood Insurance Requirements for VA as a Direct Lender, Seller, or Servicer of 
Loans.  Circular 26-96-1. Washington, DC: Department of Veterans Affairs.
________. 2001. Lenders Handbook. Pamphlet 26-7. Washington, DC: Department of Veterans 
Affairs. Available at http://www.warms.vba.va.gov/pam26_7.html
________. 2003. Fact Sheet: Facts about the Department of Veterans Affairs. Available at 
http://www1.va.gov/opa/fact/docs/vafacts.htm
U.S. House of Representatives.1990. Hearing before the Subcommittee on Policy Research and 
Insurance, Committee on Banking, Finance, and Urban Affairs, House of Representatives. 
Washington, DC. 
U.S. Senate. 2004.  Flood Insurance Reform Act of 2004. Committee Report 108-262. 
Washington, DC.
   A SFHA defines the area in which there is a 1 percent chance of being flooded in any given year (i.e., the 100-year 
floodplain).  Over a 30-year period, there is at least a 26 percent chance that a SFHA will be flooded to the elevation 
of the 100-year flood.  Flood Insurance Rate Maps (FIRMs) identify areas designated as SFHAs.
   FEMA also uses some of the premiums to cover the programs operating and administrative expenses.
   The Flood Insurance Reform Act of 2004 (P.L. 108-264) does not contain any provisions directly affecting the 
mandatory purchase requirement.
  The 1973 Act defines community as a state or a political subdivision thereof which has zoning and building code 
jurisdiction over a particular area that has been identified as having SFHAs.
  These data come from FEMA, but Kunreuther (1978) stated that fewer than 275,000 homeowners [had] 
voluntarily bought a [flood] policy in the first four years of the NFIPs operation.  The difference in data may be 
attributable to slightly different reporting periods or to the difference between the total number of policies ever 
purchased and the number of existing policies (other data suggest that nonrenewal rates for flood insurance were, 
and continue to be, higher than for homeowners insurance).  In any case, only a small proportion of property 
owners elected to purchase federal flood insurance after it initially became available.
  Prior to August 1996, federal regulatory agencies responsible for overseeing lenders compliance with the 1973 
Act differed in their interpretation of what constitutes the making of a loan.  For example, the FRB and the OCC 
did not consider the purchase of a loan to be an event that triggered an obligation to obtain a flood hazard 
determination.  In contrast, the OTS (and its predecessor, the Federal Home Loan Bank Board) considered the 
purchase of a loan to be equivalent to making a loan.  The FDIC did not have a position on this issue.  With the 
issuance of joint regulations by the federal regulatory agencies in 1996 (U.S. Department of the Treasury et al. 
1996), these agencies, plus the FCA and the NCUA, agreed that a loan purchase is not an event that triggers lenders 
obligation to obtain a flood hazard determination.
  The Office of Thrift Supervision (OTS) replaced the Federal Home Loan Bank Board and the Federal Savings and 
Loan Insurance Corporation in 1989.  The 1973 Act did not include the Farm Credit Administration (FCA).  As a 
result, farm credit banks, federal land bank associations, and production credit associations were not initially subject 
to the mandatory purchase requirement.
   The FFIEC (1997) and the OTS (2001) incorrectly declare that government-guaranteed or insured loans are not 
permitted in nonparticipating communities.  Such loans are not permitted in SFHAs in nonparticipating communities 
but are permitted outside of SFHAs in nonparticipating communities.
   Federal agencies include any department, agency, corporation, or other entity or instrumentality of the executive 
branch of the federal government andthe Federal National Mortgage Association and the Federal Home Loan 
Mortgage Corporation.  Unlike the federal agencies that regulate lending institutions, Fannie Mae and Freddie Mac 
have no regulatory authority.
   If a property is located in a SFHA in a participating community, the property owner may be eligible for disaster 
assistance.  If the property is in a nonparticipating community that has one or more SFHAs that have been identified 
for at least one year, the property owner is not be eligible for federal disaster assistance in the event of a 
presidentially declared flood disaster. 
   A conventional loan is one that is neither insured nor guaranteed by a federal agency.
   As the Mandatory Purchase of Flood Insurance Guidelines (FEMA 1999) observe, the 1977 change benefited 
developers who now can obtain federally guaranteed money for floodplain development.  This statement is 
imprecise and suggests an inaccurate conclusion.  The 1977 law maintained the prohibition against federal financial 
assistance for construction or acquisition of property in a SFHA of a nonparticipating community.  Federally 
guaranteed money, which is considered to be one form of federal financial assistance, for acquisition or construction 
would therefore not be available to developers.  (Federally guaranteed money for other purposes may be available to 
developers, but this is beyond the scope of the mandatory purchase requirement.)
   Fannie Mae and Freddie Mac had both required flood insurance for buildings in SFHAs prior to this date, so the 
practical effect of the statutory change is unclear.
   The NFIP does not insure land.  As a consequence, in determining the amount of insurance coverage required 
under the mandatory purchase requirement, lenders can assess the portion of the loan that is associated with 
improved real estate and exclude the appraised value of the land.  The Federal Reserve Board notes that the amount 
of federal flood insurance available is limited to the overall value of the property securing the loan minus the value 
of the land on which the property is located.  Although the law imposes a minimum amount that each loan must 
have and establishes a per-loan maximum, the law does not prevent lenders from requiring that each loan be insured 
up to the maximum coverage available through the NFIP (although some states prohibit requiring insurance beyond 
replacement costs).  In no instance, however, will the NFIP provide coverage for a building for more than its 
insurable value, even if the loan value, exclusive of the land, exceeds the insurable value of the building.  
Lenders can also require that personal property within a structure located in a SFHA be insured if the property 
secures all or part of a loan.  From a lenders perspective, requiring insurance on a buildings contents may be 
prudent when the property, real or personal, represents collateral for the loan.
   Lenders that originate loans using standard forms from Fannie Mae and Freddie Mac, which are commonly used 
in the industry even for loans not sold on the secondary market, have had legal authority at least since 1990 to 
require flood insurance and to force place this insurance if borrowers fail to obtain or renew coverage when it is 
required. 
  The Federal Financial Institutions Examination Council Act of 1978 (Title X of P.L. 95-630) created the FFIEC.  
It is an interagency body that prescribes uniform principles, standards, and report forms for the federal examination 
of financial institutions by the FRB, FDIC, NCUA, OCC, and OTS and makes recommendations to promote 
uniformity in the supervision of financial institution (FFIEC 2002).  The National Flood Insurance Reform Act of 
1994 (P.L. 103-325) requires the FFIEC to consult with and assist federal entities for lending regulationin 
developing and coordinating uniform standards and requirements for use by regulated lending institutions under the 
national flood insurance program.  Title XII of the Economic Growth and Regulatory Paperwork Reduction Act of 
1996 (P.L. 104-208) requires the FFIEC and each federal banking agency represented on the FFIEC to conduct, not 
less frequently than once every 10 yearsa review of all regulations prescribed by the Council or by any such 
appropriate Federal banking agency, respectively, in order to identify outdated or otherwise unnecessary regulatory 
requirements imposed on insured depository institutions.  The chairman of the FCA has been a nonvoting member 
of the FFIEC since 1985, and the FCA coordinates its policies with those the FFIEC establishes.  
  OFHEO, which was created in 1992 as an independent entity within the Department of Housing and Urban 
Development, oversees the safety and soundness of Fannie Mae and Freddie Mac.  
   In a study conducted for FEMA, PricewaterhouseCoopers (1999) estimated that 6.6 million structures, including 
6.2 million residential structures, were located in SFHAs in 1997.  FEMA currently estimates that there are about 
7.9 million structures in SFHAs.
   The report did not indicate whether any of the loans had been sold to Fannie Mae or Freddie Mac.  Such loans 
would be subject to the requirement. 
   Some buildings in A and V zones are not subject to the mandatory purchase requirement because, for example, 
their owners do not have a mortgage.  The owners of such buildings may elect to purchase flood insurance.   
voluntarily.  The proportion of policies in A and V zones purchased voluntarily is not known.
  B, C, and X zones represent areas of moderate and low risk and are outside the SFHA.  As discussed below, some 
policyholders are administratively grandfathered.  Due to a change in the boundaries of a SFHA, a property may be 
remapped into a SFHA but be allowed to retain the rates associated with the propertys former location in a B, C, or 
X zone.  Such grandfathered properties may be subject to the mandatory purchase requirement.
   The base flood elevation (BFE) represents the estimated water surface elevation resulting from the 1 percent 
annual chance flood.  
  Two percent of respondents did not report a line of credit.  These nonrespondents could fall into either category.
   In 2003, as an example, conventional loans were used to finance the purchase of 84 percent of new homes.  Loans 
from the Department of Veterans Affairs, the Federal Housing Administration, and the Rural Housing Service were 
used to finance the purchase of an additional 12 percent.  Cash was used for 4 percent.
  See the discussion below on monitoring the mandatory purchase requirement for a fuller description of the variety 
of monitoring processes that exist among federal agencies.  
   Readers should remember, however, that mortgages typically cover the structure and the land, whereas flood 
insurance covers only structures and not land, so the shortfall is not be as large as it appears.  The median prices also 
disguise differences among regions.  The Bureau of the Census estimated that 53 percent of new homes sold in the 
Northeast and 45 percent of those sold in the West had a sale price, including the value of the improved lot, of 
$300,000 or more in 2004.  During the same period, according to the Bureau, the median sales price of homes was 
$312,000 in the Northeast, $203,400 in the Midwest, $178,500 in the South, and $279,300 in the West.
   The U.S. Department of Commerce (2004c) defines a housing unit as a house, apartment, group of rooms, or 
single room occupied or intended for occupancy as separate living quarters.  Living quarters include structures 
intended for residential use, such as a house, apartment, boarding house, or manufactured home.
   Data comparing current loan value to replacement cost are not available, and the reader is again reminded that 
property values typically include the value of land, which cannot be insured. 
  Such institutions are, nevertheless, subject to certain federal regulations related to lending, such as those 
governing truth in lending and the Real Estate Settlement Procedures Act.  
  Data on federally regulated and state-chartered federally insured credit unions could not be disaggregated from a 
larger sum of mortgage debt prior to 1995.  Therefore, the regulatory status of this debt cannot be determined.  The 
inclusion of mortgage debt from the unregulated credit unions not regulated by the NCUA would increase the share 
of nonregulated  mortgage debt for 1980.  
   If the permanent location of a manufactured home is not known at the time of closing, the lender must insure that 
a determination is completed as soon as the permanent location is ascertained.
   Federally regulated lenders have been required to use the form since January 2, 1996.  Lenders that sell loans to 
Fannie Mae and Freddie Mac must also use the form.  For mortgages issued prior to January 1996, the NCUA 
(2004) requires regulated credit unions to retain (a) copies of official maps, including the date and complete panel 
number of the FEMA map used to determine whether the collateral is located in or out of a flood hazard zone; (b) 
written statements in each [loan] file indicating a loan determination was performed and the result; and (c) copies of 
any written contracts between the [credit union] and the appraiser performing flood assessments.  The NCUA 
(2000b, 2004) incorrectly notes that a copy of the completed SFHD form must be kept in every loan file.  Lenders 
are permitted to retain these forms electronically (U.S. Department of the Treasury et al. 1996).
   Federally regulated lenders have been allowed to provide mortgages to property owners in SFHAs in 
nonparticipating communities since 1977, but Fannie Mae and Freddie Mac are prohibited from purchasing these 
mortgages.  As a result, these loans often have higher interest rates and shorter terms than conventional loans issued 
to borrowers in SFHAs in participating communities.  Property owners in SFHAs in nonparticipating communities 
are not eligible for federal disaster assistance related to flooding if their community has been identified as a SFHA 
for one year or more or for federally insured or guaranteed loans at any time.
   The NCUAs regulations permit a federal credit union to purchase a loan only if the credit union could grant the 
loan or if the federal credit union refinances the loan within 60 days.  In order to grant a loan, a federal credit union 
would have to complete a SFHD Form; a refinancing would also require a determination.  The regulation applies 
only to federal credit unions, not to federally insured state-chartered credit unions. 
   Murray Franke Greenhouse List & Lippitt LLP conducted surveys for the association in 2002 and 2004.  The 
responses are not representative of all flood determination companies.  The results are available at 
http://www.floodassoc.com 
  Some people interviewed for this report suggested that potential disagreements among flood determination 
companies provide opportunities for lenders to shop for determinations favorable to a borrower (i.e., a 
determination that a property is not in a SFHA or that it is in an A zone rather than a V zone).  No evidence was 
found to substantiate such claims. 
  The data in Appendix 2 provide estimates of the total number of housing units in each state.    
   As a practical matter, however, a lender is likely to perform these acts in order to fulfill its statutory responsibility 
for having flood insurance in place for whatever time the property is in a SFHA.
   The Federal Register is the official daily publication for rules, proposed rules, and notices of federal agencies and 
organizations as well as executive orders and other presidential documents.  The semiannual compendium identifies 
all new FIRMs, changes in FIRMs, and all Letters of Map Amendment and Letters of Map Revision  issued during 
the previous six months.   These letters are discussed below. 
   At least some regulated lending institutions believe that remapping does not trigger the requirement even when an 
institution becomes aware of a map change.  As one bank official noted: Flood insurance for someone in a flood 
zone is required for new loans, but it wouldnt affect an existing loan on the books.  See Dodge (2003).
   When a lender provides a loan for a manufactured homes and does not know where the manufactured home will 
be located until just prior to the time of loan closing, the lender can meet the reasonable requirement notice if it 
provides the notice to the borrower as soon as practicable after determination that the [manufactured] home is or 
will be located in a SFHA and before completion of the loan transaction (U.S. Department of the Treasury et al. 
1996).  
   A survey of consumers conducted for FEMA in 1999 found that 26 percent agreed that You cant buy flood 
insurance if you are located in a high-risk area (KRC Research & Consulting 1999)
   In the same Federal Register notice in which FEMA (1995b) declared that lenders may provide the form to 
insurance agents, the agency also stated that the form should record a lender identification number that will be 
transferred onto the flood insurance policy application by the insurance agent, thus implying that the agent would 
routinely receive a copy of the form.  In fact, however, the policy application does not require or provide any space 
to record a lender identification number.  FEMA (2003) now considers inclusion of a lender identification number 
on applications for flood insurance to be impractical.  All of this results in a situation in which lenders are required 
to record a lender identification number on the form (even though many lenders do not know what their number is) 
and, once the number is recorded, it serves no apparent purpose.  As one FEMA official informed AIR, there is no 
rationale for including the lender identification number on the Standard Flood Hazard Determination form.  Despite 
the absence of a rationale, the FDIC (2001a) informed the banks that it regulates that the identification number is 
required information and helps the NFIP track insurance policies in force. 
   One large lending institution estimated that conflicts in determinations between those obtained by lenders and 
borrowers or insurance agents occur with about one of every ten loans.  Borrowers and lenders can jointly request 
that FEMA review the accuracy of a lenders determination.  Until FEMA responds to the appeal, borrowers are not 
required to purchase flood insurance (U.S. Department of the Treasury et al. 1996).  If a borrowers appeal is 
successful, FEMA provides a Letter of Determination Review (LODR).   Requests for LODR are rare, and most are 
returned to the applicants due to late submission or because the proper documentation was not submitted.
   Consistent with this industry practice, the FDIC has informed the lenders it regulates that the amount of 
insurance should not be less than the value of the improved structure (FDIC 2001a).  The FDIC recognizes that this 
amount of coverage is generally not required, but the agency has offered this advice in an effort to encourage lenders 
to protect themselves and their customers thoroughly from flood losses.  
  As FEMA (2005) explains in its Flood Insurance Manual: If 80 percent of the full replacement cost of the 
dwelling is less than the maximum amount of insurance available under the NFIP, then the proportion [of the loss 
settlement] is determined by dividing the actual amount of insurance on the dwelling by the amount of insurance 
that represents 80 percent of its full replacement cost. But if 80 percent of the full replacement cost of the dwelling 
is greater than the maximum amount of insurance available under the NFIP, then the proportion is determined by 
dividing the actual amount of insurance on the dwelling by the maximum amount of insurance available under the 
NFIP.
   This procedure may conflict with congressional intent.  The Flood Insurance Reform Act of 2004 directs the 
GAO to conduct a study of the adequacy of the scope of coverage provided under flood insurance policies in 
meeting the intended goal of Congress that flood victims be restored to their pre-flood conditions.  In addition, the 
U.S. Senates (2004) report on the legislation declares that FEMA should conduct a comprehensive review of its 
rules to determine if changes should be made to ensure that families who are flooded receive adequate payments 
under their flood insurance policies to allow them to repair or rebuild their homes.  
   The regulatory agencies (U.S. Department of the Treasury et al. 1996) have determined that a construction loan, 
loan secured by 25 acres or more of real estate, or commercial loan is subject to the escrow requirements if the loan 
is secured by improved real estate primarily used for residential purposes and an escrow account is also required in 
connection with the loan for fees, taxes, insurance premiums, or other charges.  
   Within FEMA, such purchase is typically referred to as force placed, although lender placed is the preferred 
and more palatable term among those who purchase or impose the insurance on their borrowers.  The 1994 Reform 
Act preempts state laws that limit or prohibit forced placement or that require a borrowers agreement in order to 
force place flood insurance. 
   The Comptrollers Handbook (OCC 1999) incorrectly notes that the amount that must be force placed is equal to 
the difference between the present amount of coverage and the lesser of the outstanding principal balance, the value 
of the improved property, or the maximum coverage limit (emphasis added).
   Section 102(e)(1) of the 1994 Reform Act declares that forced placement of flood insurance is appropriate at the 
time of origination, but the federal regulatory agencies (U.S. Department of the Treasury et al. 1996) have jointly 
interpreted the law to mean that forced placement should not be necessary at the time of origination and that 
flood insurance coverage must be in effect at the time of closing a designated loan.  In contrast to this 
interpretation, the FDIC (2001a) has informed institutions subject to its regulation that they must force place 
insurance in situations where a borrower either does not obtain required flood insurance coverage before closing a 
loan, or allows flood insurance coverage to lapse after the loan is made. 
   FEMA (1999) cites the absence of any underwriting data as a rationale for MPPP rates that are considerably 
higher than those rates for voluntary policies.  In fact, however, it is not clear that there is a dearth of information.  
Forced-placed insurance through the MPPP is available only for those property owners who previously had flood 
insurance but who cancelled or failed to renew it.  As a consequence, since the property owner previously had flood 
insurance, FEMA is already in possession of all or nearly all the information it might need to rate at least some 
properties properly and to continue coverage, albeit it force placed.  In some instances, such as when a structure 
does not comply with a communitys floodplain ordinance, rates for force-placed insurance through the MPPP may 
be less expensive than those associated with a Standard Flood Insurance Policy.
   FEMA (2000) prohibits the purchase of more than one NFIP policy on a single structure due to concerns about 
fraud or abuse with respect to claims and the possibility that multiple policies could lead to insurance in excess of 
that permitted by law.  
    An otherwise protected area is an undeveloped coastal barrier used primarily as a wildlife refuge, sanctuary, or 
recreational or natural resource conservation area. 
   The Manual states that the start of constructionfor insurance purposes means the date the building permit was 
issued, provided the actual start of constructionwas within 180 days of the permit date.   FEMAs Flood 
Insurance Application asks agents to indicate whether a building is in the course of construction.  For a building to 
be in the course of construction, the loan would have already been provided.
   A LOMR is an official revision to a FIRM and can change flood insurance zones, floodplain and/or floodway 
boundaries, planimetric features, and/or the BFE.  
   According to the Department of Commerce (2004c), nearly nine million owner-occupied housing units had more 
than one mortgage in 2003.
   An RCBAP offers coverage of up to $250,000 per unit.
   The SFHD form makes no mention that certain properties may be ineligible for federal flood insurance because 
of section 1316.  In fact, the directions for the form specify incorrectly that federal flood insurance is available to 
all residents of a community that participates in the NFIP.  
   FEMAs Mandatory Purchase of Flood Insurance Guidelines (1999) incorrectly notes that a loan on a 1316 
property is not eligible for flood insurance protection because it has been declared to be in violation of local 
floodplain management building codes.  The Guidelines should indicate that federal flood insurance is not 
available.
   FEMAs Flood Insurance Manual (FEMA 2005) alerts insurance agents that flood insurance is not available for 
properties that are placed on the 1316 Property List, but does not indicate how an agent would identify such 
properties or make clear that it is only federal flood insurance that is not available for such properties.   In addition, 
the Manual incorrectly implies that only states are authorized to declare a structure to be in violation of a law, 
regulation, or ordinance.  
   The NCUAs (2004) Automated Integrated Regulatory Examination Software, which the administrations 
examiners use to complete examinations of credit unions, asks whether credit unions notify FEMA  but not the 
directors designee  of the identity of the servicer of each loan requiring flood insurance.  The instruction for the 
NCUAs Flood Questionnaire also notes incorrectly that credit unions are required to notify FEMA of any change 
in the servicer of a loan.
   The lowest floor is the floor of the lowest enclosed area, including a basement, except that an enclosed area used 
solely for parking, access, or storage in an area other than a basement is not considered to be the lowest floor.
   Substantial improvement represents any reconstruction, rehabilitation, addition, or other improvement of a 
building, the cost of which equals or exceeds 50 percent of the market value of the building before the start of 
construction of the improvement (FEMA 2005).  The cost of improvements to correct violations of state or local 
building codes is excluded.  Communities can have a lower threshold percentage, and some are as low as 10 percent, 
and calculate the cumulative costs of improvements over a multiyear period.
   This documentation must indicate the date of the FIRM; the zone on that FIRM in which the building is located; 
the BFE, if any, for that zone; a copy of the map panels showing the location of the building, and the rating element 
to be grandfathered.  A letter from a community official verifying this information can also be used.
   FEMAs Mandatory Purchase of Flood Insurance Guidelines (1999) may contribute to misunderstanding about 
coverage within units of the CBRS.  These guidelines indicate that a building that is walled or roofed and insured 
prior to inclusion in a unit of the CBRS can retain flood insurance after designation.  In contrast, as noted earlier, 
buildings under construction (or to be constructed) are eligible for flood insurance prior to being roofed or walled.  
Insurance in place before designation can be continued after an area becomes part of the CBRS.
  Section 7 of the Coastal Barrier Improvement Act of 1990 (P.L. 101-591) requires the head of each federal 
agency affected by the act to certify annually to the Congress and the secretary of the interior that the agency is in 
compliance with the acts provisions.  Although this certification requirement applies to FEMA and the sale of 
federal flood insurance in the CBRS and in OPAs (GAO 1992), the Department of Interior was unable to locate any 
certifications from FEMA.  As the GAO noted in 1992, FEMA needs to take the steps required to comply with the 
act and to certify that federal flood insurance is not underwritten in CBRS units.
  As Stephen Kalaf (1998) has noted, the concept of coastal barriers has been difficult for many to understand, 
and, for 15 years, insurance agents, lenders, and homeowners have struggled with the procedures for determining 
whether or not a particular building is eligible for flood insurance.  Mistakes are common, and the processes for 
resolving disputes as to whether homes are in or out of the CBRS are time consuming.  Some disputes require more 
than a year to resolve (Office of Inspector General 2001). 
   Chattel loans do trigger the mandatory purchase requirement (FEMA 1999), but many such loans for the purchase 
of manufactured homes are from nonregulated lenders.
   According to Fannie Mae, manufactured homes can be treated as real property in all states, although some states 
prevent changing chattel loans to real estate loans.
   The FCA has similar authority under the Farm Credit Act of 1971, as amended.
   In FEMAs (2000) Call for Issues Status Report, the agency noted a request for clarification of what the phrase 
means and how a pattern or practice is determined.  FEMA indicated that the issue would be subject to further study, 
but the study, if it did occur, did not lead to a substantive response to the suggestion.   
   The caps on CMPs do not limit the repercussions a lending institution can face for noncompliance with the 
mandatory purchase requirement.  The 1994 act declares that CMPs shall be in addition to any civil remedy or 
criminal penalty otherwise available.  
   FEMA (1999) incorrectly notes that the penalty for each violation is $350, but that represented the maximum 
penalty per violation under the terms of the 1994 Reform Act.  As discussed below, OFHEO has oversight 
responsibility for Fannie Mae and Freddie Mac and can impose CMPs on these GSEs for certain violations.
  The institutions approach to the forced placement of insurance is considered during this initial review.  When 
risks are identified in this area, the scope of the examination will be expanded to test how force-placed insurance 
transactions have been handled.
   Similar situations appear to exist in the other regulatory agencies that have issued CMPs.
   Although the NCUAs compliance staff indicated the availability of CMPs, the Flood Disaster Protection 
Checklist (NCUA 2002b) distributed to all federally insured credit unions notes incorrectly that the 1994 Reform 
Act does not include provisions for any civil or criminal penalties.  The related Letter to Credit Unions and checklist 
for the Flood Disaster Protection Act are in the process of being revised.  In addition, the required Flood Disaster 
Protection Act questionnaire (revised in September 2004) states that the NCUA can assess CMPs of up to $385 per 
violation and up to $110,000 annually.  
   The GSEs conforming loan limits typically increase each year.  The limits for single-family residences were 
$93,750, $187,450, and $252,700 in 1980, 1990, and 2000, respectively.  The limits are higher for two- to four-unit 
dwellings and 50 percent higher in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.  The FHAs insurable limits, 
which are lower than for the GSEs, are adjusted annually but are statutorily linked to the GSEs conforming loan 
limits.
  In September 2001, OFHEO (2001a) proposed regulations to codify its authority to oversee and enforce the 
statutory requirements affecting Fannie Mae and Freddie Mac under the provisions of the National Flood Insurance 
Reform Act of 1994.  Both GSEs contended that the proposed regulations exceeded OFHEOs authority because 
they would permit the imposition of CMPs in instances other than violations associated with the purchase of loans 
(OFHEO 2001b).  OFHEO disagreed, noting that the law cannot be reasonably read to allow unlawful conduct to 
go without sanction or remedy.  The GSEs further asserted that OFHEOs regulatory arsenal was limited solely to 
CMPs.  OFHEO again disagreed, declaring its intent to use its full array of preventative and remedial tools to 
ensure the [GSEs] safety and soundness.
   The U.S. Department of Housing and Urban Development (2003) provides a complete list of programs subject to 
the mandatory purchase requirement.
   HUD defines development or project cost as the total cost for acquiring, constructing, reconstructing, repairing, 
or improving the building.  This cost must include federal and matching funds, plus the costs associated with any 
machinery, equipment, fixtures, or furnishing. 
    In the departments opinion, the effect of the deductible amounts available through NFIP policies is to exclude 
coverage for HUD-assisted routine maintenance since the coverage would apply only to the HUD financial 
assistance, which generally would be in an amount less than the exclusion provided by the SFIP deductible.  In 
addition, HUD-assisted routine maintenance is categorically excluded from compliance with the departments 
environmental regulations (as well as its floodplain regulations) on the assumption that such maintenance lacks 
potential environmental impacts.  
   The VA indicated that given the special relationship between the United States and Native American tribes, 
which are sovereign entities within the United States, that it might make a direct loan to a Native American in a 
nonparticipating community.
   As of February 2005, the RHS was revising its directives governing the requirements for flood insurance.   A 
spokesperson for the RHS indicated that some of the agencys requirements in effect in early 2005 would be 
amended.  Nonetheless, the present summary reflects the Department of Agricultures policies and procedures 
applicable as of February 2005.
   For example, the RHS Multifamily Housing Origination Handbook (RHS 2005) notes that Property in a SFHA 
is not eligible for Federal financial assistance unless flood insurance is purchased through the NFIP.
   A representative of the RHS in Oregon noted her understanding that all post-FIRM construction in the state is at 
or above the base flood elevation due to compliance with local floodplain ordinances. The NFIP requires 
participating communities to obtain the elevation of the lowest floor of all new and substantially improved buildings 
and to retain a record of this information.  Despite this requirement, a national study of elevation-related compliance 
conducted as part of the evaluation of the NFIP found post-FIRM structures without elevation certificates or with 
elevations impermissibly below the BFE.
   The SBA permits an exception to this rule when the entire portion of the property located within the SFHA is 
uninsurable and all insurable property is located outside the SFHA.  In such instances, the property is considered to 
be outside the SFHA (SBA 2004).
   Recipients of secured, disaster-related loans outside of SFHAs are required to retain the lesser of: a) the total of 
the disaster loan and all prior liens on the flood-damaged real or personal property; b) the maximum flood insurance 
available on the flood-damaged real or personal property; or, c) the maximum insurable value of the real or personal 
property.   
  Lack of explicit statutory authority has not prevented FEMA from initiating or imposing other requirements.  In a 
Federal Register notice on disaster assistance, for example, FEMA (2002b) noted that it had published a rule on 
temporary family housing in spite of the lack of explicit authority.Because no one has questioned this rule in the 
many years that it has been in place, we believe that there is implicit authority to retain a rule that calls for possible 
State management of the temporary direct housing authority.
   The National Lenders Insurance Council believes that these recommended tasks should be the responsibility of 
WYOs or insurance agents, not lending institutions.
  Section 582 of the National Flood Insurance Reform Act of 1994 currently prohibits federal disaster assistance, 
including loans, in a flood disaster area for a person for repair, replacement, or restoration for damage to any 
personal, residential, or commercial property if that person at any time has received flood disaster assistance that 
was conditional on the person first having obtained flood insuranceand subsequently having failed to obtain and 
maintain flood insurance as required under Federal law on such property.
   A similar requirement for cooperatives would not be effective because the maximum federal flood coverage for a 
multifamily cooperative is $250,000, regardless of the replacement cost of the insured building.
   OFHEOs Strategic Plan for FY 1998-2003 (OFHEO 1998) indicated the agencys commitment to include a 
flood insurance compliance review in its annual report in every even-numbered year, but the agency did not do so in 
2000, 2002, or 2004.
   The Farm Credit Administration believes that the use of escrow accounts with commercial property should be a 
business decision between a lender and a borrower and not legislatively mandated.
   FEMA (2000) was asked to consider a change in its policies that would allow more than one NFIP policy on a 
building, thus facilitating a lenders forced placement of additional coverage when there is inadequate coverage.  
FEMA indicated that it would refer the request to its Lender Compliance Work Group for review and 
recommendation.  It appears that the group did not issue a recommendation.
   The Flood Insurance Reform Act of 2004 defines severe repetitive loss properties as one- to four-family 
residences that have had four or more claims exceeding $5,000 and cumulatively exceed the value of the property. 
   FEMA authorized the release of policy expiration information tolending institutions and State and Federal 
agencies and financial instrumentalities which regulate the lending institutions, in July 1988 but rescinded approval 
for lenders access to this information the following month.  See FEMA 1988a, 1988b.  
   The Farm Credit Administration notes that the FDICs guidelines are similar to the guidance the FCA provides to 
its examiners, but the FCA wishes to retain the right to issue separate guidance due to the FCAs focus on 
agricultural structures.  The National Lenders Insurance Council opposes a common definition of pattern or 
practice because of the varying portfolios and lending risks for different lenders.  In the Councils opinion, in 
determining what constitutes such a pattern or practice, regulators should have the same discretion they now have in 
determining violations of safety and soundness.  
 
 
 
11