69–010 

Calendar No. 460 

110TH CONGRESS REPORT " ! SENATE 1st Session 110–214 

FLOOD INSURANCE REFORM AND MODERNIZATION ACT 

OF 2007 

NOVEMBER 1, 2007.—Ordered to be printed 

Mr. DODD, from the Committee on Banking, Housing, and Urban 

Affairs, submitted the following 

R E P O R T 

[To accompany S. 2284] 

The Committee on Banking, Housing, and Urban Affairs, having 

had under consideration an original bill (S. 2284) to amend the National Flood Insurance Act of 1968, to restore the financial solvency 

of the flood insurance fund, and for other purposes, having considered the same, reports favorably thereon and recommends that the 

bill do pass. 

INTRODUCTION

On October 17, 2007, the Senate Committee on Banking, Housing, and Urban Affairs considered a Committee Print entitled ‘‘The 

Flood Insurance Reform and Modernization Act of 2007,’’ a bill to 

modernize and bring financial solvency to the National Flood Insurance Program, and for other purposes. The Committee voted 

unanimously to report the bill to the Senate. 

BACKGROUND

Congress established the National Flood Insurance Program 

(NFIP) in 1968 after finding that floods have ‘‘created personal 

hardships and economic distress which have required unforeseen 

disaster relief measures and have placed an increasing burden on 

the Nation’s resources.’’ (P.L. 90–448) After flooding events, including flooding in the 1950s, federal disaster assistance was paid out 

to communities and individuals. In establishing the flood insurance 

program, Congress wanted to create ‘‘a reasonable method of sharing the risk of flood losses through a program of flood insurance 

which can complement and encourage preventive and protective 


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measures.’’ (P.L. 90–448) Through a federal insurance program, the 

government could collect flood insurance premiums, while tying 

participation to community efforts to prevent flood losses. Almost 

20,000 communities, covering roughly 75 percent of all communities in the United States, now participate in the flood insurance 

program; these communities must undertake floodplain management activities designed to reduce threats to lives and the potential 

for damages to property in flood-prone areas. 

The flood insurance program is a three-pronged program including insurance, mapping and mitigation. All of these elements are 

critical to meeting Congressional intent of linking insurance with 

protective measures. Communities that choose to participate in the 

program are required to undertake mitigation efforts to limit flood 

related damage as well as to implement stringent building codes 

for all new development. All buildings in the Special Flood Hazard 

Areas, or the 100-year flood plain, are required to meet these stringent building code requirements and are required to carry flood insurance. 

Properties that were built prior to the inception of the program 

and the completion of flood insurance rate maps (pre-FIRM properties) pay subsidized rates as intended by Congress. Congress believed that it was inequitable to require all property owners to pay 

actuarial rates, given that structures were built prior to rate maps 

and the flood program, resulting in premiums on these properties 

that would be prohibitively expensive. In 1978, 70 percent of properties in the flood program were subsidized, compared to under a 

quarter of homes in the program today. These properties do not 

pay actuarial rates, leaving the flood program with less funds than 

needed to pay for losses in higher than average loss years. While 

Congress initially believed that pre-FIRM properties would be destroyed, rebuilt, or mitigated, the phaseout of pre-FIRM properties 

has been slow. Modern construction techniques have extended the 

useful life of these buildings. To address the most at-risk properties, in 2004 Congress established a severe repetitive loss pilot 

program to mitigate those properties that experienced multiple 

flood losses. These properties are a drain on the National Flood Insurance Program, and Congress intends for FEMA to take actions 

to assist in relocating, rebuilding, elevating, or undertaking other 

mitigation efforts with respect to these pre-FIRM properties. 

Explicit rate subsidies are not the only cause of financial difficulties in the flood program. Flood maps, a critical component of the 

program, are out of date and in many cases, inaccurate. A large 

majority of flood maps are over a decade old, leaving communities 

and their residents without an accurate assessment of flood risks. 

According to FEMA, ‘‘because flood hazards are dynamic and usually increase over time as development occurs, old maps tend to understate actual existing flood hazards. Additionally, most of the 

maps were produced using now antiquated manual cartographic 

techniques.’’ (NFIP—Program Description, August 1, 2002) FEMA 

has identified lack of funding as the primary reason that flood 

maps are out of date. 

In addition, participation in the program is not as robust as Congress anticipated. Since 1973, participation in NFIP is required for 

properties in the 100-year flood plain with federally regulated 

mortgages. Such mandatory purchase is enforced through federal 


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banking regulations. Many property owners without federally 

backed mortgages, and those with no outstanding mortgage, have 

chosen not to participate in the program. In fact, according to recent studies conducted by the American Institutes for Research, 

less than 50 percent of single-family homes in special flood hazard 

areas, and only 75–80 percent of property owners required to purchase flood insurance, actually do so. Notwithstanding the decision 

of many owners not to participate, all of the structures within the 

100-year floodplain are exposed to heightened risk. 

While only 1 percent of homes outside mandatory purchase areas 

have flood coverage through NFIP, 25 percent of flood claims are 

outside of the 100-year floodplain. This indicates that areas of residual risk, outside the 100-year floodplain, are also at risk of flooding. Structures in ‘‘residual risk areas,’’ those protected by manmade structures such as dams or levees, are not required to purchase flood insurance. While the risk of flooding for these properties remains low, a flooding event caused by a breached dam or 

levee, in a residual risk area, is likely to be widespread and cause 

significant flood damage. 

In 1983, in an effort to increase effectiveness and participation 

in the program, NFIP formed a public-private partnership with private insurance companies. Under this partnership, private insurance companies, known as Write Your Own (WYO) companies, handle the sale and administration of flood insurance policies. Over 90 

percent of flood policies are sold through WYO companies, though 

the federal government underwrites the policies. 88 private insurance companies participate in the WYO program, and they are paid 

an administrative fee of over 30 percent of all premiums collected, 

as well as 3.3 percent of any claims paid, and additional fees for 

adjusting claims, and writing additional policies. The formula for 

devising the fees paid to WYO companies is based on the administrative costs in other insurance lines, not on actual costs of administering this program. 

The NFIP has grown significantly over its history from 1 million policyholders and $50 billion of risk exposure to over 5.4 million 

policyholders with in excess of $1 trillion of risk exposure. While 

the program has been largely self-sustaining, the catastrophic nature of the 2005 hurricane season, coupled with the flood losses of 

2004, showed weaknesses in the program and left FEMA with almost $20 billion in debt to the U.S. Treasury. In the years between 

the program’s inception and 2005, taxpayers paid out $1 billion for 

flood claims, with the large majority of claims being paid through 

premium income. Claims payments resulting from the 2005 hurricanes exceed the cumulative claims payments made to policyholders since the program began. Due to the structure and the current financial situation of NFIP, the program is not in a position 

to meet the claims of policyholders, nor is it in a position to pay 

back the debt incurred from the 2005 claims. 

PURPOSE OF THE LEGISLATION

This legislation makes several key reforms to ensure that the 

program can continue to operate, is self-sustaining, and adequately 

identifies areas at risk of flood loss. 

FEMA, as well as the Congressional Budget Office and the General Accounting Office, has indicated that it will be unable to repay 


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the debt currently owed to the U.S. Treasury. Interest alone on this 

debt is approximately $900 million annually, almost 40 percent of 

annual premium income. To ensure the continuation of NFIP as 

well as the long-term financial solvency of the program, this bill 

forgives the almost $20 billion in debt, and makes a number of 

changes designed to increase the ability of the program to pay 

claims in the future. 

Under this bill, additional property owners will be required to 

purchase flood insurance, and those in the 500-year flood plain will 

be told of their flood risks, increasing the likelihood that they will 

voluntarily purchase flood coverage. This legislation will require 

flood coverage for property owners in residual risk areas, those behind levees and downstream from dams, as well as property owners 

in the 100-year flood plain or residual risk areas with mortgages 

through state-regulated lending institutions. In addition, the bill 

requires that flood insurance premiums be escrowed to ensure continuity of insurance coverage. While most property owners will not 

face significant increases in charged premiums as a result of this 

bill, certain pre-FIRM structures will, over time, be required to pay 

actuarial rates; those that are non primary residences, including 

vacation homes and businesses, severe repetitive loss properties 

and properties substantially damaged or improved. 

This legislation will require FEMA to review rates and use actuarial principles in setting rates in NFIP. FEMA will also be required to review and conduct rulemaking on insurance company reimbursement so that reimbursements and actual administrative expenses are aligned. FEMA will also be required to build up a reserve fund, over time, equal to 1 percent of all insurance in force 

so that it can pay for flood claims in high loss years. These changes 

are designed to protect the taxpayer from paying for flood insurance claims in all but the most catastrophic loss years. 

The legislation also establishes a map modernization program so 

that maps are updated, accurate and readily available. The Technical Mapping Advisory Council is re-established to ensure that 

FEMA adopts meaningful standards for mapping that are consistent and based on the most accurate data and information. 

In addition, the bill reiterates FEMA’s responsibilities under the 

Bunning-Bereuter-Blumenauer flood reform bill of 2004 to establish minimum training standards for insurance agents who sell 

flood policies, so that prospective policyholders are given accurate 

and consistent information and are sold the correct coverage. The 

severe repetitive loss mitigation pilot program established in 2004 

is extended through 2013 so that, when implemented, there are a 

full five years of mitigation activities for the most at-risk properties. In addition to the pilot program, the Committee expects 

FEMA to take all actions at its disposal to mitigate flood risks, including its authority under Section 1361 of the National Flood Insurance Act of 1968 to encourage local and state measures to guide 

development and assist in reducing flood damage. Criteria used to 

determine community participation in the program should be reviewed and should ensure that the original intent of Congress, to 

mitigate flood risk, is met. These criteria can include zoning, building codes and other local land use provisions that can assist in 

meeting this important goal. 


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HEARINGS

The Committee heard testimony in the 110th Congress on October 2, 2007, regarding proposals to reform the National Flood Insurance Program. The witnesses were: Mr. David Maurstad, Assistant Administrator for Mitigation and Federal Insurance Administrator, Federal Emergency Management Agency; Ms. Orice Williams, Director of Financial Markets and Community Development, 

Government Accountability Office; Mr. Chad Berginnis, CFM, State 

Hazard Mitigation Officer, Ohio Emergency Management Agency, 

on behalf of the Association of State Floodplain Managers, Inc.; Dr. 

Gerald E. Galloway, Professor of Engineering, University of Maryland; Mr. J. Robert Hunter, Director of Insurance, Consumer Federation of America; Mr. Vince Malta, National Association of Realtors; Mr. Mark Davey, President and Chief Executive Officer, Fidelity National Insurance Company; and Mr. Don Griffin, Vice President, Personal Lines, Property Casualty Insurers Association of 

America. 

In the 109th Congress, the Committee held hearings regarding 

proposals to reform the national flood insurance program. On February 2, 2006, the witnesses testifying were: Mr. David Conrad, 

Senior Water Resources Specialist, National Wildlife Federation; 

Ms. Regina Lowrie, Chair, Mortgage Bankers Association; Mr. J. 

Robert Hunter, Director of Insurance, Consumer Federation of 

America; Mr. David Pressly, President, National Association of 

Homebuilders; Mr. Paul Gessing, Director of Government Affairs, 

National Taxpayers Union; Mr. David John, Research Fellow, The 

Heritage Foundation; and Ms. Pam Pogue, Chair, Association of 

State Floodplain Managers. On January 25, 2006 the witnesses 

were: The Honorable David Walker, Comptroller General, United 

States Government Accountability Office; Mr. David Maurstad, 

Acting Director, Mitigation Division, Federal Emergency Management Agency; and Mr. Donald Marron, Acting Director, Congressional Budget Office. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title 

This section contains the short title of the bill, ‘‘Flood Insurance 

Reform and Modernization Act of 2007.’’

Section 2. Findings 

This section contains the Committee’s findings that the flood insurance program is in debt and that the program must be strengthened to ensure it can pay future claims. 

Section 3. Definitions 

This section defines the 100- and 500-year floodplain, as well as 

‘‘Write Your Own.’’

Section 4. Extension of National Flood Insurance Program 

This section reauthorizes the National Flood Insurance Program 

through 2013. 


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Section 5. Availability of insurance for multifamily properties 

This section allows multifamily residential buildings, those with 

4 or more units, to purchase flood insurance up to the commercial 

coverage limits, currently $500,000 for the structure. There is currently some confusion about what level of coverage is available for 

these multifamily properties. 

Section 6. Reform of premium rate structure 

Currently, 25 percent of properties in the flood insurance program pay subsidized rates because they were built prior to flood 

rate maps (pre-FIRM). To strengthen the financial situation of 

NFIP, this section requires the following pre-FIRM properties to 

pay actuarial rates (rates that reflect the true risk of flooding) 

phased in over 4 years: non-primary residences, severe repetitive 

loss properties, any properties where flood losses have exceeded the 

property value, and any business property. In addition, FEMA will 

be permitted to increase premiums by 15% per year, up from the 

current 10% cap. 

This section requires that any new flood insurance policy for a 

property not covered by a flood insurance policy as of the date of 

passage must be insured at actuarial rates. 

Section 7. Mandatory coverage areas 

This section requires the Director to issue an amended regulation 

defining special flood hazard areas, those where flood insurance is 

mandated, to include residual risk areas, those protected from 

flooding by man-made structures such as levees or dams. Once all 

essential residual risk areas are mapped, properties in these areas 

will be required to purchase flood insurance. 

Section 8. Premium adjustment 

This section prohibits FEMA’s current practice of allowing properties that are remapped into the 100-year floodplain to indefinitely 

pay rates that reflect their old risk level. Properties mapped into 

the 100-year flood plain must pay rates reflecting their new risk 

designation. Properties covered by flood insurance at the time of remapping will have the new rates phased in over 2 years. 

Section 9. State chartered financial institutions 

This section requires that by December 31, 2008, as a condition 

of state participation in the National Flood Insurance Program, 

lending institutions chartered by the states and not insured by the 

Federal Deposit Insurance Corporation shall be subject to regulations by that State that are consistent with the requirements for 

federal depository institutions with regard to maintaining flood insurance on mortgaged properties in special flood hazard areas. This 

will, in effect, require mandatory purchase of flood insurance for 

those properties in the 100-year floodplain with mortgages through 

state-regulated lending institutions. The Committee believes that 

all properties at risk, regardless of type of mortgage or lender, 

should carry flood insurance coverage. 

Section 10. Enforcement 

This section increases the cap on civil monetary penalties for 

lenders that fail to ensure that properties required to have flood 


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coverage purchase such coverage from $350 to $2000 per violation. 

This section also eliminates the $100,000 annual cap on fines that 

can be levied against a lender. The Committee urges FEMA to consistently review mandatory purchase compliance. 

Section 11. Escrow of flood insurance 

This section requires that lending institutions place flood insurance payments into an escrow account on behalf of the borrower. 

This section shall apply to any mortgage outstanding or entered 

into on or after the expiration of the 2-year period beginning on the 

date of the enactment of this Act. 

Section 12. Borrowing authority debt forgiveness 

This section completely eliminates any obligations owed to the 

United States Treasury by the National Flood Insurance Program 

for the 2005 hurricane season. This section also decreases the borrowing authority for the program from $20.775 billion to $1.5 billion, the borrowing authority prior to the 2005 storm season. The 

Committee believes this is necessary for the future of the flood program; without debt forgiveness, FEMA will have to substantially 

increase premiums on all policyholders. 

Section 13. Minimum deductibles for claims under the National 

Flood Insurance Program 

This section increases minimum deductibles as follows: minimum 

pre-FIRM property deductibles will be increased from $1,000 to (a) 

$1,500 if the property is insured for $100,000 or less or (b) $2,000 

if the property has over $100,000 in coverage. Minimum post-FIRM 

property deductibles will increase from $500 to (a) $750 for those 

with $100,000 of coverage or less, or (b) $1,000 if the flood insurance policy covers greater than $100,000. 

Section 14. Considerations in determining chargeable premium 

rates 

NFIP currently prices premiums to cover an average loss year. 

This section requires NFIP to use actuarial principles in determining rates, and to consider catastrophic loss years in the calculation of average losses. 

Section 15. Reserve fund 

To help cover losses in higher-than-average loss years, this section creates a reserve fund of 1 percent of all risk exposure in force 

within the program. FEMA will be required to put 7.5 percent of 

the target reserve fund away each year until the reserve fund 

meets its target. This section also gives discretion to the Director 

to report to Congress if hitting the reserve target ration for any 

given fiscal year would have serious negative implications for the 

overall program. In order to meet reserve targets, FEMA may not 

increase premiums more than otherwise allowable. 

Section 16. Repayment plan for borrowing authority 

This section requires detailed reporting and repayment plans be 

submitted to the Treasury and Congress whenever NFIP borrows 

funds to pay for losses in the National Flood Insurance Program. 


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Section 17. Payment of condominium claims 

This section clarifies that condominium owners with flood insurance policies should receive claims payments regardless of the adequacy of flood insurance coverage of the condominium association 

and other condominium owners. 

Section 18. Technical Mapping Advisory Council 

This section re-establishes the Technical Mapping Advisory 

Council, similar to the one established in 1994, to ensure that 

NFIP adopts meaningful standards for updating and maintaining 

maps. The Advisory Council will be comprised of government officials and others with expertise in mapping, and will make recommendations to FEMA on how to improve the accuracy of maps 

and on standards that should be adopted for flood rate maps, data, 

map maintenance efforts and funding needs and strategy. FEMA 

will be required to report annually to Congress on recommendations made by the Technical Mapping Advisory Council and actions 

taken by FEMA to address such recommendations. 

Section 19. National Flood Mapping Program 

This section requires FEMA to establish an ongoing mapping 

program to review, update and maintain flood insurance rate maps, 

including all areas within the 100-year and 500-year floodplains 

and areas of residual risk, including those protected by levees and 

dams. Requires that the most accurate data be used in mapping 

and maintenance, and requires that each map include certain elements to ensure consistency and accuracy. This section authorizes 

$400 million annually for mapping. 

Section 20. Removal of limitation on state contributions for updating flood maps 

This section lifts the current prohibition barring states from contributing greater than 50 percent of the cost of map modernization, 

thus allowing states to invest additional funds in mapping. 

Section 21. Coordination 

This section requires the various federal departments (e.g. 

NOAA, FEMA, USGS) to work together to coordinate mapping and 

risk determination budgeting, and requires OMB, FEMA and others to submit a joint report to Congress within 30 days of the budget submission on the crosscutting budget issues with respect to 

mapping. 

Section 22. Interagency coordination study 

This section requires FEMA to contract with the National Academy of Public Administration to conduct a study on how FEMA can 

improve interagency coordination on flood mapping and funding, 

and how FEMA can establish joint funding mechanisms with federal, state, and local agencies to share the collection and use of 

data for mapping. 

Section 23. Non mandatory participation 

This section states that while it is not mandatory to purchase 

flood insurance in the 500-year floodplain, due to the risk of flooding, it requires that communities be given notice when they are 


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mapped into a 500-year floodplain, and requires lenders to give notice to purchasers of property in the 500-year floodplain. 

Section 24. Notice of flood insurance availability under RESPA 

This section amends 5(b) of the Real Estate Settlement Procedures Act (RESPA) by requiring the Secretary of Housing and 

Urban Development to include in the booklet distributed an explanation of, and information on, the availability of flood insurance. 

Section 25. Testing of new flood-proofing technologies 

This section permits structures to be built to test flood-proofing 

methods so long as the structures are taken down after testing. 

There is some concern about the safety of flood-proofing, and this 

Committee believes that FEMA should consider the safety of any 

planned testing. 

Section 26. Participation in state disaster claims mitigation 

Requires FEMA, at the request of a State Insurance Commissioner, to take part in state-sponsored, non-binding mediation to 

resolve insurance claims disputes where there are multiple insurance claims on the same property. This section also maintains federal jurisdiction over NFIP. 

Section 27. Reiteration of FEMA responsibilities under the 2004 Reform Act 

This section reiterates the responsibilities of FEMA under the 

2004 Act to establish minimum training requirements, and requires that FEMA report to Congress within 3 months on the status of all reforms. The Committee is disappointed with FEMA’s 

progress on these critical reforms, and expects FEMA to quickly 

move to implement any outstanding measures. 

Section 28. Additional authority of FEMA to collect information on 

claims payments 

To ensure that FEMA can determine the accuracy of flood claims 

payments, this section requires FEMA to collect from insurance 

companies that sell flood insurance policies (Write Your Own companies) information on total claims made on a property in addition 

to flood, including wind and other damages, if the insurance company also underwrites the insurance for the other damages. 

Section 29. Reimbursement of Write Your Own companies 

This section requires that FEMA collect accurate and adequate 

information on WYO company expenses. Under this section, FEMA 

is required to conduct rulemaking within 180 days formulating a 

data collection methodology to gather expense information from insurance companies in a consistent manner. Within 60 days of a 

final rule on expense data collection, all Write Your Own companies will be required to submit 5 years of data based on that methodology. Using that data, FEMA will be required to conduct rulemaking on reimbursement rates, to ensure that Write Your Own 

companies are being reimbursed based on actual expenses, including standard business costs and operating expenses. After the 

rulemakings, GAO is required to report to Congress on the efficacy 

of the rules. 


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Section 30. Studies and reports 

This section requires FEMA to submit an annual report to Congress on NFIP’s activities and financial health, including the 

amount paid in premiums, losses, expenses, number of policies, insurance in force, estimate of average loss year and a description 

and amount of claims paid. This section also requires GAO to conduct a study of pre-FIRM structures to determine what types of 

properties are pre-FIRM, who owns the properties, locations, property values, and other information. 

In addition, this section requires GAO, in consultation with the 

Department of Homeland Security Inspectors General office, to review the three largest contractors used by FEMA in operating and 

managing the flood insurance program. It is the Committee’s understanding that much of the administration of this program is 

done by contractors. It is in the government’s best interest to ensure that this program is operating in a cost-effective way and that 

there are no conflicts of interest in using outside contractors to 

manage this program. 

Section 31. Extension of pilot program for mitigation of severe repetitive loss properties 

This section extends the pilot program established in 2004 to 

mitigate severe repetitive loss properties through 2013. FEMA will 

be required to issue a rule implementing the pilot program within 

90 days, and report to Congress on status and implementation of 

the pilot program within 6 months. The Committee is concerned 

with the status of this pilot program, and the length of time it has 

taken FEMA to implement this important program which will help 

protect people and properties in harm’s way, as well as mitigate 

properties which have been a financial drain on the program. 

Section 32. Flood insurance advocate 

This section establishes an Office of the Flood Insurance Advocate to assist policyholders with any problems they have with the 

NFIP and claims, to propose administrative changes to the Director 

that will help policyholders, and to make recommendations for legislative and regulatory changes needed in the program. The Flood 

Advocate will report to the Director of NFIP but will submit annual 

reports directly to Congress without review or approval at FEMA 

or in the Administration to ensure independence. The Flood Advocate will have the power to open regional offices, as well as temporary local offices to serve policyholders after a flooding event. 

COST OF LEGISLATION

OCTOBER 31, 2007. 

Hon. CHRISTOPHER J. DODD, 

Chairman, Committee on Banking, Housing, and Urban Affairs, 

U.S. Senate, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for the Flood Insurance Reform 

and Modernization Act of 2007. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contacts are Daniel Hoople (for fedVerDate Aug 31 2005 05:36 Nov 02, 2007 Jkt 069010 PO 00000 Frm 00010 Fmt 6659 Sfmt 6602 E:\HR\OC\SR214.XXX SR214

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eral costs), Melissa Merrell (for the state and local impact), and 

Paige Piper/Bach (for the private-sector impact). 

Sincerely, 

PETER R. ORSZAG. 

Enclosure. 

Flood Insurance Reform and Modernization Act of 2007 

Summary: The Flood Insurance Reform and Modernization Act of 

2007 would modify the National Flood Insurance Program (NFIP) 

to increase the amount of premiums collected and reduce the cost 

of expected claims. The program’s outstanding debt to the Treasury of $17.5 billion also would be forgiven. CBO expects that enacting 

this legislation would improve the financial status of the NFIP and 

significantly increase the likelihood that the program could continue to offer insurance coverage and pay claims in a timely fashion. CBO expects that without a change in law, the NFIP will be 

unable to pay all flood insurance claims promptly, and faced with 

a nonfunctional program, policyholders may abandon it. In such 

cases, the federal government may be called upon to provide additional relief in the aftermath of a disaster for properties that would 

have otherwise been insured. CBO cannot predict when this might 

occur, but today, the program faces a future with inadequate resources to pay its obligations. 

The bill would direct the Federal Emergency Management Agency (FEMA) to increase premium rates by 25 percent per year on 

certain policies that pay less than the expected cost under current 

law. FEMA would be authorized to impose average annual rate increases of up to 15 percent on all other categories of policyholders. 

CBO estimates that premium increases at this maximum level 

would be necessary to establish the reserve fund that would be created under the bill to pay insurance claims whenever necessary. Finally, the bill would require policyholders to carry a larger deductible and would end the current practice of offering new policies to 

some property owners at less than their expected cost. These 

changes would increase the cost to policyholders and reduce the net 

cost of the program to the federal government. 

CBO estimates that the proposed changes to the NFIP and the 

elimination of its Treasury debt would increase premium revenue 

over the next 10 years by nearly $19 billion and would reduce 

NFIP outlays by about $10.6 billion relative to current law. CBO 

expects this legislation would allow the program to avoid developing a growing backlog of unpaid claims, which we estimate could 

reach a value of $21 billion by 2017. At the same time, because the 

bill would forgive the NFIP’s debt to the Treasury, CBO estimates 

that the Treasury would forgo interest payments from the NFIP of 

about $9.7 billion over the 2008–2017 period. The net impact of the 

bill—including its effect on the NFIP and on the Treasury’s interest collections—would be an increase in direct spending of about $1.2 billion over the 2008–2017 period. 

As the value of flood insurance coverage in force continues to 

grow, the expected cost of claims that the NFIP will face in the 

next decade also will increase. In most years, they will probably 

total between $1 billion and $5 billion—similar to the losses the insurance program experienced in the years before Hurricane 

Katrina—but there could be another catastrophic flood in the next 


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decade with much larger losses. CBO’s estimate assumes that annual flood insurance claims during this period, under current law, 

will be equal to the amounts anticipated by the program’s actuaries 

on an expected annualized basis (which includes some probability 

that a catastrophic event would occur). This estimate also assumes 

that substantial numbers of policyholders would drop flood insurance coverage or find alternatives to the NFIP as their premiums 

rise steadily over the period. The bill would authorize the appropriation of $2.4 billion over the 

2008–2013 period for FEMA’s flood mapping program. In addition, it would authorize the appropriation of $190 million over the 2008– 2013 period to extend the pilot program to mitigate severe repetitive losses through 2013 and establish the Office of the Flood Insurance Advocate. Finally, the bill would require FEMA to participate in state-sponsored mediation programs and would direct the 

Government Accountability Office (GAO) to conduct multiple studies on the NFIP. Assuming appropriation of the necessary amounts, 

CBO estimates that implementing those provisions would cost 

about $1.6 billion over the 2008–2012 period and an additional $1 

billion after 2012. 

The bill contains two intergovernmental mandates as defined in 

the Unfunded Mandates Reform Act (UMRA) because it would direct state regulatory agencies to require, and state lenders to provide, information on flood risk to more mortgage borrowers. CBO 

estimates that the cost for state governments to comply with those 

mandates would be small and well below the annual threshold established in UMRA ($66 million in 2007, adjusted annually for inflation). 

The bill also would impose private-sector mandates, as defined in 

UMRA, on certain mortgage lenders. Based on information from industry sources and FEMA, CBO expects the direct costs to comply 

with those mandates would fall below the annual threshold for private-sector mandates established in UMRA ($131 million in 2007, 

adjusted annually for inflation). 

Estimated cost to the Federal Government: The estimated budgetary impact of the legislation is shown in the following table. The 

costs of this legislation fall within budget function 450 (community 

and regional development). 


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By fiscal year, in millions of dollars— 

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008–2012 

CHANGES IN DIRECT SPENDING 1

Changes to the NFIP: 

Estimated Budget Authority ................ 725 600 175 0 0 0 0 0 0 0 1,500 Estimated Outlays ............................... 725 600 175 0 ¥225 ¥800 ¥1,275 ¥1,850 ¥2,525 ¥3,325 1,275 

Forgone Treasury Interest Receipts: 

Estimated Budget Authority ................ 775 925 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 4,700 Estimated Outlays ............................... 775 925 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 4,700 Total Changes: 

Estimated Budget Authority ....... 1,500 1,525 1,175 1,000 1,000 1,000 1,000 1,000 1,000 1,000 6,200 Estimated Outlays ...................... 1,500 1,525 1,175 1,000 775 200 ¥275 ¥850 ¥1,525 ¥2,325 5,975 

CHANGES IN SPENDING SUBJECT TO APPROPRIATION 

Flood Mapping: 

Authorization Level .............................. 400 400 400 400 400 400 0 0 0 0 2,000 Estimated Outlays ............................... 100 260 340 400 400 400 300 140 60 0 1,500 

Severe Repetitive Loss Mitigation Pilot Program: 

Authorization Level .............................. 0 0 40 40 40 40 0 0 0 0 120 Estimated Outlays ............................... 0 0 8 24 40 40 32 16 0 0 72 

Office of Flood Insurance Advocate: 

Authorization Level .............................. 5 5 5 5 5 5 0 0 0 0 25 Estimated Outlays ............................... 3 5 5 5 5 5 2 0 0 0 23 

GAO Studies: 

Estimated Authorization Level ............. 1 0 0 0 0 0 0 0 0 0 1 Estimated Outlays ............................... 1 0 0 0 0 0 0 0 0 0 1 Total Changes: Estimated Authorization Level ............. 406 405 445 445 445 445 0 0 0 0 2,146 

Estimated Outlays ...................... 104 265 353 429 445 445 334 156 60 0 1,596 

1 In addition, CBO estimates that revenues from civil penalties assessed on lenders would increase by about $1 million a year over the 2008–2017 period. 


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Basis of estimate: For this estimate, CBO assumes that the bill 

will be enacted by the end of calendar year 2007 and that the authorized amounts will be appropriated for each fiscal year. 

To estimate program expenses over the next 10 years, CBO assumes that reimbursement agreements to private insurance companies that sell and service flood insurance policies on the behalf of 

the federal government will remain unchanged. In addition, we assume that claims over the next 10 years, under current law, will 

equal amounts anticipated by the program on an actuarial basis 

(which includes some proportionate risk of catastrophic events) and 

that the premium currently assessed by FEMA on unsubsidized 

policies is sufficient to cover the full risk of the insurance. 

Direct spending and revenues 

Over the 2008–2017 period, CBO estimates that enacting the legislation would reduce net outlays for the flood insurance program 

by about $8.5 billion and would increase the Treasury’s outlays for interest by about $9.7 billion—an estimated net increase in direct 

spending of $1.2 billion over the ten year period. 

Changes to the NFIP. The Flood Insurance Reform and Modernization Act of 2007 contains several provisions that together 

would govern the magnitude of future rate increases for flood insurance and reduce the amount of expected claims. Those provisions would: • Require the NFIP to establish a reserve fund; • Increase the ceiling on average annual rate increases that 

can be imposed on policyholders from 10 percent a year to 15 

percent a year; • Forgive the program’s outstanding debt to the Treasury; • Phase out subsidized premiums for some policyholders; • Require policyholders to carry a larger deductible; and • Prohibit FEMA from subsidizing new or previously unsubsidized policies. 

CBO estimates that those changes would reduce net outlays of 

the NFIP because premium increases would be greater than those 

that would occur under current law and because no interest would 

have to be paid to the Treasury on the program’s current debt. 

That decline would be partially offset by higher claims payments 

because, under the bill, the NFIP would have sufficient funds to 

pay expected claims; under current law, CBO expects it would not. 

Establish a Reserve Fund and Increase the Limit on Annual Rate 

Increases. FEMA would be required to establish a reserve fund 

equal to at least 1 percent of the value of flood insurance coverage 

in force during the previous year. As of August 2007, FEMA reported that flood insurance coverage in force totaled about $1.1 trillion. During the five-year period prior to the hurricane seasons of 

2004 and 2005, total coverage had been increasing by about 7 percent per year. If such a rate were to continue into the future, the 

amount of flood insurance coverage would reach about $2.1 trillion 

by 2017. CBO estimates, however, that coverage in force would 

reach about $1.8 trillion under the bill, because some policyholders 

would drop coverage as a result of the premium increases estimated to occur under the bill. FEMA would gradually accumulate 

reserves by depositing an amount equal to 7.5 percent of the required reserve in each year until the fund is fully capitalized. 


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The bill also would increase the maximum amount that FEMA 

could increase average premium rates within each risk category 

from 10 percent to 15 percent. CBO expects that FEMA would need 

to increase most rates by the maximum allowable percentage under 

the bill in order to pay claims and accumulate the required reserves, even if those rates exceed the amount FEMA estimates 

would cover the full cost of providing flood insurance. Even so, assuming that claims over the next several years occur at the level 

estimated by actuarial studies, a significant portion of the increased premium collections would be needed to pay flood claims 

and would not be available to accumulate in a reserve. Therefore, 

CBO estimates that it would be unlikely that FEMA would be able 

to collect enough premiums to meet the reserve fund target in the 

first few years after enactment. However, as successive rate increases are implemented, we estimate that the reserve fund would 

begin to accumulate reserves totaling about $8.5 billion by 2017, 

which is over half the amount that would be required to be deposited under the bill by that time. (If losses due to floods are less 

than the actuarial average over the period, the balance would be 

greater. If losses exceed the average—for example, because of a catastrophic event—the balance would be smaller. Based on FEMA’s 

actuarial review of the NFIP, CBO estimates that the expected 

annualized loss would be about $2.4 billion for policies in force in 

2008.) 

For this estimate, CBO assumes that FEMA could begin to implement premium increases to establish the reserve fund in May 

2009. In the past, FEMA has typically proposed rate increases in 

November that would be effective in May of the following year. It 

takes a year before any rate increase is fully implemented because 

individual flood insurance policies are renewed throughout the 

year. 

To estimate the amounts that could be collected and deposited 

into the reserve fund, CBO reduced the projected value of flood insurance in force to reflect the likelihood that some policyholders 

would drop NFIP coverage after successive years of 15 percent annual rate increases which could quadruple their insurance premiums if sustained for 10 years. Policyholders living in lower-risk 

areas would be especially likely to seek out and find alternative insurance products if their cost to participate in the NFIP far exceeds 

their actuarial risk. In addition, some policyholders might retain 

their policies, but choose to reduce the amount of coverage. 

Increase Rates for Pre-FIRM Properties. The bill also would authorize the NFIP to implement larger average rate increases on 

certain properties that were built before flood insurance rate maps 

(FIRMs) were completed or before 1975, whichever is later. Those 

properties are collectively known as pre-FIRM properties. The bill 

would authorize annual average rate increases of up to 25 percent 

for certain pre-FIRM properties, including: 

• Nonresidential structures; 

• Nonprimary residences (such as vacation homes); 

• Properties that have been flooded four or more times with 

total claims payments exceeding $20,000; or properties with 

two or more claims exceeding the fair market value of the 

property (also know as severe repetitive loss properties); 


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• Properties that sustain damage exceeding 50 percent of 

the fair market value of the property after enactment of the 

bill; and • Properties that undergo improvements or renovations exceeding 30 percent of the fair market value of the property. 

Under current law, the NFIP charges many pre-FIRM properties 

a premium that is less than the actuarial cost of the insurance. On 

average, FEMA estimates that those policies are discounted between 60 and 65 percent. Under the bill, FEMA would increase 

rates on those specified types of pre-FIRM properties by 25 percent 

per year until the actuarial rate is achieved. At this rate, CBO expects that most of those pre-FIRM properties would start paying 

actuarial premiums within the next 10 years. 

Based on information from FEMA, CBO estimates that about 

475,000 pre-FIRM properties would be affected by the bill. The average premium for those properties is about $800 a year. CBO expects that owners of some of those properties would either drop 

flood insurance coverage or reduce their level of coverage in response to an increase in premium charges. 

Raise Deductible for Pre-FIRM Properties. Section 13 would increase the annual deductible from $1,000 to $1,500, for pre-FIRM 

properties with coverage of less than $100,000 and from $1,000 to 

$2,000 for pre-FIRM properties with coverage of more than 

$100,000. The bill also would increase the deductible for post-FIRM 

properties from $500 to $750 for coverage less than $100,000 and 

from $500 to $1,000 for coverage greater than $100,000. Based on 

information from FEMA, CBO estimates that claims payments for 

all properties would decrease by an average of 5 percent if this 

higher deductible were implemented. 

Forgone Treasury Interest Payments. Section 12 would relieve the NFIP of its obligation to repay funds borrowed to pay 

claims from the 2005 hurricane season. As of September 2007, the 

program had an outstanding debt of $17.5 billion. Current law requires FEMA to repay any borrowed funds (with interest) as it collects premiums. In the absence of this legislation, FEMA would 

need to use a portion of its premium income to repay debt-service 

costs to the Treasury. Under this bill, such payments would not be 

necessary, and income that the NFIP would otherwise use to service this debt would instead be used to pay policyholders’ claims and 

to accumulate reserves. 

Interest payments from the NFIP to the Treasury are 

intragovernmental transactions. Eliminating those payments would 

increase the Treasury Department’s net outlays by an estimated $1 

billion per year because it would be receiving less interest income. 

While the forgiveness of the debt would reduce FEMA’s outlays for 

interest payments, CBO expects that the program would use such 

funds to pay claims that would have otherwise gone unpaid under 

current law. As such, CBO estimates that forgiving FEMA’s obligations to the Treasury would increase net outlays of the federal government by $9.7 billion over the 2008–2017 period. 

Civil Penalties. Section 10 would increase the civil penalty from 

$350 to $2,000 for lenders that do not enforce the mandatory flood 

insurance purchasing requirement. CBO estimates that the increased revenue from the civil penalties established under this bill 

would amount to about $1 million a year. 


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Other NFIP Modifications. The bill would make certain 

changes to the NFIP that might increase the number of policies in 

the program and result in the program collecting more premium income than it would under current law. CBO does not have sufficient information to estimate the number of policies that could be 

added to the program from enacting those sections. However, because CBO assumes that the additional policies generated by those 

provisions would be priced initially at full-risk rates, any additional 

premiums collected would be at least sufficient to pay out claims 

on an expected-value basis. 

Mandatory Coverage Areas. Section 7 would require that homes 

located behind levees, dams, and other man-made structures become part of special flood hazard areas. The bill would require 

property owners to purchase flood insurance once the NFIP updates its flood maps to include those new areas. 

Expansion of Mandatory Coverage Requirement to State Chartered Lenders. Section 9 would require that the NFIP refrain from 

selling flood insurance policies in states that do not require statechartered lenders to require that certain loans be covered by flood 

insurance at certain levels. Under current law, such a requirement 

already exists for lenders insured by the Federal Deposit Insurance 

Corporation. 

Nonmandatory Participation for the 500-year Floodplain. Section 

23 would require the NFIP and regulated lending institutions to 

notify communities if they are entirely or partially located within 

the 500-year floodplain (that is, an area with at least a 0.2 percent 

chance of being inundated with water in any year). Owners of properties within the 500-year floodplain (but outside of the 100-year 

floodplain) would not be subject to mandatory purchase requirements but might voluntarily purchase flood insurance upon receiving notification of potential risk. 

Spending subject to appropriation 

The bill also would authorize additional discretionary spending. 

Assuming appropriation of the specified amounts, CBO estimates 

that such spending would total about $1.6 billion over the 2008–

2012 period. 

Flood Mapping Program. Section 19 would authorize the appropriation of $400 million for each of fiscal years 2008 through 

2013 to update and maintain flood maps. In 2007, the Congress 

provided $199 million for this activity (see Public Law 109–295). 

Under the bill, maps also would be updated to include the 500-year 

floodplain and areas that would be flooded if a dam or levee failed. 

In addition, the bill would reestablish the Technical Mapping Advisory Council to assist with managing flood mapping activities. 

Based on historical spending rates for this program, CBO estimates 

that implementing this provision would cost $1.5 billion over the 

2008–2012 period and an additional $900 million thereafter, subject to appropriation of the specified amounts. 

Severe Repetitive Loss Mitigation Pilot Program. Section 

31 would authorize the appropriation of $160 million to extend 

through 2013 a pilot program to reduce potential future damages 

to properties that have experienced repetitive losses through floods. 

In 2004, the Congress authorized $40 million a year for the pilot 

program to operate through 2009 and, in 2007, provided $50 milVerDate Aug 31 2005 05:36 Nov 02, 2007 Jkt 069010 PO 00000 Frm 00017 Fmt 6659 Sfmt 6602 E:\HR\OC\SR214.XXX SR214

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lion through the National Flood Insurance Fund (NFIF) for this activity (see Public Law 109–295). The bill would continue that authorization level for fiscal years 2010 through 2013. CBO estimates 

that implementing this section would cost $72 million over the 

2008–2012 period and an additional $88 million after 2012, subject 

to appropriation of the authorized amounts. 

Over the next 10 years, some or all of such costs might be offset 

by lower claims payments, depending on the effectiveness of the 

mitigation efforts. CBO expects that such lower claims would have 

no effect on premium levels, but would result in additional 

amounts set aside in the reserve fund. Furthermore, savings from 

lower future claims cannot be attributed directly to this legislation 

because the size and duration of any mitigation program would depend on amounts provided in future appropriation acts. 

Office of Flood Insurance Advocate. Section 32 would authorize the appropriation of $5 million a year over the 2008–2013 period to establish the Office of the Flood Insurance Advocate. The 

office would assist in resolving conflicts between policyholders and 

the NFIP and would propose changes in the administrative process 

to prevent future conflicts from occurring. CBO estimates that implementing this provision would cost $23 million over the next five 

years, subject to appropriation of the specified amounts to the National Flood Insurance Fund. 

Studies. The bill would direct the Government Accountability 

Office to conduct several studies on the NFIP, including an annual 

report on the financial activities of the program. CBO estimates 

that conducting those studies would cost about $1 million over the 

2008–2012 period, subject to appropriation of the necessary funds. 

Participation in Claims Mediation. Section 26 would require 

FEMA to participate in state-claims mediation programs to help 

expedite the settlement of disputed flood insurance claims. The additional administrative costs of this provision are uncertain because it is unclear how the program would be implemented. If large 

staff increases were necessary, however, it is likely that the NFIP 

would increase the policy fee assessed on policyholders to cover this 

additional cost—resulting in no net cost to the federal government. 

Intergovernmental and private-sector impact: The bill contains 

two intergovernmental mandates as defined in UMRA. It would require state agencies that regulate mortgage lenders to require that 

those lenders provide borrowers with information about flood insurance if the property covered by the mortgage is located in the 500- 

year floodplain. It also would require state agencies that offer direct mortgages to provide such information. Based on information 

from mortgage lenders, state regulatory agencies, and state housing authorities, CBO estimates that the cost for state regulatory 

agencies would be minimal and the number of loans for which state 

agencies would be required to provide flood insurance information 

would be small. The total cost for state agencies to comply with 

those requirements would be well below the annual threshold established in UMRA ($66 million in 2007, adjusted annually for inflation). 

The legislation would impose private-sector mandates, as defined 

in UMRA, on certain mortgage lenders. Based on information from 

industry sources and FEMA, CBO expects the direct costs to comply with those mandates would fall below the annual threshold for 


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private-sector mandates established in UMRA ($131 million in 

2007, adjusted annually for inflation). 

The bill would require federally regulated mortgage lenders 

when making, increasing, extending, or renewing any loan secured 

by property located in an area within the 500-year floodplain to notify the purchaser or lessee and the servicer of the loan that such 

property is located in that floodplain. The bill also would require 

certain mortgage lenders to notify policyholders that insurance coverage may cease with the final mortgage payment and to provide 

direction as to how the homeowner may continue flood insurance 

coverage after the life of the loan. In addition, certain mortgage 

lenders would be required to deposit premiums and fees for flood 

insurance in an escrow account on behalf of the borrower. According to industry representatives, the cost for mortgage lenders to 

provide the additional notices and direction and to escrow flood insurance payments would be small. 

Previous CBO estimates: On September 20, 2007, CBO transmitted a cost estimate for H.R. 3121, the Flood Insurance Reform 

and Modernization Act of 2007, as ordered reported by the House 

Committee on Financial Services. Both bills would modify the 

NFIP, but contain substantial differences that are reflected in the 

cost estimates. 

Estimate prepared by: Federal Costs: Daniel Hoople; Impact on 

State, Local, and Tribal Governments: Melissa Merrell; Impact on 

the Private Sector: Paige Piper/Bach. 

Estimate approved by: Theresa Gullo, Deputy Assistant Director 

for Budget Analysis. 

REGULATORY IMPACT STATEMENT

In accordance with paragraph 11(b), rule XXVI, of the Standing 

Rules of the Senate, the Committee makes the following statement 

concerning the regulatory impact of the bill. 

This legislation seeks to address several gaps in coverage areas 

within the National Flood Insurance Program. Section 9 of this legislation requires states, as a requirement of participation in the 

program, to require state-chartered financial institutions to maintain flood insurance on all current and future mortgages starting 

December 31, 2008. This section will enhance safety and soundness 

of state-chartered financial institutions by ensuring that assets 

used to secure loan payments are sufficiently covered in the event 

that assets are damaged or destroyed by a flooding event. Section 

10 updates the maximum allowable civil money penalties per violation that regulators may impose against financial institutions for 

failing to comply with the provisions of this Act. Section 10 also 

eliminates the $100,000 annual cap that regulators may impose on 

financial institutions to ensure compliance with this Act. Section 11 

of this Act requires that all flood insurance payments are escrowed, 

which insures that flood insurance payments remain current and 

that assets used to secure loan payments are protected. 

This legislation also requires the NFIP to keep and maintain a 

reserve fund of one percent of total risk exposure. This provision 

ensures that policyholders’ claims will be paid without the assistance of the U.S Treasury and is also consistent with the goal of 

working to eliminate some portion of the $1.3 billion annual subsidy for the program. 


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It is expected that the reported bill will have no impact on the 

personal privacy of the current or prospective flood insurance policyholders. This bill is expected to strengthen the financial status 

of the NFIP by making rates more actuarially sound and expanding the population purchasing flood insurance. This bill also provides for more equitable treatment between policyholders as well as 

protecting the U.S. taxpayer from further loss. 

CHANGES IN EXISTING LAW (CORDON RULE)

On October 17, 2007, the Committee unanimously approved a 

motion by Senator Dodd to waive the Cordon rule. Thus, in the 

opinion of the Committee, it is necessary to dispense with section 

12 of rule XXVI of the Standing Rules of the Senate in order to expedite the business of the Senate. 

Æ 


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