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[Senate Report 109-271]
[From the U.S. Government Publishing Office]

                                                       Calendar No. 498
109th Congress                                                   Report
                                 SENATE
 2d Session                                                     109-271

======================================================================

 
          FLOOD INSURANCE REFORM AND MODERNIZATION ACT OF 2006

                                _______
                                

                 June 28, 2006.--Ordered to be printed

                                _______
                                

Mr. Shelby, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                         [To accompany S. 3589]

    The Committee on Banking, Housing, and Urban Affairs, 
having had under consideration an original bill (S. 3589) 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 May 25, 2006, the Senate Committee on Banking, Housing, 
and Urban Affairs considered a Committee Print, entitled ``The 
Flood Insurance Reform and Modernization Act of 2006,'' 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 (S. 3589) to the Senate.

                               Background

    Congress established the National Flood Insurance Program 
(NFIP) in 1968 to provide policyholders with partial insurance 
for flood related damage. Communities that chose to participate 
in the program were required to undertake mitigation efforts to 
limit flood related damage as well as to implement stringent 
building codes for all new development. The goal of mitigation 
was to ensure that people were protected from flood related 
damage by requiring that they take steps to increase the 
durability of their homes. The program was to generate 
sufficient funds through premium dollars to reduce taxpayer 
exposure to massive liabilities for disaster-related assistance 
due to flooding. During its early stages, the NFIP had about 1 
million policyholders and covered roughly $50 billion of risk 
exposure. Many of the stated goals of the NFIP have failed to 
be met.
    At the inception of this program, Congress built in 
explicit subsidies for business properties and homes known as 
pre- flood insurance rate map (pre-FIRM) structures. Congress 
believed that it was inequitable to require all structures to 
immediately pay actuarial prices given that the owners had no 
notice that they were within the mandatory purchase area for 
flood insurance. It was expected that many, if not all of the 
pre-FIRM structures would be destroyed and rebuilt or mitigated 
within a reasonable amount of time. Therefore, Congress 
employed no mechanism to eliminate the subsidy given to these 
structures at the inception of the program. However, today, 
despite expectations to the contrary, more than 25 percent of 
all the structures covered under the flood insurance program 
continue to remain explicitly subsidized. The Congressional 
Budget Office estimates the program collects about 60 percent 
of the premiums needed for actuarial balance, leaving a cost to 
taxpayers estimated at $1.3 billion per year.
    In addition to the explicit subsidy the effectiveness of 
the program has been reduced because of the inadequacies of the 
flood maps. The flood insurance rate maps (FIRMS) are used to 
determine flood risk, which is used for setting policy rates 
and determining building standards. The data used for the FIRMS 
in some areas is now more than 30 years old. Indeed, in areas 
of southern Mississippi impacted by Hurricanes Katrina and 
Rita, the flood elevation data was off by as much as 20 feet. 
Without accurate flood maps it is exceptionally difficult to 
gauge risk and thereby accurately price flood insurance 
coverage. Additionally, and more importantly, without a true 
understanding of the danger involved, it is impossible to 
ensure safety in new design and construction. Ultimately, the 
use of inaccurate maps has significantly impaired the effective 
operation of the program.
    When Congress created the NFIP in 1968, no structure within 
the program was required to maintain flood insurance until the 
flood maps were completed in 1973. From 1968 until 1973, very 
few owners of structures within known flood risk areas took the 
initiative and purchased flood insurance. Since 1973, 
participation in the NFIP is mandated for properties within the 
100-year flood plain that have a federally related mortgage on 
the property, and such mandatory participation is enforced 
through federal banking regulations. Structures in areas known 
as ``residual risk areas'' behind levees and dams and those 
without a federally related mortgage within the 100-year flood 
plain are currently not required to maintain flood insurance. 
Although any person owning a structure may choose to 
voluntarily participate, many structures within the 100-year 
flood plain that had a mortgage from a state-chartered 
institution without federal deposit insurance or who did not 
have a mortgage simply chose not to participate. 
Notwithstanding the decision of many of the owners of these 
structures not to participate, all of the structures within the 
100-year flood plain and areas of residual risk are exposed to 
heightened risk. The NFIP has failed to adequately inform and 
require all people with structures located within the 100-year 
flood plain and areas of residual risk to obtain and keep 
current flood insurance on their properties.
    In 1986, in an effort to increase the effectiveness of this 
program, the NFIP reached out to form a public-private 
partnership with private insurance companies. The partnership 
was such that the private insurance companies, known as Write 
Your Own (WYO) companies, would handle the task of 
administering the program on behalf of the NFIP in order to 
promote participation. The WYO companies receive a fee to cover 
the cost of administering the flood insurance program, but 
profit was not to be a part of the fee. Today, 96 WYO companies 
participate in the administration of the NFIP, and they receive 
fees of 30.8% of all premiums collected. This percentage is 
derived from the administrative costs of five other lines of 
private insurance that have similarities to the administrative 
costs associated with the NFIP. The actual costs incurred by 
the WYO companies in administering this program remain unknown.
    The NFIP has grown considerably over the past 38 years from 
1 million policyholders and $50 billion of risk exposure to 
nearly 5 million policyholders and $900 billion of risk 
exposure. This program, however, has not been fully self-
sustaining. Although, the hurricane season of 2005 finally 
demonstrated the inability of this program to sustain itself, 
there were prior instances where Congress took remedial actions 
in order to sustain this program before 2005. In 1986, Congress 
was forced to completely forgive nearly $1 billion of debt that 
this program had incurred. Additionally, prior to the 2005 
hurricane season, the NFIP already owed the United States 
Treasury several hundred million dollars. Finally, because the 
NFIP does not attempt to maintain reserves, it cannot operate 
without the financial assistance of the U.S.
    In addition to many of the immediate concerns outlined 
above, several outstanding issues remain unknown. For example, 
it is still unclear whether the administrative fees paid to the 
insurance companies accurately reflect the cost associated with 
administering this program. Also, it is not immediately evident 
whether the private insurance market is capable of underwriting 
a larger amount of risk associated with flood events. Most 
important of all, it remains to be seen if the Federal 
Emergency Management Agency (FEMA) is capable of administering 
this program, or whether this program should be re-organized 
into another federal agency.

                       Purpose of the Legislation

    This legislation makes several key reforms in order to 
ensure sufficient future premium income to pay new claims 
without relying on the American taxpayer. Several of the 
explicit subsidies built into the program during its 1968 
inception will be phased out within a reasonable time. Pre-FIRM 
structures that are non-primary residences, business, severe 
repetitive loss properties, and cumulative loss properties will 
have their subsidies gradually eliminated. In addition, all 
state-chartered financial institutions will be required to 
maintain flood insurance on all mortgaged properties within the 
100-year flood plain. Also, properties located in ``residual 
risk areas'' behind manmade structures such as levees and dams 
will be required to purchase and maintain flood insurance, and 
minimum deductible levels for all structures within the program 
have been adjusted to accurately reflect inflation. Finally, 
every single structure within this program will go through a 
comprehensive rate review as the flood maps are updated in 
order to accurately assess the risk associated with each 
individual structure.
    The NFIP incurred massive liabilities as a result of the 
2005 hurricane season. This legislation eliminates the NFIP's 
existing debt obligations. The legislation, however, also 
requires the NFIP to set up a reserve fund in order to ensure 
that the NFIP has adequate funds. The fund seeks to make the 
entire program function more like an insurance program by using 
reserves to pay claims during high loss years while building 
reserves during lower loss years.
    In addition to the immediate changes to this program, this 
legislation requires the GAO and others to undertake a 
considerable number of studies on every aspect of the NFIP. 
These studies include a full financial audit of the program, an 
in-depth review of the relationship between the NFIP and the 
WYO Companies to determine the actual cost to administer this 
program. The studies also seek to determine the necessity for 
continuing any subsidy within the program. The studies will 
look at whether this program should be expanded or limited 
based on the availability of private flood insurance. Finally, 
the studies will seek to determine if FEMA is capable of 
administering this program, or whether this program should be 
reorganized into another federal agency. This program is 
required to be re-authorized during the next Congress, and it 
is the intent of this Committee to use the studies to determine 
the manner in which this program should be further reformed.

                                Hearings

    The Committee heard testimony in the 109th Congress on 
February 2, 2006, regarding proposals to reform the national 
flood insurance program. 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.
    The Committee had previously heard testimony on January 25, 
2006, regarding proposals to reform the national flood 
insurance program. The witnesses testifying 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.
    The Committee initially heard testimony on October 18, 
2005, regarding proposals to reform the national flood 
insurance program. The witnesses testifying were: Mr. David 
Maurstad, Acting Director, Mitigation Division, Federal 
Emergency Management Agency; Mr. William Jenkins, Director of 
Homeland Security and Justice, Government Accountability 
Office; Dr. Chris Landsea, National Weather Service, National 
Oceanic and Atmospheric Administration; Mr. Robert Hunter, 
Director of Insurance, Consumer Federation of America; Mr. Doug 
Elliott, President, Center on Federal Financial Institutions; 
Mr. Robert Hartwig, Senior Vice President and Chief Economist, 
Insurance Information Institute; Mr. Chad Berginnis, Chief 
Financial Manager and Immediate Past Chair, State of Ohio on 
behalf of the Association of State Floodplain Managers; and 
Professor Mark Browne, Gerald D. Stephens CPCU Chair in Risk 
Management and Insurance School of Business--University of 
Wisconsin.

             Section-by-Section Analysis of the Legislation

Section 1. Title

    This section contains the short title of the bill, ``Flood 
Insurance Reform and Modernization Act of 2006.''

Section 2. Findings

    This section contains the Committee's findings that the 
flood insurance program is bankrupt, and is no longer a 
sustainable program under its current structure. Major reforms 
must be made to this program including but not limited to 
subsidy reductions/eliminations, map modernization, cost 
analysis for greater efficiency within the write your own 
insurance program, stricter compliance of mandatory coverage, 
and increased participation;

Section 3. Definitions

    This section defines the terms 500-year flood plain and 
100-year flood plain.

Section 4. Reform of premium rate structure

    Subsection (a) excludes several pre-FIRM properties from 
continuing to receive explicit subsidies as follows: non-
primary residences; any severe repetitive loss property; any 
business property; any property that has incurred damage in 
amounts exceeding its current FMV; any property which has 
sustained substantial damage exceeding 50 percent or 
substantial improvement exceeding 30 percent of its current 
fair market value.
    Subsection (b) of this section changes the annual premium 
increase for the program as follows: the overall maximum annual 
premium increase is changed from 10 percent per year to 15 
percent per year; the premium increase for phasing out the 
subsidized properties under subsection (a) of this section is 
25 percent per year until that property is no longer subsidized 
under this program.

Section 5. Mandatory coverage areas

    This section requires the Director to issue an amended 
final regulation defining special flood hazard areas to include 
areas known as residual risk areas located behind manmade 
structures such as levees and dams. Residual risk areas are 
areas that would otherwise be within the 100-year flood plain 
but are currently not required to obtain flood insurance 
because they are protected by manmade structures such as levees 
and dams;
    Subsection (c) of this section creates a limitation that 
does not require mandatory participation within the flood 
insurance program for structures that are in residual risk 
areas until such time as all residual risk areas are mapped 
that the Director deems essential to carrying out the flood 
insurance program.

Section 6. Premium adjustment

    This section states that all rates within the program are 
subject to an adjustment each time a flood insurance rate map 
is updated.

Section 7. State chartered financial institutions

    This section requires that by December 31, 2008, as a 
condition of state participation in the national flood 
insurance program that 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 regards to maintaining flood insurance on 
mortgaged properties within the 100-year flood plain.

Section 8. Enforcement

    This section increases the cap on civil money penalties 
from ``$350,'' per violation to ``$2,000'' per violation 
against lenders for violations under this Act. This section 
also states that this is a cap, and regulators may levy fines 
under the stated $2,000 per violation cap where they deem 
necessary and appropriate. This section also eliminates the 
$100,000 annual cap on fines that can be levied against 
lenders.

Section 9. Escrow of flood insurance payments

    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 10. Financing of funds from the Treasury

    This section authorizes the Secretary of Treasury to 
provide funds to cover obligations of the NFIP for the 2005 
hurricane season.

Section 11. 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 for the program from $20.775 billion to 
$1.5 billion.

Section 12. Minimum deductible levels for claims

    This section sets the minimum annual deductible for pre-
FIRM structures at $2,000, and post-FIRM structures at $1,000. 
All deductibles are on annual basis, and once the deductible 
has been met, no further deductible is required for that year.

Section 13. Considerations in determining chargeable premium rates

    This section requires an examination of all years within 
the program including catastrophic loss years to determine the 
appropriate historical loss average.

Section 14. Reserve fund

    This section creates a reserve fund of up to 1 percent of 
all risk exposure in force and effect within the program. In 
order to achieve the appropriate reserve fund level, this 
section sets up a mechanism to achieve the target 1 percent 
ratio within 10 years. 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.

Section 15. Repayment plan for borrowing authority

    This section requires that if the NFIP exercises its 
borrowing authority, the Director must submit a repayment plan 
to both the Secretary of Treasury and to Congress.

Section 16. Technical mapping advisory council

    This section creates a new technical mapping advisory 
council similar to the one established in the 1994 amendments 
to the Act. The additional participants to the original council 
include the Office of Management and the Budget (OMB), the Army 
Corp of Engineers, and a representative from the Department of 
the Interior, respectively.

Section 17. National flood mapping program

    This section requires the NFIP, with the guidance of the 
Technical Mapping Advisory Council, to map the 500-year flood 
plain and areas of residual risk as well as updating the 100-
year flood plain. This section directs the NFIP to use the 
latest technology and the most accurate flood elevation data in 
creating and updating the flood maps.

Section 18. Removal of limitation on state contributions for updating 
        flood maps

    This section lifts the prohibition of states contributing 
more than 50 percent to map modernization in order for States 
to effectively and efficiently update and maintain their maps.

Section 19. Non-mandatory participation in 500-year flood plain

    This section states that it is not mandatory for 
individuals who reside in the 500-year flood plain to obtain 
flood insurance, however it requires the Director to notify the 
communities within the 500-year flood plain to give them notice 
that their communities are in elevated flood risk areas.

Section 20. 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 and availability of flood insurance.

Section 21. Testing new flood proofing technologies

    This section requires the NFIP to allow testing of any new 
type of flood proofing technology and states that such 
structures may not be construed to be in violation of any flood 
risk mitigation plan developed by that State or community and 
approved by the Director of FEMA.

Section 22. Participation in state disaster mediation programs

    This section requires the NFIP, upon request of a state 
insurance official, to participate in state non-binding 
mediation claims where there are multiple insurance claims on 
the same subject property.

Section 23. Reiteration of FEMA responsibilities Under 2004 reform act

    This section requires the Director to submit a report to 
Congress every thirty days detailing the progress made on 
implementing the requirements of the appeals process of section 
205 of the 2004 Flood Insurance Reform Act until such time as 
the process is fully implemented.

Section 24. Studies, audits, reports

    This section requires a number of reports, audits and 
studies that are due to the Committee within one year from the 
date of the enactment of this Act. The Committee believes 
several critical areas of the flood insurance program must be 
improved upon in the coming years. Therefore, the Committee has 
asked the GAO and others to produce several in-depth reports to 
Congress detailing where improvements to this program must be 
made. Subsection (a) requires GAO to conduct an in-depth study 
on the Write Your Own program that shall include consideration 
of alternatives to the current structure of the WYO system. 
Subsection (b) requires a complete audit of the NFIP by GAO 
including the $23 billion dollars spent on claims during the 
2005 hurricane season. Subsection (c) also requires the 
Director of the NFIP to submit an annual report detailing all 
financial aspects of the program for the preceding year. 
Subsection (d) requires the GAO to study the effects that 
expanding flood insurance beyond the current caps might have on 
the private insurance market. Subsection (f) requires the 
Secretary of Treasury to conduct a study and submit a report to 
Congress on the remaining subsidies within the program. 
Subsection (g) requires GAO to study the effects of allowing 
individuals from non-participating communities to purchase 
flood insurance through the NFIP direct program.

                          Cost of Legislation

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 26, 2006.
Hon. Richard C. Shelby,
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 2006.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Julie 
Middleton.
            Sincerely,
                                          Donald B. Marron,
                                                   Acting Director.
    Enclosure.

Flood Insurance Reform and Modernization Act of 2006

    Summary: The Flood Insurance Reform and Modernization Act 
of 2006 would provide the National Flood Insurance Program 
(NFIP) with funds to pay remaining valid claims from the 2005 
Gulf Coast hurricanes and reform the program, which is 
currently in an unsustainable financial position. Without a 
change in law, the NFIP will be unable to pay all flood 
insurance claims promptly, and faced with a nonfunctional 
program, those policyholders who are not required to carry 
flood insurance may abandon it. CBO cannot predict when this 
might occur, but today the program faces a future with 
inadequate resources to pay its obligations.
    CBO expects that enacting the Flood Insurance Reform and 
Modernization Act of 2006 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. By providing funds to pay remaining 
claims from the 2005 Gulf Coast hurricanes and forgiving the 
debt incurred to pay previous claims from 2005, the bill would 
essentially return the NFIP to a financial condition similar to 
that which existed before Hurricane Katrina.
    Enacting the bill would also strengthen the NFIP's 
financial position in the future. It would direct the Federal 
Emergency Management Agency (FEMA) to impose rate increases of 
up to 15 percent per year on all policyholders so as to 
establish a reserve fund for the insurance program. That 
reserve fund would be available to pay insurance claims 
whenever it was needed. The bill also would require some 
policyholders that do not pay the full cost of their insurance 
coverage to gradually begin to do so. Finally, it would require 
some policyholders to carry a larger deductible amount on their 
insurance policies, and it would end the current practice of 
offering new policies to some property owners at less than 
their expected cost. These requirements would increase the cost 
to policyholders and reduce the net cost of the program to the 
government. Over the next several years, those changes would 
improve the chances that the NFIP would have sufficient funds 
to pay future claims.
    CBO estimates that enacting the bill would reduce net 
outlays of the flood insurance program over the next 10 years 
by about $7.6 billion relative to current law. Changes in the 
NFIP (mostly higher premiums) and the elimination of its 
Treasury debt would reduce the program's net outlays by about 
$19 billion over that period. But the appropriation of funds to 
pay the remaining claims from the 2005 hurricanes and the 
increased availability of funds to pay future claims that could 
not be paid under current law would add over $12 billion to the 
program's outlays. At the same time, because the bill would 
forgive the NFIP's debt to the Treasury, that agency would 
forgo interest payments from FEMA of about $9.5 billion over 
the 2007-2016 period, CBO estimates. The net impact of the 
bill--including its effect on the NFIP and on Treasury's 
interest receipts--would be an increase in direct spending of 
$1.9 billion over the 2007-2016 period.
    As the value of flood insurance coverage in force continues 
to grow, the cost of claims that the NFIP may face in the next 
decade will also 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 Katrina--
but there could be another catastrophic flood in the next 
decade with much larger losses. CBO's estimate assumes that 
annual flood insurance claims during this period are equal to 
the amounts anticipated by the program's actuaries for a 
typical year, but actual claims are likely to vary 
substantially from year to year and the total amount of claims 
over the next 10 years is quite uncertain. This estimate also 
assumes that substantial numbers of policyholders drop flood 
insurance coverage or find alternatives to the NFIP as their 
premiums rise steadily over the period.
    The bill also would increase the amounts authorized to be 
appropriated for FEMA's flood mapping program. In addition, the 
bill would require FEMA to participate in state-sponsored 
claims mediation programs and would direct the Government 
Accountability Office (GAO) to conduct multiple studies. 
Assuming appropriation of the authorized amounts, CBO estimates 
that implementing these provisions would cost $1.5 billion over 
the 2007-2011 period and an additional $900 million after 2011.
    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 by UMRA ($64 million in 2006, 
adjusted annually for inflation). The legislation also would 
impose private-sector mandates, as defined in UMRA, on certain 
mortgage lenders. Based on information from industry and 
government sources, CBO expects that the direct costs to comply 
with those mandates would fall below the annual threshold for 
private-sector mandates established in UMRA ($128 million in 
2006, adjusted annually for inflation).
    Estimated cost to the Federal Government: The estimated 
budgetary impact of the bill is shown in the following table. 
The budgetary impact of this legislation falls within budget 
function 450 (community and regional development).

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   By fiscal year, in millions of dollars--
                                                    ----------------------------------------------------------------------------------------------------
                                                      2007    2008    2009      2010       2011       2012       2013       2014       2015       2016
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               CHANGES IN DIRECT SPENDINGa

Payment of Remaining 2005 Claims:
    Estimated Budget Authority.....................   2,400       0       0          0          0          0          0          0          0          0
    Estimated Outlays..............................   1,825     375     200          0          0          0          0          0          0          0
Reforms to the NFIP:
    Estimated Budget Authority.....................     900     600     250          0          0          0          0          0          0          0
    Estimated Outlays..............................     900     600     250       -150       -650     -1,150     -1,775     -2,250     -2,700     -3,125
Forgone Treasury Interest Receipts:
    Estimated Budget Authority.....................     875     875     925        975        975        975        975        975        975        975
    Estimated Outlays..............................     875     875     925        975        975        975        975        975        975        975
Total Changes:
    Estimated Budget Authority.....................   4,175   1,475   1,175        975        975        975        975        975        975        975
    Estimated Outlays..............................   3,600   1,850   1,375        825        325       -175       -800     -1,275     -1,725      -2150

                                                      CHANGES IN SPENDING SUBJECT TO APPROPRIATION

Flood Mapping and Studies Estimated Authorization:
    Level..........................................     401     400     400        400        400        400          0          0          0          0
    Estimated Outlays..............................     101     260     340        400        400        400        300        140         60         0
--------------------------------------------------------------------------------------------------------------------------------------------------------
aIn addition, CBO estimates that revenues would increase by about $1 million a year over the 2007-2016 period.

    Basis of estimate: For this estimate, CBO assumes that the 
bill will be enacted near the beginning of fiscal year 2007 and 
that the authorized amounts will be appropriated for each 
fiscal year.

Direct spending and revenues

    Over the 2007-2016 period, CBO estimates that enacting the 
legislation would reduce net outlays for the flood insurance 
program by about $7.6 billion and would increase the Treasury's 
net outlays for interest by about $9.5 billion.
    Funding for Claims from the 2005 Gulf Coast Hurricanes. 
Section 10 would appropriate such sums as are necessary to pay 
the remaining claims from the 2005 Gulf Coast hurricanes that 
exceed the program's resources. According to FEMA, the total 
claims for those hurricanes will be about $23.1 billion. The 
NFIP has already been authorized to borrow $20.8 billion for 
that purpose. Based on information from FEMA, CBO estimates 
that enacting this bill would provide another $2.4 billion for 
paying claims from the 2005 hurricanes and that the resulting 
outlays would occur over the 2007-2009 period.
    Reforms to the NFIP. The bill contains several provisions 
that together would govern the magnitude of future rate 
increases for flood insurance and reduce the amount of expected 
future claims. Those provisions would:
          Require the NFIP to create 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 current outstanding debt to the 
        Treasury;
          Phase out subsidized premiums for some policyholders;
          Raise the deductibles for certain types of 
        policyholders; and
          Prohibit FEMA from issuing new subsidized insurance 
        policies.
    CBO estimates that these changes would reduce net outlays 
of the NFIP by about $10 billion over the 2007-2016 period. The 
program's net outlays would decline, relative to current law, 
because premium increases would be greater and no interest 
would have to be paid to the Treasury on the NFIP's current 
debt (which would be forgiven). That decline would be partially 
offset by higher claims payments because, under the bill, the 
NFIP would have sufficient funds to pay average expected 
claims; under current law, 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 1 percent of the value of flood insurance 
coverage in force in the previous year. By the end of 2006, 
FEMA expects that the value of flood insurance coverage in 
force will be about $1 trillion; by 2015, the amount of 
coverage is likely to reach $1.5 trillion. The bill would 
direct FEMA to gradually accumulate the necessary reserves over 
10 years.
    In addition, section 4 would authorize the NFIP to increase 
rates on policies within each risk category by an average of up 
to 15 percent per year. Under current law, the limit on rate 
increases is 10 percent. CBO expects that FEMA would have to 
impose annual 10 percent rate increases on flood insurance 
policies under current law in order to pay claims and service 
its outstanding debt to the Treasury. Under the bill, however, 
CBO expects FEMA would need to increase most rates by 15 
percent annually in order to pay claims and accumulate the 
required reserves. CBO interprets this legislation as directing 
FEMA to implement rate increases to meet the funding targets 
for the reserve fund even if those rates exceed the estimated 
actuarial cost of providing flood insurance.
    For this estimate, we assume that FEMA could begin to 
implement premium increases to establish a reserve fund 
starting in May 2007, and that it would take one year before 
any increase was fully implemented because individual flood 
insurance policies are renewed throughout the year. Starting in 
May 2007, the bill would direct FEMA to collect 10 percent of 
the reserve fund requirement (or about $1 billion) in 2007. 
That directive would imply a very large rate increase; however, 
under the bill, the increase would be capped at 15 percent. If 
claims over the next several years occur at the actuarial 
average, 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 fund for at least a few 
years.
    For this cost estimate, CBO assumes that FEMA would impose 
15 percent rate increases on its policyholders each year over 
the 2007-2016 period in an attempt to reach the reserve amounts 
specified in the bill, but that it probably would fall short of 
that target in this period. CBO estimates that flood insurance 
coverage in force would grow from about $1 trillion today to 
around $1.5 trillion by 2015. It is unlikely that FEMA would be 
able to collect enough premiums above amounts it pays for 
claims over the next 10 years to fully capitalize a reserve 
fund equivalent to 1 percent of insurance coverage in force. 
CBO estimates that, with all of the program changes authorized 
by the bill, the NFIP would have a reserve fund with a balance 
of about $10 billion in 2016, less than the estimated target of 
about $15 billion for that year. (If losses due to floods are 
less than average over that period, the balance would be 
greater. If losses exceed the average, the balance would be 
smaller. Based on FEMA's actuarial review of the NFIP, CBO 
estimates the expected loss is about $3.5 billion for policies 
in force in 2006.) To estimate the amounts that could be 
collected in response to the bill's reserve fund requirement, 
CBO reduced the projected amount of flood insurance coverage to 
reflect thelikelihood that some policyholders would drop NFIP 
coverage or find alternatives to that coverage after successive years 
of 15 percent annual rate increases ultimately quadrupled their 
insurance premiums. Policyholders that live in lower-risk areas that 
are paying actuarially fair insurance premiums today might seek and 
find alternative insurance products in the future if their cost to 
participate in the NFIP far exceeded their actuarial risk. 
Alternatively, some policyholders in this situation might choose to 
reduce their flood coverage or drop it altogether. Such resources would 
reduce the total coverage in force and hence the required size of the 
reserve fund.
    Increase Rates for Pre-FIRM Properties. Section 4 would 
authorize the NFIP to gradually increase premiums on certain 
properties that were built before flood insurance rate maps 
(FIRMs) were completed or before 1975, whichever is later--
known collectively as pre-FIRM properties. The affected pre-
FIRM properties include:
          Properties that have been flooded four or more times 
        with the total claims payments exceeding $20,000; or 
        properties with two or more claims exceeding the fair 
        market value of the property;
          Nonresidential structures;
          Nonprimary residences (such as vacation homes);
          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 after enactment of the bill.
    Under current law and policies, many pre-FIRM structures 
are charged a flood insurance premium that is less than the 
full actuarial cost of the insurance. Thus, such policies are 
considered to be subsidized by the program. The bill would 
authorize FEMA to increase rates on those specified types of 
pre-FIRM properties (but not other types of pre-FIRM 
properties) by 25 percent a year until the actuarial rate is 
achieved. At that rate, CBO expects that many, but not all, of 
these pre-FIRM properties would start paying actuarial rates 
within the next 10 years.
    According to FEMA, approximately 455,000 pre-FIRM 
properties would be affected by the bill, and 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 12 would 
increase the deductible for pre-FIRM properties from $1,000 to 
$2,000 for both the structure and its contents. For pre-FIRM 
properties, which do not pay actuarial rates for their 
insurance, the increase in the deductible would not affect the 
price of the insurance, but it would decrease the amount of 
claims payments made for such properties. Based on information 
from FEMA, CBO estimates that claims payments would decrease by 
about 7.5 percent if this higher deductible were implemented.
    Bar New Subsidized Policies for Pre-FIRM Properties. 
Section 4 would prohibit FEMA from offering new subsidized 
insurance policies. CBO estimates that this provision would 
reduce spending by a negligible amount over the next 10 years 
because we expect few new properties eligible for pre-FIRM 
rates to be added to the flood insurance program.
    Forgone Treasury Interest Payments. Section 11 would 
relieve the NFIP of its obligation to repay funds borrowed to 
pay claims from the 2005 Gulf Coast hurricanes. Current law 
requires FEMA to repay any borrowed funds (with interest) as it 
collects premiums. In the absence of legislation to relieve 
FEMA of it obligation to repay debt, FEMA would need to use a 
portion of its premium income to pay 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 its debt would instead be used to pay policyholders' 
claims and accumulate reserves.
    Interest payments from the NFIP to the Treasury are 
intragovernmental transactions; they are recorded in the budget 
as outlays for FEMA and as offsetting receipts (that is, 
negative outlays) for the Treasury. Eliminating those payments 
would reduce FEMA's outlays (making more funds available to pay 
claims and accumulate reserves)--but it also would increase the 
Treasury Department's net outlays by $0.9 billion to $1.0 
billion per year because it would be receiving less interest 
income.
    Additional Claims Payments Under the Bill. CBO expects that 
enacting this legislation would enable the flood insurance 
program to continue to grow in size and to pay claims that it 
would be unable to pay in a timely fashion under current law. 
That would be possible because the legislation would 
appropriate $2.4 billion needed to pay remaining NFIP claims 
from 2005, increase premiums and deductibles, and eliminate the 
program's debt to the Treasury. Over the 2007-2016 period, CBO 
estimates that NFIP would pay over $12 billion for current and 
future claims that probably could not be compensated under 
current law. That estimate assumes that flood insurance claims 
would be equivalent to the expected annual cost of the program 
as estimated by FEMA's actuaries--over $3.5 billion today. In 
future years, those expected losses will increase with 
inflation and change as the number of policies in force varies.
    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 currently does. CBO has no information 
to estimate the number of policies that could be added to the 
program from enacting these sections.
    Mandatory Coverage Areas. Section 5 would require that 
homes located behind levees, dams, and other man-made 
structures become part of special flood hazard areas, which are 
areas at high risk for flooding. The bill would require 
property owners to purchase flood insurance once the NFIP 
updates its flood maps to include those new high-risk areas. 
CBO assumes that the additional policies generated by this new 
mandatory purchase requirement would be pricedinitially at 
actuarial rates. CBO has no basis for estimating the number of policies 
that might be sold under this provision.
    Nonmandatory Participation for the 500-year Flood plain. 
Section 19 would require the NFIP and regulated lending 
institutions to notify communities if they are entirely or 
partially located within the 500-year flood plain. Properties 
within the 500-year flood plain would not be subject to 
mandatory purchase requirements but could voluntarily purchase 
flood insurance, which CBO assumes would initially be priced at 
actuarial rates. As the cost of those policies increased far 
above actuarial rates to capitalize the proposed reserve fund, 
CBO expects few of these property owners would elect to buy 
flood insurance.
    Civil Penalties. Section 8 would increase the civil penalty 
from $350 to $2,000 for lenders that do not enforce the 
mandatory purchase requirement. CBO estimates that the 
increased revenue from the civil penalties established under 
this bill would amount to about $1 million a year.

Spending subject to appropriation

    The bill also would authorize additional discretionary 
spending. Assuming appropriation of the authorized amounts, CBO 
estimates that such spending would total about $1.5 billion 
over the 2007-2011 period and an additional $900 million after 
that period.
    Flood Mapping Program. Section 17 would authorize the 
appropriation of $400 million a year over the 2007-2012 period 
for updating flood maps to include the 500-year flood plain 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 section would 
cost $1.5 billion over the 2007-2011 period and an additional 
$900 million in subsequent years.
    Participation in Claims Mediation. Section 22 would require 
FEMA to participate in state-sponsored claims mediation 
programs to help expedite the settlement of disputed flood 
insurance claims. The additional administrative costs of this 
provision are uncertain because FEMA does not know how it would 
implement this provision. If staffing increases were 
significant, however, it is likely that the NFIP would raise 
the administrative fees assessed on policyholders and that 
added income from those fees would offset any increase in 
costs.
    Studies. Section 24 would direct GAO to conduct four 
studies on various aspects of the NFIP as well as an audit of 
the program's spending related to the 2005 Gulf Coast 
hurricanes. CBO estimates that conducting those studies would 
cost about $1 million over the 2007-2011 period.
    Impact on State, Local, and tribal Governments: 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 flood plain. 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 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 
($64 million in 2006, adjusted annually for inflation).
    Impact on the Private Sector: The legislation would impose 
private-sector mandates, as defined in UMRA, on certain 
mortgage lenders. Based on information from industry and 
government sources, CBO expects that the direct costs to comply 
with those mandates would fall below the annual threshold for 
private-sector mandates established in UMRA ($128 million in 
2006, adjusted annually for inflation).
    The bill would require mortgage lenders--when making, 
increasing, extending, or renewing any loan secured by property 
located in an area within the 500-year flood plain--to notify 
the purchaser or lessee and the servicer of the loan that such 
property is located in the 500-year flood plain. 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 could 
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. Therefore, CBO estimates that the 
aggregate direct cost of complying with the mandates would fall 
below the annual threshold.
    Previous CBO Estimate: On April 4, 2006, CBO transmitted an 
estimate for H.R. 4973, the Flood Insurance Reform and 
Modernization Act of 2006, as ordered reported by the House 
Committee on Financial Services on March 16, 2006.
    H.R. 4973 contains a number of provisions similar to those 
in this bill, such as increasing rates on certain pre-FIRM 
properties, increasing the annual limit on rate increases, and 
providing funds to pay the remaining claims from the 2005 Gulf 
Coast hurricanes. H.R. 4973 would not, however, forgive the 
NFIP's debt to the Treasury, and CBO estimated that all of the 
additionalpremium income under the bill would have to be used 
to pay claims. The cost estimates reflect those differences between the 
bills.
    Estimate prepared by: Federal Costs: Julie Middleton and 
Perry Beider; Impact on State, Local, and Tribal Governments: 
Melissa Merrell; Impact on the Private Sector: Paige Paper/
Bach.
    Estimate approved by: Robert A. Sunshine, 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 7 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 8 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 8 
also eliminates the $100,000 annual cap that regulators may 
impose on financial institutions to ensure compliance with this 
Act. Section 9 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 of the 
$1.3 billion annual subsidy for the program.
    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. 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 May 25, 2006, the Committee unanimously approved a 
motion by Senator Shelby 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.

                ADDITIONAL VIEWS OF SENATOR JIM BUNNING

    I am pleased that the Committee has included many necessary 
reforms to shore up the financial shortcomings of the National 
Flood Insurance Program (NFIP) in this legislation. However, I 
still have serious concerns about both the financial soundness 
and the administration of the NFIP.
    The NFIP was created in 1968 to make certain a minimum 
level of insurance against losses from flooding was available 
to property owners. But the program was not created actuarially 
sound. Because Congress made purchase of policies mandatory for 
some property owners, premium rates were subsidized by the 
taxpayers for properties in existence before the purchase 
requirement. Because the government bears the risk of loss and 
does not have to make a profit, the program is implicitly 
subsidized by the taxpayers. And because premiums are based on 
broad zone classifications and badly outdated maps, 
policyholders are not even charged actuarial rates on newly 
constructed structures.
    After nearly 40 years, the subsidies and fiscal unsoundness 
remain. Financially, that makes no sense. The explicitly 
subsidized properties present a greater risk of loss because 
they often do not meet modern building standards. The flawed 
premium calculation methodology also prevents charging 
policyholders for the risks they pose to the taxpayers.
    The original design of the NFIP has also produced several 
perverse--and dangerous--incentives. First, because there is no 
incentive to fortify old structures, the program encourages 
policyholders not to make their structures safer. Second, 
because premiums are not based on risk and are implicitly 
subsidized, the program encourages building in high-risk areas. 
Third, because vacation homes and other properties can be 
insured and subsidized, the program provides extra benefits to 
the least needy. Fourth, the mere existence of not-for-profit 
insurance backed by the taxpayers prevents private insurers 
from even trying to offer competing products.
    This legislation builds upon the reforms enacted in 2004. 
It eliminates the subsidies for the properties least deserving 
of taxpayer handouts. It allows larger annual premium 
adjustments to increase premium income to the program. More at-
risk structures are required to purchase insurance policies, 
and the current mandatory purchase requirements will be better 
enforced. Future catastrophic losses will be offset by the 
creation of a reserve fund and an improved formula for 
calculating annual premium rates. Finally, numerous 
administrative changes, including more detailed mapping, will 
help the program better cope with future losses.
    Unfortunately, these reforms come at a high price--well 
over $20 billion. But even more reforms are needed to make the 
program financially sound. There has been opposition to 
significant reforms in the NFIP since day one, but the 
taxpayers deserve better and this Committee must continue to 
implement needed changes. The current authorization expires at 
the end of 2007, and I hope that the lessons and losses of the 
past will encourage more significant reforms in the 
reauthorization.
    While I believe this legislation addresses some significant 
problems in the design of the NFIP, there are also problems not 
of Congress's creation. The administration of the program by 
the Federal Emergency Management Agency (FEMA) has, at times, 
been in defiance of the clear intent of Congress. Had the 
Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 
not been enacted, victims of the 2004 and 2005 hurricane 
seasons would have had no insurance coverage for flood damage. 
Yet FEMA has still not fully implemented that law. Provisions 
of that Act establishing education and training requirements 
for insurance agents and a pilot program for mitigation of 
severe repetitive-loss properties must continue to be improved.
    Most inexcusably, the appeals process established in that 
Act has yet to be implemented. FEMA did not even propose a rule 
until 23 months after the Act was signed into law and 17 months 
after the statutory deadline passed. And the rule proposed by 
FEMA was wholly inadequate and provided no protections for 
policyholders. I have received a written promise from the 
Secretary of Homeland Security that changes to provide due 
process for appellants will be made when the rule becomes 
final. Those changes will include setting a 90-day deadline for 
FEMA to resolve appeals, establishing a point of contact within 
FEMA for a claimant to get assistance with filing an appeal, 
and requiring FEMA to provide an explanation of why the claim 
was denied and what information is necessary to file the 
appeal.
    Looking to the upcoming reauthorization, this Committee 
must again make significant reforms to financially fortify the 
NFIP. If FEMA continues to defy Congress's intent in the 2004 
Act, or in this legislation, there must be serious 
consequences. We owe it to the policyholders to ensure the 
program works, and we owe it to the taxpayers to ensure they do 
not have to foot the bill for another catastrophic loss.
                                                       Jim Bunning.

                                  
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