Created by the National Flood Insurance Act of 1968, the NFIP is designed to protect homeowners from flood losses while also minimizing the exposure of property to flood damage. To participate in the program, communities must adopt and enforce floodplain management ordinances to mitigate the effects of flooding on new or existing homes in special flood hazard areas (SFHA). Flood insurance is available in communities participating in the NFIP and is offered to eligible homeowners for homes and their contents. FEMA, through its Federal Insurance and Mitigation Administration, manages the federal flood insurance program and floodplain mitigation programs. When the program was created, the purchase of flood insurance was voluntary. To increase the impact of the program, however, the Congress amended it in 1973 and in 1994 to require the purchase of flood insurance by many homeowners and to place the onus for ensuring compliance upon lending institutions. Currently, homeowners in SFHAs in participating communities must purchase flood insurance as a condition of obtaining mortgages on their homes if the loans are made, increased, extended, or renewed by federally regulated lending institutions; sold to Fannie Mae or Freddie Mac; or made, insured, or guaranteed by a federal agency, such as the Small Business Administration, Federal Housing Administration, or the Department of Veterans Affairs. No definitive data on the number of mortgages meeting these criteria exist; however, on the basis of 1999 data reported by lenders, most mortgaged properties meet the above criteria and, if in a SFHA, would be subject to the requirements of the National Flood Insurance Act. Federally regulated lending institutions—which make most of the mortgages in the United States—and loan servicers must ensure that, where required, flood insurance is purchased at the time that the mortgage is obtained and maintained throughout the life of the loan, or added if the residence involved is reclassified as being located in a SFHA. They may not make, increase, extend, or renew a loan secured by a structure located in a SFHA in a participating community unless the structure is covered by flood insurance. Lenders generally purchase flood zone determinations from flood zone determination companies that use FEMA flood maps and other data to ascertain if properties are situated in flood zones. The companies record the results of their determinations on a standard flood hazard determination form (SFHDF) and provide this form to lenders, who are required to maintain it. Figure 1 shows the process that lenders generally follow for obtaining and recording flood zone determinations as part of their mortgage approval process. If a lender or servicer determines at any time during the life of the mortgage that a property is located in a SFHA—even if a flood zone remapping places it in a SFHA after the mortgage was first originated—the lender or servicer must ensure the purchase of the appropriate flood insurance. The federal agencies that regulate lending institutions and the GSEs were also given certain compliance responsibilities. As required by the 1994 amendments to the National Flood Insurance Act, the regulatory agencies established rules directing lending institutions not to make loans secured by improved real estate located in SFHAs unless flood insurance had been purchased. The regulatory agencies are to examine loans for compliance with these regulations during their periodic examinations of member financial institutions, using uniform policies and procedures for assessing lender compliance with flood insurance requirements. The GSEs were required to implement procedures reasonably designed to ensure that flood insurance coverage exists for any purchased loan that is secured by improved real estate located in a SFHA. The GSEs have established flood insurance purchase requirements to be followed by institutions that sell mortgages to them or service mortgages for them and have procedures in place to assess loans for compliance. Appendix II contains additional information on bank examination procedures and processes, and appendix III contains additional information on the review and audit procedures followed by GSEs. Officials involved with the flood insurance program developed contrasting viewpoints about whether lenders are complying with flood insurance purchase requirements primarily because the officials use differing types of data to reach their conclusions. Federal bank regulators and officials from Fannie Mae and Freddie Mac base their belief that lenders are generally complying with the NFIP’s purchase requirements on regulators’ examinations and GSEs’ reviews conducted to monitor and verify lender compliance. In contrast, FEMA officials believe that many lenders frequently are not complying with the requirements, which is an opinion based largely on noncompliance estimates computed from data on mortgages, flood zones, and insurance policies; limited studies on compliance; and anecdotal evidence indicating that insurance is not in place where required. Neither side, however, is able to substantiate its differing claims with statistically sound data that provide a nationwide perspective on lender noncompliance. On the basis of their bank exams and compliance reviews, bank regulators and GSE officials believe that the rates of noncompliance with flood insurance purchase requirements are very low. According to representatives of the regulatory agencies, very few violations of flood insurance requirements have occurred. Moreover, according to the bank regulators’ 1994-2000 annual reports to the Congress, most of the violations found during examinations have been of a technical nature, such as improperly completing necessary forms or not giving borrowers timely notification that the property is in a flood zone before the loan closing date. More serious violations, such as failure to confirm that insurance is in place when required, or failure to obtain a flood zone determination for a property, have been infrequently detected during examinations. For example, since 1996, the bank regulators have levied 51 civil monetary penalties on lending institutions that committed serious violations of flood insurance requirements. Fannie Mae and Freddie Mac may force lenders who sell loans to repurchase a loan if their requirements for flood insurance are not met. Both enterprises told us that this action has rarely occurred because instances of noncompliance are almost always corrected by the lenders. Similarly, the bank regulators’ examiners and managers responsible for conducting bank examinations that we talked to said lending institutions are doing a good job of complying with flood insurance requirements. In general, the examination process involves field examiners assessing a lending institution’s procedures for ensuring compliance with the flood insurance requirements and checking a sample of loan files to verify that the procedures are routinely followed. According to the examiners, lending institutions are familiar with the stipulations of various consumer compliance laws and fulfilling the requirements for flood insurance has become a standard procedure in mortgage lending. Bank regulatory and industry officials have stated that completing standard flood hazard determination forms and ensuring that borrowers obtain flood insurance for properties where it is required are standard business practices for lenders. They added that at larger lending institutions, automated systems typically track borrowers’ flood insurance policies throughout the life of a loan. Nevertheless, the regulatory agencies and GSEs acknowledge that complete data on compliance do not exist and the data they obtain from bank examinations are not statistically representative of compliance either for the bank or the country. Regulators and GSEs do not use a statistical sample of loans when examining for flood insurance compliance. Their findings at a lending institution, or even from all of the lending institutions that they regulate, therefore, cannot be generalized to the industry. Examining for compliance with flood insurance purchase requirements is but one of approximately 20 different laws and regulations—such as those relating to equal opportunity lending, truth-in-lending, and debt collection practices—included in compliance examinations. Staff of one regulatory agency told us that obtaining a statistically valid sample for any of these issues would require examination of many more loans than currently inspected and would seriously threaten their ability to examine bank compliance with other requirements. They do not believe it would be prudent or cost-effective to review a statistically valid sample of loans for compliance with NFIP regulations without stronger evidence of widespread noncompliance. FEMA officials disagree with bank regulators and GSEs about the level of overall lender compliance with flood insurance requirements. Although FEMA officials believe that lenders have been doing a better job of ensuring the purchase of flood insurance in recent years, they also believe that noncompliance rates are still significant. FEMA officials base their opinion on three factors: (1) their estimate of the aggregate number of homeowners who live in flood zones, have federally backed mortgages and, therefore, are required to have flood insurance compared with the number of flood insurance policies in force; (2) a small number of relevant, but limited, studies; and (3) anecdotal information obtained from conversations with local government officials and others knowledgeable about the flood insurance program. FEMA does not have information on the individual properties that should be covered by flood insurance, but it has estimated the number of properties that should be insured. Using that estimate, it developed an overall estimate of noncompliance indicating that many properties do not have the required insurance. According to FEMA’s estimate, in fiscal year 2000 nearly one out of three homes required to have flood insurance did not have it. On the basis of Mortgage Bankers Association data on homes and mortgages, U.S. Corps of Engineers data on the percentage of structures located in SFHAs, and its own insurance policy data, FEMA estimates that less than 2.9 million flood insurance policies have been issued for over 4.3 million mortgaged properties in SFHAs. According to this estimate, nearly 1.4 million—32 percent—may not have flood insurance. FEMA officials acknowledge that an accurate rate of noncompliance will not be known until mortgage data are linked to flood insurance policy data. They nevertheless believe that the estimate indicates a potentially significant noncompliance problem. FEMA officials point out that two studies the agency conducted also indicate noncompliance with the mandatory purchase requirement. A 1999 study conducted by a FEMA regional office and a 2000 study by the FEMA IG assessed specific areas to determine the number of homes that had flood insurance. The two studies examined different localities, but each found a portion of sampled properties—as high as 45 percent in the regional office study—that did not have the required insurance, as discussed below. A post-disaster compliance study issued in April 1999 by one of FEMA’s regional offices assessed rates of noncompliance after a 1998 flood in Vermont.