Senate Report 112-98 - FLOOD INSURANCE REFORM AND MODERNIZATION ACT OF 2011

[Senate Report 112-98]
[From the U.S. Government Publishing Office]

Calendar No. 250
112th Congress Report
SENATE
1st Session 112-98

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FLOOD INSURANCE REFORM AND MODERNIZATION ACT OF 2011

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December 5, 2011.--Ordered to be printed

_______

Mr. Johnson of South Dakota, from the Committee on Banking, Housing,
and Urban Affairs, submitted the following

R E P O R T

[To accompany S. 1940]

The Committee on Banking, Housing, and Urban Affairs,
having had under consideration an original bill (S. 1940) 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 September 8, 2011, the Senate Committee on Banking,
Housing, and Urban Affairs considered a Committee Print,
entitled ``The Flood Insurance Reform and Modernization Act of
2011,'' 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
measures.'' (P.L. 90-448) The NFIP includes three essential
components to reduce the impact of flooding on lives and
property: prevention, mitigation, and insurance.
Today, over 40 years later, more than 21,000 communities in
all 50 States, the District of Columbia, and the U.S.
territories, now participate in the NFIP. Communities that
choose to participate in the NFIP undertake mitigation efforts,
regulate land use, and implement responsible building codes for
new development to reduce the threat to lives and property.
Buildings in Special Flood Hazard Areas, frequently referred to
as the 100-year floodplain, are required to meet these building
code requirements and, if mortgaged with a federally-regulated
lender, are required to purchase flood insurance. Flood
insurance is also available in areas outside of the Special
Flood Hazard Area in participating communities, though federal
law does not require that it be purchased. The Federal
Emergency Management Agency (FEMA), which administers the NFIP,
provides flood hazard data, maps, and tools that are used by
communities in carrying out their responsibilities. These maps
are also used by lenders and insurance companies for compliance
and insurance purposes.
Nearly thirty years ago, in an effort to meet Congressional
intent that the program be ``carried out to the maximum extent
practicable by the private insurance industry'' and through
``cooperative efforts'' (P.L. 90-448), NFIP formed a public-
private partnership with private sector insurance companies,
known as Write Your Own (WYO) companies. Under this
partnership, WYO companies handle the sale and administration
of flood insurance policies while the federal government bears
the insurance risk and pays claims from the National Flood
Insurance Fund. Roughly 85 percent of flood policies are sold
through WYO companies with the rest sold through the NFIP
directly, by private insurance agents. The NFIP pays the WYO
companies for their administration of the policies based on
expenses incurred in other comparable lines of insurance, not
their actual costs incurred for NFIP. In 2011, FEMA estimates
that 30 cents of every premium dollar will be used to pay for
administration. Of this amount, WYO companies are expected to
earn roughly 11 cents of every premium dollar for
administrative expenses and 3 cents to cover costs associated
with adjusting claims and about 14 cents per dollar is
allocated for agent commissions. WYO compensation for claims
adjustments adjusts with the volume of claims, and has
constituted a much higher percentage of premium income in high-
claims years.
Today, there are more than 5.6 million flood insurance
policies in force providing over $1.2 trillion in coverage to
individuals and businesses. The NFIP has made flood insurance
available to the general public, especially those most at risk.
Yet, there are a number of challenges currently facing the
program which is roughly $17.75 billion in debt in the wake of
large losses in 2004 and 2005. Significant challenges include
subsidized rates for certain properties, low participation
rates, and non-compliance with mandatory purchase requirements,
among others. These challenges have contributed to doubts about
the financial soundness of the NFIP and its ability to be self-
sustaining going forward, absent reform.
Properties with buildings that were built prior to the
inception of the NFIP 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 these property owners to pay actuarial rates, given
that the structures were built prior to rate maps and knowledge
of the risk and because actuarial premiums on these properties
might be prohibitively expensive. Yet the cumulative effect of
subsidized premiums for insuring these properties leaves the
NFIP with fewer funds available to pay losses, especially in
years with losses higher than anticipated for an average
historical loss year. The NFIP estimates that $1.5 billion in
premium revenue is foregone annually due to subsidized rates--
this is equal to half of the $3 billion the NFIP currently
collects in premiums. Nearly 22 percent of policies are priced
using subsidized pre-FIRM rates. While Congress initially
believed that over time pre-FIRM properties would be lost to
flood, rebuilt, or mitigated, the phase-out 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 the
Severe Repetitive Loss Pilot program to mitigate those
properties that experienced multiple flood losses. These
properties remain a challenge to the NFIP, and Congress intends
for FEMA to move toward further mitigation and actuarial
pricing with respect to these pre-FIRM properties.
Rate subsidies have not been the only financial challenge
to the NFIP. Flood maps are a critical component of the NFIP as
they help identify risk, inform property owners, and help set
boundaries of mandatory purchase requirements and rates. By the
early 2000s, maps were outdated and, in many cases, inaccurate.
FEMA, at the direction of Congress, has made significant
progress in the last eight years updating data and flood maps
and providing new tools to communities throughout the United
States, thereby providing residents with a more accurate
assessment of flood risks. As maps have been modernized to
reflect current flood risks, some property owners have found
themselves drawn into Special Flood Hazard Areas and subject to
mandatory purchase requirements by their lenders, while roughly
the same number have been removed from such areas and relieved
of such requirements. While map modernization can be met with
skepticism within communities, Congress believes that it is
crucial in order to warn property owners about their flood
risks and to ensure that insurance premiums are risk-based.
Participation in the program is not as robust as Congress
anticipated. Since 1973, the purchase of flood insurance has
been required for properties in the 100-year floodplain with
federally-regulated mortgages. Such mandatory purchase is
enforced through lenders and federal banking regulations, yet
the compliance rate in covered areas is estimated to be as low
as 50 percent (GAO Testimony, June 23, 2011). Voluntary
purchases by property owners, either by those property owners
without federally-backed mortgages or those with property
outside areas requiring purchase, are low even when such
properties are exposed to heightened risk.
Various levels of flood risk also exist outside the
currently mapped 100-year floodplain. While there are only a
small percentage of insured structures outside the 100-year
floodplain, about 30 percent of all current NFIP policies, they
account for a little over 20 percent of all NFIP losses. In
addition, structures in ``residual risk areas,'' including
those protected by flood control structures such as dams or
levees, are not currently required to purchase flood insurance.
While the risk of flooding for these properties may be low, a
flooding event caused by a breached or overtopped dam or levee
is likely to be widespread and cause significant flood damage.
Current mapping designations may not account for the nature of
the risk and level of protection offered by such structures,
which may lead consumers to underestimate their true risk of
flood damage.
These and other financial challenges facing the NFIP call
into question whether the program is actuarially sound in the
aggregate and whether it can remain financially viable absent
reform. While the program has been largely self-sustaining, the
catastrophic nature of the 2005 hurricane season, coupled with
the flood losses of 2004, has left FEMA heavily indebted to the
U.S. Treasury. Due to the structure and the current financial
situation of NFIP, reforms are needed.

PURPOSE OF THE LEGISLATION

This legislation makes several key reforms to ensure that
the NFIP can continue to operate, adequately identify areas at
risk of flood loss, inform property owners of their risks,
improve local mitigation options, ensure that at-risk property
owners purchase and maintain coverage and be self-sustaining.
This legislation will require FEMA to review flood
insurance rates and use actuarial principles in setting those
rates. FEMA will also be required to review and conduct
rulemaking on WYO company payments so that reimbursements and
actual administrative expenses are aligned. FEMA will also be
required to build up, over time, a reserve fund equal to one
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 having to lend taxpayer dollars to
pay for flood insurance claims in all but the most catastrophic
loss years. While most property owners are not expected to face
significant increases in charged premiums as a result of this
bill, certain structures will, over time, be required to pay
actuarial rates: non-primary residences, including vacation
homes and businesses, severe repetitive loss properties and
properties substantially damaged or improved.
Under this bill, additional property owners will be
required to purchase flood insurance. This legislation will
require flood coverage for property owners in residual risk
areas, those behind levees, downstream from dams, and near
other flood control structures. Flooding events and losses in
such areas in 2011 have demonstrated the need for purchase
requirements with pricing reflecting the actual level of risk
and flood protection. Property owners in the 100-year
floodplain with mortgages provided through state-regulated
lending institutions will now also be required to purchase
flood insurance. In addition, the bill requires that flood
insurance premiums be escrowed to ensure continuity of
insurance coverage. Notice will be provided to property owners
in the 500-year floodplain to inform them of their flood risks,
which may lead to more owners protecting their properties
through flood insurance.
The legislation also establishes a map modernization
program so that maps continue to be updated, made more
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.
Mitigation of risks remains an important component of the
NFIP. This legislation updates FEMA's existing mitigation grant
programs to streamline and improve communities' access to
existing mitigation funds. Among the streamlined programs is
the Severe Repetitive Loss Program.
The bill also establishes a Commission on Natural
Catastrophe Risk Management and Insurance that is to examine
the risks posed to the United States by natural catastrophes
and means for mitigating those risks and paying for losses, and
report to Congress on its findings and recommendations. The
Commission's examination is not limited to floods, but other
types of natural catastrophes as well, such as hurricanes,
earthquakes, volcanic eruptions, tsunamis, tornados, wildfires,
and droughts.

HEARINGS

Building upon the numerous hearings the Committee held in
the 109th and 110th Congresses, the Committee heard testimony
in the 111th Congress on September 22, 2010, regarding
proposals to reform the NFIP. The witnesses were: The Honorable
Roger Wicker, United States Senator, Mississippi; the Honorable
Richard Durbin, United States Senator, Illinois; Ms. Orice
Williams Brown, Director of the Office of Financial Markets and
Community Investment, U.S. Government Accountability Office;
Ms. Sally McConkey, Vice Chair, Association of State Floodplain
Managers; Mr. J. Nicholas D'Ambrosia, Vice President of
Training and Recruiting, Long & Foster Companies on behalf of
the National Association of Realtors; and Mr. Stephen Ellis,
Vice President, Taxpayers for Common Sense.
In the 112th Congress, the Committee held two hearings
regarding proposals to reform the NFIP. On June, 9, 2011, the
witnesses testifying were: The Honorable Roger Wicker, United
States Senator, Mississippi; and the Honorable William Craig
Fugate, Administrator, Federal Emergency Management Agency. On
June 23, 2011, the witnesses were: Ms. Orice Williams Brown,
Director of the Office of Financial Markets and Community
Investment, U.S. Government Accountability Office; Mr. Chad
Berginnis, Associate Director, The Association of State
Floodplain Managers; Mr. Adam Kolton, Executive Director,
National Advocacy Center, National Wildlife Federation, on
behalf of the Smarter Safer Coalition; Mr. Barry Rutenberg,
First Vice Chairman of the Board, National Association of Home
Builders; Mr. Travis B. Plunkett, Legislative Director,
Consumer Federation of America; and The Honorable Scott H.
Richardson, Partner, Richardson and Ritchie Consulting.

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Flood Insurance Reform and Modernization Act of 2011.

TITLE I--FLOOD INSURANCE REFORM AND MODERNIZATION

Section 101. Short title

Section 102. Findings

Section 103. Definitions

Includes definitions of 100-year floodplain, 500-year
floodplain, Administrator, National Flood Insurance Program,
and Write Your Own.

Section 104. Extension of National Flood Insurance Program

Reauthorizes the National Flood Insurance Program, and
financing authority, through 2016.

Section 105. Availability of insurance for multifamily properties

Allows multifamily residential buildings, designed for
occupancy of more than four families, to purchase flood
insurance up to the limits for business properties.

Section 106. Reform of premium rate structure

Requires the following pre-FIRM properties to pay actuarial
rates (rates that reflect the true risk of flooding) phased in
over four years: non-primary residences; severe repetitive loss
properties; any properties where flood losses have exceeded the
property value; any business property; and any property that
has sustained substantial damage or substantial improvement.
Requires that any premiums for a new flood insurance policy
for a property not covered by a flood insurance policy as of
the date of passage must be based on actuarial rates.
Allows FEMA to increase premiums by 15 percent per year, an
increase from the current 10 percent cap on annual increases.
Adds a requirement for FEMA to allow policyholders that are
not required to have their premiums escrowed every month with
their lender to pay their premiums in installments. FEMA
currently requires a single annual premium payment.

Section 107. Mandatory coverage areas

Expands the mandatory flood insurance purchase requirement
to encompass ``residual risk areas,'' including areas located
behind a flood control structure, such as a levee or dam. Once
residual risk areas in the United States are mapped, properties
in these areas will be required to purchase flood insurance.
The price of such policies must accurately reflect the actual
level of flood protection provided by the flood control
structure in the area, regardless of a flood control
structure's certification status. With this requirement,
policyholders protected by strong flood control systems will
benefit from policies reflecting their lower levels of risk.
Similarly, even policyholders near decertified flood control
systems will receive appropriate credit for the protection
provided by their local system.

Section 108. Premium adjustment

Requires that properties mapped into the 100-year
floodplain must pay rates reflecting their new risk
designation. Properties covered by flood insurance at the time
of re-mapping, as well as newly mapped properties, will have
the new rates phased-in over four years, with 40 percent of the
increase assessed in the first year, and assessments of 20
percent in each of the next three years.

Section 109. State chartered financial institutions

Requires the mandatory purchase of flood insurance for
properties located in the 100-year floodplain with mortgages
provided by state-regulated lending institutions. Mandatory
purchase is already required for properties with mortgages
provided by federally-regulated lending institutions.

Section 110. Enforcement

Increases penalties for lenders that fail to ensure
compliance with flood insurance purchase requirements.
Penalties are increased from $350 to $2000 per violation. This
section also removes the limit on annual penalties.

Section 111. Escrow of flood insurance

Requires that lending institutions escrow flood insurance
payments for properties that are located in mandatory purchase
areas.

Section 112. Minimum deductibles for claims under the National Flood
Insurance Program

Sets minimum deductibles. Minimum pre-FIRM property
deductibles will be: (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 be: (a) $1,000 for those with $100,000 of coverage or
less; or (b) $1,250 if the coverage is greater than $100,000.

Section 113. Considerations in determining chargeable premium rates

Requires FEMA to use actuarial principles in determining
rates, and to consider catastrophic loss years in the
calculation of the average historical loss year. FEMA prices
premiums to cover, in aggregate, claims expected in an average
historical loss year.

Section 114. Reserve fund

Requires FEMA to build up a reserve fund to help cover
losses in years where claims are higher than expected as
compared to losses in an average historical loss year. The
reserve fund must maintain a balance equal to a reserve ratio
of one percent of the sum of the total potential loss exposure
of outstanding policies. In order to reach this requirement,
FEMA will be required to put at least 7.5 percent of the
reserve ratio into the fund each year until the reserve ratio
is achieved.

Section 115. Repayment plan for borrowing authority

Requires the NFIP Administrator to submit a report and a
repayment plan to the U.S. Department of Treasury and Congress
Committees whenever FEMA has to borrow funds to pay for claims
under the NFIP.

Section 116. Payment of condominium claims

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 117. Technical Mapping Advisory Council

Re-establishes the Technical Mapping Advisory Council to
ensure that FEMA adopts meaningful standards for updating and
maintaining flood insurance rate maps. The Technical Mapping
Advisory Council will be comprised of government officials and
others with expertise in mapping. The Council 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.
Requires FEMA to report annually to Congress on
recommendations made by the Technical Mapping Advisory Council,
and actions taken by FEMA to address such recommendations.

Section 118. National Flood Mapping Program

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 residual risk areas, including those behind
flood control structures. 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.
Authorizes $400 million annually for mapping. Directs FEMA to
enhance communication and outreach to States, local
communities, and property owners regarding mapping changes and
mandatory purchase requirements.

Section 119. Scope of appeals

Permits community map appeals to address the Special Flood
Hazard Area boundary in addition to the Base Flood Elevation.

Section 120. Scientific Resolution Panel

Establishes an independent Scientific Resolution Panel that
will, in general, address mapping-related concerns from
communities that are dissatisfied with the outcome of their
appeal to FEMA. The provision would also authorize certain
communities that have already been re-mapped to use the new
Panel to rule on Letters of Map Revision.

Section 121. Removal of limitation on State contributions for updating
flood maps

Removes the restriction that States may only contribute up
to 50 percent of the cost of mapping and allows States to
invest additional funds for mapping.

Section 122. Coordination

Requires the various federal agencies to work together to
coordinate mapping and risk determination budgeting, and
requires the Office of Management and Budget, FEMA and others
to submit a joint report to Congress within 30 days of the
budget submission on crosscutting budget issues with respect to
mapping.

Section 123. Interagency coordination study

Requires FEMA to contract with the National Academy of
Public Administration to conduct a study on how FEMA can
improve interagency coordination on 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 124. Nonmandatory participation

Reaffirms that those in the 500-year floodplain are not
required to purchase flood insurance but requires that
communities be given notice when they are mapped into a 500-
year floodplain, and requires lenders to give notice to
purchasers or lessees of property in the 500-year floodplain.

Section 125. Notice of flood insurance availability under RESPA

Amends the Real Estate Settlements Procedures Act (RESPA)
and requires lenders provide a disclosure of the availability
of flood insurance under the NFIP and whether or not the
property is located in an area having special flood hazards to
all purchasers.

Section 126. Participation in State disaster claims mitigation

Requires FEMA, under certain circumstances, at the request
of a State insurance commissioner, to participate in State
sponsored, non-binding mediation to resolve insurance claims
disputes when a disaster has been declared and claims for other
types of insurance are also pending.

Section 127. Additional authority of FEMA to collect information on
claims payments

Requires the NFIP to collect from WYO companies information
and data as needed to determine the accuracy of the resolution
of flood claims under NFIP flood insurance policies following a
flood.

Section 128. Oversight and expense reimbursements of insurance
companies

Requires that FEMA collect accurate and adequate
information on WYO company expenses. Under this section, FEMA
is required to develop a methodology for determining what WYO
companies should be reimbursed for their activities under the
NFIP. All WYO companies will be required to submit data based
on that methodology. Using that data, FEMA will be required to
conduct a rulemaking on reimbursement rates to ensure that WYO
companies are being reimbursed based on actual expenses,
including standard business costs and operating expenses. GAO
will report to Congress on the efficacy of the rules.

Section 129. Mitigation

Reforms and streamlines existing FEMA mitigation programs.

Section 130. Flood protection structure accreditation task force

Requires FEMA and the Army Corps of Engineers, in
cooperation with the National Committee on Levee Safety, to
form a task force to better align the data that the Corps
collects during levee inspections with the data required under
FEMA's accreditation program.

Section 131. Flood in progress determinations

Requires FEMA to conduct a study examining, among other
things, the process for determining when a flood event has
commenced or is in progress for purposes of NFIP flood
insurance coverage. This section also clarifies the meaning of
``eligible coverage'' for purposes of recent Missouri River
flooding.

Section 132. Clarification of residential and commercial coverage
limits

Clarifies current statutory limits on coverage of multi-
business commercial structures.

Section 133. Local data requirement

Requires that FEMA re-map certain communities that were
originally mapped using data not specific to the community,
using locally relevant data.

Section 134. Eligibility for flood insurance for persons residing in
communities that have made adequate progress on the
construction, reconstruction, or improvement of a flood
protection system

Requires the Administrator to provide flood insurance at a
rate similar to that provided to people that reside behind a
completed levee, to people who live behind a levee, or other
flood control system, that is undergoing construction,
reconstruction, or improvements which the Administrator deems
to have met certain requirements regarding the current status
of the levee and a timetable for completion of the project.
Establishes a system of consultations between the levee owner
and the Administrator to determine if the construction,
reconstruction, or improvement project has a reasonable
likelihood of completion on schedule.

Section 135. Studies and reports

Requires FEMA to submit an annual report to Congress on its
activities and financial health, including the amount paid in
premiums; losses; expenses; number of policies; insurance in
force; estimate of average historical loss year; and a
description and amount of claims paid.
Requires GAO to conduct a study of pre-FIRM structures and
requires GAO, in consultation with the Department of Homeland
Security Office of Inspector General, to review the three
largest contractors used by FEMA in operating and managing the
flood insurance program.

Section 136. Reinsurance

Requires FEMA to conduct an assessment of the private
reinsurance market's capacity to assume a portion of the NFIP's
insurance exposure. The section clarifies that FEMA is
authorized to secure reinsurance from the private market. It
also requires FEMA to include in their annual report to
Congress an assessment of NFIP's ability to pay claims, as well
as any use of FEMA's authority to secure reinsurance.

Section 137. GAO study on business interruption and additional living
expenses coverage

Requires the GAO to conduct a study on the possibility of
including optional business interruption and/or additional
living expenses coverage, and the effects that these optional
coverage options could have on the NFIP.

Section 138. Policy disclosures

Requires additional disclosures for policies under the
NFIP, and provides for fines.

Section 139. Report on inclusion of building codes in floodplain
management criteria

Requires FEMA to conduct a study and report to
Congressional Committees regarding the impact, effectiveness,
and feasibility of amending section 1361 of the National Flood
Insurance Act of 1968 to include widely used and nationally
recognized building codes as part of the floodplain management
criteria.

Section 140. Study of participation and affordability for certain
policyholders

Requires FEMA to conduct a study on possible methods to
encourage and maintain participation in the NFLP, as well as
making the NFIP more affordable for certain people through
targeted assistance. The study also will include an economic
analysis provided by the National Academy of Sciences.

Section 141. Study and report concerning the participation of Indian
tribes and members of Indian tribes in the National Flood
Insurance Program

Requires the GAO to conduct a study and report to Congress
on the factors contributing to the currently low rate of
participation of Indian tribes and members of Indian tribes in
the NFIP, and methods which can be used to encourage more
participation by Indian tribes and their members.

Section 142. Technical corrections

TITLE II--COMMISSION ON NATURAL CATASTROPHE RISK MANAGEMENT AND
INSURANCE

Section 201. Short title

Section 202. Findings

Section 203. Establishment

Establishes a nonpartisan Commission on Natural Catastrophe
Risk Management and Insurance.

Section 204. Membership

Requires that the Commission be composed of 16
congressionally appointed members from a broad cross section of
subject matter experts.

Section 205. Duties of the Commission

Requires that the Commission examine the risks posed to the
United States by natural catastrophes and means for mitigating
those risks and for paying for losses caused by natural
catastrophes.

Section 206. Report

Requires that the Commission submit a report to
Congressional Committees no later than 9 months after the date
of the enactment of the title on its findings and
recommendations, unless the time is extended.

Section 207. Powers of the Commission

Authorizes certain powers with which the Commission will
conduct its duties, including scheduling of meetings and
obtaining data.

Section 208. Commission personnel matters

Requires the Commission to operate under certain personnel
rules.

Section 209. Termination

Requires that the Commission terminate 90 days after the
date on which it submits its report under Section 206.

Section 210. Authorization of appropriations

Authorizes congressional appropriations for this
Commission.

COST OF LEGISLATION

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

S. 1940--Flood Insurance Reform and Modernization Act of 2011

Summary: The legislation would authorize the National Flood
Insurance Program (NFIP) of the Federal Emergency Management
Agency (FEMA) to enter into and renew flood insurance policies
through fiscal year 2016. Under current law, the NFIP's
authority will expire on November 18, 2011.
The legislation would make a number of changes to the NFIP
aimed at improving the financial status of the program. Under
both current law and this legislation, the NFIP may borrow an
additional $3 billion from the Treasury (the program's current
debt stands at $17.8 billion). Assuming some probability of a
rare catastrophic event in the future, CBO expects that this
borrowing authority will be exhausted in 2014. The changes made
by the bill would improve the financial condition of the
program and reduce its need to borrow from the Treasury--a
source of direct spending--by a total of $380 million between
2012 and 2014, CBO estimates. However, because the program
would continue to operate with insurance premiums that are not
sufficient to cover all expected costs, CBO estimates that the
NFIP would still need to borrow up to the statutory limit by
2015 and that reduced borrowing from 2012 to 2014 would be
offset by increased borrowing in 2015, resulting in no net
effect on direct spending over the next 10 years.
Over the 2012-2021 period, CBO estimates that the changes
made by this legislation would increase net income to the NFIP
by about $4.7 billion, improving the financial status of the
program by that amount. However, under current law, the program
will not have enough resources to pay all of the claims that
will be due over that period. Therefore, we expect that
additional income earned by the program would be used to
fulfill obligations to flood insurance policyholders that would
otherwise be delayed, resulting in no net effect on direct
spending over the next 10 years.
The bill also would increase civil penalties on mortgage
lenders and government-sponsored enterprises that act in
violation of current law. Additional amounts collected under
the bill would be recorded as revenues and would total about $1
million per year, CBO estimates, reducing budget deficits by
$10 billion over the 2012-2021 period. Because enacting the
legislation would affect direct spending and revenues, pay-as-
you-go procedures apply.
CBO estimates that implementing the legislation would have
a discretionary cost of almost $1.6 billion over the 2012-2016
period, subject to appropriation of the necessary and specified
amounts. Most of that spending would be for FEMA's flood
mapping program. The bill also would authorize appropriations
for: mitigation grants, establishment of a Commission on
Natural Catastrophe Risk Management and Insurance, and numerous
studies and assessments undertaken by FEMA and the Government
Accountability Office (GAO).
The bill would impose intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA) by directing state
regulatory agencies to require, and state lenders to provide,
information on flood risk and insurance to more mortgage
borrowers. CBO estimates that the cost of those
intergovernmental mandates to state governments would be small
and well below the annual threshold established in UMRA ($71
million in 2011, 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 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 ($142 million in 2011, adjusted annually for inflation).
Estimated cost to the Federal Government: The estimated
budgetary impact of this legislation is shown in the following
table. The costs of this legislation fall within budget
function 450 (community and regional development).
Basis of estimate: For this estimate, CBO assumes that the
legislation will be enacted near the beginning of fiscal year
2012, that increases in insurance premiums for certain
properties will be implemented by the spring of 2012, and that
amounts specified and estimated to be necessary will be
appropriated for each year.

Background

Authority to Underwrite Coverage. The NFIP was established
to encourage the purchase of flood insurance by property owners
located in communities that adopt minimum guidelines for
floodplain management and enforce building codes designed to
mitigate flood damages. Flood insurance coverage is mandatory
for properties located within an area designated as having at
least a 1 percent chance of being flooded in any year (such an
area is known as a Special Flood Hazard Area, or SFHA) and
financed by a federally regulated lending institution,
government-sponsored enterprise for housing, or federal lender.
Property owners not receiving financing from those entities or
located outside a SFHA may purchase flood insurance coverage
from a private carrier or the NFIP at their discretion. Under
current law, FEMA is authorized to underwrite the sale and
renewal of flood insurance policies through November 18, 2011.

TABLE 1.--ESTIMATED BUDGETARY IMPACT OF THE FLOOD INSURANCE REFORM AND MODERNIZATION ACT AS ORDERED REPORTED BY THE SENATE COMMITTEE ON BANKING,
HOUSING, AND URBAN AFFAIRS ON SEPTEMBER 8, 2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
------------------------------------------------------------------------------------------
2012- 2012-
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2016 2021
--------------------------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN DIRECT SPENDING

Estimated Budget Authority................................... -25 -125 -230 380 0 0 0 0 0 0 0 0
Estimated Outlays............................................ -25 -125 -230 380 0 0 0 0 0 0 0 0

CHANGES IN REVENUES

Increased Civil Penalties.................................... 1 1 1 1 1 1 1 1 1 1 5 10

NET INCREASE OR DECREASE (-) IN THE DEFICITS FROM CHANGES IN DIRECT SPENDING AND REVENUES

Impact on Deficit............................................ -26 -126 -231 379 -1 -1 -1 -1 -1 -1 -5 -10

CHANGES IN SPENDING SUBJECT TO APPROPRIATION

Flood Mapping Program:
Authorization Level...................................... 400 400 400 400 400 0 0 0 0 0 2,000 2,000
Estimated Outlays........................................ 80 240 320 400 400 320 160 80 0 0 1,440 2,000
Mitigation Assistance Grants:
Authorization Level...................................... 40 40 40 40 40 40 40 40 40 40 200 400
Estimated Outlays........................................ 2 8 20 34 38 40 40 40 40 40 102 302
Commission on Natural Catastrophe Risk Management and
Insurance:
Estimated Authorization Level............................ 2 0 0 0 0 0 0 0 0 0 2 2
Estimated Outlays........................................ 2 0 0 0 0 0 0 0 0 0 2 2
Studies and Reports:
Estimated Authorization Level............................ 6 1 1 1 1 1 1 1 1 1 10 15
Estimated Outlays........................................ 6 1 1 1 1 1 1 1 1 1 10 15
Total Changes:
Estimated Authorization Level........................ 448 441 441 441 441 41 41 41 41 41 2,212 2,417
Estimated Outlays.................................... 90 249 341 435 439 361 201 121 41 41 1,554 2,319
--------------------------------------------------------------------------------------------------------------------------------------------------------

Subsidized Premiums. Throughout the program's history, FEMA
has charged premiums well below the amount necessary to offset
the expected cost (also known as the full-risk or actuarial
cost) for properties built before a community's Flood Insurance
Rate Map (FIRM) was completed, or before 1975, whichever is
later. Those properties, known as pre-FIRM properties, make up
over 20 percent of all NFIP policies. FEMA estimates that pre-
FIRM policyholders pay average premiums that are about 40
percent to 45 percent of the full-risk cost. Owners of some
post-FIRM properties also pay discounted premiums under current
law; however, they are few in number (less than 1 percent of
all NFIP policies) relative to pre-FIRM properties. It is
unclear whether other property owners receive premium subsidies
not directly specified in law.\1\ For this estimate, CBO
assumes that all policies not directly receiving subsidies will
generate a sufficient amount of income to cover expected claims
and related expenses over time.
---------------------------------------------------------------------------
\1\See Congressional Budget Office, The National Flood Insurance
Program: Factors Affecting Actuarial Soundness (November 2009).
---------------------------------------------------------------------------
Ability to Pay Claims and Other Expenses. The National
Flood Insurance Fund (NFIF) is the sole source of claims
payments and other expenses associated with the NFIP. Under
current law, the fund is credited with premium and fee receipts
from policyholders, annual appropriations, interest earned on
fund balances, and amounts borrowed from the Treasury. As of
July 2011, the NFIP insured approximately 5.6 million policies
with written annual premiums in place of $3.4 billion. For
fiscal year 2011, the Congress provided the fund with $169
million in appropriations, offset by an equivalent amount of
additional fee collections from policyholders (see Public Law
112-10). No interest income will be earned and no borrowing is
expected to occur this year, CBO estimates.
The majority of the NFIP's expenses consist of payments for
insured claims resulting from outstanding coverage in place,
which currently stands at about $1.2 trillion. FEMA estimates
that claims payments and other delivery and underwriting
expenses in 2011 will total about 80 percent of premium and fee
income, based on the historical experience of policies and
coverage amounts for properties currently insured by the
program. Actual expenses for insured claims, however, have
varied widely by year, ranging from less than 10 percent of
premiums to almost 800 percent of premiums (based on calendar
year totals).
In most years, annual appropriations along with premium and
fee income have been sufficient to cover the annual expenses of
the NFIP. Prior to 2005, it was occasionally necessary for the
program to borrow from the Treasury to meet expenses during
greater-than-average loss years; however, that borrowing was
relatively small (less than $1 billion) and was repaid with
interest. Nonetheless, because of the large subsidy that exists
for many policies, CBO estimates that the program will--on
average--have greater annual expenses than revenue. This
differential became apparent in the aftermath of Hurricanes
Katrina, Rita, and Wilma in 2005. Because of the severe and
widespread damages experienced during those storms, the program
borrowed an unprecedented $16.7 billion in fiscal year 2006 to
cover claims and interest expenses. NFIP's current debt to the
Treasury stands at $17.8 billion. It is highly unlikely that
the program will have sufficient income to repay those borrowed
funds within the next 10 years.
Assuming actuarial-level losses in 2012 and beyond, the
NFIP will need to continue borrowing from the Treasury until
its line of credit (currently set at $20.7 billion) is
exhausted, which CBO estimates will occur in 2014 under current
law.\2\ At this point, because expenses of the program may only
be paid to the extent that resources in the NFIF are available,
net spending would be zero for a given fiscal year. Payments
for claims and other expenses would be delayed until sufficient
resources became available to the NFIF from premium and fee
collections. If the delay for such claims were to become
untenable, policyholders might seek claims payments through a
lawsuit. It is unclear how that matter would be resolved.
---------------------------------------------------------------------------
\2\Actuarial-level losses take into account the full range of
possible losses, including rare catastrophic events like Hurricane
Katrina.
---------------------------------------------------------------------------

Direct spending and revenues

CBO estimates that enacting this legislation would have no
net impact on direct spending over the 2012-2016 or 2012-2021
periods. We estimate that enacting the bill would increase
revenues from the collection of civil penalties by about $1
million per year over those periods.
Section 104 of the legislation would provide FEMA with the
authority to continue selling and renewing policies through
fiscal year 2016. While this authority would otherwise expire
in fiscal year 2012, the program is assumed to continue in the
CBO baseline, consistent with rules governing baseline
projections of mandatory programs. Thus, extending the NFIP
under this legislation would have no effect on direct spending
relative to the baseline.
In addition to extending the NFIP, the legislation would
make a number of changes to the program. The changes that would
affect direct spending are:
Premium increases for some pre-FIRM
policyholders;
Temporarily discounted premiums for new and
existing policyholders that are required to pay a
higher premium under a revised FIRM; and
Required capitalization of a reserve fund.
The aggregate budgetary effects of those changes are shown
in Table 2.
The bill also would increase the minimum policy deductible
and the average annual limit on premium growth. CBO estimates
that those changes would not affect net direct spending.
Overall, CBO estimates that changes made by this
legislation would increase net income to the NFIP by $380
million through 2014. CBO expects that the flood insurance
program will not have exhausted its remaining borrowing
authority during this period. Therefore, additional net income
of the NFIP over that period would reduce expected borrowing
from the Treasury--a source of direct spending. However,
assuming annual program deficits, CBO estimates that any
reduction in direct spending in those years would be offset by
increased direct spending financed by additional borrowing in
2015 (up to the limit on the NFIP's borrowing from the
Treasury), resulting in no net effect on the federal budget
over the next 10 years.\3\ After the borrowing authority of the
NFIP has been exhausted, the changes made by the legislation
would not affect net direct spending because CBO expects that
any additional income earned by the program would be used to
fulfill obligations (mostly claims payments) that would
otherwise be delayed. However, enactment of the legislation
would improve the financial status of the program by reducing
this ``backlog'' of unfulfilled payments. Under current law,
CBO estimates that delayed payments would total $3.6 billion by
2016 and $12.6 billion by 2021. Under this legislation, we
estimate that the ``backlog'' would total $2.3 billion in 2016
and $8.0 billion in 2021, a reduction of about $1.3 billion and
$4.7 billion, respectively.
---------------------------------------------------------------------------
\3\CBO estimates that changes made by the legislation would reduce
the aggregate subsidy built into premiums under current law by about 50
percent by 2021; however, because the legislation would not completely
eliminate subsidies for all policies, we estimate that the program
would typically continue to operate with a deficit.

TABLE 2.--CHANGE IN NET INCOME TO THE NFIP UNDER THE FLOOD INSURANCE
REFORM AND MODERNIZATION ACT OF 2011 OVER SELECTED TIME PERIODS
------------------------------------------------------------------------
By fiscal year, in millions of
dollars--
--------------------------------------
2012-2014 2012-2016 2012-2021
------------------------------------------------------------------------
Receipts:
Premium Increases for Some 362 1,310 4,565
Pre-FIRM Policies...........
Temporarily Discounted -12 -20 -50
Premiums....................
Additional Premiums to 50 154 775
Capitalize Reserve Fund.....
--------------------------------------
Total Changes to Receipts 400 1,444 5,290
Expenses:
Increased Payments to WYO 120 438 1,600
Companies...................
Reduced Claims Due to Dropped -100 -274 -975
Policies....................
--------------------------------------
Total Changes to Expenses 20 164 625

Change in Net Incomea............ 380 1,280 4,665
Cumulative Net Effect on Direct -380 0 0
Spending........................
------------------------------------------------------------------------
aAfter the NFIP's borrowing authority has been exhausted, changes in net
income are reflected as a corresponding increase or decrease in the
delayed payments of claims and do not affect direct spending.
Note: FIRM = Flood Insurance Rate Map; WYO = Write-Your-Own.

Premium Increases for Some Pre-FIRM Properties. Section 106
would direct FEMA to increase flood insurance premiums for
certain pre-FIRM properties, including nonresidential
properties, nonprimary residences, and severe repetitive loss
properties (defined as residences with at least four paid
claims greater than $5,000 or with two paid claims that
cumulatively exceed the market value of the house). Following
the first rate adjustment that occurs at least three months
after enactment (which CBO assumes would take place in the
spring of 2012), policyholders of properties fitting the
criteria of the bill would begin receiving premium increases of
25 percent per year until the amount collected covers the full
cost of the insurance.\4\ New policies that fit such criteria
would pay the full-risk premium beginning three months after
enactment.
---------------------------------------------------------------------------
\4\The 25 percent would include some increase that FEMA would have
applied to the policy under current law; thus, the increase in the per-
policy premium attributable to this legislation would be less than 25
percent.
---------------------------------------------------------------------------
Based on current policy information obtained from FEMA, CBO
estimates that more than 440,000 existing policies would be
subject to such premium increases under this provision. Those
policyholders currently pay an average premium of about $1,174
per year. Once subsidies are completely phased out, we expect
that annual premiums for those policies would be, on average,
about two and one-quarter times greater than the premium that
would otherwise be charged under current law. While some
policyholders would reduce or eliminate coverage as a result of
those increases, CBO estimates that any resulting decrease in
premium receipts would be more than offset by increases from
properties that remain in the program.
Additional premium receipts from pre-FIRM policyholders
would total about $1.3 billion over the 2012-2016 period and
about $4.6 billion over the next 10 years, CBO estimates. Under
current agreements, Write-Your-Own (WYO) companies would
receive a portion of that additional premium (about 30
percent), as shown in Table 2, to offset an increase in
expenses. Subsidized policyholders that drop out of the NFIP
would save the program the cost of paying claims on those
policies, resulting in a decrease in expenses. As a whole, CBO
estimates that implementing the premium increases outlined in
the legislation would increase net income to the NFIP by $1.2
billion over the next five years and by about $3.9 billion over
the 2012-2021 period.
Temporarily Discounted Premiums. Section 108 would direct
FEMA to phase in increases to the premiums it charges as a
result of an updated FIRM. The phase-in would occur over a
four-year period following the effective date of the updated
map. In the first year, policyholders would pay 40 percent of
the increase they would otherwise be charged. In each year
thereafter, premiums would increase by an additional 20 percent
until the full increase is implemented in the fourth year.
For some properties newly mapped into a SFHA, FEMA would
charge a higher premium under this section than would otherwise
be charged under current law. This assumes that FEMA's
Preferred Risk Policy (PRP) Extension program, currently
available to properties newly mapped into a SFHA, is
discontinued.\5\ For some policies, the aggregate discount
under the PRP Extension program would be greater than the
discount those policies would receive under this bill. For some
other policies, including those not eligible for the PRP
Extension program, the aggregate discount under the bill would
be greater. On net, CBO estimates that implementing this
section would decrease premiums received from properties newly
mapped into a SFHA by $50 million over the next 10 years
relative to current law. Net income to the NFIP would fall by a
lesser amount ($35 million) because of reduced payments to WYO
companies.
---------------------------------------------------------------------------
\5\For properties newly mapped into a SFHA after October 1, 2008,
that previously qualified for a PRP premium (that is, could not have
two or more claims or disaster relief payments of $1,000 or more, or
three losses or payments of any kind), FEMA currently offers a discount
equal to the difference between the premium the policyholder would have
paid and the PRP premium. That discount is available for two years. For
properties mapped into a SFHA after October 1, 2008, and before January
1, 2011, the discounted premium is available for the two policy years
effective between January 1, 2011, and December 31, 2012.
---------------------------------------------------------------------------
For properties already located within the 100-year
floodplain, the net effect of this provision is less certain.
Under current law, an existing policyholder determined to be at
a higher risk under an updated map is ``grandfathered'' into
the lower-risk class as long as the policy remains active.
Those policies might see premium increases under this bill;
however, those increases would be offset by new policies that
receive a discount. CBO does not have sufficient data to
estimate the number of policies that are currently
``grandfathered'' into lower-risk classes nor the number of new
policies already in an SFHA that would receive a discount under
the bill.
Require Capitalization of a Reserve Fund. Section 114 would
require FEMA to establish a National Flood Insurance Reserve
Fund with a balance equal to at least 1 percent of flood
insurance coverage in place during the previous year. While the
bill does not specify a date for full capitalization, the NFIP
would be required to deposit an amount into the fund equal to
at least 7.5 percent of the target ratio each year. Under the
legislation, FEMA would have the authority to increase premiums
each year (up to the 15 percent maximum allowed by the bill) as
necessary to make the required deposit; however, a smaller
deposit would be allowed in years when excess premium receipts
were less than sufficient (due to higher-than-expected
expenses).
Under current law, FEMA charges flood insurance premiums
that are greater than the historical average cost of such
coverage.\6\ The main purpose of such charges is to build
surpluses (or pay down debt) for future years when costs may be
greater than historical averages. Because the reserve fund
would be used for a similar purpose, CBO assumes that FEMA
would adjust premiums so that aggregate receipts would exceed
historical average costs by an amount roughly equal to the
required contribution to the fund under the bill. Thus, during
a year when costs equal historical averages, the program would
collect exactly enough to make the full required deposit. Using
this approach and assuming historical premium growth and
insurance coverage growth of about 5 percent, CBO estimates
that the aggregate premiums that would be collected under
current law would not be sufficient during a historical average
year to make the capital deposit required by the bill.
Therefore, CBO expects that FEMA would increase premiums as a
result of this provision. We estimate that those additional
premiums would increase the net income of the NFIP by about
$735 million over the next 10 years after accounting for
additional payments made to WYO companies.
---------------------------------------------------------------------------
\6\The historical average cost for a flood insurance policy is not
necessarily equal to the full-risk, or actuarial, cost. Historical
average costs reflect actual losses observed over some period of time
(in this case, between 1978 and 2008) and does not include the full
range of possible losses that have not yet occurred. Because of this,
actuarial loss estimates are much greater than historical costs for
some properties.
---------------------------------------------------------------------------
Increase in the Minimum Policy Deductible. Section 112
would increase the minimum deductible for some flood insurance
policies. For the current policy year (which began in October
2010), the standard deductible is $2,000 for most subsidized
properties and $1,000 for nonsubsidized properties; however,
pre-FIRM policyholders may reduce that deductible by $1,000 in
exchange for a higher premium.
CBO estimates that about 255,000 pre-FIRM policies
currently carry deductibles below levels required by the bill
and thus would be affected by this provision. We do not have
enough information to determine the number of post-FIRM
policies that would be affected. By increasing the insurance
deductible on some flood insurance policies, this legislation
would reduce average insured claims. However, because the bill
would not change the amount of subsidized coverage, we expect
that premium receipts would decline by an equivalent amount
over time, resulting in no net impact to the NFIP or the
federal budget.
Increase in Average Annual Limit on Premium Growth. Section
106 would authorize the NFIP to increase premiums within a
specific risk category by an average of up to 15 percent per
year. Under current law, the limit is 10 percent. Based on
historical experience, CBO assumes that raising this limit
would not result in annual premium increases of more than 10
percent for most subsidized policies (with the exception of
policies that would receive larger premium increases because of
other sections of this legislation). (Under both current law
and this legislation, actuarially rated policies are assumed to
receive premium increases necessary to cover the full cost of
the coverage but not additional amounts to subsidize those
policyholders that pay insurance premiums that are below
actuarial rates.) Therefore, implementing this provision would
have no net effect on the NFIP or the federal budget.
Civil Penalties. Section 110 would increase the civil
penalty from $350 to $2,000 for lenders and government-
sponsored enterprises that violate current law and would
eliminate the limit on the aggregate amount of penalties that
could be assessed on any single institution in one year. CBO
estimates that the increased revenues from penalty collections
would amount to about $1 million a year.
Study on Affordability. Section 140 would authorize FEMA to
use up to $750,000 from the NFIP to conduct a study on the
participation and affordability of flood insurance for certain
eligible policyholders. Spending for the study would not be
subject to appropriation. CBO estimates that enacting this
provision would increase costs to the NFIP, and thus reduce net
income to the program, by $750,000 in 2012, requiring
additional borrowing in that year. The additional borrowing in
2012 would be offset by reduced borrowing in 2015 (when CBO
expects that the NFIP's ability to borrow would be exhausted),
resulting in no net impact on the federal deficit over the next
10 years.

Changes subject to appropriation

CBO estimates that the discretionary costs of implementing
this bill would be about $1.6 billion over the 2012-2016
period, subject to appropriation of the necessary amounts.
Flood Mapping Program. Section 118 would authorize the
appropriation of $400 million for each of fiscal years 2012
through 2016 to update and maintain flood maps. In 2011, the
Congress provided $182 million for this activity (see Public
Law 112-10).\7\ Under the bill, FlRMs would be regularly
updated to include all populated and potentially populated
areas located in the 100- and 500-year floodplains, areas of
residual risk, and the level of protection provided by flood
control structures. Based on historical spending patterns, CBO
estimates that implementing this provision would cost about
$1.4 billion over the 2012-2016 period and an additional $560
million in later years.
---------------------------------------------------------------------------
\7\That law also made available up to $147 million for floodplain
management and mapping; however those amounts were to offset through
additional collections from policyholders through the Federal Policy
Fee.
---------------------------------------------------------------------------
Mitigation Assistance Grants. Section 129 would consolidate
several existing mitigation programs of the NFIP and would
increase authorized spending for those programs by a total of
$40 million a year. Under current law, FEMA operates three
separate programs that provide grants to state and local
governments to purchase, relocate, or elevate NFIP-insured
properties--the Flood Mitigation Assistance (FMA) program, the
Repetitive Flood Claims (RFC) program, and the Severe
Repetitive Loss (SRL) program. Current law authorizes the
appropriation of $40 million and $10 million per year,
respectively, for the FMA and RFC programs. The SRL program is
not authorized in fiscal year 2012 or beyond under current law.
The legislation would consolidate the three existing
mitigation programs of the NFIP into a Mitigation Assistance
Grant program and would authorize the appropriation of $90
million per year--an increase of $40 million over current law--
for those activities. The bill also would adjust the federal
cost share and allow for grants to be made directly to property
owners in certain cases. Based on historical spending for flood
mitigation activities, CBO estimates that implementing this
provision would cost $102 million over the 2012-2016 period,
assuming appropriation of the specified amounts.
Commission on Natural Catastrophe Risk Management and
Insurance. Title II of the legislation would establish a 16-
member Commission on Natural Catastrophe Risk Management and
Insurance. The commission would report to the Congress on
various aspects of public and private insurance markets and
efforts to mitigate losses in future disasters within one year
after enactment. The commission would terminate 90 days after
issuing this report. Based on historical costs for current and
previous commissions of similar size and scope, CBO estimates
that implementing this provision would cost $2 million in 2012,
assuming appropriation of the necessary amounts.
Studies and Reports. The legislation would direct FEMA and
GAO to conduct studies and issue reports on a number of topics.
Some of those studies, including research on expanding the
program to include coverage for business interruption and
living expenses, the purchase and affordability of reinsurance,
inclusion of building codes, and reimbursement expenses of WYO
companies, would conclude after a set period of time. Other
reports on interagency coordination, program activities, and
claim-paying ability would occur annually. Based on the cost of
similar studies, CBO estimates that producing the reports
required under the legislation would cost about $10 million
over the next five years, assuming the availability of
appropriated funds.
Other Discretionary Changes. The legislation would make a
number of other changes that CBO estimates would not affect net
discretionary spending for the NFIP. Those changes include
establishing a Technical Mapping Advisory Council (section 117)
and a Scientific Resolution Panel (section 120). The Technical
Mapping Advisory Council would be an 18-member council that
would review and recommend new and existing mapping standards
for FIRMs. The five-member Scientific Resolution Panel would
assist in settling disputes between FEMA and communities
related to revisions to a flood map.
Under current law, spending for floodplain management
activities (which CBO assumes would include operations of the
Technical Mapping Advisory Council and the Scientific
Resolution Panel) are subject to approval in appropriation
acts. FEMA is authorized to offset those costs through the
collection of a fee (known as the Federal Policy Fee) from
policyholders. As such, CBO estimates that implementing this
section would have no net effect on discretionary spending over
the next five years, assuming appropriations of the necessary
amounts and corresponding increases in fee collections.
Pay-As-You-Go considerations: The Statutory Pay-As-You-Go
Act of 2010 establishes budget-reporting and enforcement
procedures for legislation affecting direct spending or
revenues. The net changes in outlays and revenues that are
subject to those pay-as-you-go procedures are shown in the
following table.

CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR THE FLOOD INSURANCE REFORM AND MODERNIZATION ACT OF 2011 AS ORDERED REPORTED BY THE SENATE COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS ON SEPTEMBER 8, 2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
------------------------------------------------------------------------------------------------
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012-2016 1012-2021
--------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE OR DECREASE (-) IN THE DEFICIT

Statutory Pay-As-You-Go Impact......................... -26 -126 -231 379 -1 -1 -1 -1 -1 -5 -5 -10
Memorandum:
Changes in Outlays................................. -25 -125 -230 380 0 0 0 0 0 0 0 0
Changes in Revenues................................ -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -5 -10
--------------------------------------------------------------------------------------------------------------------------------------------------------

Estimated impact on state, local, and tribal governments:
The bill would impose intergovernmental mandates as defined in
the Unfunded Mandates Reform Act. 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 directly offer mortgages to provide such information and
to notify borrowers about how to continue flood insurance
coverage once the mortgage is repaid in full. Based on
conversations with industry representatives, CBO estimates that
the cost to 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 for
intergovernmental mandates ($71 million in 2011, adjusted
annually for inflation).
Estimated impact on the private sector: 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 floodplain to notify the purchaser or lessee and
the servicer of the loan that such property is located in the
500-year 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. Finally, the bill would require lenders to
provide all purchasers a disclosure of the availability of
flood insurance under the Real Estate Settlements Procedures
Act. According to industry representatives, the cost for
mortgage lenders to provide the additional notices and
information 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 for private-sector mandates established in UMRA ($142
million in 2011, adjusted annually for inflation).
Previous CBO estimate: On June 8, 2011, CBO transmitted a
cost estimate for H.R. 1309, the Flood Insurance Reform Act of
2011, as ordered reported by the House Committee on Financial
Services on May 13, 2011. CBO estimates that both this
legislation and H.R. 1309 would have no net impact on direct
spending over the 2012-2016 and the 2012-2021 periods. This
legislation would increase federal revenues by about $1 million
a year more than H.R. 1309 because of additional civil
penalties for lenders and other entities included in the bill.
CBO estimates that enacting this legislation would increase
net income to the NFIP by about $500 million more than H.R.
1309 over the next 10 years. This difference mainly results
from the faster phase-in of actuarial rates for certain pre-
FIRM properties and the expected collection of additional
premiums to capitalize the reserve fund under this bill. CBO
expects that fewer pre-FIRM policies would be subject to
premium increases under this legislation, relative to H.R.
1309; that would only partially offset the increase in net
income to the NFIP attributable to other effects.
CBO estimates that the discretionary cost for this
legislation would be $1.2 billion higher over the 2012-2016
period than that for H.R. 1309. About $1.1 billion of that
difference would be for FEMA to revise and update flood maps.
The majority of the remaining difference is attributable to
additional funding for mitigation grants under this bill. (H.R.
1309, as passed by the House of Representatives on July 12,
2011, includes a similar increase in funding for mitigation
grants, but that provision was not a part of the version
estimated by CBO.)
H.R. 1309 also contains a mandate on private mortgage
lenders that would require them to accept flood insurance from
a private company if the policy fulfills all federal
requirements for flood insurance. The bill would also require
such mortgage lenders to include specific information about the
availability of flood insurance in each good-faith estimate.
Those mandates are not contained in the Senate legislation; CBO
estimated that the cost of complying with those mandates would
be small and fall below the annual threshold.
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 deficiencies
within the structure of the NFIP. Section 109 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, 2011. 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 110 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 110
also eliminates the $100,000 annual cap that regulators may
impose on financial institutions to ensure compliance with this
Act. Section 111 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. Department of Treasury and
is also consistent with the goal of working to eliminate some
portion of the 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 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 September 8, 2011, the Committee unanimously approved a
motion by Senator Johnson 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.