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From Banking and Finance Law Daily, March 14, 2014

Congress sends bipartisan flood insurance measure to President

By J. Preston Carter, J.D., LL.M.

The Senate has passed a measure intended to help protect homeowners from facing soaring Federal Emergency Management Agency (FEMA) flood insurance premium rate hikes. As flood zones are updated as a result of implementation of the Biggert-Waters National Flood Insurance Reform Act, many homeowners have been placed into a flood zone for the first time and are being required to pay thousands of dollars in premiums under new flood insurance rate rules. The Homeowner Flood Insurance Affordability Act (H.R. 3370), approved by a vote of 77 to 22, will delay the implementation of FEMA’s new flood maps until the agency completes an affordability study. The legislation also includes a provision that would compensate homeowners when they successfully appeal their placement into a flood zone.

The following measures of H.R. 3370 are intended to prevent sharp rate increases:

  • Create a firewall on annual rate increases. The measure prevents FEMA from raising the average rates for a class of properties above 15 percent and from raising rates on individual policies above 18 percent per year for virtually all properties.

  • Repeal the property sales trigger. H.R. 3370 repeals the provision in Biggert-Waters that required homebuyers to pay the full-risk rate for pre-Flood Insurance Rate Map (FIRM) properties at the time of purchase. This provision caused property values to steeply decline and made many homes unsellable, hurting the real estate market. Under the bill, homebuyers will receive the same treatment as the home seller.

  • Repeal the new policy sales trigger. The bill repeals the provision in Biggert-Waters that required pre-FIRM property owners to pay the full-risk rate if they voluntarily purchase a new policy. This provision disincentivizes property owners from making responsible decisions and could hurt program participation. The bill allows pre-FIRM property owners to voluntarily purchase a policy under pre-FIRM conditions.

  • Reinstate grandfathering. The measure repeals the provision in Biggert-Waters that would have terminated grandfathering. If grandfathering was terminated, property owners mapped into higher risk would have to either elevate their structure or have higher rates phased in over five years. The bill allows grandfathering to continue and sets hard caps on how high premiums can increase annually.

  • Refund homeowners who overpaid. The bill requires FEMA to refund policyholders for overpaid premiums.

  • Establish an affordability goal. H.R. 3370 requires FEMA to minimize the number of policies with annual premiums that exceed one percent of the total coverage provided by the policy.

The Homeowner Flood Insurance Affordability Act also establishes the following requirements to enhance FEMA transparency and outreach:

  • Reimburse successful appeals. The measure allows FEMA to utilize the National Flood Insurance Fund to reimburse policyholders and communities who successfully appeal a map determination. FEMA currently has the authority to reimburse successful appeals of map findings, but Congress has never appropriated funding for this purpose. Making appeal reimbursement an eligible expense of the NFIF would give FEMA the incentive to “get it right the first time” and repay homeowners and communities for contributing to the body of flood risk knowledge.

  • Flood Insurance Advocate. A Flood Insurance Advocate is established within FEMA to answer current and prospective policyholder questions about the flood mapping process and flood insurance rates. The Flood Insurance Advocate will be responsible for educating policyholders about their individual flood risks, their options in choosing a policy, assisting property owners through the map appeals process, and improve outreach and coordination with local officials, community leaders, and Congress.

  • Urban mitigation fairness. The bill requires FEMA to establish guidelines on alternative mitigation methods for urban structures where tradition mitigation efforts such as elevation are impractical. This section makes clear that such alternative forms of mitigation must be taken into account in the calculation of risk premium rates.

  • Clear communication. FEMA is required to clearly communicate full flood risk determinations to policyholders even if their premium rates are less than full risk. This helps to inform policyholders as to their true flood risk.

  • Fairness for small businesses, houses of worship, non-profits, and low-income homes. FEMA is also required to report to Congress on the impacts of rate increases on small businesses, non-profit entities, houses of worship, and residences with a value equal to less than 25 percent of the area median home value. If FEMA determines there is an effect on affordability for these properties, it must provide recommendations to Congress within three months after making the determination.

  • Mapping accuracy. FEMA must certify its mapping process is technologically advanced and to notify and justify to communities that the mapping model it plans to use to create the community’s new flood map is appropriate. Also FEMA must send communities being remapped the data being used in the mapping process.

  • Notification. Finally, H.R. 3370 requires FEMA, at least six months prior to implementation of rate increases as a result of the measure’s enactment, to make publicly available the rate tables and underwriting guidelines that provide the basis for the change, providing consumers with greater transparency.

Menendez response. Sen. Robert Menendez (D-NJ) authored and first introduced the bill in October 2013 on the one-year anniversary of Superstorm Sandy. This legislation passed overwhelmingly in the Senate in January 2014. A companion version—modified in consultation with Menendez—passed the House of Representatives last week (see Banking and Finance Law Daily, March 5, 2014). The bill will now be sent to President Obama for his signature.

Menendez said "we have averted the manmade perfect storm that would have crushed thousands of families under the weight of skyrocketing flood insurance rates, forced many from their homes, plummeted property values and destroyed entire communities."

Warren relieved. Reaction in the Senate to the bill's passage has been largely positive. Sen. Elizabeth Warren (D-Mass) indicated that she was "relieved" that the Senate passed the measure so that homeowners would be protected from "unaffordable and unexpected flood insurance rate hikes."

Hagan amendment. Included in the measure as passed was an amendment by Sen. Kay Hagan (D-NC) intended to ensure that ensures borrowers with certain types of residential loans, including second mortgages or loans to purchase a property with an already existing master policy such as a condo, are not forced to escrow flood insurance premiums twice or go through the laborious process of proving to a lender that they already have coverage.

Reed amendment. The bill also includes an amendment by Sen. Jack Reed (D-RI) requiring FEMA to study the possibility of making voluntary, community-based flood insurance policies available through the National Flood Insurance Program.

Bi-partisan support. Following the Senate vote, Sen. Jeff Merkley (D-Ore) said, “I’m glad Congress has been able to put aside the partisan gridlock and work to find a real solution that makes a big difference for middle class families.”

According to Sen. Pat Toomey (R-Pa), the measure includes his two goals for flood insurance reform: easing the burden of sudden rate increases and protecting the flood insurance program’s sustainability.

“At a time when many Americans are still struggling to pay the bills each month from a slowly recovering economy, it is unacceptable that hundreds of thousands of homeowners have faced unreasonable and unmanageable increases to their flood insurance premiums,” said Sen. Joe Manchin (D-WVa). “I’m pleased that members of Congress from both chambers have come together to relieve hardworking American homeowners from these drastic rate increases.”

Senator Heidi Heitkamp (D-ND) applauded passage of the bill and noted that it includes a provision offered by her and Sen. John Hoeven (R-ND) to continue the basement exception, allowing communities to continue using floodproofed basement credits if they floodproofed their basements.

Senator Richard Blumenthal (D-Conn) said the measure will help millions of homeowners across the country from becoming “victims of pernicious premium increases. I look forward to the President signing this bill into law.”

Representative Patrick Murphy (D-Fla), who voted for the measure in the House, also applauded the Senate’s swift action on the flood insurance fix.

Industry approval. In a joint press release, the American Bankers Association and the American Bankers Insurance Association stated that the bill “addresses National Flood Insurance Program affordability issues and corrects other unintended consequences resulting from earlier reform efforts. It also addresses problems relating to escrow accounts for NFIP policyholders which have imposed unnecessary and costly new requirements on borrowers, lenders and servicers, driving up the cost of flood insurance.”

The Independent Community Bankers of America stated that the bill would prevent sharp flood insurance rate hikes while ensuring the actuarial soundness of the National Flood Insurance Program. However, the organization remains concerned with the impact of higher premiums on commercial properties, which will continue to face rate hikes under the Biggert-Waters Flood Insurance Reform Act of 2012.

Prior to the Senate vote, ICBA President & CEO Camden R. Fine sent a letter to the Senate urging passage of the measure which would “provide relief from flood insurance premium ‘shock’ that is depressing home values and freezing the real estate market in certain communities.”

Companies: American Bankers Association; American Bankers Insurance Association; Independent Community Bankers of America

MainStory: TopStory FinancialStability FloodInsurance

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