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From Banking and Finance Law Daily, March 5, 2014

House passes legislation to control increases in flood insurance

By Colleen M Svelnis, J.D.

The House of Representatives has approved legislation to control massive increases in flood insurance that came about in response to the Biggert-Waters Flood Insurance Reform Act of 2012. The 2012 act was intended to phase in rates more closely based on a property’s actuarial degree of flood risk. However, the unintended effect was that insurance costs soared over 10 times the previous amount in some areas. The Homeowner Flood Insurance Affordability Act (H.R. 3370) was passed with overwhelming bipartisan support to help alleviate this effect. The vote was 306-91 and the bill now goes to the Senate for approval. Rep. Michael Grimm (R-NY), who sponsored the bill, said “At the end of the day, this vote proves that Members of Congress can truly champion the interests of the people, and I thank my colleagues, especially Representatives Maxine Waters, Bill Cassidy, Gregory Meeks, Frank Lobiondo and Majority Leader Eric Cantor for their constant humility and dedication throughout this process.”

In 2012, the Biggert-Waters Act was passed to address a $24 billion deficit in the National Flood Insurance Program (NFIP). NFIP has offered subsidized insurance rates since its creation in 1968 to encourage homeowners to purchase flood insurance. However, the current debt could prevent them from paying out future claims to policyholders.

The bill, which passed the house on March 4, 2014, includes the following elements:

  • A cap on yearly increases at 18 percent for individual policies;

  • FEMA will set a affordability target where the cost of flood insurance policy would be limited to 1 percent of the total coverage amount;

  • reinstate grandfathered status for covered properties;

  • repeal the home-sale and new-policy rate-increase triggers;

  • provide a refund for people who have realized large premium increases due to the purchase of a pre-FIRM subsidized home without the full transparency from the Federal Emergency Management Agency as to the new rate structure;

  • require FEMA to complete an affordability study and to propose an affordability framework to help homeowners cope with dramatically higher premiums;

  • properties that are newly included in a flood zone will enter the program at a significantly lower preferred risk premium level, and will be protected by the same rate increase cap as all other properties going forward;

  • FEMA will be required to notify Congress and affected communities of its intention to issue revised flood maps at least 60 days before the preliminary map is released;

  • FEMA must monitor and report on the affordability of policies for small business, non-profit organizations, houses of worship, and low-income homeowners;

  • a surcharge will be collected on all policies to be directed to a Reserve Fund, to prevent future NFIP insolvency; and

  • requires that FEMA disclose to homeowners the full risk of the properties, regardless of their current level of subsidy.

Opposed the bill. Jeb Hensarling (R-Texas), Chairman of the Financial Services Committee, delivered remarks on the floor of the House, decrying “poorly designed and costly government-run insurance programs” such as the National Flood Insurance Program. He said “[a]t the end of the day, the program forces roughly 96 percent of all Americans to subsidize the remaining four percent, regardless of income or need.” Hensarling, who had proposed four bills over the past two months to modify the Biggert-Waters Act, stated that “We agreed to go slower on reforms and to temporarily cap payments as long as the program would eventually require all property owners to pay the fair amount that they owe and, overall, the program would begin to bring in more income so taxpayers could avoid yet another bailout.” However, Hensarling does not support the compromise bill that was passed, saying the bill, “although technically ‘Pay-Go’ compliant, would postpone actuarially sound rates for perhaps a generation. It would kill off a key element of risk-based pricing permanently, which is necessary if we are to ever transition to market competition. Finally, it creates brand-new subsides for a program that is already bailout broke.” Additionally, he expressed concern that the bill “represents a big step backwards from reform and leaves us just a few hurricanes or a few short years away from the next taxpayer bailout.”

Bipartisan support. Rep. Maxine Waters (D-Calif), who led the Democratic effort to provide flood insurance rate relief, supported the compromise bill. “The new legislation includes a number of important provisions to protect flood insurance policyholders from dramatic rate hikes. Above all, these include ending dramatic increases caused by events such as property sales—and restoring grandfathered rates for those who played by the rules and built their properties according to code. For families hit by unaffordable premium increases, this bill provides important relief in the form of a refund. And it requires FEMA to provide Congress with the affordability study that was supposed to be finished nearly a year ago.”

Rep. Cedric Richmond’s (D-La) statement on the passage of the bill: “I'm proud to announce that after much negotiation, the House has reached a compromise that will provide relief to policyholders from skyrocketing flood insurance rates. From the outset, I wanted to reform the program in way that would make premiums more affordable, flood maps more accurate and increases accountability and oversight of NFIP's operations. While this legislation does not go as far as many of my colleagues and I would like, this compromise achieves these three goals.”

Rep. Keith Rothfus (R-Pa) commented, “The House took action today to provide needed relief for homeowners experiencing skyrocketing flood insurance premiums.” He continued, “in contrast to the Senate legislation that threatens the future of the National Flood Insurance Program, the bill approved by the House is paid for and requires reforms to continue, albeit more gradually, to make the program solvent and put it on a sustainable footing.”

Rep. Carolyn Maloney (D-NY) said “This bill will require FEMA to actually complete the ‘affordability study’ that Congress mandated in Biggert-Waters, so that independent experts can determine the best way to successfully balance the demands of consumer affordability and long-term solvency of the flood insurance program.” She said, “In the meantime, this bill would set a hard cap on rate increases at 18 percent a year, which will protect families and businesses from the kinds of 500 percent rate increases that have become all-too-common.”

Rep. Stephen Lynch (D-Mass) said the bill would provide meaningful relief for most homeowners suffering from unfair and extreme flood insurance premium increases. He noted that the bill will also impose “meaningful reforms to the Federal Emergency Management Agency’s (FEMA) flawed flood mapping process. “Not only does this bill roll back the most egregious and unfair premium increases that were the unintended consequence of the Biggert-Waters Act, but it also brings transparency and accountability to FEMA’s troubled and error-prone flood mapping process.”

Rep. Dennis Ross (R-Fla), who supported the bill, said, “Today, I voted to hold FEMA accountable to communities, increase FEMA’s transparency to homeowners, and help protect taxpayers,” said Ross. However, Ross maintained that “in order to fully protect both homeowners and taxpayers, we need to provide an opportunity for the private market to get involved in the selling of flood insurance”

Industry support for bill. The Independent Community Bankers of America (ICBA), advocate of the bill, released a statement of support. “ICBA strongly supports today’s House vote to House vote to protect homeowners and communities nationwide from much higher National Flood Insurance Program premiums,” ICBA President and CEO Camden R. Fine said. Fine warned that the sharp hikes in flood insurance under the 2012 Act “would make flood insurance unaffordable for many policyholders who built to code and followed the law every step of the way. The House bill approved today would stop these devastating rate increases and avoid further instability in our nation’s still-recovering housing market.”

MainStory: TopStory FloodInsurance

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