House Financial Services Committee Issues Report on National Flood Insurance Program Administrative Reform Act

WASHINGTON, July 29 -- The House Financial Services Committee issued a report (H.Rpt. 115-233) on legislation (H.R. 2875) to make administrative reforms to the National Flood Insurance Program to increase fairness and accuracy and protect the taxpayer from program fraud and abuse. The report was advanced by Rep. Jeb Hensarling, R-Texas, on July 18.

Excerpts of the report follow:

Purpose and Summary

Introduced by Representative Nydia Velazquez on June 12, 2017, H.R. 2875, the "National Flood Insurance Program Administrative Reform Act of 2017," makes administrative reforms to the National Flood Insurance Program to increase fairness and accuracy and protect the taxpayer from program fraud and abuse.

Background and Need for Legislation

GENERAL OVERVIEW

Floods are among the most frequently occurring and costly natural disasters. Most declarations of federal disasters by the Federal Emergency Management Agency (FEMA) are related to flooding. Yet despite the frequency and severity of losses that result from flooding, the private insurance market generally did not provide insurance for flooding; when it did, insurance for flood-related damage can be expensive because the properties most at-risk tend to be highly concentrated geographically and the potential risk of economic losses is extremely high.

To supplement the availability of flood insurance in the private market, Congress, in 1968, created the National Flood Insurance Program (NFIP), which is administered by FEMA and provides flood insurance to approximately 5.1 million policyholders across the country. In exchange for premiums paid by policyholders, NFIP makes federally backed flood insurance available to homeowners and other property owners (for example, businesses, churches, and farmers) in these communities.

Homeowners with mortgages held by federally regulated lenders on property in participating communities identified by FEMA to be in Special Flood Hazard Areas are required to purchase flood insurance (mandatory purchase requirement). NFIP coverage limits vary by program (regular or emergency) and property type (for example, residential or nonresidential). In NFIP's regular program, the maximum coverage limits for residential policyholders are $250,000 for buildings and $100,000 for contents. For commercial policyholders (that is, those with policies for nonresidential properties), the maximum coverage limit is $500,000 per building and $500,000 for contents owned by the building owner. There is additional coverage for contents owned by the tenants.

Residents and business owners in over 22,000 participating communities across the United States and its territories are able to buy NFIP flood insurance policies through insurance agents and companies that participate as third-party administrators in the "Write Your Own" (WYO) program. The WYO program allows private insurance carriers to issue and service government underwritten and taxpayer backed NFIP policies with no private financial liability from the insurer. Insurance companies that participate in the WYO program receive an expense allowance for policies they write and the claims they process. In addition, their agents earn a commission for the policies they sell. The federal government, however, retains responsibility for managing the risk and paying claims, as well as covering any litigation costs should a WYO insurer be sued in court.

Property owners can purchase flood insurance through the NFIP only if their communities participate in the NFIP. To participate in the NFIP, a community must agree to abide by certain statutory provisions intended to mitigate the risk of flooding, such as building codes that require new structures built in floodplains (high-risk areas) to be protected against flooding or to be elevated above the 100-year floodplain.

As of June 5, 2017, the NFIP has an outstanding debt of $24.6 billion borrowed from taxpayers, with roughly $1.1 billion available cash-on-hand and $5.825 billion remaining of its total temporary $30.425 billion Treasury borrowing authority. The NFIP's debt results primarily from its borrowing to pay claims relating to the Gulf Coast hurricanes in 2005 and Superstorm Sandy in October 2012. This borrowing stems from a structural imbalance in how the NFIP measures and prices for risk, resulting in only 46 percent of premium dollars collected in 2016 being available for the payments of claims. With such a low portion of premiums available to pay claims, the pressure on the NFIP to borrow from taxpayers increases. The NFIP's structural budget crisis has required periodic legislation to increase its borrowing authority, the most recent example of which occurred in January 2013 when Congress increased the NFIP's borrowing authority by $9.7 billion--from $20.725 billion to its current $30.425 billion level.

Superstorm Sandy, which made landfall in October 2012, resulted in $65 billion in damage and destroyed or damaged 650,000 residential homes. Following the destruction, FEMA paid thousands of flood insurance claims to victims but, reports began to surface that many claims might have been severely underpaid due to the submission of false engineering reports. By 2015, there were both constituent and media reports that described "dozens of cases" where original drafts of engineering reports were either revised or deleted in order to understate the extent to which the policyholder suffered insured losses, thus lowering payments to flood insurance claimants. Policyholders alleged that these practices were widespread. As a result of these practices, insurance companies made lower payments than they otherwise should have, causing many homeowners to be unable to rebuild their homes.

Superstorm Sandy resulted in 144,000 claims received by FEMA, through the Write Your Own companies, paying approximately $8.4 billion to policyholders. Because of the concerns regarding certain alleged fraudulent practices, FEMA established a task force in February 2015 to expeditiously resolve litigation from the claims involving Superstorm Sandy and offer all policyholders, who believe they may have been underpaid, the opportunity to have their claims reviewed. As of March 2017, FEMA paid out an additional $350 million to policyholders on those claims resulting from the Superstorm Sandy claims event.

H.R. 2875 is a culmination of the lessons learned from FEMA, stakeholders, and policymakers during the claims paying process responding to Superstorm Sandy. According to the Department of Homeland Security's Inspector General,

FEMA does not provide adequate oversight of the WYO [Write Your Own] program under NFIP. Specifically, FEMA is not using the results from its Financial Control Plan reviews to make program improvements; is not performing adequate oversight of the SALAE [Special Allocated Loss Adjustment Expenses] reimbursement process; and does not have controls to provide proper oversight of the appeals process. These conditions exist because FEMA does not have adequate guidance, resources, or internal controls. As a result of this inadequate oversight, FEMA is unable to ensure that WYO companies are properly implementing NFIP and is unable to identify systemic problems in the program. Furthermore, without adequate internal controls in place, FEMA's NFIP funds may be at risk for fraud, waste, abuse or mismanagement.

H.R. 2875 addresses concerns which range from the inadequacy of mitigation programs, fraudulent statements and claims, lack of oversight of the taxpayer-funded litigation practices and costs, the need for a more transparent process for claims payments and appeals, and better disclosures.

Hearings

The Committee on Financial Services' Subcommittee on Housing & Insurance held two hearings examining matters relating to H.R. 2875 on March 9, 2017 and March 16, 2017. The Committee on Financial Services held a hearing examining matters relating to H.R. 2875 on June 7, 2017.

Committee Consideration

The Committee on Financial Services met in open session on June 21, 2017 to consider H.R. 2875. The Committee ordered H.R. 2785 to be reported favorably to the House, without amendment, by a recorded vote of 58 yeas to 0 nays (Recorded vote no. FC- 64), a quorum being present.

Committee Votes

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion to report legislation and amendments thereto. The sole recorded vote was on a motion by Chairman Hensarling to report the bill favorably to the House without amendment. The motion was agreed to by a recorded vote of 53 yeas to 0 nays (Recorded vote no. FC-58), a quorum being present.

Committee Oversight Findings

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House of Representatives, the findings and recommendations of the Committee based on oversight activities under clause 2(b)(1) of rule X of the Rules of the House of Representatives, are incorporated in the descriptive portions of this report.

Performance Goals and Objectives

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House of Representatives, the Committee states that H.R. 2875 will make administrative reforms to the National Flood Insurance Program to increase fairness and accuracy and protect the taxpayer from program fraud and abuse.

New Budget Authority, Entitlement Authority, and Tax Expenditures

In compliance with clause 3(c)(2) of rule XIII of the Rules of the House of Representatives, the Committee adopts as its own the estimate of new budget authority, entitlement authority, or tax expenditures or revenues contained in the cost estimate prepared by the Director of the Congressional Budget Office pursuant to section 402 of the Congressional Budget Act of 1974.

Committee Cost Estimate

The Committee adopts as its own the cost estimate prepared by the Director of the Congressional Budget Office pursuant to section 402 of the Congressional Budget Act of 1974.

Congressional Budget Office Estimates

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House of Representatives, the following is the cost estimate provided by the Congressional Budget Office pursuant to section 402 of the Congressional Budget Act of 1974:

U.S. Congress,

Congressional Budget Office,

Washington, DC, July 18, 2017.

Hon. Jeb Hensarling,

Chairman, Committee on Financial Services,

House of Representatives, Washington, DC.

Dear Mr. Chairman: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 2875, the National Flood Insurance Program Administrative Reform Act of 2017.

If you wish further details on this estimate, we will be pleased to provide them. The CBO staff contact is Robert Reese.

Sincerely,

Mark P. Hadley

(For Keith Hall, Director).

Enclosure.

H.R. 2875--National Flood Insurance Program Administrative Reform Act of 2017

Summary: Under current law, property owners can buy flood insurance through the National Flood Insurance Program (NFIP). Property owners who buy insurance through the NFIP pay annual premiums which are deposited into the National Flood Insurance Fund (NFIF) and are used to pay flood damage claims submitted by policyholders. Those premiums and payments are not subject to annual appropriation.

H.R. 2875 would give NFIP policyholders the option to buy a higher level of coverage under the Increased Cost of Compliance (ICC) program, which provides payments to property owners to undertake flood mitigation activities following a flood claim. The bill also would direct the Federal Emergency Management Agency (FEMA) to make several administrative changes to the NFIP related to claims payment determinations, program staffing, and related matters.

Assuming appropriation of the necessary amounts, CBO estimates that implementing H.R. 2875 would cost $11 million over the 2018-2022 period, mostly for an advisory committee on flood insurance. Enacting the legislation would affect direct spending and revenues; therefore, pay-as-you-go procedures apply. However, because any increase in NFIP collections and revenues would be offset by increased direct spending, CBO estimates that the net effect on the deficit would be negligible.

CBO estimates that enacting H.R. 2875 would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2028.

H.R. 2875 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA) and would impose no costs on state, local, or tribal governments.

Estimated cost to the Federal Government: The estimated budgetary effect of H.R. 2875 is shown in the following table. The costs of this legislation fall within budget function 450 (community and regional development).

(TABLE OMITTED)

Basis of estimate: For this estimate, CBO assumes that H.R. 2875 will be enacted near the end of fiscal year 2017 and that the necessary amounts will be appropriated each year.

Spending subject to appropriation

H.R. 2875 would establish a flood insurance advisory committee, which would include members from across the federal government and the private sector. The committee would be responsible for reviewing and making recommendations on several different aspects of the NFIP. Based on information from FEMA about the resources that would be needed for this committee, CBO estimates that implementing this provision would cost $10 million over the 2018-2022 period, mostly for salaries, expenses, and expert advice.

The bill also would direct the Government Accountability Office to complete two studies on the NFIP. The first would analyze the policies and practices for adjusting claims for losses under the NFIP. The second would analyze how the NFIP handles earth movements that stem from flooding, such as landslides, when adjusting claims for losses under the program. Based on the cost of similar studies, CBO estimates that completing those studies would cost $1 million in 2018.

Direct spending and revenues

CBO estimates that enacting H.R. 2875 would have a negligible effect on the deficit over the 2018-2027 period.

ICC Coverage. H.R. 2875 would give NFIP policyholders the option of buying additional ICC coverage, which provides assistance to help cover the cost of mitigation activities that will reduce the risk of future flood damage to a building. Under current law, when a building covered by the NFIP suffers a flood loss and is declared to be substantially or repetitively damaged, an ICC insurance policy will provide up to $30,000 to bring the building into compliance with state or community floodplain management laws or ordinances. Expected ICC program spending is covered by premium payments collected from NFIP policyholders.

Under the bill, policyholders would have the option to buy up to an additional $30,000 in ICC coverage (making up to $60,000 of coverage possible for a single property). Property owners that buy additional ICC coverage would pay a surcharge for that coverage in an amount determined by FEMA. CBO estimates that any additional spending by the NFIP for extra ICC coverage would be offset by the additional collections from property owners who buy such coverage; thus, the net effect on direct spending would be negligible.

Pre-Existing Conditions Pilot Program. The bill would authorize FEMA to create a pilot program through December 31, 2022, that would allow private insurance companies who partner with FEMA to sell and service NFIP policies (known in the program as Write Your Own, or WYO, insurance companies) to inspect properties with NFIP insurance for pre-existing structural conditions that could result in the denial of an NFIP claim. Following an inspection the WYO company would submit a report outlining the presence or absence of any pre- existing structural conditions to the property owner and FEMA.

Under the pilot program, FEMA could impose a surcharge on each policy that opts to have an inspection for pre-existing conditions to account for any administrative costs faced by the WYO companies to complete those inspections. Because H.R. 2875 gives FEMA discretion to set the surcharge at any rate, CBO estimates that any additional costs associated with completing those inspections would be offset by additional NFIP collections; thus, the net effect on direct spending would be negligible.

Civil Penalties. H.R. 2875 would bar anyone from making a false or misleading statement, production, or submission when adjusting a claim for NFIP coverage. The bill would create a civil penalty of up to $10,000 per false statement. Civil penalties are recorded in the budget as revenues. CBO estimates that such revenues would be insignificant in any year under the bill. Furthermore, any civil penalties collected under the bill would be deposited into the NFIF and could be spent without further appropriation; thus, the net effect on the deficit would be negligible.

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. CBO estimates that enacting the bill would have an insignificant effect on direct spending and revenues over the 2018-2027 period.

Increase in long-term direct spending and deficits: CBO estimates that enacting H.R. 2875 would not significantly increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2028.

Intergovernmental and private-sector impact: H.R. 2875 contains no intergovernmental or private-sector mandates as defined in UMRA and would impose no costs on state, local, or tribal governments.

Estimate prepared by: Federal costs: Robert Reese; Impact on state, local, and tribal governments: Rachel Austin; Impact on the private sector: Logan Smith.

Estimate approved by: H. Samuel Papenfuss, Deputy Assistant Director for Budget Analysis.

Federal Mandates Statement

The Committee adopts as its own the estimate of Federal mandates prepared by the Director of the Congressional Budget Office pursuant to section 423 of the Unfunded Mandates Reform Act.

Advisory Committee Statement

One advisory committee within the meaning of section 5(b) of the Federal Advisory Committee Act was created within this legislation. Pursuant to the Act, the Committee determines that the functions of the proposed advisory committee are not presently being performed by an agency or existing advisory committee. The Committee further determines that such functions cannot be performed by enlarging the mandate of an existing advisory committee. The advisory committee created by this legislation is as follows:

Sec. 14. Federal Flood Insurance Advisory Committee.

Applicability to Legislative Branch

The Committee finds that the legislation does not relate to the terms and conditions of employment or access to public services or accommodations within the meaning of the section 102(b)(3) of the Congressional Accountability Act.

Earmark Identification

H.R. 2875 does not contain any congressional earmarks, limited tax benefits, or limited tariff benefits as defined in clause 9 of rule XXI.

Duplication of Federal Programs

Pursuant to section 3(c)(5) of rule XIII, the Committee states that no provision of H.R. 2875 establishes or reauthorizes a program of the Federal Government known to be duplicative of another Federal program, a program that was included in any report from the Government Accountability Office to Congress pursuant to section 21 of Public Law 111- 139, or a program related to a program identified in the most recent Catalog of Federal Domestic Assistance.

Disclosure of Directed Rulemaking

Pursuant to section 3(i) of H. Res. 5, 115th Cong. (2017), the Committee states that H.R. 2875 contains no directed rulemaking.

Section-by-Section Analysis of the Legislation

Sec. 1. Short title

This Act may be cited as the "National Flood Insurance Program Administrative Reform Act of 2017".

Sec. 2. Increased Cost of Compliance coverage

Authorizes the FEMA Administrator to supplement its existing Increased Cost of Compliance (ICC) program (which is typically mandatory for many policyholders) coverage of up to $30,000 with the option of allowing policyholders to purchase additional enhanced ICC coverage of up to $60,000, as priced accordingly by NFIP. Like the existing ICC coverage, this enhanced ICC coverage would be used to comply with local and State floodplain management requirements by covering the cost of mitigating a building that has been substantially or repetitively damaged by floods. Additionally, the allowable uses of ICC coverage would be expanded to cover certain pre- disaster mitigation costs for certain at-risk properties identified by State or local governments.

Sec. 3. Pilot program for properties with pre-existing conditions

Authorizes the FEMA Administrator to create a pilot NFIP program to authorize Write Your Own (WYO) insurance companies to inspect pre-existing structural conditions of insured and pre-insured properties that could result in a denial of a flood insurance claim. A report covering any such conditions would be filed with the FEMA Administrator to create a pre-disaster baseline of the conditions that might affect the resolution of future NFIP claims. The NFIP is required to conduct a rigorous study and evaluation and report to Congress no later than December 31, 2021 prior to the pilot sunset on December 31, 2022.

Sec. 4. Penalties for fraud and false statements in the National Flood Insurance Program

Requires the FEMA Administrator to prohibit false or fraudulent statements connected to the preparation, production, or submission of claims adjustment or engineering reports. Authorizes the FEMA Administrator to develop penalties for such violations, including disbarment from participation in the NFIP.

Sec. 5. Enhanced policyholder appeals process

Codifies the due process protections for policyholders established after Superstorm Sandy by FEMA for individuals wishing to appeal a full or partial denial of their NFIP claim by their insurance company, and require FEMA to provide policyholders with a written appeal decision that upholds or overturns the decision of the insurer.

Sec. 6. Deadline for approval of claims

Requires the FEMA Administrator to make final determinations regarding the approval of a claim for payment or disapproval of the claim within 90 days of the claim being made. Authorizes the FEMA Administrator to extend the 90-day deadline by an additional 15 days when extraordinary circumstances warrant more time.

Sec. 7. Litigation process oversight and reform

Provides the FEMA Administrator with additional authorities and responsibilities for overseeing litigation conducted by WYO insurance companies acting on behalf of the NFIP. Requires the FEMA Administrator to ensure WYO litigation expenses are reasonable, appropriate, and cost-effective, with the authority to deny any expenses that are contrary to those terms. Gives the FEMA Administrator the authority to direct litigation strategy as necessary.

Sec. 8. Prohibition on hiring disbarred attorneys

Prohibits the FEMA Administrator from hiring any attorney in connection with the program who has been suspended or disbarred.

Sec. 9. Underpayment of claims by Write Your Own (WYO) companies

Requires the FEMA Administrator to align penalties for WYO insurance companies that knowingly underpay claims for losses covered to be commensurate with the NFIP's penalties applicable to overpayment of such claims.

Sec. 10. Use of technical assistance reports

Requires the FEMA Administrator to restrict the use of outside technical reports by WYO insurance companies and the NFIP direct servicing agents as part of specific NFIP claims investigations only to such reports that are final and are prepared in compliance with applicable state and federal laws regarding professional licensure and conduct. Defines "technical assistance report" to mean reports created for the purpose of furnishing technical assistance to an insurance claims adjuster assigned by NFIP, including those by engineers, surveyors, salvors, architects, and certified public accountants.

Sec. 11. Improved disclosure requirement for standard flood insurance policies

Requires the FEMA Administrator to create a coverage disclosure sheet for policyholders, which outlines the coverage afforded by the NFIP's standard flood insurance policy, including a description of the type of loss that would be covered, a summary of costs associated with the policy, clear communications of the policy's full flood risk determinations. Requires the disclosure to include an acknowledgement of the disclosure by the policyholder and the insurer selling the policy on behalf of the NFIP.

Sec. 12. Reserve Fund amounts

Authorizes FEMA to transfer money from the Reserve Fund into the NFIP for the purposes of paying future claims.

Sec. 13. Sufficient staffing for Office of Flood Insurance Advocate

Requires the FEMA Administrator to ensure the Office of the Flood Insurance Advocate has sufficient staffing within 180 days after enactment.

Sec. 14. Federal Flood Insurance Advisory Committee

Creates a new Technical Insurance Advisory Council consisting of federal, state, and local experts to review the NFIP's insurance practices and propose new standards to FEMA.

Sec. 15. Interagency guidance on compliance

Twelve months after enactment and every two years thereafter, requires that federal banking agencies update the document entitled "Interagency Questions and Answers Regarding Flood Insurance," which address many flood insurance compliance questions in order to understand any conflicts with FEMA requirements or other industry practices and limitations.

Sec. 16. GAO study of claims adjustment practices

Requires the Comptroller General of the United States to conduct a study assessing the policies and practices for adjustment of claims for losses under the NFIP to determine whether the current system impacts the quality of the claims and adversely impacts policyholders.

Sec. 17. GAO study of flood insurance coverage treatment of earth movement

Requires the Comptroller General of the United States to conduct a study assessing the treatment of "earth movement and subsidence caused by flooding" on the NFIP and policyholders.

Changes in Existing Law Made by the Bill, as Reported

In compliance with clause 3(e) of rule XIII of the Rules of the House of Representatives, changes in existing law made by the bill, as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, and existing law in which no change is proposed is shown in roman):

NATIONAL FLOOD INSURANCE ACT OF 1968

The full text of the report is found at: https://www.congress.gov/congressional-report/115th-congress/house-report/233/1?r=19

Myron Struck, editor, Targeted News Service, Springfield, Va., 703/304-1897; [email protected]; http://www.targetednews.com