Flood Insurance: Extent of Noncompliance with Purchase Requirements Is Unknown

The Federal Emergency Management Agency (FEMA) run National Flood Insurance Program (NFIP) has combined flood hazard mitigation efforts and insurance to protect homeowners against losses from floods. The program provides an incentive for communities to adopt floodplain management ordinances to mitigate the effect of flooding upon new or existing structures. Virtually all communities in the country with flood-prone areas now participate in the NFIP, and over four million U.S. households have flood insurance. Nevertheless, the President's proposed budget for 2003 characterizes the NFIP as "moderately effective," because many at-risk properties remain uninsured. The proposed budget establishes a goal to increase flood insurance policies in force by five percent in 2003 and would increase funding for flood zone mapping activities to better identify at-risk properties. Although the assessment and goal described in the proposed budget apply to the entire NFIP, the success of a particular component of the program--the mandatory purchase requirement--has been the subject of debate for many years. The federal bank regulators overseeing lending institutions that hold or service mortgages on properties that must have flood insurance believe that there is a high level of compliance. However, others have questioned whether the requirements are being met. The different types of evidence collected by bank regulators and government-sponsored enterprises on the one hand, and FEMA on the other, are the bases for their opposing perspectives on lender noncompliance with flood insurance purchase requirements. Federal organizations overseeing lenders use bank examinations and loan portfolio reviews to examine a nonstatistical sample of loans for compliance. These organizations uncovered few significant violations, leading them to believe that lenders are complying with flood insurance purchase requirements. In contrast, FEMA relies on its own noncompliance estimates from data it generates itself, from other entities, limited studies it conducted, and anecdotal evidence from public officials and others with knowledge of the program to gauge noncompliance. These data indicate that lenders are not adequately complying with the requirements. GAO's analysis of readily available data does not suggest a major noncompliance problem at loan origination in highly flood-prone areas. Property-specific data on mortgages, flood zone determinations, and flood insurance policies--compiled at loan origination and at various points during the life of the loan--would be needed to fully measure compliance. These data are needed to ensure that homeowners purchase, maintain, and do not terminate required flood insurance.