January 26, 2014

S. 1926 – Homeowner Flood Insurance Affordability Act of 2014

Noteworthy

Floor Situation: On Monday, January 27, following the Leaders’ remarks, the Senate will resume consideration of the motion to proceed to S. 1926, the Homeowner Flood Insurance Affordability Act of 2014, with the time until 5:30 p.m. equally divided. At 5:30p.m., the Senate will conduct a cloture vote on the motion to proceed to S. 1926. On January 16, a unanimous consent agreement was circulated on the Hotline to allow for a specified number of amendments to be considered. Unanimous consent was not reached. 

Background: The National Flood Insurance Program (NFIP), created in 1968, is a federal program managed by the Federal Emergency Management Administration (FEMA). The program has three components: to provide flood insurance; to improve floodplain management; and to develop maps of flood hazard zones. The National Flood Insurance Reform Act of 1994 (P.L.103-325) made flood insurance mandatory for all federally-backed mortgages of properties located in the special flood hazard areas. The NFIP allows property owners in participating communities to buy insurance to protect against flood losses. Participating communities are required to establish management regulations in order to reduce future flood damages. This insurance is intended to furnish an insurance alternative to disaster assistance and reduce the costs of repairing damage caused by floods to buildings and their contents. A homeowner is able to purchase additional flood insurance, but they must be covered by NFIP insurance first.

On July 6, 2012, the Biggert-Waters Flood Insurance Reform Act of 2012 reauthorized the NFIP through Sept. 30, 2017. The bill made reforms to make the program more financially and structurally sound. The purpose of the legislation was to change the way the NFIP operates and to raise rates to reflect true flood risk, as well as to make the program more financially stable. The bill also changed how Flood Insurance Rate Map (FIRM) updates affect policyholders.

Subsequently, in October 2012, Hurricane Sandy caused widespread flood-related property damage in coastal states in the Northeast and the mid-Atlantic region. In January 2013, the Administration sought, and Congress passed, legislation to provide a $9.7 billion increase in the NFIP’s borrowing authority, from $20.725 billion to $30.425 billion, to pay flood claims related to Hurricane Sandy.

S. 1926 has not been considered by committee, nor have earlier versions of the bill (S. 1610 and S. 1846). 

The Senate Banking Subcommittee on Securities, Insurance and Investment held a hearing on March 19, 2013 on S. 534, a freestanding bill included in title II of S. 1926 to establish a National Association of Registered Agents and Brokers (NARAB). On June 6, 2013, S. 534 was reported by voice vote with Senator Coburn recorded as a no vote. On July 29, the bill was reported out of committee, the committee report was filed, and the legislation was placed on the Senate calendar. Similar legislation (H.R. 1155) passed the House by a vote of 396-6. 

The recently enacted fiscal year 2014 omnibus legislation included a provision to delay, for the duration of the omnibus, premium increases in section 1308(h) of the NFIP related to a premium adjustment to reflect current risk of flood. The language prohibits FEMA from implementing future premium increases on “grandfathered properties.” It does not speak to premium increases triggered by the sale of a property, which FEMA implemented Oct. 1, 2013.

Overview

Title I of the bill would prohibit FEMA from increasing flood insurance risk premium rates to reflect the current risk of flood for certain properties. It sets forth expiration dates for such prohibitions.

Amends the National Flood Insurance Act of 1968 to prohibit FEMA from providing flood insurance to prospective customers at rates less than those estimated for any property purchased after the expiration of a six-month period (currently, any property purchased after July 6, 2012).

Directs FEMA to: (1) restore during such six-month period specified estimated risk premium rate subsidies for flood insurance for pre-FIRM properties and properties purchased after such six-month period, and (2) submit to certain congressional committees a draft affordability framework addressing the affordability of flood insurance sold under the NFIP.

Title II would establish the NARAB and authorize it to license producers of insurance to operate in multiple states. Currently, each state establishes requirements for licensing insurance producers within that state. Under the bill, insurers that join the NARAB would be able to obtain a license to act as a producer in any state other than their home state by meeting the NARAB’s eligibility requirements and paying certain fees. States would retain full authority to regulate the business of insurance and to investigate and discipline insurers doing business in their state.

Considerations

According to a recent report by the Government Accountability Office, the NFIP “has accrued $24 billion in debt, highlighting structural weaknesses in the program and increasing concerns about its burden on taxpayers.” Some have suggested eliminating subsidized premium rates so property owners would pay for their risk of flood loss. The Biggert-Waters Flood Insurance Reform Act of 2012 moves NFIP toward charging full-risk rates.

The realty industry argues that beginning on October 1, 2013, FEMA imposed full-risk rates on properties sold after July 2012. However, in applying the increase retroactively, many buyers between July 2012 and October 2013 were not informed of the increase before purchasing their property. As a result, some homeowners are seeing sizeable increases in their flood insurance premiums. As a result of assessing premiums that reflect full risk, some homeowners are seeing sizeable increases in their flood insurance premiums. The industry also argues that numerous rate quote miscalculations and discrepancies have been found, calling into question the accuracy of many rate increases around the country. The National Association of Realtors testified before Congress noting examples of where the quoted rates exceeded the risk rate by $10,000-$30,000 per year.

Bill Provisions

Title I – Homeowner Flood Insurance Affordability Act

Section 103 

FEMA may not implement section 1308(h) of the National Flood Insurance Act of 1968, regarding premium adjustments to reflect current risk of flood, until FEMA meets specified requirements.

The delay applies to: 1) homes and businesses that are currently “grandfathered,” properties that had flood insurance policies in effect when the new flood maps become effective and maintained continuous coverage; or were built in compliance with flood maps in effect at the time of construction; 2) properties that purchased flood insurance after July 6, 2012; and 3) properties that were sold after July 6, 2012, that obtained new insurance. 

The delay shall expire six months after the date FEMA proposes the draft affordability framework or the date that FEMA certifies in writing to Congress that the agency has implemented a flood mapping approach that results in technically credible flood hazard data in all areas applied. These steps are to be taken within 18 months after FEMA completes the affordability study mandated by the Biggert-Waters Flood Insurance Reform Act of 2012. 

The draft affordability framework shall outline how the agency proposes to address the issues of affordability of flood insurance sold under the program. Criteria for the draft affordability framework are outlined in the legislation. 

Section 104

Requires FEMA to submit to Congress within two years of enactment the affordability study and report required under Biggert-Waters. 

Section 105

Amends Biggert-Waters to strike “not more than $750,000” and inserts “such sums as to be necessary” for completion of the affordability study. 

Section 106

Allows the use of the National Flood Insurance Fund to reimburse policyholders who successfully appeal certain flood map determinations. Reimbursement is for costs associated with services of surveyors, engineers or similar services. Bill strikes cap of $250,000 and inserts “such as amounts as may be necessary.”

Section 107

Amends existing law to include reconstruction in addition to construction to qualify a community for more affordable flood insurance if the community is in the process of taking steps to improve its flood control systems. 

Section 108

Requires FEMA to rate a covered structure using the elevation difference between the flood-proofed elevation and the adjusted base flood elevation of the covered structure. Intended to preserve basement exception so that homeowners who have flood-proofed their basement receive credit in determining flood insurance rates. 

Section 109

Requires the designation of a Flood Insurance Advocate to advocate on behalf of policyholders under the NFIP and in the mapping of flood hazards, risks from flood, and implementation of measures to minimize the risk of flood. Such sums as necessary are authorized to carry out the duties and responsibilities of the Flood Insurance Advocate. 

Title II – National Association of Registered Agents and Brokers

Section 321

Re-establishes the NARAB as an independent, nonprofit corporation. 

Section 322

Says that the purpose of NARAB is to provide a mechanism for licensing, continuing education, and other nonresident insurance producer requirements to be applied on a multi-state basis without affecting the laws and rights of states to license, regulate, and supervise insurance providers. 

Section 323

Any state-licensed insurance producer would be eligible to join the association unless its state insurance license is suspended or revoked, and must satisfy the association’s membership requirements. Association members must undergo a national criminal background check detailed in the bill within two years of application.

Permits the association to establish separate classes of membership for insurance producers with separate criteria, including a class for business entities. The association may establish criteria for membership, but these cannot be less protective than those contained in the National Association of Insurance Commissioners (NAIC) Producer Licensing Mode Act in effect upon enactment.

Association membership shall authorize an insurance producer to sell, solicit, or negotiate insurance and perform related activities in any state for which the members pay the state licensing fee. Association membership would convey nonresident insurance producer status in the chosen state. The association will collect licensing fees and remit them to states. States will retain authority to regulate market conduct and enforce consumer protection laws. The association will notify state insurance commissions and NAIC of new members. The association will establish continuing education requirements but cannot offer such courses.

NARAB may suspend or revoke membership or assess fines for causes detailed in the bill. It may conduct investigations of complaints of members and/or share this function with states. Provisions become effective the later of two years after enactment or the date of incorporation of the association. 

Section 324

Establishes a board of directors to consist of 13 members to be appointed by the President with the advice and consent of the Senate; eight shall be insurance commissioner, no more than four may be from the same political party, one will be designated as chairman; three shall have expertise in property and casualty insurance, and two shall have expertise in life or health insurance. After initial appointments, members to serve two-year terms, with half appointed annually. 

Section 325

Provides for the association to adopt bylaws in a manner similar to procedures under the Administrative Procedures Act. All proposed laws and bylaws will be submitted to the President and the states and shall be published with the opportunity for public comment.

Section 326

Powers of the association will include: ability to establish and collect fees to cover cost of operations; adopt, amend, and repeal bylaws and standards governing association business; establish procedures to provide notice and comment opportunity; hire employees and appoint officers to carry out functions of the association; borrow money; secure funding to be treated as loans to be repaid by the association with interest at market rates.

Section 327

Association shall report annually to the President, through the Department of the Treasury, and states, through state insurance regulators, on the conduct of its business.

Section 330

Bill preempts state law and prohibits states from imposing discriminatory laws, regulations and licensing fees on association members. Only the member’s home state may impose licensing or continuing education requirements on association members beyond what is required by the association. 

Section 331

Association to coordinate with the Financial Industry Regulatory Authority to ease any administrative burdens that fall on members of both entities. 

Section 332

After exhausting available remedies for relief within the creation of the association, any person aggrieved by the association may pursue civil action in federal district court. 

Section 333

NARAB may not receive or borrow any amounts from the federal government to pay the costs of establishing or operating the association.

Administration Position

The Administration has not issued a formal position on the legislation.

Cost

The Congressional Budget Office has not released a score on S. 1926. However, it has produced scores on two similar bills that make up the components of S. 1926.

According to the CBO score for S. 1846 – legislation similar to Title I of S. 1926 – the NFIP would borrow and spend an additional $900 million over the 2014-2018 period. It reported that “because total borrowing is limited under current law, additional amounts borrowed over the next five years would be offset by less borrowing in later years, resulting in no net effect through 2024. In the absence of sufficient borrowing authority, CBO expects that the program would be forced to delay payment of insurance claims until additional resources became available.”

Regarding Title II, CBO estimates that “enacting S. 534 would increase revenues by $490 million and increase direct spending by $483 million; taken together, those effects would reduce the deficit by $7 million over the 2014-2023 period.”

Possible Amendments

Consideration of amendments is unclear at this time. The amendments below were noted on a recent Hotline under consideration for unanimous consent.

  • Blunt: Raises Biggert-Waters’ “substantial improvement threshold” or remodeling from 30 percent to 50 percent of a structure’s fair market value before incurring the loss of flood insurance subsidies.
  • Heller/Lee (SA#2690): Clarifies Biggert-Waters language that private flood insurance satisfies the requirements of mandatory purchase of flood insurance.
  • Hagan (SA#2691): Exempts certain loans from the requirement to escrow flood insurance premiums.
  • Rubio: Requires FEMA to disclose publicly all data used in changing risk premium rates; permits policy holders to pay premium payments monthly rather than annually; and expands the categories in which a policyholder can challenge rates.
  • King: Reimbursement of expenses to communities for successful map appeals, in addition to the reimbursements for individuals already included in S. 1926. 
  • Reed (SA#2653): Requires FEMA to conduct a study to assess voluntary community-based flood insurance options. 
  • Coburn: Alternative to the NARAB title.
  • Merkley: Forced placed insurance
  • Toomey: Cap on annual premium increases with a spending offset.
  • Whitehouse: Fees for map change requests.
  • Gillibrand (SA#2689): Requires FEMA to issue mitigation guidelines other than building elevation. 
  • Paul: (S. 209): Requires a full audit by the Comptroller General of the Board of Governors of the Federal Reserve System and the Federal Reserve banks.

Johanns: (S. 634) Amends Dodd Frank to clarify that non-financial end users should not be subject to costly margin requirements.