To participate in the program, communities must adopt and enforce floodplain management ordinances to mitigate the effects of flooding on new or existing homes in special flood hazard areas (SFHA). In contrast, FEMA officials believe that many lenders frequently are not complying with the requirements, which is an opinion based largely on noncompliance estimates computed from data on mortgages, flood zones, and insurance policies; limited studies on compliance; and anecdotal evidence indicating that insurance is not in place where required. Nevertheless, they believe that the preponderance of information available to them indicates that lenders are not fully ensuring compliance with flood insurance purchase requirements. These data, in the aggregate, do not suggest that noncompliance is widespread at the time of loan origination in highly flood-prone areas. These structures have different purchase requirements than other residential properties. Mortgage, Flood Determination, and Insurance Policy Data Needed to Fully Assess Compliance, but Challenges Exist

Property-specific data on mortgages, flood zone determinations, and flood insurance policies—obtained both at loan origination and at various points during the life of the loan to ensure the insurance remains in force—would be needed to fully assess compliance. The regulators and GSEs, on the one hand, and FEMA, on the other, have differing viewpoints of the viability of and need for obtaining these data. Appendix I: Objectives, Scope, and Methodology

Federal Emergency Management Agency (FEMA) officials and bank regulators disagree about whether lenders are fully complying with the flood insurance purchase requirements of the National Flood Insurance Program (NFIP). What are the bases for the differing perspectives on lender noncompliance? What does other readily available data indicate about the level of noncompliance? These procedures require that for the flood insurance component of the examinations the regulators assess   whether an institution performs required flood determinations for home mortgage loans, including mobile homes affixed to a permanent foundation; if the institution requires flood insurance in the correct amount when it makes, increases, extends, or renews a covered loan; if the institution provides the required notices to the borrower whenever flood insurance is required as a condition of the loan; if the institution requires flood insurance premiums to be escrowed when other items, such as hazard insurance and taxes, are required to be escrowed; and if the institution complies with the forced placement provisions in cases where flood insurance on the loan is not sufficient to meet the requirements of the regulation. For larger institutions, examiners review a nonprojectable sample of loans.
What GAO Found

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.