WASHINGTON — Mortgage lenders that finance properties prone to flood risk should do more than just require borrowers in federally desigated flood areas to buy insurance, lawmakers said Thursday.
Congress has long tried to reform the National Flood Insurance Program but members of the House and Senate have been unable to agree on how to keep the program financially viable. By law, borrowers in flood zones identified by the Federal Emergency Management Agency must purchase a policy before getting a loan.
But senators said at a hearing that lenders' obligations should extend beyond that initial closing table, including disclosing upfront to borrowers the flood-related risk associated with properties both within and outside the federal flood zones. Homeowners living outside the FEMA-designated areas can still purchase insurance through the NFIP if they choose.
"Do you believe that mortgage lenders should bear a greater responsibility for informing homeowners of their graduated flood risk, and if so, would you commit to working with lenders to make sure they’re living up to this responsibility?” Sen. Elizabeth Warren, D-Mass., said in questioning of David Maurstad, FEMA's deputy associate administrator.
Warren said one issue with the flood insurance program is a misperception that "if you're outside the zone, you don't need to worry about" flood risk. She commended steps by FEMA to move "toward a graduated assessment in terms of risk instead of using a binary approach."
“Climate change is making flood risk worse with each year, and our homeowners need NFIP coverage to protect their families,” Warren said. “We just have a real responsibility to inform them accurately about what those risks are.”
Maurstad agreed that lenders could have a role informing borrowers about incremental flood risks.
“If we can work with ways where the lending community can embrace the graduated [flood] risk, we'll do everything we can,” he said.
Sen. John Kennedy, R-La., who has long worried about the cost of flood insurance premiums, also questioned Maurstad on the role mortgage lenders have in working with homeowners in floodplains. Kennedy suggested that financial institutions should have a more explicit obligation to ensure that borrowers renew their flood insurance policies well after the initial closing.
"A lot of people buy insurance because they have to. I’m glad they do, they should buy it. The mortgage lender says, 'Yep it’s in place, let’s close on the loan and they [the borrower] drop the insurance,' " Kennedy said. "To follow up on Sen. Warren’s question, why don’t we do a better job of of requiring our mortgage lenders to do their job to make sure that people keep their insurance?”
Maurstad said lenders could ultimately take on more responsibility.
“I think they do" take on responsibility, he said. “Can they take more? Yes.”
Private flood insurance is often pricey and unavailable in certain locations especially prone to flooding, leaving the government-backed NFIP as the only option.
But the program has operated at a deficit since Hurricane Katrina, carrying a loss
Mortgage lenders, under the so-called mandatory purchase requirement, are responsible for ensuring that borrowers purchase and hold a flood insurance policy if their property is located in certain flood areas designated by FEMA. But some, including Warren, are suggesting that lenders should disclose flood risks to borrowers in areas outside of FEMA-designated floodplains if flood risks are still present.
"We just need to make sure that we turn this plan into action and families that live just outside flood zones actually are participating and understanding what's going on here," she said.
While the House Financial Services Committee
“It’s not just an insurance program — NFIP’s job isn’t just to help communities after the floods, but to prevent and minimize the damage in the first place,” Senate Banking Committee Chair Sherrod Brown, D-Ohio, said in an opening statement. “Through NFIP reauthorization, we have an opportunity to improve the NFIP, to make our families, businesses, and communities safer and more resilient and to meet the challenge posed by a changing climate.”
Maurstad said he believed FEMA’s new pricing methodology would help lenders relay to borrowers a more accurate depiction of their flood risk. That methodology, called Risk Rating 2.0, will launch in October to assess flood risks for borrowers with NFIP policies.
“Risk Rating 2.0 will actually help, because it's going to give a better indication of what the risk is in a community in a graduated basis. Price is one of the best signals for what your risk is. Risk Rating 2.0 will help in the situation that you're talking about,” he said to Warren.
FEMA has argued that the new framework will more equally distribute insurance costs among borrowers, but others have expressed alarm about the lack of information about the algorithms behind the methodology, as well as estimates that Risk Rating 2.0 will cause rates to increase for 3.8 million borrowers in the program.
In the hearing the committee
The methodology came under fire again during Thursday’s hearing, as several senators expressed worry that Risk Rating 2.0 would make flood insurance premiums too expensive for some borrowers.
“I think what I find even more frustrating is that we call Risk Rating 2.0 equity in action, when I think this new rating system is anything but equitable,” said Sen. Bob Menendez, D-N.J.
But Maurstad maintained that Risk Rating 2.0 would more equally distribute the costs of flood insurance among borrowers.
“How is Risk Rating 2.0 better? It's better because it incorporates new variables into calculating what the premium is,” which include heavy rainfall, flood frequency and coastal erosion, he said. “It encompasses the entire realm of flood risk, which is part of the reason why it's more equitable for the program.”
