Overview of HUD's Flood Insurance Requirements, National Flood Insurance Program

Floods are the most common and costly natural disaster in the United States, according to the Federal Emergency Management Agency (FEMA). Between 1980 and 2013, the United States suffered more than $260 billion in flood-related damages. These significant losses translate to a large volume of flood insurance claims. In 2005, for example, Hurricane Katrina resulted in claim payments of $16.3 billion from the National Flood Insurance Program (NFIP), ranking as the most expensive flood in the U.S. since the NFIP’s inception in 1968. In 2012, Hurricane Sandy resulted in more than $8 billion in claim payments, ranking as the second most costly flood in the U.S. And damage claims are still coming in from the four cyclones to reach the U.S. this hurricane season. These statistics provide a stark reminder about the importance of understanding and complying with federal flood insurance laws and regulations.

National Flood Insurance Program Basics

Championed by President Lyndon B. Johnson, the NFIP was created by the National Flood Insurance Act of 1968, after disillusioned private insurers abandoned the market when they realized flood insurance wasn’t profitable. According to Congressional analysts, NFIP policies “transfer some of the financial risk of property owners to the federal government” and, in return, require flood-prone communities to adhere to certain building codes and implement flood mitigation strategies.

NFIP is run by FEMA, but must be reauthorized by Congress every five years. Along with a host of other federal government programs, the current authorization, passed in 2012, was set to expire at the end of September. But H.R. 601, the continuing resolution passed last week, extended that authorization through Dec. 8. After that date, key authorities of the NFIP, such as the authority to issue new contracts and the ability to borrow large sums from the U.S. Treasury, will lapse, and it will be up to lawmakers to ensure the program’s future.

With regard to coverage, only those living in one of the nation’s 22,000 “NFIP-participating communities,” neighborhoods at risk of significant flooding that have adopted flood mitigation strategies, can purchase NFIP policies from the government through their insurance agent.

Some owners, especially those in high-risk areas, may be required to buy flood insurance, while others, usually those in moderate-risk locales, may be offered an optional policy. Premium rates, some of which are partially subsidized by the federal government, are based on the area’s degree of risk and the property construction and elevation.

Trump Administration Proposals

In a recent letter to the Senate, Mick Mulvaney, the director of the Office of Budget and Management (OMB), said that, as a result of claims filed after Hurricanes Harvey, Irma, and Maria, the NFIP program is expected to exhaust its financial resources, including its $30.4 billion in borrowing authority, by the end of the month. After the authority expires, NFIP will not be able to pay any further claims. Mulvaney recommends that Congress pass legislation wiping out $16 billion of NFIP’s outstanding debt so that NFIP can continue to function in the near future.

The letter calls on Congress to pair the debt forgiveness with a series of reforms. To reduce costs and improve the NFIP’s financial health, the letter recommends Congress prohibit the NFIP from providing flood insurance to any new structure built in a Special Flood Hazard Area (SFHA) and from underwriting new policies for any commercial property not currently insured through NFIP.

Information on where SFHAs are located is available on Flood Insurance Rate Maps (FIRM) published by the FEMA. The SFHA is represented on the flood map by darkly shaded areas designated with the letter “A” or “V.” FEMA uses engineering studies to determine the delineation of these areas or zones subject to flooding. The flood maps are available for public review at the local planning agency or building permit agency. Local appraisers and companies that make flood hazard determinations for banks and other lenders in connection with property loans also have access to these maps and databases.

The administration also proposes that NFIP be given the authority to discontinue coverage for what it describes as “extreme repetitive loss” properties. To help NFIP build up its reserves, the Trump administration recommends Congress authorize it to increase the reserve assessments it charges policy holders whenever its reserve ratios fall below specific thresholds. Under the administration’s proposal, any increase in reserve assessments would not count against the statutory 18 percent cap on premium increases for NFIP policies.

The administration is also asking Congress to take steps to promote private sector involvement in the flood insurance market. Specifically, Mulvaney suggests that Congress clarify that private polices satisfy NFIP’s mandatory purchase requirements, allow insurance brokers who sell NFIP policies through the Write-Your-Own (WYO) market to also offer private flood insurance policies, and require that more NFIP program data be made available to the public.

The letter also proposes that Congress establish a means-tested affordability program, to begin in 2021, that will shield NFIP policy holders earning less than 80 percent of area median income (AMI) from substantial rate increases that are currently scheduled under existing law. FEMA estimates that 26 percent of NFIP policyholders in SFHAs, and 21 percent of policyholders outside of SHFAs, earn less than 80 percent of AMI.

HUD Requirements

The Flood Disaster Protection Act of 1973 (42 U.S.C. 4012a) requires that projects receiving federal assistance and located in an area identified by FEMA as being within a SFHA be covered by flood insurance under the NFIP. In order to be able to purchase flood insurance, the community must be participating in the NFIP. If the community is not participating in the NFIP, federal assistance cannot be used in those areas.

There are four exceptions to the flood insurance purchase requirements:

Formula grants made to states. HUD state‐administered assistance, such as Community Development Block Grants (CDBG), Emergency Shelter Grants (ESG), and HOME Investment Partnership Grants, are considered “formula grants made to States.”

State-owned property. Flood insurance purchase is not required for any state‐owned property that’s covered under an adequate state policy of self‐insurance satisfactory to FEMA. If the state agency has authority under state regulations, it may require the property owner to purchase and maintain flood insurance to protect the federal investment benefiting HUD-assisted SFHA property.

Small loans. Flood insurance is not required for loans having an original outstanding principal balance of $5,000 (or less) and a repayment term of one year (or less) as authorized by Section 102(c)(2) of the Flood Disaster Protection Act.

Assisted leasing activities. Assisted leasing activities that do not include repairs, improvements, or acquisition are exempt from these flood insurance requirements. In other words, flood insurance is not required for leasing alone.

In its October 2014 Climate Change Adaptation Plan, HUD acknowledged the risks of flood events and the importance of flood insurance. The plan identifies flooding as an extreme weather event that could affect public housing structures, residents, and administration. It states that the HUD’s Office of Public and Indian Housing (PIH) should evaluate and improve the policy on insurance requirements for PHAs to anticipate a variety of climate change impacts. It further states that PIH should train its staff to evaluate the best way to ensure that PHAs have adequate insurance coverage.

According to the Office of Policy Development and Research (PD&R), as of June 2015, approximately 14 percent of PHAs have at least one building located in a flood zone (556 of 3,937), and about 5 percent of public housing buildings are in flood zones (11,591 of 234,590). PD&R believes an additional 3,940 buildings may be located in flood zones, but has been unable to determine the exact number because PIH does not have geocoded location data for all public housing assets.

In one audit performed by HUD’s Office of Inspector General (OIG), auditors found three PHAs with some buildings in a flood zone that did not have flood insurance before 2012’s Hurricane Sandy. For two PHAs, not all of the buildings were covered by flood insurance because the PHAs relied upon insurance companies to keep abreast of FEMA’s updates to flood plain maps. The third PHA was aware of the need to obtain flood insurance but did not do so. As a result, one PHA incurred debt to pay for Hurricane Sandy-related repairs, and another operated at a loss. FEMA deducted the amount the third PHA would have received from flood insurance from a FEMA grant.

One of the PHAs required nearly $3.8 million to bring its housing up to standards after Sandy-related repairs. In the past, the PHA used capital funds to renovate housing. Now, the housing improvement funds will repay the loan while tenants live in unrenovated apartments.

As a result of the audit, OIG recommended that the Office of Public and Indian Housing require field offices to verify that PHAs have flood insurance policies for buildings in a flood zone and establish procedures to obtain updated flood plain maps and distribute them to PHAs.