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Tuesday, April 1, 2003
U.S. House of Representatives,
Subcommittee on Housing and Community Opportunity,
Committee on Financial Services,
Washington, D.C.

    The subcommittee met, pursuant to call, at 2:06 p.m., in Room 2128, Rayburn House Office Building, Hon. Robert Ney [chairman of the subcommittee] presiding.

    Present: Representatives Ney, Baker, Bereuter, Jones, Miller of California, Tiberi, Harris, Watt, Clay, Miller of North Carolina, and Scott.

    Chairman NEY. [Presiding.] This hearing of the Housing and Community Opportunity Subcommittee will come to order. We are here to hear testimony on the National Flood Insurance Program. Also I thank our witnesses obviously for being here today. I know you traveled a long distance to arrive here. This is an important hearing and your testimony will assist us in determining how best to go about reforming and reauthorizing the National Flood Insurance Program.
    Floods have been and continue to be one of the most destructive and costly natural hazards to our nation. The National Flood Insurance Program is a valuable tool in addressing the losses incurred throughout this country due to floods. It assures that businesses and families have access to affordable flood insurance that would not be available on the open market. The National Flood Insurance Program was established in 1968 with the passage of the National Flood Insurance Act. Prior to that time, insurance companies generally did not offer coverage for flood disasters because of the high risks that would be involved. Today, almost 20,000 communities participate in the National Flood Insurance Program. More than 90 insurance companies sell and service flood policies. There are approximately 4.4 million policies covering a total of $620 billion.
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    In order to participate in the program, communities must agree to abide by certain hazard mitigation provisions such as adopting building codes that require new flood plain structures to be protected against flooding or elevated above the 100-year flood plain. As many of you are aware, the NFIP reauthorization was due to expire December 31, 2002. Unfortunately, Congress adjourned without extending the program. This situation was quickly remedied in the 108th Congress on January 13 of this year. President Bush signed into law a bill to reauthorize the program for one year, retroactive to January 1, 2003. This one-year reauthorization will give us the time necessary to determine how best to go about reforming the existing program.
    We are fortunate to have three of our more distinguished members of Congress on our first panel to discuss the proposals they have introduced. Congressmen Bereuter and Blumenauer have introduced H.R. 253, Two Floods And You Are Out Of The Taxpayer's Pocket Act, which authorizes the program until 2007 and makes changes to the program as it relates to repetitive loss properties. Congressmen Bereuter and Blumenauer have a keen interest in reforming this program and we look forward to hearing about their legislation.
    Congressman Baker has introduced H.R. 670, the Flood Loss Mitigation Act of 2003, to provide for identification, mitigation and purchase of properties insured under the National Flood Insurance Program that suffer repetitive losses. As a representative from Louisiana, we know that our chairman, Mr. Baker, is no stranger to the issue and we look forward to hearing about the details of his legislation.
    I would also like to welcome Anthony Lowe, the administrator of the flood insurance program and Director of the Mitigation Division, along with our other witnesses. We do look forward to your insight and expertise. I would let you know that our ranking member, Ms. Waters, has notified us she will not be able to be with us today. However, without objection, her statement and that of any member will be included in the record. Hearing no objections, it will be included.
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    With that, I will turn to the gentleman, Mr. Watt.
    Mr. WATT. Thank you, Mr. Chairman.
    Ms. Waters asked me to be here, because I had asked somebody to substitute for me at a 10 o'clock hearing on a subcommittee that I was the ranking member of, and that person had agreed to do it. I felt like I at least ought to return the favor to somebody. So I am here. She asked me also to be here because she knows that North Carolina has a dog in this fight, and she probably figured I was going to be here listening to the testimony anyway. North Carolina, I think, is maybe the fifth most impacted state by what we are here to deal with today.
    I have a statement from Ms. Waters which I will not read, in the interest of time, but will submit for the record under the chairman's unanimous consent request. I look forward to hearing the witnesses, both my colleagues and the witnesses on subsequent panels. I yield back in the interest of time.
    Chairman NEY. I thank the gentleman for yielding back. Other opening statements?
    Mr. CLAY. Mr. Chairman?
    Chairman NEY. Mr. Clay.
    Mr. CLAY. I appreciate that the committee will hold hearings on a subject so important to my district and the State of Missouri. My district is in an area that is the watershed of both the Missouri and the Mississippi Rivers, two of the largest river systems in the United States. Congress passed a the National Flood Insurance Act to identify flood-prone areas, make flood insurance available to property owners and communities enrolled in the program, and to assist and encourage floodplain management and ultimately reduce federal spending for disaster assistance.
    In 1993, one of the worst years in the history of Midwest floods, my district suffered from floods both in the city and in the county areas of St. Louis. There was no one left untouched by the devastation that took place. It would be hard to anyone to contemplate what would have happened were not the National Flood Insurance Program already in place. There is a tremendous need for the reauthorization of this program. It is the key to survival of many Missouri businesses and families.
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    One of the largest issues of this reauthorization is addressing the issue of repetitive lost property—those properties that have experienced two or more losses greater than $1,000 each within a 10-year period. FEMA has identified over 48,000 properties insured under the national flood insurance plan that meet the definition of a repetitive loss property. Of that number, over 10,000 have had flood losses that total over $80 million annually.
    Mr. Chairman, I look forward to the discussion of these issues today and I ask unanimous consent to submit my statement to the record.

    [The prepared statement of Hon. Wm. Lacy Clay can be found on page 48 in the appendix.]

    Chairman NEY. Without objection. I thank the gentleman for his statement.
    The gentleman from Georgia, Mr. Scott?
    Mr. SCOTT. Chairman Ney, I want to thank you and certainly Ranking Member Waters and Ranking Member Watt, who has so dutifully taken her place. I want to thank you for holding this important hearing today regarding the National Flood Insurance Program. I represent the State of Georgia. We have had one very impactful area in my state recently, and that is in the Albany-Southwest Georgia area, with the Flint River; and also down in the central part of our state with the Ocmulgee River. We have had some very catastrophic situations that took place there.
    I want to thank the distinguished panel of witnesses and my colleagues who are working very feverishly on this issue. I certainly support the National Flood Insurance Program because I believe that it provides an important service to people who have had property hit by a natural disaster. However, I recognize that an exceptional group of repetitive loss properties have cost the program a significant share of annual funds. With the budget battles that are currently being waged in the House, we certainly need to find the best ways to target these scarce federal funds. I certainly look forward to hearing about H.R. 253 and H.R. 670 and other recommendations for the reform of the program.
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    As we move forward, there are some specific issues that I certainly hope we will cover. I am very much concerned about those that are at the lower end of the economic pole, the lower-income occupants in repetitive loss properties, that do not have the ability to just move anywhere or pay for mitigation measures. It is important to find out what can you assure the low-income owner or renter of properties in regards to these reforms to the program, and what protections can be offered to them. I am also concerned that in some cases mitigation purchase offers may be insufficient to pay off an outstanding balance on mortgages secured by these targeted properties. Is there an appeal? What appeal or what option would a homeowner have to address this inequity?
    We are dealing with the most important asset that any family can have, and that is their home. I recognize the importance of that and I also recognize the importance of the budget shortfall we are faced with. This is our challenge.
    Thank you, Mr. Chairman. I appreciate it.
    Chairman NEY. I thank the gentleman from Georgia.
    With that, we will begin with Mr. Baker.


    Mr. BAKER. Thank you, Mr. Chairman. I appreciate your courtesy in calling this hearing and offering me an opportunity to participate.
    This is an unusual issue in that in the former Congress, former member Bentsen, myself, Baker, my good friend from Nebraska, Mr. Bereuter, and Mr. Blumenauer were all active on this subject. It seems the letter ''B'' and hot water sort of go together, hand in hand. I have not figured it out yet.
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    We also have quite different perspectives about the validity of the program and its usefulness to the American people. The first thing I would like to address is the question of taxpayer bailout and the access to taxpayer funds in order to make this program operational. We have plotted and make available to the committee a chart which shows over time the line of credit which is utilized by the program to meet needs of those who fall victim to a flooding event. As you may know, we assess a participant in the program a premium. The premium goes into a fund, and depending on the cycle of weather and flooding and events, we can either have a surplus or a deficit in that fund. There is no question that in given years, we have dipped significantly into that line of credit and have in essence a loan from the American taxpayer. To date, this chart goes through the end of 2001, showing about a $700 million surplus on hand in that fund. All funds advanced for the purpose of flood insurance program payments have been repaid with interest. This is one of those rare occasions, as opposed to being a run on the line of taxpayer credit, it actually is a program which has returned money to the program from which it was intended.
    It is my judgment that we need to frame the argument in proper perspective. It really is not a run on taxpayer money. However, if we choose to contrast that with the Federal Emergency Management Administration's general disaster relief program, in the year 2001, for example, $3 billion of taxpayer-appropriated dollars were paid out. Now, we all find those appropriations and activities meritorious. No one here is suggesting we do away with FEMA disaster assistance, but keep in mind the flood insurance program has generated repayment of all advances with interest and currently have a surplus. It certainly will run deficits again, as disasters take their toll, as contrasted with the FEMA appropriations which literally spend billions of dollars from the taxpayer's pocket.
    Then when we began to look state by state, I think many would find this of interest—taking, for example, the state of California as one example of participation in the program. They have insurance in force covering about $45 billion in assets. The premiums they collect to cover that $45 billion exposure is $134 million a year—$45 billion coverage; $134 million in premium. The state of Louisiana, by example, has $45 billion of policy in force. We pay $151 million in flood insurance premium. The small state of Louisiana pays $20 million more a year in flood insurance premium than the great state of California, with the same exposure to the fund.
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    What does this mean? It means we are perhaps more likely to have a flooding event, but we are paying our portion of our risk. If you look to the numbers of individuals who are covered by the program—and just a brief word how it works. Each state has a 100-year flood survey. If you fall within that 100-year plain, you are supposed to be enrolled in the program paying premium appropriate to your flood risk. That is not the case. Of the areas identified within the 100-year flood plain nationally, approximately one-half of the individual properties are enrolled in the flood insurance program. So on its face there appears to me a very readily acceptable solution. Those who are in a flood-prone area should simply pay the premium. On the other hand, if you were involved in an automobile accident more than once, even if you paid your premium, we do not say to you, we are going to take away your car insurance. Neither should we say in the case of a repetitive flood loss, because you flooded more than once, you should lose your coverage.
    Why? Well, if I lived downstream in South Louisiana, and I encourage all of you to come because if you have not been down to the great port of Baton Rouge or New Orleans, about two-thirds of this wonderful nation's water goes right by my house. It is a magnificent thing to see. But in most developments, if you buy in a nice dry subdivision, minding your own business, you can live there for a number of years and because of upstream development, either the municipality, the parish or county as you call it, other developers, can change drainage patterns. You have an on-shore wind, a hurricane brewing, a full moon—that has an affect—and you have an upstream development that changes flood patterns, all of a sudden you find yourself with water in your home where it never occurred before. That was not in bad faith. It was by the actions of upstream development over which you have no control.
    So what can we do about this? Well, it just so happens I have a bill, as referenced by the chairman, H.R. 670. This establishes a process which I think Mr. Scott in his opening statement would find interesting. It does not say we are going to pass one standard—repetitive loss, dollars lost. It is going to say that when FEMA identifies you as a problem, they have an obligation to notify you and say you are a problem. Then you have a right to a hearing and offers of mitigation. Under the Bereuter proposal, it is two offers of mitigation you must refuse before you are booted out. Under our proposal, it is one. If you refuse mitigation one time, and it is a responsible solution to your problem, you are out of the program. It does not refer or relate, however, to the number of losses for which you may claim. You can have one bedroom in the house get the carpet wet, and it is a $1,000 event. You could have one event and be $100,000 event. It gives FEMA the responsibility and the authority to do a case-by-case assessment and places within their hands the responsibility to protect the integrity of the program. To me, that makes a great deal of sense.
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    You are absolutely correct. In many cases, people who live in low-lying areas are not living in the expensive houses. There are people who may have significant debt. There are people who are going to have alternatives to go out or perhaps even enjoy the benefit of home ownership. They may be renters. The devastation is no less. In South Louisiana, we have a rather direct way of saying it: Do not throw Bubba out with the bathwater. We have working families who are paying their flood insurance premiums, who by no fault of their own find themselves in circumstances not of their own choosing.
    There is a way to remedy this program. One is to get all who benefit from it paying premiums as we do in Louisiana, and two, is to give FEMA the discretionary authority to get rid of the multiple offenders who are violating the principles on which the program was built, and I support that. Lastly, as Mr. Blumenauer's interest has expressed repeatedly over time, we need to do more in the way of local initiatives and greening the results of a flood mishap. Where we have a property we have identified, let it not go back into commerce. Turn it into green space so we do not repeat the same problems we are correcting.
    Finally, communities should be given credit for their own initiatives to reduce flooding where possible. In my own district, we just passed a property tax in some very conservative territory, as a local match with state dollars to build a $160 million drainage structure which is to lower flood elevations in our community by two to six feet, depending on where you live. Where a community is taxing itself to make changes, that ought to be given credit by FEMA.
    Thank you, Mr. Chairman, for this time.

    [The prepared statement of Hon. Richard H. Baker can be found on page 35 in the appendix.]

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    Chairman NEY. I thank the gentleman for his testimony.
    The gentleman from Nebraska, Mr. Bereuter.


    Mr. BEREUTER. Good afternoon, members of the subcommittee. Mr. Chairman, thank you very much for holding this hearing today on this important subject.
    In January of this year, Congressman Earl Blumenauer and I introduced the Two Floods And You Are Out Of The Taxpayer's Pocket Act. We introduced similar legislation in both the 106th and 107th Congress, and I have been active with former Congressman Joseph Kennedy since practically my first service on his subcommittee and committee. This bill represents, then, a continuation of a long-term interest in our effort to reduce the extraordinary cost of repetitive losses from the NFIP as administered by FEMA.
    At the outset, I would like to thank Mr. Blumenauer for his dedication and devotion to the principles and details of this legislative effort. I also note that during the 106th Congress, FEMA, under the direction of James Lee Witt, was involved in assisting us in drafting our legislation and was supportive of it. Furthermore, I would like to thank my colleague, Richard Baker, who has, of course, just testified, for his effort and concern about the functioning of the NFIP. He brings up a number of good points. We are proud in fact to take into account certain of his concerns, and there are others that should be. I look forward to working with him.
    This legislation is very important because, of course, the authorization expires on December 31 of this year. Our legislation would extend the authorization until 2007 and make essential changes to the program as it relates to repetitive loss properties. According to FEMA, as of January 31 of this year, the NFIP program insured over 48,000 repetitive loss properties. Repetitive loss properties are those which have two or more NFIP claims each over $1,000 within a 10-year period, as we are using that term. These properties represent 1 percent of the properties that are currently insured by the NFIP, but in an average loss year they counted for 25 percent of the NFIP flood claim dollars. The NFIP pays out on average more than $200 million annually to address repetitive loss properties.
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    If enacted, this legislation we offer I think will help turn the tide against the huge costs associated with repetitive loss properties. Twenty-five percent of all current NFIP policies are subsidized by other premium payers, and thus do not pay actuarially sound rates for their coverage. I agree with Mr. Baker that all properties located within the 100-year flood plain should be required to have national flood insurance. However, they should also pay actuarially sound rates, I would contend. A significant number of those subsidized policies are for repetitive loss properties. Moreover, the NFIP has had the unintended effect of helping people stay in areas that are repeatedly flooded, when it would be in their best interest and those of FEMA and other policyholders of NFIP to mitigate the flood vulnerability of these properties, or to move elsewhere.
    The legislation authorizes a $400 million increase in the FEMA mitigation grant assistance program over four years, to be used to relocate or elevate properties that have sustained the most repetitive loss flood damage. Furthermore, the legislation addresses the repetitive loss properties in a simple, straightforward manner. The owner of repetitive loss property will be charged the actuarially sound risk-based rate for their national flood insurance policy, if both of two conditions prevail. The first condition is that two or more NFIP claims must have been paid on an individual property, each over $1,000, within a 10-year period of time. By the way, we certainly will look for discussion and consideration of an amount different, higher than $1,000 if that is in fact too low. The definition is different than the one used in our legislation in the 106 and 107th Congress, which included flood insurance claims under that figure, within the definition of a repetitive loss property. This was a response to the concerns brought to us by various members and interests.
    Second, the owner of the property must have refused a federally funded buyout or federally funded mitigation measure such as an elevation of the structure or property. Of course, mitigation offers would be made only when there is a cost effective mitigation option for the property. FEMA has testified in the past that properties which have suffered more repetitive NFIP claims and/or losses will in general be those which are more cost-effective to mitigate. I think it is important to note that this Act will not in any manner deny flood insurance coverage to any interested owner, renter or occupant of a property. That is not the case, but they must pay realistic actuarially sound rates under this legislation.
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    I co-authored this legislation for numerous reasons. However, the following four reasons are the most significant grounds, I think, for this legislative initiative. First, some policyholders of repetitive loss properties are able to take advantage of and abuse the NFIP by making claim after claim on the same flood-prone properties. Number two, federal taxpayer money will be saved under H.R. 253. Yes, I know that there is a return on it under most conditions, and eventually that may always be the case. That is uncertain. Three, through the policies and practices of the currently constituted NFIP, the Federal government is encouraging development by giving the subsidized flood insurance to these high-risk areas through the excess insurance premiums and costs to other policyholders. And fourth and finally, there is a demographic trend of far more, and a higher percentage of Americans living closer to the United States coastlines and rivers which will, in the absence of reform legislation, result in a greater number of repetitive loss claims.
    So laying a few facts on each of these four, I would say the following. According to FEMA, there is a category of 10,000 repetitive loss target properties which meet one of the two definitions. These target properties either have four or more total NFIP losses no matter what their value, or they have had two or three losses, or the cumulative NFIP payments are equal to or greater than the buildings' value. For example, one of the most egregious examples among a great many examples of abuse of the NFIP was a home in Houston, Texas which was valued at $114,480, yet it received $806,591 in flood insurance payments over the last 18 years. These property owners did not do anything wrong. They just exploited the current situation that is there in our flood insurance program.
    I think it is important to note that some NFIP repetitive loss policyholders are not intending to abuse the NFIP, but instead are trapped in a cycle of loss after loss, and mitigation is their only solution for their property. In fact, in some repetitive loss properties, the value of a person's home is now less than their mortgage. It is important to note that FEMA is the only willing buyer of many repetitive loss properties. Furthermore, under the NFIP a very large regional cross-shifting of the cost of flood insurance is occurring. The policyholders in non-repetitive loss areas of the country by their higher than appropriate premiums are subsidizing the policyholders in repetitive loss areas of the country. In FEMA's defense, it does not have the congressionally mandated tools to address the costs and the cost shifting caused by these repetitive loss properties, and we attempt to give them those tools in this legislation.
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    Second, the legislation will save federal taxpayer dollars. According to FEMA, $1.2 billion of the over $12 billion in past NFIP losses have been funded by general taxpayer funds. While this money has finally been repaid by FEMA to the Department of Treasury—and my colleague points out, with interest—I certainly know of no private insurance company that can long stay in business if it disregards good actuarial practices. American NFIP policyholders and taxpayers are paying the costs for those individuals who choose to live or who have perhaps no option but to live in high flood risk areas and who fail to take prudent mitigation actions. In some cases, they do not have the resources for mitigation. This bill will help to ensure the future solvency of the NFIP, even when the prospect that we are going to have, according to climatologists, many more hurricanes in the upcoming years.
    Moreover, this bill will also save substantial taxpayer money in the cost of federal disaster relief assistance, as many properties will be bought out and removed from federal disaster area-prone areas. This bill explicitly provides that many types of federal disaster relief assistance will be not given to the owners of repetitive loss properties, but only if they refuse to accept the mitigation assistance. Third, my support for the legislation is based on the fact that NFIP gives subsidized flood insurance to disaster-prone areas. Many interests, including taxpayers organizations, flood plain managers, and environmental groups, have argued that the NFIP encourages people to live in repeatedly flooding areas. The question needs to be asked whether rebuilding in repetitive loss, high-risk areas is a sensible and economically justified policy. I believe in many cases the answer certainly would be no. The Federal government should not encourage development in even more repetitive loss properties.
    Fourth and lastly, the demographic reality is that more and more Americans each year have residential properties along our coasts and rivers. For example, according to the U.S. Census Bureau, within the next 10 years 75 percent of the United States' population will live within 100 miles of the U.S. coastline. Due to this demographic trend, the time is certainly upon us when Congress should change the structure of the NFIP and encourage proper mitigation action. To further illustrate this point, I support this legislation because of a predicted future change in weather patterns. Dr. William Gray, a highly respected professor of atmospheric science at Colorado State University, predicted that over the next few decades the East Coast and the Gulf Coast will be subjected to more frequent and forceful tropical storms, including hurricanes. Due to the number of repetitive loss properties on the coast, additional hurricanes will result in huge numbers of additional claims under NFIP, and of course disaster relief. It is imperative, I think, that the NFIP is changed before the eye of yet another hurricane is upon us.
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    In summary, I think we need to stop treading through water of repetitive loss after repetitive loss. Passing legislation is the right thing to do at this time. In fact, Congress has delayed far too long in making some obvious reforms to NFIP. We look forward to working with you, Mr. Chairman and members of the subcommittee and the committee, including especially Mr. Baker, in attempting to craft legislation which will serve the purposes of the NFIP, the taxpayers, and will not result in undue hardship for people that happen to be living in repetitive loss structures.
    Thank you very much.

    [The prepared statement of Hon. Doug Bereuter can be found on page 41 in the appendix.]

    Chairman NEY. I thank the gentleman.
    The gentleman, Mr. Blumenauer from Oregon.


    Mr. BLUMENAUER. Thank you, Mr. Chairman and members. We deeply appreciate the opportunity to testify here today on this critical issue.
    I will not bore you with repeating what my colleagues have mentioned. I just want to be clear that I deeply appreciate the leadership that Mr. Bereuter has demonstrated. I feel like I have learned a lot in having a chance to work with him on this legislation. I am intrigued with a number of the points that our colleague Mr. Baker has focused on in terms of some of the unique circumstances that have occurred over time. We must be broad-minded and flexible in dealing with them.
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    My focus is making sure that the Federal government is a better partner in making our communities more livable, making families safe, healthy and more economically secure, and dealing meaningfully with the water cycle is an important way to meet that responsibility. For too long, the Federal government has tended to treat our precious water resources as if they were mere engineering projects, machines we could adjust, channel, narrow and accelerate without consequence. The results, frankly, have been little short of disastrous. The flood insurance program is an important element that has developed to try and ameliorate this situation. It is a good example of how the Federal government can work with local communities to lessen the impacts that disasters have on people's lives and property.
    As we move toward the reauthorization process, it is time for the Federal government to provide better incentives for all involved—individuals, communities and states—to deal in a comprehensive fashion. Part of the problem is that the way the federal flood insurance program is currently constituted actually encourages flood plain development by, reducing the economic risks of living near the water. We have stimulated some of the things that Congressman Baker talks about that actually make the problem worse over time. The administration, to its credit, has identified an important environmental and economic priority to reform the flood insurance program, and they did that from the first day they started work. The 2003 budget aimed to, ''reform the National Flood Insurance Program to improve financial performance and transfer greater financial responsibilities to individuals who build in flood-prone areas.''
    The OMB has argued that for too many years the program has put expenses greater than revenue from insurance premiums that prevent building the long-term reserves necessary for a rational insurance program. As has been mentioned by my colleague Mr. Bereuter, we are facing, no pun intended, the eye of the storm in the future—demographic changes, change in weather patterns because of global climate change, and changes in development patterns. We are going to see greater and greater catastrophic loss. Already, we have talked about the $1.2 billion that was necessary to shift because there was a shortfall. But there is a greater problem over time. We are dealing with expenses for disaster relief that the Federal government has to pay that are far in excess of that—over $3 billion extra in a typical year. There are other experts here that will talk in terms of how it is actually greater.
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    We have seen that our specific target properties take too much of the premium dollar. We subsidize people to live in repetitively flooded areas. In order for them to do so, not only does it drain more resources from the program, but everybody else pays a higher insurance premium than would be necessary. Now, Congressman Baker points out, and I agree with him, that you should not take away somebody's car insurance because they have an accident. But the current situation is analogous to taking that proverbial little old lady who drives her car once a week to church without incident, and making her pay more because somebody who is repeatedly in auto accidents actually pays far less—not taking insurance away, but they actually pay less than they should.
    Our Act would correct that. It would not deny insurance to anybody, but it would force them to make a choice after repetitive flood loss. They either move, mitigate or ''pay the freight.'' I would suggest that this will save billions of dollars in avoided disaster relief that we have seen every year in the eight years that I have been in Congress. We have had to shell out more money than was budgeted. But it also will protect the people who live in harm's way. We do not do anybody a favor keeping them in the path of repeated floods. Members of this committee know examples in their own states—in Georgia, in North Carolina, in Ohio, in Louisiana, in Texas—where we have seen people die because they live in places where God has repeatedly shown that he does not want them. We do not do them any favors. I am very interested in the suggestions that are being offered by Mr. Baker for ways to provide appeals, to deal with areas of low income and historic districts. I think we can work that problem through, but we do them no favor keeping them in harm's way.
    I have seen the example in my own community. In 1996, we had one of the worst floods in the last half-century. I used to be the Portland public works commissioner and was out there in the morning where there was national television coverage as we were trying to sandbag to prevent flooding in our downtown. We had at least three people die. We had 23,000 people in our state that had to be relocated. We had an estimated more than $250 million of loss, not just from flood insurance, but from disaster relief that the Congress voted to provide. After this experience, our community secured a Project Impact designation and leveraged federal money to create more disaster-resistant communities. Our city applied for a community rating system rating, and in 2001 got a class six rating, what was than the seventh-best rating in the country. Since then, our flood plain residents have seen 20 percent reduction in their insurance premiums, and we have seen much less damage from subsequent events.
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    I look forward to working with you to save taxpayer money, to save lives, improve the environment and deal with people who have legitimate needs. I appreciate your courtesy.

    [The prepared statement of Hon. Earl Blumenauer can be found on page 45 in the appendix.]

    Chairman NEY. I thank all three members for testifying. I would be curious, and will work with Congressman Baker, with your office—a very fascinating chart of the year-end results, I would like to see some of the analysis of how this happened and how the flow went up and down. It would be interesting.
    I do not have any questions. I just have a comment. We had an interesting situation occur, and I think it just fits in with how you craft a bill, how it is carried out—whatever bill it is. But in Powhattan Point, Ohio we had floods down in an area I used to represent in the old district. What ended up happening was the people would move the trailers off when the flood was coming, and then they would move the trailers back—for years. Well, they moved the trailers off one time, and all of a sudden FEMA said you cannot move them back now until you build a 40-foot tall block wall and put the trailers on top of it. I am not talking manufactured housing. I am talking about 25-year-old trailers.
    So you have to step in with caution, and say wait a minute. You could kind of look at it technically that those people were twice or ten-times went into a flood area, but actually—this is a unique thing, I know—but still FEMA came in an said, no you cannot do that—build a 40-foot tall structure, put the trailer on top of it. I think there are cases, when you deal with any of this, you have to really think it through. I know this is one isolated case. There are a lot of situations, I think, that cause a lot of interesting debate on how you craft this to work.
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    Mr. BAKER. Mr. Chairman, I want to take recognition of some of the points my colleagues have made, and say that the example you have just given is the exact opposite of what I am concerned about, where people go buy a trailer before the flood; they wait until it is starting to flood; move the trailer into the flood plain; make the claim and move back out after the water is gone. I think in the example that Mr. Blumenauer gave of the little old lady and the repetitive speeder, I would in this case give FEMA the right to be the cop and not wait on hearings, not wait on offers, not wait on mitigation turn-downs, but empower FEMA to go get the bad guys and throw them out the next morning.
    We are not really that far apart. I think the only difference is how we get at the problem people and who has the authority to make those determinations. I just thank the Chairman for his willingness to give us this opportunity.
    Chairman NEY. Thank you. I want to thank the members for their testimony.
    Mr. BEREUTER. Mr. Chairman, I would ask unanimous consent, as a member of the subcommittee if I may, that Mr. Blumenauer be allowed to come up front and listen to the other testimony under such conditions as you would lay down.
    Chairman NEY. Without objection.
    Mr. BEREUTER. Thank you.
    Chairman NEY. As long as he walks up and does not ride a bicycle up to the front, but that is okay.
    I support his bicycling efforts, too, by the way.
    I call panel two. I want to welcome Mr. Anthony Lowe. Mr. Lowe has been appointed Director of the Mitigation Division of the Emergency Preparedness and Response Directorate in the newly created Department of Homeland Security. He continues to serve as a Federal Insurance Administrator responsible for overseeing the National Flood Insurance Program.
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    With that, we welcome you, Mr. Lowe.


    Mr. LOWE. Thank you. Thank you very much, Chairman Ney, Ranking Member Waters, in her absence, Mr. Watt, members of the subcommittee. I am Anthony Lowe, Federal Insurance Administrator and Director of the Mitigation Division of the Emergency Preparedness and Response Directorate of the Department of Homeland Security.
    On behalf of the National Flood Insurance Program, the NFIP, we appreciate the invitation to appear today before the Subcommittee on Housing and Community Opportunity. This summer marks the 35th year since Congress first authorized the National Flood Insurance Program. After humble beginnings, the NFIP now stands as the largest single-line property insurer in the United States, with 4.4 million policies in force and $637 billion in insurance coverage. Nearly 20,000 participating communities are managing their flood risk and reducing America's flood damages by an estimated $1 billion each year. Floods are still, however, the most frequent and costly hazard in the nation. So our mission to save lives and property in America continues. It is our goal to make the NFIP a performance-driven, results-oriented program to improve the delivery of hazard identification, mitigation, and flood insurance services across the United States.
    In line with the President's management agenda, we are managing the NFIP, as well as all of our mitigation programs, to achieve real results that reduce the risk and provide greater protection. By the end of this fiscal year, our performance objective is that 5,000 more people, 2,200 more structures, and 150 more community infrastructures will be better protected. Toward this end, we are moving to an e-commerce model that will automate the NFIP's business processes to improve delivery of services, while decreasing the total cost to the program along the entire value chain.
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    In addition, critical to achieving program results is accurate flood-risk information. Accurate flood-hazard data saves money. More importantly, accurate flood-hazard data saves lives. We appreciate Congress appropriating $150 million this fiscal year to help us update and digitize the NFIP flood maps. We are leveraging that investment with our State and local partners to earn even greater value.
    Our mitigation programs are also paying off. For example, among our Flood Mitigation Assistance, FMA, projects completed between 1997 and 2002, we found that for every dollar we invested in mitigation, the taxpayer received savings of $2.62 in avoided flood damages. During this period, we leveraged $170 million for federal dollars, and $60 million in State and local cost-shares to return an overall savings to the American taxpayer of $440 million. We cannot put a price tag on what this means in human terms, however—only that our mitigation projects have made thousands of citizens safer from floods and the misery they cause.
    Mr. Chairman, besides the obvious success of the program, I am also happy to report that the NFIP is once again debt-free. In June, 2001, Tropical Storm Alison became the program's first $1 billion storm. We had to borrow $660 million from the Treasury to pay for losses that exceeded our reserves. We repaid that debt with interest in October, 2002. Again, our greatest achievement continues to be in the lives we save and in the communities that are safer from flood losses. However, the NFIP has its challenges. Everyone recognizes that repetitive flood loss properties are a national problem. We are paying far too much in claims for just a handful of properties, and there is a painful human face to this problem as well. Far too many people are caught in a desperate cycle of damage-repair-damage with few options for escape. To a degree, the problem of repetitive flood loss properties is an inherited one. Congress structured the NFIP as an agreement between the Federal government and local communities, communities that would adopt and enforce mitigation standards for new construction in their high-risk flood plains. In return, all property owners could purchase flood insurance.
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    This program was designed so that the owners of existing properties would pay discounted premium rates that do not reflect the full actuarial risk, so as not to be penalized for buying or building in a flood plain before full knowledge of the flood risk was known. Today, we find that almost all repetitive flood loss properties were built before the availability of detailed flood-risk information. Of course, two bills are being considered today by this committee to address the problem of repetitive flood loss properties. I commend the sponsors for their leadership in focusing attention on this national problem and in proposing remedies for people caught in a desperate cycle of repetitive flood losses. While the administration has not taken a position on these bills, we would like to share with the Subcommittee our thoughts on the necessary tools to address the problem of repetitive flood losses in America.
    The NFIP's broad definition of two or more flood losses of $1,000 or more helps us identify for analysis our entire universe of insured repetitive flood loss properties—some 48,000 properties. From this broad category, we would like to first target 10,000 of these insured repetitive loss properties for mitigation, relocation, elevation, or acquisition. This target group of properties has four or more flood losses or two or three losses that cumulatively exceed the value of the building. We have paid close to $1 billion in flood insurance claims on these properties since 1980. We need a full set of tools to address this problem. In this connection, resources are clearly necessary. Flexibility is also key in determining the composition of repetitive loss projects and in defining our highest priority properties. On average, the program identifies 500 to 750 new repetitive flood loss properties each year. There should also be some consequence for a property owner who refuses a mitigation offer to remove himself from harm's way. An actuarial premium or sufficient deductible is in keeping with the intent of this program.
    However, we are also cognizant that some property owners do not accept mitigation assistance, especially buyout offers because they cannot afford the cost share. In other cases, there are few alternative living sites in that area. So again, we need flexibility and often creativity to deal with this unique circumstance. Let me give you one example of that creativity. We are piloting a project in Louisiana that involves the demolition and rebuilding or elevation of six severely flood-damaged properties on the repetitive target list. This will give the owner a new home at the cost of an elevation project. A similar pilot is also occurring in Florida. That cost-share in Louisiana is being borne by the State and the parish. In addition, we also need the involvement of State and local governments in the disposition of these properties so that the Federal government does not become the owner of these properties. With these tools, we can achieve the results that are good for the community, the individual property owner, and the NFIP.
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    Chairman NEY. I want to note the time has expired.
    Mr. LOWE. Thank you.
    For us to continue to be effective, however, the authorization of the NFIP is important. We appreciate the actions of this committee to reauthorize this program when we had that lapse back in December. Needless to say, the program and its stakeholders would also be happy with the multi-year authorization that has been discussed by one of the bill sponsors.
    Again, thank you for the opportunity to testify on behalf of the program and the Department of Homeland Security.

    [The prepared statement of Anthony Lowe can be found on page 60 in the appendix.]

    Chairman NEY. Thank you, Mr. Lowe. On FEMA's description of repetitive loss properties, there is a threshold of two or more $1,000 events in a 10-year period.
    Mr. LOWE. Correct.
    Chairman NEY. How was that definition of repetitive loss arrived at?
    Mr. LOWE. What we were trying to do was to really define the entire universe of repetitive loss properties so we could further analyze those properties and try to determine what, if anything, we should do. Obviously, we know that we have 48,000 of those properties from that definition. We were also able to determine that $200 million annually was being spent on these properties. Similarly, with the 10,000 properties that we boiled down from the total to develop our repetitive loss target strategy, we know there is an annual loss of $80 million. Again, that comes from our definition. Because we add to those properties every year from 500 to 750, it means we need a flexible definition that will allow us the opportunity to adjust that target group.
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    There is also another aspect that I am just going to mention very quickly, simply because I have read the transcripts from last year's hearing—excuse me, the year before last. There are many instances where there is a property on the target list in the community, but there may be other nearby properties that are repetitive loss, but maybe have not had many losses. The community or the State decides, we need to do something about the whole flood plain, and we do not want the blight of a checkerboard effect of both mitigated and unmitigated properties. Therefore, the State or community proposes to actually address the whole area or the whole number of properties in that community. In that instance, again, we want to have the flexibility to be able to meet their need.
    Chairman NEY. If you need the flexibility, but the desire to have the $1,000 in the statute, is that correct?
    Mr. LOWE. Frankly, I do not think we would at all be opposed to simply publishing a rule as to what the target group would be in any given year.
    Chairman NEY. Instead of——
    Mr. LOWE. Instead of any particular dollar amount or any particular number. I say that because the flood plain is always changing and that number will always be changing. We are going to learn as we begin to mitigate more and more of these properties as well.
    Chairman NEY. The GAO report—I am not sure when it came out—but it identified improving the financial condition of the flood insurance program and it said that it would be a major management challenge to do that, to improve the financial condition. Do you think there are structural changes needed within FEMA in response to the GAO report?
    Mr. LOWE. Again, personally, I would disagree with that report. I think the fact that this program has existed as long as it has, and since 1986 has consistently repaid the treasury what it borrowed with interest after certain disasters—I think that indicates in fact a certain amount of actuarial soundness of the program. By the same token, I think we can do a tremendous amount to strengthen this program by dealing with these repetitive loss properties. The older, so-called pr-FIRM properties account for basically a premium shortfall in the program of about $700 million annually. So when you look at that figure, it means we almost never build up a reserve. Our reserve right now is about $112 million. I wish it were the $700 million that one of the congressmen mentioned, but right now it is not. Again, addressing the repetitive loss problem would very significantly help us to increase our reserves and strengthen the soundness of the National Flood Insurance Program.
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    Chairman NEY. Right now you are free of debt to the U.S. Treasury.
    Mr. LOWE. That is correct.
    Chairman NEY. This is probably something you cannot predict, but do you have people looking at future trends, and would you anticipate having to come back for appropriations?
    Mr. LOWE. Again, we have not had to come back for an appropriation since 1986. I certainly cannot predict the trend, but an average loss year for the NFIP is from about $750 million to about $850 million, which basically means the program can handle that. When losses exceed that amount then the program runs into problems and we have to go to the Treasury to borrow.
    Chairman NEY. Questions from the gentleman, Mr. Watt?
    Mr. WATT. You obviously want the flood insurance program reauthorized, but I am not clear on what terms you would have it reauthorized. Is the Administration planning to take a position on the bills that have been introduced? And if so, when? And if not, is the Administration planning to come forward with a proposal itself under which it would like this reauthorization to take place?
    Mr. LOWE. I appreciate that. The Administration, as I understand it, does not normally take a position on a bill until after it has been reported out of committee. In this instance, what I have tried to do is to highlight for you, really in looking at both of the bills, the tools that we believe are necessary. Certainly, as I mentioned earlier, the multi-year authorization is important, but so are the flexibility in terms of definition and the understanding both bills seem to exemplify as it pertains to the cost share. Those of you who are concerned about people who may not be able to afford to either take advantage of a mitigation offer or to perhaps move elsewhere, this helps address that situation. So I commend the sponsors of both pieces of legislation. In the past, as has been mentioned, we have assisted, for example Congressman Bereuter, in developing that bill.
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    Mr. WATT. But both of the bills, it seems to me, the central focus of both of the bills is to eliminate repeat users, either through mitigation or through getting them out of the ability to be in the program. What is your attitude toward that?
    Mr. LOWE. Again, as I testified, I really believe that much of what we are trying to do is really quite the same. I think we want to get people out of harm's way. I think that is what our mission is. I think that is the purpose of both bills. In that connection, I think that both dealing with actuarial premiums and/or even deductibles in a more realistic way will help provide us the opportunity, whether someone mitigates or not, to be able to address this problem to some extent. Obviously, I have heard a couple of times that somehow this program encourages people to live in the special flood hazard areas, and I am not convinced that is the case. But nevertheless, the purpose of this program, when it was authorized, was that it would in fact offer insurance to anyone. So the only question that we really have is upon what terms.
    Mr. WATT. Let me ask this question a little bit more directly, then. Would the Adminstration be happy with a reauthorization either single or multiple years that does not change the program?
    Mr. LOWE. Again, we are hopeful in the program end, and I think the administration might have a position later more directly on the tools that are necessary. The history that I understand that this program has had with Congress, has been one of trying to look at this program over many years, to determine the policy tools that are necessary.
    Mr. WATT. I do not think you are being responsive to my question, Mr. Lowe.
    Mr. LOWE. I know what you are trying to say, but I——
    Mr. WATT. I am trying to find out if you want this program changed or not. I guess that is the bottom line. Would you be satisfied with a reauthorization that does not do anything other than reauthorize the existing program, I guess is the question.
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    Mr. LOWE. Let me put it to you the best way I can. If you reauthorize this program and you do not change it, then the only thing I can do is pretty much what I have tried to do since I have been here. That is to take every single mitigation program we have and try to leverage it against the repetitive loss problem. What have we seen? We have seen that the number of properties that I am able to, and this program is able to mitigate in one year is exceeded by the number of repetitive loss properties that are added. In other words, I can mitigate, let's say, 270 properties in a year, but I am adding to that list from 500 to 750—some are in the target group; some are in the bottom group.
    Mr. WATT. So you want more ability to mitigate.
    Mr. LOWE. We need more.
    Mr. WATT. You want more ability to mitigate.
    Mr. LOWE. We need more flexibility.
    Mr. WATT. Thank you, Mr. Chairman.
    Chairman NEY. I thank the gentleman.
    Mr. Bereuter?
    Mr. BEREUTER. Thank you, Mr. Chairman. The gentleman from North Carolina asked a very fair question. I would have to reiterate that H.R. 253 does not force anyone out of the NFIP. It simply says if they refuse mitigation after that second flood of certain dimension, then they have to pay actuarially sound rates. You asked a very fair question at the end there, and I will answer for Mr. Lowe, from my perspective. We have toyed around with this legislation and this program long enough, and either we have reforms or I think we have to force a crisis by blocking reauthorization.
    I do have a couple of questions for Mr. Lowe. I very much appreciate your testimony and all the agency has done in the past in your successor position as well. What is your estimation of FEMA's due diligence or success in ensuring compliance for mandatory flood insurance programs, with homeowners who have federally insured mortgages? What more could be done?
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    Mr. LOWE. I think we need to look for ways to do more. Some of what we have been trying to do since I think there was an IG report that raised this issue, is to sync-up our computer system. We would then have a better idea of when people are not complying, after a disaster when they have dropped their flood insurance that they were required to get in order to get assistance after a flood.
    Mr. BEREUTER. Do you think we have had proper kind of effort exerted by financial institutions to cooperate in ensuring that in fact there is flood insurance for properties located within a flood plain for which mortgages are insured?
    Mr. LOWE. I have no reason to believe that those determinations have been incorrect. By the same token, we have found there seem to be policies that are falling in between the cracks. So we are spending a tremendous amount of our energy to increase our flood insurance policy base, not by necessarily new policies, which we are certainly interested in, but also by retaining existing policies. We are finding that what we are bringing in the front end, we are almost losing the same amount, if you will, out of the back end. That means we are dropping policies, policies that probably still require flood insurance. So we are trying to address that now in a number of ways, and I certainly can go into more detail if you would like.
    Mr. BEREUTER. Mr. Lowe, as you know, the cost to taxpayers comes primarily for disaster assistance. We have larger and larger disaster assistance rolls because we have few disincentives. In fact, we have some real incentives with Federal and other public funds to locate in flood plain areas. But I would ask you a question with respect to Federal lands. There are more than some people might imagine that are within flood plains, and which have residences located upon them. The Association of State Flood Plain Managers recommends charging these properties as well, actuarial rates. Do you agree that this is a good idea? Are these properties causing a drain on the National Flood Insurance Program?
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    Mr. LOWE. Yes. I think we definitely need to pay attention to those. I suspect it would be a reasonably large, relatively, percentage of our 10,000 or 48,000 list—either one. I think you are going to find a number of Federal properties. We do need to take another look. Again, whether we address it by full actuarial rates or a combination of full actuarial rates and deductibles, I think we have to kind of move and get off the dime. I think in that connection, Congress' help is very helpful, so that the American taxpayers and certainly property owners feel like their concerns have been fully considered before being hit, if you will, with a full actuarial rate or some higher deductible.
    Mr. BEREUTER. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman NEY. I thank the gentleman. Mr. Scott of Georgia?
    Mr. SCOTT. Yes, Mr. Lowe, the general thrust of this is the repeaters, the repetitive loss properties. Let me ask you about the mitigation process. I am fascinated to know why these folks repeatedly, consistently put their families and themselves in harm's way. And could it be that in the mitigation process that maybe the amount that is being offered for that purchase is insufficient to cover the balance on the payoff of their mortgage? Are we being fair with these people? I mean, it just seems to me that there has got to be a little bit more to all of this from the standpoint of that person and his family consistently putting himself in harm's way. Could you respond to that, if that is a problem?
    Mr. LOWE. Sure. There are a large number of reasons why people refuse mitigation offers. A lot of them have to do with not being able to meet the cost share, and different states have different rules on what that cost share is. Some states or communities can do more; some can do less. The average split is 75 federal, 25 state or local. If that cost is passed on to a property owner, they may or may not be able to come up with it, which may have a tremendous amount to do with whether or not they take advantage of a mitigation offer. There are certainly other considerations as well. Aesthetics sometimes comes up, believe it or not. The impacts in that community on the tax base can have an impact. There are a lot of things that can come up.
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    One of the questions that I have asked my staff is, what has been the impact of fair market value and mortgages on determinations of whether or not to accept a mitigation offer. What I am finding is that by and large if someone is talking about a first mortgage, it is not much of an issue. But if we are talking about a second mortgage, and somebody has a lot of money outstanding, so to speak, it can be more of an issue. Again, I think both bills that we are talking about today go a long ways to deal with that. Again, the example that I gave of the pilot project in Louisiana, which is again also occurring in Florida, both attempt to address this situation where there is inadequate resource, if you will, that a homeowner can bring to bear so that they can get out of a bad situation.
    I would also note one other thing. We have just completed a demographic study, and we have another one that is also in the works. We looked at 2.7 million properties in as many ways as we could against our repetitive loss group, both the large group as well as the target group. What we found is that it really is not a low-income problem. There is not a disproportionate number of low-income properties overall in the repetitive loss target group or in the broader group. However, there are some aberrations. The reverse of that is somewhat true, for example, in Louisiana. So that is a very real problem. But again, that is where we have to have the flexibility to be creative.
    I think we have the will, and the program has the will. I think we need the support of Congress and we need the flexibility. Again, in terms of mortgages and fair market values, if we have a situation where someone, because of repetitive flood losses is rapidly losing the value of their property, as was suggested, this may be the best offer that they have. But it is going to be a fair offer, and I suspect most people are going to frankly want to get out of a bad situation. They are not going to want to stay there with floors that never dry out and mold in the baseboards and all of those sorts of things. It is just a horrible way to live.
    Mr. SCOTT. So you believe that these two measures before us will give you the tools that you need?
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    Mr. LOWE. I believe so—the flexibility in the definition, the resources, and certainly the reauthorization. Those are really key for us. Most of the other things we can work through. But again, we have the will to do it and to leverage all of our programs in a way that we have never had before. So I really want to take advantage of that.
    Chairman NEY. The time of the gentleman has expired.
    Mr. Blumenauer? Would you like to ask a question? I thank the gentleman.
    I want to thank the witness for his time.
    Mr. LOWE. Thank you.
    Chairman NEY. The next panel, panel three. I would note there are votes expected within probably the next 15 or 20 minutes, so we will try to adhere strictly to the time clock. That way we can get in the witnesses testimony and the members of course would be able to come back after the vote.
    I want to welcome panel three, and we will begin with Chad Berginnis. He is the Flood Plain Management Program Supervisor in the Division of Water with the Ohio Department of Natural Resources. He has coauthored a comprehensive revision of model state flood plain regulations, drawing in part on his previous experience as director of the Perry County Planning Commission. We want to make sure you tell Mr. Speck we said hi. He was the State Senator that I replaced years ago in Ohio, so he is director of ODNR. Welcome.
    Fletcher Willey is the Chairman of the Government Affairs Committee, Flood Insurance Task Force of the Independent Insurance Agents and Brokers of America, an association representing more than half of all the independent insurance agencies in the country. Mr. Willey owns the Willey Agency in Nags Head, North Carolina, and has been in the insurance industry for nearly 30 years.
    Gerald Nielsen is from Metairie, Louisiana—Billy Tauzin and Baker can pronounce that better than I can, but I will give it a shot—Metairie, where he has been practicing law in the area of flood insurance. The Nielsen Law Firm handles National Flood Insurance Program related litigation on a national basis, and Mr. Nielsen has been the attorney of record in the majority of all case law in this area.
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    Rick Willetts is the President and CEO of the Cooperative Bank in Wilmington, North Carolina, a state-chartered commercial bank with assets of $500 million. Today, he is representing America's Community Bankers, an association of banks which originate more than 25 percent of all mortgages in the United States, some of which are for properties in areas of high flood risk.
    I want to welcome the panel, and we will begin with Mr. Berginnis.


    Mr. BERGINNIS. Thank you, Mr. Chairman, and good afternoon.
    In June, 1998 and one week into my job as Perry County planner, a flood devastated a small Appalachian village in our county of Corning, Ohio. Within nine months, we developed a hazard mitigation grant program project that included 59 structures. The mitigation options included acquisition, elevation, retrofitting things such as relocating utilities, were the options chosen by participants. One of those participants, Gertrude Kerrigan, who had flood insurance, declined to participate later on because she said I will probably be long gone before the next flood comes. Hazel Cales, who also had flood insurance, was reluctant at first, but later chose to elevate her home. Afterwards, she told the mayor of Corning, I sleep through the night now and my furniture no longer sits on concrete blocks inside of my living room.
    These experiences illustrate benefits and social complexities of implementing the National Flood Insurance Program and flood mitigation. After nearly 35 years, the NFIP has been successful at reducing flood losses nationally, however some modifications are necessary to increase this success.
    My name is Chad Berginnis, and I represent the Association of State Flood Plain Managers as vice chair. We are an organization that represents over 5,000 people that are mostly State and local officials that deal daily with the National Flood Insurance Program, the flood plain management and mitigation programs. I want to use the balance of my time to discuss repetitive loss, NFIP reauthorization and some future issues of the NFIP.
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    Repetitive losses are a drain on the flood insurance fund. The association believes that an overall repetitive loss strategy should include implementing mitigation that achieves measurable results, implementing cost-effective mitigation that is in the best interest of the NFIP, implementing mitigation that is technically feasible, having a sensitivity to low-income homeowners, allowing flexibility in choosing mitigation options, and utility of different mitigation programs. Two ways to implement this type of strategy would be to actually implement a new initiative based on what we believe is a blending of the best elements of H.R. 253 and H.R. 670, and modifying the existing mitigation insurance mechanism, ICC, or increased cost of compliance coverage.
    Both H.R. 253 and H.R. 670 have a number of good provisions, including a definition of repetitive loss properties that at least defines the universe of properties to be considered; an appeals mechanism to ensure due process for property owners; funding that is ultimately paid by the flood insurance fund; the charging of actuarial rates on structures if mitigation is refused; and provisions to address structures on property leased from federal entities. Additionally, upon analysis of these bills, the association recommends that the committee should direct FEMA to work with State and local partners to develop procedures for assessing mitigation options. There should be a recognition that for certain properties, subsidized flood insurance is the best mitigation; that FEMA works directly with property owners, but only after the state and community are unwilling to participate; and that the Federal government not become a landowner regardless of the circumstances.
    The increased cost of compliance mitigation insurance has not realized its full potential and could be modified to effectively tackle the repetitive loss issues. Currently, ICC collects over $80 million, yet since 1997 under 1,100 claims have been paid, averaging $11,400 per claim. The maximum claim amount allowed will increase from $20,000 to $30,000 this May. The association believes there are two reasons for this underutilization: FEMA's tight interpretation of the statute, and actually some language within the statute itself. We have provided the committee with three pages of recommended changes.
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    Briefly, I would also like to comment on the reauthorization of the NFIP. The association believes it is reasonable to reauthorize the NFIP on a three-year basis, which reserves the opportunity for congressional oversight. Then I would like to conclude by discussing the future of the NFIP. The Association of State Flood Plain Managers is both excited and apprehensive. The map modernization program and FEMA's effort to partner with State and local communities have been tremendous. However, we are much more apprehensive about proposed changes to existing mitigation programs. The flood mitigation assistance programs was authorized by this committee in 1994, and is funded by flood insurance policyholders. The 2004 administration budget blurs the line between FMA and a new pre-disaster mitigation program. We would urge the committee to express its intent that FMA be independent of this new program.
    Our final area of concern is uncertainty associated with FEMA's placement in the Department of Homeland Security. The NFIP is only one of the department's many responsibilities and we hope that programs like the NFIP continue to get the resources and attention required to face this nation's primary natural hazard.
    Chairman NEY. I would want to note to the witness to sum up because the time has expired. Thank you.
    Mr. BERGINNIS. Thank you.
    The village of Corning and its residents have a more promising future due to the NFIP and FEMA's mitigation programs. The programs work. Let's work together to make these programs even better.
    Thank you.

    [The prepared statement of Chad Berginnis can be found on page 49 in the appendix.]

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    Chairman NEY. I want to thank the gentleman. We will move on to our next witness, Mr. Nielsen.


    Mr. NIELSEN. Good afternoon. My name is Gerry Nielsen. I am a lawyer from New Orleans. My job is to go before federal judges, sometimes State Court judges, all over the United States and I attempt to explain to those judges what Congress intends for the National Flood Insurance Program and what FEMA intends. Right now, there is a structural problem that is preventing me from doing that job effectively, and I am bringing that idea to the Congress' attention because the Congress is the only place where I can go to have a jurisdictional statute fixed.
    In 1983, Congress amended the jurisdictional statute to provide for exclusive jurisdiction in the federal courts. But ever since then, the claimants have never stopped trying to maneuver these claims back into the State Courts. So it is an incessant, expensive battle. Lately, they have been meeting with some success. The word ''claim'' in the statute, federal judges are looking at that under removal jurisdiction, which is a very narrow analysis, and saying, well, wait a minute—that word ''claim''—you look at that statute; they are just talking about the claims under the policies. I have got no basis for being in federal court for policy issuance, policy underwriting—all of the operations pursuant to which we put the U.S. Treasury at risk. That is the part that agents and companies do. We handle all of that.
    So we are having cases falling into the State Court, and we are having an increase of artful pleadings of people changing the kinds of claims they are making to get around your commend of 4072. The biggest problem this creates is agents. Agents are getting sued at a much higher rate, just for forum manipulation. Now, the position of the states is just to the opposite. The state of California and the state of Florida, who have great interest in the program, have both held through their courts—no, we are going to look straight up at Congress' intent; there is no way Congress intended that the jurisdiction of how you put the U.S. Treasury at risk is in the States—50 different sets of State Courts—and federal court jurisdiction is only over how the money goes out the door. So in those two key program states, jurisdiction over any claim is in the federal courts.
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    The insurance commissioners of the States of Texas, Mississippi, North Carolina and South Carolina are all of accord. They have signed sworn affidavits that are attached to my written testimony stating that they have neither jurisdiction nor regulatory control over anything involving the NFIP. So I have got the federal judges sending me to the State Courts, and I have got the State Courts telling me to be in federal court. My job is to build a uniform body of case law. It is a problem.
    I have presented for the committee a proposed revision of the statute which says in essence that any dispute arising out of participation or attempted participation in the program must be in the federal courts. If you pass this statute, what do you get? Three things: One, you get a stoppage of all the legal bills that are being spent in these arguments over jurisdiction; two, you start to get the development of a unified, uniform system and body of case law over all program issues. Then when you get that, you start getting lessened legal bills on all issues all over the map. What do citizens get? A citizen has no interest in their legal dispute being tied up in the courts for three years over where it is supposed to be. My last 10 appearances before appellate courts, seven out of ten of those were discussions of jurisdiction. We never got to the merits. No citizen wants that.
    Now, I quickly point out, I am not asking the Congress to in any way restrict anyone's remedies. We are just talking about jurisdiction here. A federal judge can ruin my client's day as easily as a State Court judge. But where that line is drawn between what federal law governs and what State law governs, has to be drawn on a uniform basis across the country so that the deal anyone gets is equal in California as opposed to New Jersey—that it is the same all the way across the country. So if we make clear that the judges that are deciding what the law is for this unified national program are federal judges, we get lower costs; we get uniformity of decision and predictability in the law; and we get efficient litigation.
    The states are the ones saying this is what we ought to have, and it is the federal judges who are hamstrung by their own limited jurisdiction under the Constitution, who are now saying otherwise. And no one is saying that the current situation is what Congress intended.
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    Thank you for hearing me.

    [The prepared statement of Gerald Nielsen can be found on page 69 in the appendix.]

    Chairman NEY. I thank the gentleman for his testimony.
    Mr. Willey?


    Mr. WILLEY. Thank you, Mr. Chairman.
    I spoke earlier with Congressman Jones in the room, and he wanted me to thank you for sponsoring the bill that renamed the potato to freedom fries.
    Chairman NEY. We appreciate that. My relatives in France are not real happy, but we appreciate Walter's support.
    Mr. WILLEY. Thank you, sir.
    My name is Fletcher Willey, and I am speaking today on behalf of the Independent Insurance Agents and Brokers of America. The NFIP provides the only way that homes and businesses can be protected from catastrophic floodwaters. The private insurance industry will not and has not come to the table to provide coverage for this kind of exposure. Although the independent agents and brokers of America have not taken a position on the two bills before us today, it is clear that reforms are necessary to address certain operating losses and to make the NFIP actuarially sound.
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    We hope that we can work with you on this reform, because our members have the expertise and the experience serving our flood policy holders covering billions of dollars of property. This is just not a professional matter for me. I live on Roanoke Island, in the flood plain along coastal North Carolina, so I have a personal investment on flood protection. Today, we will outline the five principles that the independent agents support for improving the flood program. First, we need to strengthen the building regulations on both new construction and improvements of existing buildings. Experience with the program shows us that only 4 percent of the repetitive loss properties were built when the communities began enforcing elevation requirements. Second, in creased compliance with mandatory flood insurance purchase requirements show that only 25 percent of the flood plain have flood coverage. We propose that all insurance companies need to inform property owners that their homeowners policy does not cover flood damage.
    Third, the NFIP should have additional resources for mitigation. This way, the program can take action to prevent future losses. There are two ways to do this: one, buyouts to move the most frequently damaged risk; and grants to elevate the other risky properties. Multiple loss properties account for $200 million per year in claims. These risks are subsidized by everyone else. Four, we need to stop the abuse of the program with multiple claims. Some properties have collected five to six times their full replacement costs from previous claims. Five, we need to require mandatory disclosure of flood claim history so that new buyers will not knowingly buy a known flood risk property.

    [The prepared statement of Fletcher J. Willey can be found on page 103 in the appendix.]

    Chairman NEY. The time of the gentleman has expired. The reason I want to mention that to say the time, we have about 10 minutes until the vote ends, so if we give the last witness five minutes, and then we will come back—whoever would like to come back. Thank you.
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    Mr. Willetts?


    Mr. WILLETTS. Good afternoon, Mr. Chairman, and members of the subcommittee. Thank you for the opportunity to testify today.
    My name is Frederick Willetts, III. I am president and CEO of Cooperative Bank in Wilmington, North Carolina. Cooperative Bank is a State-chartered commercial bank with total assets of $500 million. We operate 20 offices from Virginia Beach, Virginia to Myrtle Beach, South Carolina. I am testifying today as a member of America's Community Bankers. The NFIP is important to every mortgage lender in the United Stats whose lending territory, like mine, includes properties in areas of high flood risk. We and our customers have come to rely on the NFIP as a primary source of affordable flood insurance.
    ACB supports attempts by the Federal government to begin stemming the costs associated with repetitive loss properties to taxpayers. These efforts must protect mortgage lenders by giving them advance notice of any actions that would impair the homeowner's ability to repay the mortgage or recoup the value of the property. Also, Congress must clarify that it does not intend to treat as repetitive loss properties those that have experienced losses that are not expected to reoccur. We also commend Congress for expediting NFIP authorization earlier this year. However, ACB believes that any bill to reform the NFIP must extend NFIP authorization for a period of at least four or five years.
    ACB supports increased flood insurance premiums under the circumstances identified in H.R. 670 and H.R. 253, as a way of making property owners take additional responsibility to prevent multiple claims. However, legislation should take into account circumstances that might unduly imperil the homeowner, the lender or other affected parties. Very large increases in premiums could impair the property owner's capacity to pay and would likely affect the value and the marketability of their property. Therefore, the mortgage lender should be notified formally of the planned premium increase in advance, and at a time when intervention might still be possible.
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    A lender's collateral could also be put at great risk by a mitigation buyout offer. Lenders deserve some assurances that any loan secured by a property targeted for demolition will be repaid with the proceeds of the buyout. We recommend that the bills provide for notice to the mortgage lender or servicer of a buyout offer made under the mitigation program. ACB believes it is essential for Congress to clarify that it does not intend to deny flood insurance coverage to properties in broad geographic areas that might experience large numbers of losses as an aberration. For instance, my home region of coastal North Carolina has recently experienced an unusually large number of hurricanes, one of which resulted in a 500-year flood. It would not be practical for FEMA to respond to such circumstances by seeking extensive mitigation or relocation. Entire communities would be affected. Legislation should clarify the expected scope of circumstances under which FEMA might deny, cancel or otherwise change the availability of flood insurance under the bills to avoid such unintended effects.
    Again, thank you for the opportunity to testify today. I would be pleased to answer any questions you might have.

    [The prepared statement of Frederick Willetts III can be found on page 98 in the appendix.]

    Chairman NEY. I thank the gentleman for his testimony. We will break to vote, and then if you could bear with us, I appreciate it, we will return. Thank you.
    Chairman NEY. The committee will come to order. I want to again apologize to the witnesses. We had to go cast a vote. I think we had finished the testimony of the last witness. I would open it up to questions.
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    Mr. Bereuter?
    Mr. BEREUTER. Thank you very much, Mr. Chairman. I appreciate you continuing the question period so we could come back up and vote for that purpose.
    Mr. Willey, as an insurance agent, how can we increase compliance with the mandatory purchase requirements for flood insurance? Why is there not a better record at this point?
    Mr. WILLEY. Thank you for the question. We would like to see a requirement that insurance companies notify people that they must buy flood insurance from the National Flood Insurance Program, because homeowners policies do not cover flood. We think it is a notification problem. I know that the National Flood Insurance Program is trying to find ways to notify people, but we think the homeowners' carriers should tell people that they need to get a flood policy to be covered for flood.
    Mr. BEREUTER. I would like to ask you, Mr. Willetts, maybe you are the best person to start with, at least on this question. How many mortgages, what percentage of mortgages do you think in this country are federally insured or federally backed?
    Mr. WILLETTS. Congressman, I would not have a way of estimating that. I would assume that the majority through brokerage arrangements as well as direct loans through banks and thrifts.
    Mr. BEREUTER. Do we have a requirement now which applies to the issuance of mortgages that are not federally backed, and the mandate for flood insurance to cover properties that are in the flood plains?
    Mr. WILLETTS. I am not aware that that requirement extends beyond federally insured financial institutions, congressman.
    Mr. BEREUTER. I think you are right. I could ask any of you to respond to the concern that people may purchase a property for which there has already been two floods that exceed in value $2,000, for example, or $8,000, as the case in our bill. Perhaps in that case the decision has not been made yet about whether or not they are going to accept mitigation when they sell. That is a pending issue. How do we serve adequate notice to the property owner who may be considering purchase of that property?
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    Mr. WILLETTS. I am not the attorney in the group, but I will attempt to answer that. I think some method of recording, some device at the public record would be perhaps the best way to accomplish that.
    Mr. NIELSEN. You could do it through the public record, having something recorded against the property, or on FEMA's Web site, which is quite extensive. You could have publication. One of the problems FEMA seems to have with this is that they are torn between their own objectives and the Privacy Act. Right now, the companies have to enforce various provisions of the policy and need information as to what has happened on prior claims, and FEMA is really torn as to whether or not they are supposed to be giving us that. So in terms of prior claims for U.S. Treasury funds, there should be no claim of privacy. That would seem to me strange, that if you have made a claim for public funds that is a public record, and there should be a ready source or a list of that information that anybody can get at any time.
    Mr. BEREUTER. Mr. Nielsen, I noted your concern about the jurisdictional question, about the money being spent there, and I take that quite seriously. I think, because I recall that you have specific language that you are suggesting in leaving for us to consider. Is that correct?
    Mr. NIELSEN. Yes. It is on page 10 of the written testimony.
    Mr. BEREUTER. Thank you.
    Mr. Willetts, on page two of your testimony you state that any fix should take into account circumstances that might unduly imperil the homeowner of the land or other affected parties. You mention that you support an appeals process similar to that included in the Baker bill that would allow an owner of property to appeal a decision on mitigation. Are there any changes, requirements or stipulations that you would include as a part of the appeal process?
    Mr. WILLETTS. Any changes to the requirements?
    Mr. BEREUTER. Any changes or stipulation or requirements to that kind of appeals process, to the language in his bill? Do you have any specific suggestions as to how that might be changed or improved?
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    Mr. WILLETTS. There has been discussion about architectural integrity, for one thing, in altering a building. Obviously, the question we have brought up several times today about sufficient funds to pay off the loan. I would think that the word ''practical'' is probably too broad a term, but there could be other cases I cannot think of immediately.
    Mr. BEREUTER. Mr. Chairman, I know I have the red light, but may I have Mr. Berginnis respond to that question, too?
    Chairman NEY. Without objection.
    Mr. BEREUTER. Thank you.
    Mr. BERGINNIS. I think as far as the appeals process, Congressman Baker raises several points in his proposal regarding things like historic structures. Those could be things handled perhaps in an appellate-type process, as opposed to an exception kind of criteria where you would exempt actually a whole class of structures.
    Mr. BEREUTER. Thank you.
    Thank you, Mr. Chairman.
    Chairman NEY. I would point out to the gentleman, I have really two brief questions. If you would like to continue, I just have two brief questions. It would be up to you.
    The first question I would have is for Mr. Berginnis. The Association of Flood Plain Managers supports the introduction of actuarial rates after mitigation is refused, following a second loss. What is your view on someone who has paid several thousand dollars in premiums over the course of many years, only to lose their coverage after a couple of thousand dollar claims?
    Mr. BERGINNIS. This is a situation, and again it is a point made in the oral and written testimony, where there needs to be a realization that there could be circumstances where the best mitigation is the continuance of the subsidized flood insurance. I think the example, Mr. Chairman, that you gave is very appropriate to that, where a person has paid a lot of premium over years. They may have four, five, six claims, each of them $1,000, yet there may not be a cost-effective way to actually do mitigation. And so potentially in that case, continuing subsidized flood insurance would be appropriate.
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    Chairman NEY. Thank you.
    The other question would be for Mr. Willetts. I noted in your testimony it says that to avoid such problems in the future, ACB advocates a multi-year extension of NFIP, authority for a period of at least four to five years. I think Mr. Bereuter's bill has seven, or up to 2007, if I am correct. I just wondered, is the rationale in any way tied to actuarial tables or what is the interest that it would serve to help you better be able to be involved?
    Mr. WILLETTS. I think to avoid the potential train wreck that we faced at the beginning of this year.
    Chairman NEY. Mr. Bereuter, do you have additional questions?
    Mr. BEREUTER. Thank you, Mr. Chairman.
    I would like to go back to Mr. Berginnis, if I could, to the discussion you had there with the chairman in response to his question, which is certainly one of the important questions we need to consider. What about that person that really does not want to proceed or is unable to proceed, in their judgment, to accept the mitigation offer? Now, that would be a problem only, wouldn't it, when we do not have 100 percent of the mitigation costs paid for by the Federal government—75 percent, for example, and 25 percent by State or local? Then would you think that regardless of whether or not the person wants the mitigation to go forward, it ought to go forward, since it is not a matter of them not being able to afford it, but simply they choose not to do that and continue to live at a high-risk location without mitigation?
    Mr. BERGINNIS. Well, I think—and again there are so many factors involved as far as offers of mitigation—but really the concept that the association supports is that in these repetitive loss situations, that a property might go through an evaluation of cost-effectiveness, making sense to the flood insurance fund, and go through this process to find out if in fact the property itself can be mitigated. I would think that there would probably be limited circumstances where somebody would continue with subsidized flood insurance, but certainly that could be affected by things like cost-sharing, when you are dealing with, for instance, a low-income homeowner. If the mitigation option were to be 100 percent federal, for instance, for those folks, then a reasonable expectation would be that they would be able to accept the mitigation offer.
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    Certainly, mitigation is not just—we need to have the flexibility to consider all mitigation. It is not just buyouts. It is elevations. It may be doing minor retrofitting. Somebody could have a furnace that has been repetitively damaged in a flood five or six times, and the appropriate mitigation there may be to elevate the furnace unit or relocate it to a higher level, and you have eliminated the insurance, or at least reduced the insurance risk.
    Mr. BEREUTER. And wouldn't it be logical to assume that proper management, common sense management on the part of the federal agency would suggest that where mitigation is extraordinarily expensive or not really very realistic, they simply will not make mitigation offers, and therefore this relieves the person from being struck out by two strikes and you are out, because there are two conditions. One is, there have been two losses at least, which total $1,000 each loss or more, and that an offer be made and refused. In this case, the offer probably we assume would not be made. Isn't that what you would hope out of a common sense kind of application of the federal agency's requirements? I hope.
    Mr. BERGINNIS. Yes. And I think that would be reasonable—if it is not cost-effective, an offer would not be made. Then, again, it would just continue to go——
    Mr. BEREUTER. It continues to be there. I have one final question, Mr. Chairman. Thank you for your patience.
    Mr. Willey, you suggest that an accessible electronic data base of flood losses be created to facilitate disclosure of flood information. Has your organization been in contact with FEMA regarding the creation of such a data base by chance? Are there currently any procedures used to elicit flood information from property sellers, of which you are aware? The latter could be open to any of you, if you know.
    Mr. WILLEY. No, sir. I think the problem is that I have understand that the disclosure runs contrary to the privacy law. I might want to refer to my friend.
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    Mr. NIELSEN. That would be something that Congress could look at, is that all of this is being done with public funds. To say that there is a privacy interest, as I said earlier, seems inconsistent. So if you could relieve FEMA of that problem for the specific purpose of allowing lists on these things to be published, to where anybody could go look at them, then that would alleviate notice problems. Also one of the big problems we have in flood litigation is a failure to inform claim, where you did not tell me. Well, to the Supreme Court, that is strange because the flood program is a law, the policy is a law. But if we are holding back information that might give rise to that type of claim being validated.
    Mr. BEREUTER. I appreciate that suggestion. We are going to look at that. It would therefore be due diligence for any financial institution or any lawyer helping a person to purchase to check that list if it is available and publicly so.
    Mr. NIELSEN. Correct.
    Mr. BEREUTER. Mr. Chairman, thank you very much.
    Chairman NEY. I thank you, Mr. Bereuter.
    Mr. BEREUTER. Thanks to all the witnesses.
    Chairman NEY. I want to thank the witnesses for coming to the Capitol today and for your very helpful testimony. We have a duty to do something with the issue, and as we go through the next several weeks, we want to keep your views in mind. Also I want to note Mr. Bereuter and Mr. Blumenauer have a very well thoughtful crafted, what I would call a base situation to begin with on that bill.
    So I appreciate your involvement today and Mr. Blumenauer, who was here, and the rest of the members.
    The chair notes that some members may have additional questions for this panel which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and place their responses in the record.
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    With that, the hearing is adjourned.
    [Whereupon, at 4:25 p.m., the subcommittee was adjourned.]