Economic Development:

How Do Federal Agencies Assure That Disaster Loan Recipients Maintain Mandatory Flood Insurance

CED-80-10: Published: Oct 26, 1979. Publicly Released: Nov 2, 1979.

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The disaster loan programs of the Farmers Home Administration (FmHA) and the Small Business Administration (SBA) were reviewed in an examination of the procedures used by federal agencies to ensure that disaster loan recipients maintain flood insurance when required as a condition for such loans. GAO reviewed legislation; agency policies, procedures, regulations, and guidelines; and gathered statistics on repeat flooding, flood insurance policies, and FmHA and SBA flood disaster loan activities since fiscal year 1975.

1either of these agencies nor the Federal Emergency Management Agency (FEMA) had adequate information concerning the number of communities suffering repeat flooding, the number of loans requiring mandatory flood insurance made in flood hazard areas, and the number of borrowers required to buy flood insurance who had failed to renew or had their insurance concelled before the final repayments of their loan. Therefore, the extent of actual or potential losses to the government and to borrowers from failure to maintain flood insurance could not be determined. Since neither of the legislative acts covering flood and disaster relief is explicit as to second loans to individuals failing to maintain required insurance on previous loans, FEMA, FmHA, and SBA established their own policies and regulations on subsequent assistance. Thus, there was some inconsistency in the three agencies practices. Given the known incidences of repeat flooding at the county level throughout the Nation during the last decade, flood insurance policy cancellation could develop into a financial disaster for uninsured borrowers. FEMA has certain corrective actions planned to combat the current lack of adequate information at the community and borrower levels. FmHA had adequate procedures to protect the government's interest by ensuring that flood insurance is maintained where required. SBA practices appear to be less than adequate in that the agency does not have contingency procedures which allow it to pay the insurance premium if the borrower fails to renew.

Matter for Congressional Consideration

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: The Subcommittee on Oversight and Review should, in conjunction with the appropriate legislative committee, examine whether there is a need for a more specific or uniform national policy governing subsequent loans to individuals who fail to maintain flood insurance required by a previous loan.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Administrator of SBA should: (1) determine the extent of flood insurance cancellation by disaster loan recipients since the Flood Disaster Protection Act of 1973 took effect, (2) examine the writeoffs of uncollectable loans since that time due to repeat flooding, and (3) estimate the annual costs of monitoring SBA flood disaster loans. Unless the costs of loan servicing substantially exceed actual or potential uninsured losses, the Administrator should revise agency procedures to require that each flood disaster loan threatened by the borrower's failure to renew be serviced annually. If the agency revises its procedures, the Administrator should adopt contingency provisions similar to those of the FmHA which would permit SBA to pay the borrower's insurance, should he fail to do so, and to seek reimbursement from the borrower.

    Agency Affected:

 

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