Flood insurance reform nears passage in Congress.

Congress is putting the finishing touches on legislation that, among other provisions, restricts "reverse redlining" and reforms the national flood insurance system, with the House acting overwhelmingly Aug. 4 and the Senate scheduled to take up the legislation Aug. 5.

Among the key provisions in the massive legislation, the Community Development and Regulatory Improvement Act of 1994, H.R. 3474, the bill imposes tough disclosure requirements on high-cost mortgages and mandates that lenders determine whether the borrower has the income needed to pay off the loan before granting it. The disclosure requirements come into play when interest rates and fees exceed the yield on comparable Treasury securities by 10%.

The bill prohibits high-cost mortgages from charging prepayment penalties, refinancing charges paid to the original lender, balloon payments, negative amortization and certain prepaid payments.

The flood insurance provisions strengthen and expand current requirements that persons living in flood-prone areas purchase flood insurance as a condition of their loan, and prohibit Fannie Mae and Freddie Mac from purchasing the mortgage loans of properties located in flood-prone areas unless they are covered by flood insurance.

The bill, however, exempts mortgage bankers from enforcing this purchase rule, but Fannie Mae and Freddie Mac as well as other federal lenders such as the FHA and VA, would still be barred from purchasing these loans.

Under the bill, lenders would be required to notify borrowers of flood insurance requirements on their loans whenever it becomes apparent to the lender that a property is in a flood-hazard area, and to purchase unilaterally--and charge the borrower for--flood insurance if the borrower fails to do so.

Federal banking regulators would be required during regular examinations to determine whether lenders are complying with flood insurance purchase requirements; financial penalties would be imposed against lenders who have a pattern or practice of failing to comply.

Because the provision mandates flood insurance coverage, it also aims to ease the cost through a new mechanism to be called the Flood Mitigation Fund. This program would provide matching grants to states and communities for flood mitigation activities such as construction of seawalls and levees.

The bill also authorizes the Federal Emergency Management Agency to issue supplemental mitigation insurance policies, which could provide policyholders with additional funds to rebuild to upgraded standards homes that have suffered substantial flood damage. Homeowners could charge only up to $75 for this insurance.

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