Communities in Vermont are still reeling from the effects of torrential downpours and major flooding that hit the region in July, with more heavy rain expected in the near future. To date, over 4,000 homes and 800 businesses have reported damage, and two people lost their lives. Even those not in flood zones as designated by the Federal Emergency Management Agency (FEMA) were struck with flooding.

NCUA offers aid to affected federally insured credit unions

In early August, the NCUA issued a press release stating they are working with federally insured credit unions in the state to ensure continuity of vital financial services.

In addition to reminding consumers that their member deposits at federally insured credit unions remain protected, NCUA is also providing guidance to credit unions in affected areas on how best they might serve their communities in these difficult times. For example, NCUA is encouraging credit unions to “make prudent loans with special terms and reduced documentation to affected members.”

To assist the credit unions themselves, NCUA is rescheduling routine examinations, guaranteeing lines of credit through the Share Insurance Fund, and making loans through the Central Liquidity Facility credit unions in need.

Lastly, low-income-designated credit unions are eligible for up to $7,500 in grant funding to repair flood damage and restore services.

Government Accountability Office unimpressed with National Flood Insurance Program

Meanwhile, the Government Accountability Office (GAO) recently issued a report on the condition of the National Flood Insurance Program (NFIP) and its deficiencies. Chief among them is the $20.5 billion owed by the NFIP to the Treasury, which the GAO suggests is not only unlikely to be repaid as currently structured but if not addressed may only grow larger.

The NFIP is managed by FEMA and was created to provide flood insurance to property owners, renters, and businesses that reside in high-risk floodplains, and whose existing homeowners insurance is unlikely to include flood protection.

Per the GAO, the NFIP was mostly self-sustaining prior to the events of Hurricane Katrina in 2005. Subsequent major events like Hurricane Sandy in 2012 and Hurricane Harvey in 2017 only exacerbated the funding issue.

Part of the issue the report claims is that in its current structure, which includes statutorily required discounted premiums for certain properties, the program was unable to accumulate a surplus. As major flooding events have become more common, it has depleted the NFIP fund and required them to borrow further from the Treasury.

As the program was created to keep insurance affordable, it has also come at the expense of making solvency difficult. Premiums have not always historically reflected the risk to the property, resulting in higher premiums for some, and more often too low of premiums for others.

The GAO did acknowledge that recent changes to FEMA’s methodology for setting premiums (Risk Rating 2.0 set in October 2021) have and will continue to improve the program’s ratemaking by more accurately tying premiums to actual risk of flooding. That said, they point the finger at two other charges that are not risk-based, meaning that often the premiums are not actuarially sound.

Unfortunately for those in need, affordability will increasingly become a concern, especially if FEMA aligns its premiums with the GAO’s recommendations. Per the report: “FEMA had been increasing premiums for a number of years prior to implementing Risk Rating 2.0. By December 2022, the median annual premium was $689, but this will need to increase to $1,288 to reach full risk. Under Risk Rating 2.0, about one-third of policyholders are already paying full-risk premiums. Many of these policyholders had their premiums reduced upon implementation of Risk Rating 2.0. All others will require higher premiums, including 9 percent who will eventually require increases of more than 300 percent.”

That’s an 87% increase to the median premium. But with extreme flooding happening more and more often, it may be a necessary adjustment to the program in order for it to stay afloat.

NCUA currently divided on responsibility to address climate risk

The elephant in the room, Climate Change, continues to be a sticking point for politicians. But while banking agencies are making headway in addressing the risks climate change poses to the financial system, the credit union community might be falling behind.

In July, the NCUA Deputy Executive Director Rendell L. Jones gave testimony before the U.S. House of Representatives Subcommittee on Financial Institutions and Monetary Policy on climate-related financial risks. One conclusion provided: “The agency believes credit unions are best positioned to assess various risks and opportunities within their specific fields of membership. Climate change presents several conceptual and practical challenges for credit unions and the NCUA. Just as credit unions must continue to adapt to account for climate-related financial risks, among other risks, the NCUA must evolve its understanding of the impact on credit unions, credit union members, the credit union system, and the National Credit Union Share Insurance Fund (Share Insurance Fund).”

Whether that will still be the NCUA’s stance with board member Rodney Hood’s term ending in August remains to be seen. It is expected that the Republican will be replaced by a Democrat when President Biden nominates a new candidate, likely pushing the board towards Chairman Todd Harper’s viewpoint that the NCUA has a duty to ensure credit unions can withstand the risks of climate-related events.

Deputy Executive Director Jones’s full testimony can be read on the NCUA website.