WASHINGTON (8/17/11)--Draft National Flood Insurance Plan (NFIP) reforms could have the unintended effect of driving some small mortgage lenders, including credit unions, out of the mortgage business, the Credit Union National Association (CUNA) and related trade groups have warned. At issue is Section 111 of an NFIP reform discussion draft, which would require all mortgage lenders to escrow for NFIP premiums. Current law only requires lenders that escrow for taxes and insurance to also escrow for NFIP premiums. CUNA, the American Bankers Association, the Independent Community Bankers of America, the Mortgage Bankers Association, and the National Association of Federal Credit Unions co-signed a Tuesday letter that was sent to Senate Banking Committee chairman Sen. Tim Johnson (D-S.D.), leading minority member Richard Shelby (R-Ala.), and all other members of the committee. The trades noted that “there is a significant cost involved with establishing escrow accounts, particularly for community banks, credit unions, and community-based lenders that have small lending volumes. “These lenders must outsource their escrow services, and they are not eligible for volume discounts,” and financial institutions in rural and underserved areas are concerned by the costs that outsourcing escrow services would create. “A reduction in the number of loan originators would lead to more consolidation of the mortgage market, thereby reducing credit options in an already troubled market,” the letter added. NFIP reforms are expected to be discussed by the committee when congress returns in early September. The U.S. House last month overwhelmingly supported legislation that would continue the NFIP for a further five years. The NFIP was set to expire on Sept. 30. The legislation (H.R. 1309) preserves the rights of credit unions and others to protect their collateral from flood hazards and would clarify that flood insurance purchases "would date back to the date the existing policy lapsed or became insufficient in coverage amount, including any premiums or fees incurred during the 45-day notification period." CUNA has backed these changes. Legislators from both bodies of Congress and both sides of the aisle, including Sens. Johnson and Shelby, have called for reforms to the NFIP. The U.S. Government Accountability Office (GAO) in recent months said that Congress should act to increase the financial stability of NFIP and limit taxpayer exposure. The NFIP provides more than $1.2 trillion in coverage to Americans in flood-prone areas, but it is an estimated $18 billion in debt to the U.S. Treasury.