FDIC Federal Register Citations

The Peoples State Bank

Re: Federal Deposit Insurance Corporation
RIN 3064-ZA00
Loans in Areas Having Special Flood Hazards; Interagency Questions and Answers Regarding Flood Insurance

To Whom It May Concern:

I appreciate the opportunity to comment on the proposed Interagency Questions and Answers Regarding Flood Insurance. I am the compliance officer for my bank.

Following are my comments on the proposed Questions and Answers in which further clarification by the regulatory agencies would be appreciated.

Questions #7 and #10 of the Questions and Answers proposal introduces the term called “insurable value” in question #7. While this term has been introduced little has been done to define the meaning of “insurable value”. Although it is stated that, “It is very important to calculate the correct insurable value of the property,” no additional explanation outside of the fact that the land value is not included in the calculation is given.

Question #10 states:

The amount of insurance required by the Act and Regulation is the lesser of:

• The outstanding principal balance of the loan(s) or
• The maximum amount of insurance available under the NFIP, which is the lesser of:
o The maximum limit available for the type of structure or
o The ‘‘insurable value’’ of the structure (see Question 7).

The guidance found in the MPFIG, page 27, Calculating Coverage states:

To meet compliance requirements, the amount of flood insurance must at least be, but is not limited to, the lowest of:

• The outstanding principal balance of the loan(s); or
• The maximum amount of coverage available under the NFIP for the particular type of building; or
• The full insurable value of the building and/or its contents, which is the same as 100-percent replacement cost value (RCV). (Unlike the practice in other lines of property insurance, building RCVs under the NFIP do not include market values or the value of the land.)

The MPFIG defines insurable value as 100-percent of replacement cost value and the Questions and Answers proposal does not address replacement cost value in relationship to the term insurable value.

From page 27 of the 2007 release of the Mandatory Purchase of Flood Insurance Guidelines:

(2) Calculating Coverage
To meet compliance requirements, the amount of flood insurance must at least be, but is not limited to, the lowest of:
• The outstanding principal balance of the loan(s); or
• The maximum amount of coverage available under the NFIP for the particular type of building; or
• The full insurable value of the building and/or its contents, which is the same as 100-percent replacement cost value (RCV). (Unlike the practice in other lines of property insurance, building RCVs under the NFIP do not include market values or the value of the land.)

And from page 28

By insuring buildings to the full RCV, the lender and borrower are both better protected.

Also from page 28

(3) Loss Payments
Lenders should seek the assistance of property insurance agents or companies when determining the appropriate flood insurance coverage amounts, as they do for other lines of insurance. The borrower’s financial interest should also be taken into account. Further, agents can help identify and consider the extent of recovery allowed under the three forms of the NFIP’s Standard Flood Insurance Policy (SFIP), which are described below:

• General Property Form

– Designed for use on non-residential risks
– Limits recovery to actual cash value (i.e., the cost to repair or replace an insured item of property at the time of loss, less the value of its physical depreciation).

• Dwelling Form

− Designed for use on residential risks − Pays losses to most building elements on the replacement cost basis, only if:
- The building was the primary residence for at least 80 percent of the preceding 365 days or the period of ownership; and
- At the time of loss, the building insurance amount represented at least 80 percent of the replacement cost immediately before the loss, or the maximum available under the NFIP. (“Replacement cost” means that the settlement is not subject to a deduction for depreciation.)
− Otherwise, the Dwelling Form pays on the actual cash value basis, which involves a deduction for depreciation. This is also the case for contents coverage.
− Special loss settlements apply to manufactured (mobile) homes.
• Residential Condominium Building Association Policy (RCBAP)
− Designed for residential condominium associations
− Has its own loss settlement provisions.

Then from 339.3

. . . The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the overall value of the property securing the designated loan minus the value of the land on which the property is located. . . .

Looking at the calculating coverage section on page 28 it indicates we are to get coverage in the lesser amount of the outstanding loan balance, the maximum available through the NFIP for the particular property type, or the full replacement cost value of the property.

Then the discussion on Loss Payments beginning on page 29 indicates that the maximum coverage under the NFIP for non-owner occupied property is the actual cash value of the property.

So the question is do we have to insure for coverage purpose on all property to the RCV, or do we go by the Loss Payment section and use ACV for non-owner occupied properties? Is the “insurable value” RCV for owner-occupied properties and ACV for non-owner occupied properties.

The regulators need to further explain the differences between RCV and ACV and the correct methods to calculate the required amount of insurance when RCV is beyond the insurable value of a building.

Regarding question #35, “Is flood insurance required if a building and its contents both secure a loan, and the building is located in an SFHA in which flood insurance is available? Answer: Yes. Flood insurance is required for the building located in the SFHA and any contents stored in that building.”

Are the building and contents considered collectively or separately? By reading the (2) Calculating Coverage section on page 27 of the MPIF one can effectively argue that as long as you have the building and/or the contents insured for the lesser of the loan balance or their insurable value you would be in compliance.

Thank you for this opportunity to comment on the proposed FAQs.

Yours very truly,

Dan Persfull
VP Compliance Officer
The Peoples State Bank
Ellettsville, IN 47429