From: Dale L. Sewell
To: Comments
Sent: August 5, 2003
The Flood Insurance regulation (FDIC Part 339) imposes an unnecessary burden on banks and
consumers as follows:
Part 339.3
Requirement to purchase flood insurance where available requires the
amount of flood insurance purchased to 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.”
The logical formula for calculating the amount of insurance required should be the amount of
the loan minus the value of the land.
The following example from an actual examination best demonstrates the problem:
Amount of loan:
$290,000
Overall value of property:
$750,000
Value of land:
$500,000
Insurance coverage:
$200,000
Per the regulation, the amount of insurance required is $250,000 ($750,000 - $500,000). The
collateral was underinsured by $50,000 ($250,000 - $200,000).
But what if a 100-year flood occurred and destroyed the structure? The loan is still
secured by the value of the land of $500,000. Therefore, the bank is
not at risk because the value of the land exceeds the value of the note
by $210,000 ($500,000 - $290,000).
Never the less, the examiner cited the bank for not sufficiently insuring the collateral and
required the bank to force the consumer to increase his insurance coverage. If the bank had more
than one loan in this situation, it could have resulted in a civil money penalty situation.
