Gary K. Van Meter
Office of Regulatory Policy
Farm Credit Administration
1501 Farm Credit Drive
McLean, VA 22102-5090
Re: RIN 3064-ZA00
Dear Van Meter:
AgriBank on behalf of several of its lender associations appreciates the opportunity to be able to respond to the Agencies’ proposed Questions and Answers on flood insurance and to restate some concerns previously voiced.
Insurable value (Q9/10)
One of our concerns relates to the two new definitions of insurable value. While we appreciate the efforts of the regulators to reduce the impact of RCV on commercial or agricultural properties, we have concerns with abandoning the use of ACV in favor of the new proposed alternatives. It is unreasonable that an owner of a non-residential building must insure the building to RCV, incurring additional premium costs, yet the General Property Form Flood Insurance Policy pays only for a loss to be adjusted at ACV on non-residential property. The property will be over insured at the customer’s expense. A business owner can assess the importance of a non-residential building to its operation and choose instead to insure it at ACV. This is often the case with agricultural producers having multiple low-value buildings used in their operations.
We strongly urge FCA to consider this issue in light of the impact on the Farm Credit System because of the vastly different loans and properties in our lenders’ portfolios. A significant number of System loans are secured by non residential buildings, so the issues faced by the System are very different from those addressed by other lenders and their regulators. Even non System lenders with commercial portfolios do not have the high percentage of non residential loans that FCS has. Other regulators cannot fully appreciate this issue to the same extent that FCA can.
Demolition/removal cost value
The use of this value is limited to non residential buildings used for ranching, farming or industrial purposes. Industrial use is included in the term, commercial is not. Commercial use including buildings not engaged in retail or wholesale sale of goods are not included. Acceptable buildings for use of this cost value are warehouses, storage, manufacturing or maintenance facilities. We question whether this description is clear enough or broad enough to be useful. For example we are unsure if a concrete grain elevator would be eligible for this cost value. In one view it is a storage facility, but it could also be used in the retail or wholesale sale of goods.
Because non residential buildings are not typically insured to RCV, it will be necessary for Farm Credit lenders to obtain RCV from an insurance agent when it does not exist elsewhere.
Functional building cost value
It is likely the determination of functional building cost value will also require the expertise of an insurance agent as the lender’s appraisal may not contain this cost valuation approach. We doubt this information will be readily available from property insurance policies as our experience has been that they often use actual cash value ACV versus RCV in determining the value of a non residential structure.
We are told that insurance agents will be familiar with the above cost values and most subscribe to Marshall Swift & Bech (MSB) or comparable software which will easily enable them to estimate the above values for a residential building. However, this software is not as easily accessed for calculating estimates associated with low value commercial or agricultural properties. The tables and formulas are not geared toward agricultural or commercial structures. We understand that it would cost $10,000 to $15,000 for an insurance agent to obtain the commercial version of MSB (or similar software) for cost value calculations for farm buildings. This out of the reach for most companies, or lenders for that matter, unless they are writing a large number of flood policies.
Whether the association uses in house appraisers or fee appraisers, they will incur a cost to determine either of these two alternative values. They will either need to calculate it manually (assuming they do not have the software) or they will incur a cost or delay unless the insurance professional involved has the commercial MSB estimator software.
If a lender were trying to determine either of these values for a residential property, the agent would easily be able to estimate the values using the software estimate calculator. Based on the large proportion of the FCS portfolio that is non-residential, this cost and inconvenience will affect System lenders and their customers to a much larger extent than commercial lenders.
Regulators indicate lenders can solicit assistance from an insurance professional when evaluating insurable value, emphasizing that determining insurable value is the lender’s responsibility. If lenders are now responsible for these insurance industry based calculations, we must have simple access to the same tools an insurance professional has. Discussion of the tools illustrates the difficulty of having the lender be responsible for determining this value. The insurance company/agent should be responsible for calculating the correct amount of insurance and providing that to the customer, not the lender.
System lenders are available to discuss alternatives to these methods of determining insurable value, particularly alternatives that do not require an appraisal or specialized software to estimate the cost value of these low value buildings or any non residential buildings.
Fixture interest in grain bin, without underlying real estate--page 35921
The regulators say that if a lender takes a security interest in a grain bin without taking an interest in the underlying RE, flood insurance must be required. Although no change was made to a related Q&A, a grain bin was added to the flood insurance manual definition of a non residential building. This represents a change in FCA’s direction wherein the past the key question was whether the lender had made an improved loan secured by a mortgage on the underlying real estate.
Zone Discrepancy Issues (Q71/72)
When the information is available, Associations intend to note the grandfather code provided by insurance providers in part E of FEMA 81-93, so it is available for any subsequent owner, if the form is recorded or delivered to subsequent owners.
We appreciate the opportunity to comment on the Q&As. They are well done and reflect a consistent effort of regulators working closely with FEMA to provide additional information to lenders. As lenders, we take our role seriously and want to increase property protection from disasters without adding unnecessary costs to borrowers.
Dana K. Smith
Assistant General Counsel
cc: District Association CEOs, in-house counsel and flood contacts