2007 Update to FFIEC Interagency Questions and Answers on Flood Insurance
Gary, comments from the lenders in the AgriBank district are attached. Please feel free to call if you have any questions.
Dana K. Smith
Assistant General Counsel
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May 20, 2008
Submitted by email at email@example.com.
Gary K. Van Meter
Office of Regulatory Policy
Farm Credit Administration
1501 Farm Credit Drive
McLean, VA 22102-5090
RE: Comments to Proposed Revisions to Interagency Questions and Answers Regarding
Flood Insurance (2008 Q&A)
Dear Mr. Van Meter:
We appreciate this opportunity to submit comments on the proposed revisions to Q&As published in the Federal Register on March 21, 2008 (73 Fed. Reg.15259). The comments which follow are the product of input developed by AgriBank and AgriBank District associations. They are presented in numerical order, not in order of importance:
Non residential buildings are insurable at actual cash value, not replacement cost value, and Q&As should provide specific guidance about this
Question 7, Question 10, Question 12 and Question 13 introduce the concept of a building’s “insurable value,” which is the value of the building securing a loan minus the value of the land plus the cost of the foundation. Every reference to insurable value in these questions should be amended to add “as determined by the insurance carrier” because this is based on an insurance calculation, not lending or credit information available to the lender.
ACV vs. RCV
The “insurable value” does not specify that coverage for a commercial building is at actual cash value (ACV) and coverage for residential buildings is at replacement cost value (RCV). The Flood Insurance Policies and other FEMA information confirm this distinction. Several areas of FEMA’s September 2007 Mandatory Purchase of Flood Insurance Guidelines (2007 Guidelines) create confusion by indicating that coverage and loss payments are at RCV, when RCV does not apply to non-residential buildings (see pp. 27-28 of the 2007 Guidelines). The regulators can clarify this point in the Q&As.
We understand and agree that insuring buildings at replacement cost is generally to the benefit of the insured and the lender and that RCV represents insurance industry practice. However, there is no legal requirement that non-residential buildings must be insured to RCV. In fact, 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. 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 appreciate knowing that we can revise the notice to customers of SFHA (Appendix 4-4 of the Guidelines) to suit our business, and FCS lenders intend to address the correct coverage available depending on the type of property, referencing ACV for non-residential buildings and contents or RCV for residential dwellings.
Some partial solutions
· Expressly provide that the 2008 Q&As supersede p. 27 of the Guidelines (Calculating Coverage) and the notice in Appendix 4-4, or
· Add a question to the Q&As to explain that ACV applies to coverage and losses of commercial buildings and all contents.
· Modify the preamble and add to the NFIP application a quick reference table indicating that coverage and loss adjustment is dependent on the insurable value of the type of property insured:
o Residential building = RCV
o All contents; commercial building = ACV
o Condominium individual units = RCV
o Condominium association property = ACV
· Provide samples of three notices to customers – one for residential dwellings, one for commercial buildings, and one for RCBAP.
Determination of insurable value is better calculated by the insurance carrier, not the lender
Once steps are taken to identify whether insurable value is ACV or RCV, depending on the type of property, an insurance carrier or agent is better equipped than a lender to calculate that amount. The definition of ACV is defined as RCV less physical depreciation. “Depreciation” needs to be more expressly defined. The currently glossary definition is: “a decline in value resulting from age, physical wear or functional obsolescence.” It is clear lenders should not calculate insurable value based on fair market value less land value. It is also clear that depreciation does not refer to tax depreciation. Depreciation is an insurance term, and the calculation method or formula is readily available primarily to insurance claims adjustors. Insurance depreciation tables indicate an amount or calculation based on the date of construction and normal wear and tear. Such depreciation formula is used to calculate ACV and determine the amount of coverage to require. Lenders have access to information based on appraised value, not insurable value.
Question 40 indicates that when a lender purchases a loan, the participating lender must conduct upfront due diligence to ensure that the lead lender has required the borrower to obtain flood insurance at origination and that the lead lender has controls to monitor compliance during the loan term. In addition, the Agencies expect participating lenders to have adequate controls to monitor the activities of the lead lender over the term of the loan. We have two concerns with these requirements.
Overbroad: The requirement that a loan purchaser, seller, or servicer must comply with flood insurance requirements pertains only to Fannie Mae and Freddie Mac lenders or those selling loans to such GSEs, not to other federally-regulated lenders, such as Farm Credit System lenders. The 2007 Guidelines at p. 53 explain this distinction thoroughly, and that a loan transfer, purchase, or sale does not trigger compliance with the Act. The flow chart at p. 54 provides a visual demonstration of this point. Q&A 40 must be corrected to clearly explain this.
Burden: This requirement is unrealistic and unduly burdensome, putting participating lenders at a significant competitive disadvantage if required to operate as envisioned by the current answer to this Question. The participating lender does not have the contractual right to require a lead lender, seller, or syndicator to obtain a SFHD and provide borrower notice under the Act. Imposing such requirements present significant economic and logistical burdens for the participating lenders and the borrowers, placing the participating lender in the unenviable position of requiring a single policy for the entire outstanding loan balance (up to the allowable amount) at its expense to protect the interests of all lenders, including the lead lender. This burden is particularly acute when the participating lender holds a tiny fraction of a multi-million dollar transaction, likely forcing the participating lender to walk away from the transaction. We recommend instead that a loan participation and loan syndication be treated in the same manner as the purchase of a loan from another lender, as addressed in Question 41, scenario 2. We request that you make it clear that the purchase of either a loan participation or a whole loan does not trigger the flood determination requirements for the purchaser. This conclusion should be the same whether or not the lead lender is subject to the Act. The participating lender should not be made responsible for the acts or omissions of the other lenders.
It also should be noted that a participating lender may have no (and in a loan syndication likely will not have) any ability to actively monitor or impact the activities of the administrative agent in a broadly syndicated transaction and may not have any ability (contractual or otherwise) even to vote on actions potentially triggering flood insurance requirements, let alone actively monitor compliance at such time or act in the event of non-compliance. We recommend that the Agencies remain silent on this issue at this point, instead leaving to safety and soundness analysis any requirement that participating lenders assess the risk associated with loan servicing on a counterparty-by-counterparty basis, with flood insurance compliance and monitoring being one of the myriad factors considered in that assessment.
The System lenders believe that the purchaser of a loan participation should be treated in the same manner as the purchaser of a whole loan. The final Q&As should clarify that loan participations, loan purchases, sales, and syndications are all governed by the same rules, i.e., that the purchase of a loan or loan interest does not trigger the flood determination requirements for the purchaser, unless the purchasing/participating lender is a housing GSE.
Resolving flood zone discrepancies
Question 64 and Question 65 present a noble idea that discrepancies in risk zones be resolved, but it is impractical to require the lender to be accountable for that. Lenders do not have the information or expertise to identify or resolve these discrepancies. Discrepancies could be due to grandfathering from an older zone designation, LOMAs, or determination company errors.
If the declaration page and the lender’s flood zone determination do not show the same risk zone, the lender cannot close the loan or is forced to lender-place the coverage with a private carrier if the borrower refuses to agree that the proper zone is the highest. That leads to a servicing/customer nightmare, a reduction in premiums paid to NFIP, and potential claims by the borrower against the determination company, insurance agent, insurance company, lender, and NFIP.
Determination companies and insurance agencies do have the resources. If the borrower brings information to the insurance agent showing a grandfathering of the zone or a LOMA, the agent can rate the risk and write the coverage accordingly. One partial solution to reduce the number of discrepancies to be researched would be to add to the application and the notice to borrower boxes that can be checked:
· if the property has been grandfathered,
· a LOMA is on file,
· the zones are different, but the lender and insurance company agree the risk is not a discrepancy, or
· the borrower and lender agree to jointly file a LODR with FEMA.
The most the lender can do is to ask the determination company to review the determination again.
What is a zone discrepancy?
Please define zone “discrepancies.” If there is a difference in zones, but the difference does not create a difference in premium or actual risk, regulators should provide guidance that this zone difference is an acceptable risk that does not need to be resolved. For example, if the two determinations are in any AR zone (AR, AR/A, AR/AE, AR/AH, AR/AO, AR/A1-A30) or A99 zone, which are treated the same as non-SFHAs for determining premiums, the differences should be acceptable, not requiring lender resolution.
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.