[John Antalek]

Good morning. I attended yesterday’s Compliance for Commercial Lenders training and I had a question about flood insurance. Our bank had a self-identified deficiency because we became aware that we had some CML loans in a flood zone that we filed a UCC but did not have contents coverage on the flood insurance policy. We are now challenged with coming up with a policy in regard to how to determine the value that should be place on the contents. Do you have any insight on this topic?

Thanks
Jenn Beers
AVP, Director of CML Loan Administration and CRA Officer

Topic

[Kimberly Boatwright, CAMS, CRCM]

Thank you for the question. This is an important issue in commercial lending because a security interest in personal property can trigger flood insurance requirements even when the institution’s primary focus is the real estate collateral.

My recommendation would be to establish a consistent, documented methodology for identifying and determining the insurable value of the personal property securing the loan.

I would start by reviewing the security agreement to identify the specific personal property securing the loan and determining where that property is located. I would also distinguish between loans secured by both real estate and business personal property and loans secured by personal property only. Additionally, consider whether the UCC filing covers specifically identified equipment or inventory versus a blanket lien on business assets.

For valuation purposes, the institution could establish acceptable documentation based on the type of collateral, such as equipment listings, appraisals, inventory reports, or other supportable valuation records. The procedure should address situations where inventory fluctuates or the collateral description is broad.

I would be careful not to automatically equate the value of the UCC filing, the outstanding loan balance, and the insurable value of the contents. The institution should determine the required flood insurance amount under the applicable regulatory requirements and document its methodology. The NFIP maximum for nonresidential contents coverage is generally $500,000, but that does not mean every loan requires that amount. The required coverage must be determined based on the applicable regulatory calculation and the circumstances of the loan and collateral.

I would also recommend coordinating with the institution’s flood insurance provider or specialist to confirm the appropriate valuation approach for different types of commercial collateral, particularly where the institution has a blanket lien on business assets or the value of inventory fluctuates.

As the procedure is developed, make sure it addresses collateral identification, valuation documentation, calculation of required coverage, exceptions, and ongoing monitoring. For the existing deficiency, the institution should also document its review and remediation of affected loans and address any applicable notification and force-placement requirements where coverage is insufficient.

The Interagency Questions and Answers Regarding Flood Insurance and the institution’s primary regulator’s examination guidance are useful resources when developing the procedure. The goal is to establish a consistent, supportable process that identifies the personal property subject to the flood insurance requirements, documents its insurable value, and determines the required coverage.

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