There are a lot of things to consider and comply with when you have a loan that requires flood insurance.
Not only do you need to provide the required notice and have the borrower obtain an adequate amount of insurance, but you must also ensure the deductible for the policy is in line.
This starts to step outside your compliance requirements a bit and moves in on your safety and soundness considerations.
Jerod explains more in the video.
Transcript:
When we get there, we're going to talk about flood insurance deductibles. You might say, "Well, why do I care about deductibles?" Well, this is where the flood insurance compliance requirements start to fringe over onto the safety and soundness area, but we've got guidance out there that says you need to go there. And one of the reasons you need to go there is the first item underneath letter C1, which says you can't allow a borrower to choose a deductible that allows them not to have insurance.
So let me help you understand that. If you look at number three on page 31, you've got, in letter A, the minimum deductibles, and there's a range of 1500, or I'm sorry, 1,000 to 2000 if you look at those things as a whole. We'll come back and talk about how those things are split out in a moment. The maximum if you look in B, 3B is 10,000 for residential and 50,000 for nonresidential. Now, this is just like any other insurance. When it comes to flood insurance, the higher the deductible, the cheaper the premium. As the deductible goes up, I have to put more in out of my back pocket in the event of a loss. Therefore, my premium is a little cheaper. The higher the deductible, the cheaper the premium.
So there's something to be gained from the customer's perspective for choosing that higher deductible. They have that lower premium. So if the maximum is 10 and 50,000, respectfully, let's just pretend for a moment that I've got a 20,000 loan, and it's a commercial loan. And the building, let's just say the building is worth 30,000 or whatever. Okay? So the lesser of there is going to be the $20,000 loan. The building is worth 30,000. You know what? I, as the customer, I'm going to choose a 25,000 deductible. I can't have that because then there's no insurance. So you have to have a deductible that's equal to or less than the amount of insurance that's required in connection with the loan.
Now, if you heard me, you did hear me correctly. I said equal to or less than. They will sell you insurance with a deductible equal to the amount of insurance. I don't get it. It's like you don't have insurance, but that would technically pass the compliance test. You can't allow them to have a deductible greater than the amount of insurance that's necessary for connection with the lesser of calculation.
Now, there's some more to this deductibles game. C2 says that just because the customer can achieve a cheap premium by way of a higher deductible, it's not in the best interest of the bank to allow that to happen in every case. There's a safety and soundness consideration. Does your customer have the capacity to repay that deductible, and it's a higher deductible likely, in the event of a loss? And so what the guide suggests is that you are essentially underwriting your borrower's ability to repay that deductible that they've selected. It's not a safe and sound practice to just allow all borrowers in all situations to have the highest deductible so that can have the cheapest premium. They may not be able to pay in the event of a loss, and that brings to you a safety and soundness risk.
Published
2022/04/13
