How does the NFIP's 2007 Mandatory Purchase of Flood Insurance Guidelines differ from the its May 2011 Flood Insurance Manual? Is the May 2011 Manual the newest version of the old Mandatory Purchase Guidelines?

No, they are 2 different documents. The Flood Manual is really for insurance professionals, but is useful for bankers to understand how the insurance policies are written and work. The Mandatory Purchase Guidelines are for bankers and spell out the rules bankers have to follow.

Thank you.

Dani's correct about the differences between these two publications. However, I want to point out something:

The MPFIG are NOT "rules". They are guidelines (best practices, suggestions, etc.). The Guidelines should be treated as such and not considered the law or regulation. Why do I make this distinction? Because the Guidelines are absolutely incorrect in a couple of things:

1. They state a new SFHDF is required when a loan is made. The law, regulation and FAQs all make it clear that a lender can rely on a previous SFHDF, even when making a new loan, if the 3 conditions are met.

2. The Guidelines indicate lenders must use RCV when calculating insurable value. This is not in the law or regulation. This is a highly debated topic, but it is not a regulatory requirement.

If your examiners quote from the Guidelines concerning either of these two topics, you need to know these are not regulatory requirements. They are FEMA guidelines. Don't confuse the two.

So, is RCV even a consideration when determining the minimum coverage?

If an RCV is used in a situation where there is high land vs. low structure value, has a violation occured?

For example:

NFIP maximum is $250k &
Loan balance is $200k, but
RCV is $50k ($300k property value - $250k land value).

So, in this scenario, what should the minimum coverage amout be? $50 or $200k?

The lesser of the value of improvements, loan amount or maximum insurance available.

M. Cockrell. RCV is not the value less land. It's what it would cost to rebuild a structure. IF the property is not owner-occupied, you will likely be looking at ACV, which would be the RCV less depreciation.

Another consideration is demo cost. In some cases of low-value buildings that are going to be removed, the cost to demo and clean-up can be used in place of RCV/ACV.

In your description above, it appears $200K would be your lowest number.

"In your description above, it appears $200K would be your lowest number. "

RRJ, I agree with everything that you said, however I don't think we have enough information to actually draw that conclusion. We don't actually know the RCV or whether ACV should be a consideration. It appears they took the market value of the property and subtracted the land value and as you pointed out, that is not a proper calculation method.

I agree...this is why I used the word 'appears' as it is not crystal clear...thanks for elaborating on that fact!

Missed the "appears"

Understood, but who determines that value? And, how? Where do I find the secret formula?


But back to the original purpose of my inquiry (which was prompted by David's statements): The act only stipulates two factors for determining minimum coverage amount.

1) outstanding principal balance
OR
2) maximum NFIP limit.

As I'm FDIC regulated, Part 339.3 also only names balance & NFIP.

It isn't until you broach the guidelines that RCV is introduced as a consideration for determining the required coverage amount.

So, if you use RCV (however it's derived) and it happens to be less than either of the other two factors, have you violated the law???

You might want to re-read 339.3 and the MPFIG:

(2) Calculating Coverage

To meet compliance requirements, the amount of flood insurance must at least be, but is not limited to, the lowest of:

• The outstanding principal balance of the loan(s); or

• The maximum amount of coverage available under the NFIP for the particular type of building; or

• The full insurable value of the building and/or its contents, which is the same as 100-percent replacement cost value (RCV). (Unlike the practice in other lines of property insurance, building
RCVs under the NFIP do not include market values or the value of the land.)

§ 339.3 Requirement to purchase flood insurance where available.

(a) In general. A bank shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must 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 RCV and ACV standards for determining value of the property was thoroughly vetted by all the regulatory agencies in the 2009 Q&A

The underlying principal is that it does no one any good to force a borrower to buy more insurance than the insurance will pay.

Okay, your point about needless overspending on insurance certainly makes sense, but isn't the bolded text the very definition that RRJ just stated RCV isn't.

And, for the record, I still haven't read it in the text of the FDPA. (Did I miss it?)

Presented the question to an EIC from a previous FDIC exam & the response was: "The FDIC follows the guidance provided by FEMA; and therefore, using the RCV would be appropriate in some instances."

Have you read this document? I think it would help put your mind to rest on some of these issues:

http://edocket.access.gpo.gov/2009/pdf/E9-17129.pdf