Based on prior research and threads here on BOL, it was my understanding that if a UCC lien is filed and covers peronal property within the building (aside from fixtures and the like), that contents coverage is required. It appears the FDIC newsletter below contradicts that. Opinion?


FEDERAL DEPOSIT INSURANCE CORPORATION
Division of Depositor and Consumer Protection – New York Region
June 2014

This information is not official FDIC guidance or instruction, but should provide you with a meaningful summary of items that may impact your institution.

Flood Insurance – Contents Coverage and General Best Practices
Section 339.3(a) of the FDIC's Flood Insurance Regulations (Flood Insurance) states in part, "A bank shall not make, increase, extend, or renew any designated loan unless the building ...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." While the requirement is generally straightforward, there can be confusion about when a bank should require commercial borrowers to obtain flood insurance for personal property. This article will clarify when banks should require contents coverage for loans secured by non-residential properties and provide strategies for compliance. The article concludes with best practices to manage Flood Insurance compliance risks.

Non–Residential Properties (Commercial Loans) and Flood Insurance requirements for contents and personal property
Contents coverage for attached or affixed personal property or contents may be required for designated loans based upon the language within the mortgage instrument. The term “security interest” or similar language included in the mortgage instrument or other legal documentation is used to determine if Coverage A – Building-Only and Coverage B – Personal Property Flood Insurance is required. For example, a mortgage instrument that references a security interest in all business assets or inventory may trigger the need to obtain Coverage B in addition to Coverage A.

The method of securing the collateral is not relevant for determining flood insurance requirements. The need for coverage is not based on whether the bank intends to pursue or perfect a lien against the collateral. For example, filing a Uniform Commercial Code-1 financing statement is not a determining factor in whether or not flood insurance is required.

Flood Insurance rules require contents coverage if all of the following conditions are met:

the bank has a security interest in the building and its contents or personal property;

 the contents and/or personal property is within the building that is located in a special flood hazard area; and

 the personal property and/or contents have insurable value.

Contents Coverage – Strategies for Compliance
Banks have used various strategies to ensure compliance with this Flood Insurance rule. Some
banks use standardized legal documentation for commercial mortgage loans that always takes a
security interest in personal property or contents. These banks require the borrower to obtain
flood insurance for contents if the conditions described above are met. Alternatively, unless it is
necessary to approve the loan, other banks customize legal documents to not take a security
interest in contents. Contents coverage would not be required in this scenario, since the bank
does not have a security interest in personal property. Also, in cases where personal property or
contents securing a loan have negligible or no insurable value, affidavits from borrowers or
insurance agents have been used to document that Coverage B insurance is not obtainable.

. . . it was my understanding that if a UCC lien is filed and covers peronal property within the building (aside from fixtures and the like), that contents coverage is required. It appears the FDIC newsletter below contradicts that.

How does the newsletter contradict that?

It is this statement that is confusing me...

The need for coverage is not based on whether the bank intends to pursue or perfect a lien against the collateral. For example, filing a Uniform Commercial Code-1 financing statement is not a determining factor in whether or not flood insurance is required.

If your security agreement includes contents then your loan is secured by the contents and will require flood insurance if the property is located in a SFHA and the loan is secured by both the contents and the building regardless if you perfect your lien by filing the UCC.

In other words perfecting (filing) your lien has no bearing on whether you are required to obtain flood insurance. The requirement is based on if the applicable security agreement lists the building and/or contents as security for the loan.

Thanks Dan, always helpful.

Can I ask an additional question on this? Is there any exception to the content coverage?

We are taking the property and contents. The customer has a flood policy on the property only, but the amount is sufficient to cover the loan amount. Do we need to require coverage on the contents in this instance? If so, where is the cite? I am still fairly new and locating cites to back me up is difficult. . . .

Thank you.

§ 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.

(b) Table funded loans. A bank that acquires a loan from a mortgage broker or other entity through table funding shall be considered to be making a loan for the purpose of this part.

[Codified to 12 C.F.R. § 339.3]

[Section 339.3 amended at 61 Fed. Reg. 45707, August 29, 1996, effective October 1, 1996]

Thank you ,Dan, for the cite.

The cite says personal property, so would this also apply to a commercial loan where we would take both the property and equipment?

The cite you quoted also states the insurance must be at least equal to the lesser of the outstanding balance or the maximum limit of coverage. In this case, even though it is property only, it is sufficient to cover the loan balance, so wouldn't the lesser be the outstanding principal balance (covered by the property) and we wouldn't need content insurance?

Forgive me, fairly new to loan compliance and sometimes I think I try to overthink the situation, rather than just take the simple route.

I haven't heard from anyone, but I think I have figured this out. Maybe someone could tell me if my thinking is off. . . .

Say the loan is for $200,000 and the borrower already has $200,000 flood insurance on the property. Since we are taking the property and contents, the contents also need to be insured, however, the customer doesn't need to get an additional policy to cover the contents (which would make the total more than the loan). The customer needs to make sure the $200,000 policy covers both the proprty and the contents. In other words, the customer doesn't need additional coverage, the customer just needs to make sure the coverage he has includes the contents.

Am I anywhere close?