Does the bank legally have to determine what Replacement Cost Value is on a property if the insurance is enough to cover the loan?

There is no legal requirement to do anything but make sure you have adequate insurance. If the insurance policy covers the loan amount, you are done. The same thing would be true if they already had the maximum amount of available insurance, i.e. $250,000 on a 1-4 family residential property. The ACV or RCV becomes moot at that point.

Thank you. I have it as a finding in my audit and Loan Ops is saying the OCC said as long as the insurance covers the loan we are fine but my issue is what if the structure itself valued under the loan amount. This happens a lot with lake homes because the property is worth more than the house. So we have situations where the loan is lets say $175,000 and the insurance is equal to that amount. There was never a RCV determination so the bank has no clue if we required too much insurance.

So now I am not sure if I want to "drop" my finding because what if there are situations where we did require too much. Obviously Loan Ops would love for it to go away.

So is there something out there saying it is against regulation to have too much insurance?

You can always require more insurance than the minimum; HOWEVER, you cannot insure a structure for more than its insurable value. Do you have any documentation in file, like a hazard policy, that would give you some sort of value on the structure?

For each one I am going have to look through for the value. This is an issue where I have several of these loans with no value and our policy says we need the value of each structure permanently affixed to the property but I am getting push back.

In all situations - the lesser of the following (mandatory)

Amount of the loan - your loan is covered - no issue

Max $$ available - bank can request additional for safety and soundness issues. (Especially high value homes in flood areas.)

Replacement Cost - Like Jade mentioned, you can force them to get more than what the insurance company will pay in a claim, BUT potential UDAAP issue.

I am being told that basically since it is in the bank policy and there is guidance from the OCC stating that lenders may require more coverage to fully protect their collateral that I should basically drop the issue and just make it a memo that maybe the wrong type of appraisal was ordered(or just drop it completely).

I feel that is a potential UDAAP issue and that the bank can be sued for not making sure that the bank is requiring too much flood insurance but now I am stuck because I have nothing to really back myself to say they must determine the RCV for all properties.

The closest you are going to get is Q&A #9:

https://www.bankersonline.com/sites/default/files/tools/flood_faq_2011_10_17.pdf

If you are actually telling borrowers they need $xx coverage and the insurable value of the property is actually $xx - $50,000, then there is some UDAAP risk. But that fact should be readily apparent to a reviewer based on basic information in the file, overall property value, other hazard insurance, condition of subject property in the appraisal, etc.

Thank you, that is basically how I described it. I explained that while it is not a regulatory requirement that the bank is at risk of a UDAAP if a customer does their due diligence and researches the law and how we determined the required insurance amount. And honestly Flood insurance is one of the only subjects within banking that I have seen multiple customers do exactly that because the coverage amount directly relates to their premium.

Would it be acceptable by law to use the RCV on the building Flood vs. the RCV for the entire project HOI?

Insurable Value

Given these practical considerations, the Agencies are adopting question and answer 9 with a revision to provide that, in calculating the required amount of insurance, the lender and borrower (either by themselves or in consultation with the flood insurance provider or other appropriate professional) may choose from a variety of approaches or methods to establish a reasonable valuation. They may use an appraisal based on a cost-value (not market-value) approach, a construction-cost calculation, the insurable value used in a hazard insurance policy (recognizing that the insurable value for flood insurance purposes may differ from the coverage provided by the hazard insurance and that adjustments may be necessary; for example, most hazard policies do not cover foundations), or any other reasonable approach, so long as it can be supported. It is important for lenders to recognize that, when calculating the minimum amount of insurance that is required to be purchased, the insurable value is only relevant to the extent that it is lower than either the outstanding principal balance of the loan or the maximum amount of insurance available under the NFIP.

https://www.occ.gov/news-issuances/federal-register/76FR64175.pdf

Insurable Value

Because an NFIP policy will not pay a claim in excess of a property’s insurable value, it is important that this value be determined correctly. A miscalculation of the property’s insurance value could cause the lender to inadvertently require the borrower to purchase too much or too little flood insurance coverage, resulting in a violation. For example, if the value of the land is not excluded when determining the insurable value of a home or building, the borrower will purchase coverage exceeding the amount the NFIP will pay for a covered loss.33

To provide greater clarity about insurable value, the agencies issued Interagency Flood Q&A 9 in October 2011. Interagency Flood Q&A 9 explains that while equating the insurable value to replacement cost value (RCV) is appropriate in some cases, RCV should not be used as a proxy for insurable value for properties whose insurance loss payout would ordinarily be based on actual cash value:

Strictly linking insurable value to RCV is not practical in all cases. In cases involving certain residential or condominium properties, insurance policies should be written to, and the insurance loss payout usually would be the equivalent of, RCV. However, in cases involving nonresidential properties, and even some residential properties, where the insurance loss payout would normally be based on actual cash value, which is RCV less physical depreciation, insurance policies written at RCV may require an insured to pay for coverage that exceeds the amount the NFIP would pay in the event of a loss. Therefore, it is reasonable for lenders, in determining the amount of flood insurance required, to consider the extent of recovery allowed under the NFIP policy for the type of property being insured.34

The guidance further states that when this occurs, lenders may choose from any reasonable approach to calculate insurable value as long as it can be supported. The guidance provides examples of permissible methods, including appraisal based on a cost-value (not market-value) approach, a construction-cost calculation, and the insurable value used in a hazard insurance policy with appropriate adjustments.35