Is the coverage adequate

Loan amount is $520,000.
2 properties not in a flood zone.
2 properties in a flood zone.
One property RCV $174,000, the other property RCV is $153,000.
The lender assigned loan amount value to the first property at $112,185 and insurance was obtained for $158,000.
The lender assigned loan amount value to the second property at $98,202 and insurance was obtained for $99,400.
Loan amounts attributed to the third and fourth property are $104,359 and $205,255 respectively.
My question to you all is:
Is the flood coverage adequate???????

Assuming the RCV is the appropriate insurable valuation method for the types of buildings, I would say you are underinsured.

You are required to have insurance of a least the lesser of:

1. Loan Amount
2. Insurable value
3. NFIP max

For the loan amount, your combined insurance has to equal or exceed the whole loan amount. There isn't a provision that allows you to assign a certain amount of the total loan amount to each building and only insure at that level. If that were allowed, you could assign $1 to the buildings in a flood zone to essentially eliminate the flood insurance cost.

IMO, you would have to have policies at least equal to the RCV for both buildings in a flood zone.

So the loan amount does not apply in these scenarios?
Or, seeing that the loan amount is over $250,000, as long as my insurances are over $250,000 I am adequately covered?

Lost my original post. With the assumption TMat made about RCV being the correct value for these types of buildings, I will take a stab. For purposes of calculating flood insurance, my understanding is you don't consider the apportion any of the loan to them, you only consider the buildings in the flood zone. In this case, the total RCV of the two buildings inside the zone is $327,000, which is less than the loan amount, so that is the minimum amount you would need, in two policies, unless I am misunderstanding something.

Your combined RCV is lower than your loan amount, so you would insure to RCV, up to the NFIP max.

If your total loan was 220k, you would have to have two policies that total at least 220k, because your loan amount would then be less than the combined RCV.

So if the RCV is the value that we need to have in order to have adequate insurance...it would have to be one policy for $174,000 and one policy for $153,000 correct? The customer cannot divvy that up the way they want to?

If RCV is the lowest of the three, each building would have to have coverage at least in the amount of the RCV. You can't divy it up like you could if loan amount was the lowest.

Is there no provision allowing for determination of minimum coverage by the % of the loan amount secured by buildings in the flood zone when secured by multiple properties?

For example, 10 properties with equal value are securing the loan. Only one is in flood zone. Loan amount is $100K. All properties have RCV of $50K. A lender is still required to get $50K in flood, which would be 50% of the loan amount, even though the property is only 10% of the collateral?

Yes, because you have to look at the total loan amount in your calculation of the lowest of the three options. So in this case, insurable value is 50K, loan amount ins 100K, and max is 250K. The lowest would be insurable value at 50K.

Look at the mortgage. Is the mortgage for the full loan amount, or does it reflect a lesser amount?

What does the mortgage have to do with it? If the loan amount is $300,000 secured by a dwelling, even if only partially secured by the dwelling, and the dwelling's insurable value is $450,000 then the minimum flood insurance coverage would be $250,000.

Dan, my response was directed to the example Inherent_Risk gave.

Another Example:
You have a loan secured by 2 properties- 1 in a SFHA, 1 out. The total loan balance is 300,000. The RCV for the structure in the SFHA is 200,000. The bank decides to secure part of the loan with the property in the SFHA, so the mortgage reflects 150,000. Would you not be able to require flood insurance for the 150,000 (secured amount) instead of the RCV of 200,000?

The amount of your mortgage is not part of the three items in the calculation, i.e., loan amount, insurable value, maximum amount of insurance. How can you limit your mortgage to less than the loan amount? You must be in a very weird jurisdiction that allows something like that.

Would you not be able to require flood insurance for the 150,000 (secured amount) instead of the RCV of 200,000?

No.

As Randy stated the minimum coverage is the LESSER of:

1. The outstanding principal balance of the loan, or loans secured by the property located in a SFHA;
2. The insurable value of the property, or properties located in a SFHA securing the loan; or
3. The maximum available coverage through the NFIP for the property type located in a SFHA.

I have only dealt with this once (a few years ago), but it was accepted by the examiner at that time. That experience is what gave me the idea that this was acceptable. That particular situation was a large commercial loan that involved 2 properties each containing multiple apartment complexes. The loan was originated with the 2 mortgages only reflecting a portion of the total loan balance. Flood was then calculated based only on the portion of the loan amount that that property secured.

I am completely open to other ideas and I see your point... I would rather be told that I am wrong than to continue in ignorance ☺

it was accepted by the examiner at that time

You had an examiner that gave you a break.

For future reference you may find this tool helpful:

https://www.bankersonline.com/tools/151072

FWIW, I totally agree you can't allocate a loan to a building and you don't consider the amount of the mortgage.

Here's another way to try to make sense of this:
Forget all properties not in a SFHA. Wipe them off the table and plug in the 3 numbers
1) loan(s) amount
2) Insurable Value of each building
3) Max available for each building.

The lesser of those 3 is what you need in Flood Insurance. Then, if there's multiple buildings, the borrower can allocate the insurance needed among the building, but make sure each building has some coverage.

So next time I'll tell the lender to make 2 separate loans if they want to finagle the flood coverage calculation like that. Ha!

That would work for the first loan, but you run into the same issue when you make the second loan.

I want to piggyback on this one to make sure I am providing the correct information.

Scenario: existing loan originally for the purchase of 2 investment properties, one in a flood zone and one out. The flood policy has expired and I have no evidence that it has been renewed.

I am putting together the 45 day notice to mail out. Current balance is approximately $53M, and RCV at the time of origination was approximately $27M. Therefore, all that is required in coverage is the $27M, correct? (Ignoring the $250M value because it doesn't apply here)

If lender made two separate loans, one for $100M for properties in a SFHA (RCV $200M) and one for $200M for the properties out of the SFHA (RCV $400M), then the bank would only require $100M instead of $200M if it was one loan.

Finagling definitely looks possible if non-SFHA loans are ignored in the calculations.

Correct. $27,000 is the lowest of 3 (loan amount, insurable value and max available from the NFIP) PLUS it's the maximum the borrower should purchase because it is the insurable value.

IR - Flood insurance requirements are loan by loan based on the specific collateral for that loan. If you separate the collateral, you only have to worry about the $100M loan. Of course if you were recently lending in the Houston, Florida, SC, etc. area - having less than RCV on a borrower that doesn't have adequate resources to fix a property above the required flood insurance amount might not be the wisest approach.

I think a lot of banks need to reassess their approach to flood insurance.

I think a lot of banks need to reassess their approach to flood insurance.
I do too. It's always baffled me that banks go with the "lesser of 3" when the loan balance is the lowest. What most lenders don't realize is that when you insure property for less than it's insurable value, you don't really have that much insurance. You have "percentage coverage".

For example:
If you have a $25,000 loan on a building valued at $100,000 and you only require $25,000 in insurance, then you have 25% coverage. If the building suffers $20,000 in damage, the borrower gets a check for $5,000. Can they afford the extra $15,000 to repair the property. If not, that's your collateral and if they walk away from it, you repossess a damaged building that becomes hard for you to sale to recoup your loss.

Thank you David, I appreciate it! I also think what you and Rlcarey said makes a lot of sense. Something I will be bringing up to my superiors!