[Federal Register Volume 59, Number 12 (Wednesday, January 19, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-1053] [[Page Unknown]] [Federal Register: January 19, 1994] ======================================================================= ----------------------------------------------------------------------- SMALL BUSINESS ADMINISTRATION 13 CFR Part 116 Policies of General Application; Flood Insurance Protection AGENCY: Small Business Administration. ACTION: Proposed rule. ----------------------------------------------------------------------- SUMMARY: This proposed rule would amend the amount of flood insurance coverage required of recipients of certain SBA assistance. Under this proposal, flood insurance would be required in an amount equal to the lesser of the sum of all liens on the property (including any SBA lien) plus, if the SBA assistance is unsecured, the outstanding balance of the SBA assistance or the insurable value of the property, but in no event would the required insurance exceed the maximum flood insurance available under the National Flood Insurance Act of 1968. DATES: Written comments must be received on or before February 18, 1994. ADDRESSES: Comments may be sent to Bernard Kulik, Assistant Administrator or Disaster Assistance, U.S. Small Business Administration, 409 Third Street, SW., Washington, DC 20416. FOR FURTHER INFORMATION CONTACT: Bernard Kulik, Assistant Administrator for Disaster Assistance, (202) 205-6734. SUPPLEMENTARY INFORMATION: Prior to May 10, 1983, a borrower under any of SBA's financial assistance programs was required to carry and maintain flood insurance in the amount of the SBA loan balance, even if the insurable value of the collateral for the loan were greater and higher amounts of flood insurance were available under the National Flood Insurance Act of 1968, as amended (the ``NFI Act''). See 13 CFR 116.11(c) (1983). On May 10, 1983, SBA amended this regulation to require borrowers to purchase the maximum amount of insurance available under the NFI Act, not to exceed the insurable value of the property. 48 FR 20933. The purpose of the amendment was to assure that the value of SBA's collateral would be protected from floods in flood prone areas. SBA had realized that flood insurance in the amount of the SBA loan balance was inadequate protection when SBA's interest in the collateral was junior to another lender. If, for example, a disaster loan applicant had an existing mortgage on his property in favor of a commercial lender, SBA would assume a junior lienholder's position as security for the disaster loan. If a subsequent flood disaster occurred and the borrower had been carrying flood insurance only in the amount of the SBA loan, the insurance proceeds would be applied first to the commercial loan and would be insufficient to repay SBA. The requirement of ``full insurable value'' insurance prevented this outcome. However, it also forced many borrowers to purchase insurance far in excess of the loan they would receive from the Agency. Moreover, in the ten years since the adoption of the May 10, 1983 final rule, SBA has observed a number of loan application cancellations as a result of the high cost of full insurable value insurance relative to the principal amount of the SBA loan. In some of those cases, the cost of the insurance may have even approached or exceeded the amount of the SBA assistance. SBA recognizes that full insurable value insurance confers a benefit on the borrower (protection for his equity in the property), the Agency (reduction in the need for future disaster assistance), and the national flood insurance fund (bolstering of the fund's reserves). Nevertheless, the benefit comes at an additional cost to the borrower at a time when the borrower may be suffering significant economic distress from a flood disaster. SBA has come to the conclusion that it can adequately protect its interest in the collateral or in the general credit of the borrower without forcing the borrower to purchase full insurable value flood insurance. Without returning to the pre-1983 rule, which placed SBA's interest in the collateral at risk if there were senior lienholders, SBA believes it can improve the present rule to protect SBA's interest without unnecessarily burdening the borrower. Because SBA's real interest in the collateral exists only to the extent of the outstanding balance of the loan, SBA loans can be adequately protected even if insurance does not cover the full value of the collateral, so long as insurance does cover the amount of all outstanding liens (including any SBA lien) on the property plus, in the event SBA's assistance is unsecured, the outstanding balance of such assistance. Then, if a borrower were to suffer a subsequent flooding loss and recover insurance proceeds, SBA would likely be reimbursed in full for the outstanding amount of its loan. Of course, if that flooding were to cause damage in excess of all liens (plus the amount of SBA's loan if SBA were unsecured), such ``excess'' damage would not be covered by insurance and would erode any equity the borrower might have had in the property. After considering the issues discussed above, SBA has concluded that its flood insurance requirement should be amended. Accordingly, SBA is hereby proposing to revise Section 116.11(c) to require that applicants for SBA financial assistance who are located in a special flood hazard area obtain and maintain flood insurance in an amount equal to the lesser of: (1) All outstanding liens (including SBA's lien) on the property plus, if the SBA assistance is unsecured, the outstanding balance of the SBA assistance or (2) the insurable value of the property, but in no event would the required insurance exceed the flood insurance available under the NFI Act. This provision applies to the following programs: 7(a) business loans, 7(b) disaster loans, sections 501, 502 and 503 development company loans, lease guarantees, small business investment companies and pollution control guarantees. (13 CFR 116.10 (1993)) It is expected that most of the time the insurable value of the collateral will exceed the amount of all liens on the property (plus SBA's assistance, if unsecured). Thus, for most borrowers, the amount of flood insurance required would be determined by the liens on the property (plus SBA's assistance, if unsecured) so long as flood insurance in that amount were available under the NFI Act. On those occasions when the insurable value of the collateral dips below the liens on the property (plus SBA's assistance, if unsecured), only enough insurance to protect the collateral would be required. Compliance With Executive Orders 12866, 12612 and 12778, and the Regulatory Flexibility and Paperwork Reduction Acts Executive Order 12866 and Regulatory Flexibility Act SBA certifies that this proposed rule, if adopted, would not be a significant regulatory action for purposes of E.O. 12866 and, for purposes of the Regulatory Flexibility Act, 5 U.S.C. 601 et seq., would not have a significant economic impact on a substantial number of small entities, for the following reasons: 1. It would not result in an annual economic effect of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities. 2. It would not create a serious inconsistency or otherwise interfere with an action taken or planned by another agency. 3. It would not materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof. 4. It would not raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in E.O. 12866. Executive Order 12612 SBA certifies that this proposed rule, if adopted, would have no Federalism implications warranting the preparation of a Federalism Assessment in accordance with Executive Order 12612. Paperwork Reduction Act For purposes of the Paperwork Reduction Act, 44 U.S.C., ch. 35, SBA hereby certifies that this proposed rule, if adopted, would impose no new reporting or recordkeeping requirements. Executive Order 12778 SBA certifies that this proposed rule is drafted, to the extent practicable, in accordance with the standards set forth in section 2 of E.O. 12778. List of Subjects in 13 CFR Part 116 Flood insurance, Flood plains, Small businesses. For the reasons set forth above, part 116 of title 13, Code of Federal Regulations, is proposed to be amended as follows: PART 116--[AMENDED] Subpart B-- [Amended] 1. The authority citation for subpart B of part 116 is proposed to be revised to read as follows: Authority: 15 U.S.C. 634(b)(6), 636 (b), (c), (f); Public Law 102-395, 106 Stat. 1828, 1864; and Public Law 103-75, 107 Stat. 739. 2. Section 116.11 is proposed to be amended by revising paragraph (c) to read as follows: Sec. 116.11 Requirements. * * * * * (c) Amount of coverage required. The amount of flood insurance required is the lesser of the sum of all liens on the property (including any liens in favor of SBA) plus the outstanding balance of any unsecured SBA assistance, or the insurable value of the property, but in no event shall the required insurance exceed the maximum flood insurance available under the National Flood Insurance Act of 1968, as amended. * * * * * Dated: October 25, 1993. Erskine B. Bowles, Administrator. [FR Doc. 94-1053 Filed 1-18-94; 8:45 am] BILLING CODE 8025-01-M