[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]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 116

 

Policies of General Application; Flood Insurance Protection

AGENCY: Small Business Administration.

ACTION: Proposed rule.

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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