The quarterly newsletter for the Chicago Region of FDIC’s Division of Depositor and Consumer Protection published on March 31, 2019 contain a good reminder of a subtle item that is missed by some lenders. The subtle item is contents coverage. You generally don’t take contents as collateral, or do you?
Section 329.3(a) of the FDIC’s flood insurance regulation states, in part, that 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.
Flood insurance is required on the personal property or contents if:

  • The bank has a security interest in both the building and its contents or personal property;
  • The building (and the contents) are located in a special flood hazard area; and
  • The contents have an insurable value.

But you only take a mortgage on the building and the land, right? You don’t use a security agreement covering the contents and have not filed a UCC-1, right? Read your mortgage closely. Some mortgages or deeds of trust include language that create a blanket security interest in all contents of the building, even if not perfected by filing a UCC-1. The presence of such language triggers the need for flood insurance on both the building and the contents. It only takes a few minutes to check the contents of the mortgage.
A copy of the FDIC’s quarterly newsletter is available here https://mycomplianceresource.com/wp-content/uploads/2019/04/1Q2019-DCP-Newsletter.pdf .