[HMDA Guy 78]

If possible, I’d like to verify my understanding of flood regulations on a couple of items. Could anyone offer some thoughts on the following?

1) A commercial loan is made. The building is in a SFHA, but only the contents in the building are taken for collateral, not the building itself. Under Flood regulations, flood insurance is not required on the contents, but could be required by the Bank at our discretion.

2) 2 commercial loans are made simultaneously to the same borrower. Loan #1 is secured by two buildings – both of which are in a SFHA. Loan #2 is secured by the contents of the two buildings held as collateral for loan #1. It is my understanding that under flood regulations, flood insurance would be required for both the buildings and contents of the buildings, since the buildings are held as collateral on a loan.

[rcooper]

1) I agree.

2) Flood insurance wouldn’t technically be required but would be in the best interest of the bank and the borrower to obtain. (See this FDIC Q&A, #3: https://www.fdic.gov/news/conferences/NY/2012-12-03-qa.pdf )

Also, it might be helpful to review the interagency flood Q&A’s, #38-#40 linked here:https://www.fema.gov/media-library-data/20130726-1742-25045-4927/interagency_q_a.pdf.

[HMDA Guy 78]

Thanks, Robin. So – if we had building only coverage, then we are not technically in violation of flood regulations, and it is more of a safety-and-soundness issue?

Also… is it correct to say that the total coverage of building coverage plus contents coverage combined must be equivalent to the “lesser of the three” for sufficient coverage? Or in this case, would you treat each loan as a separate entity (i.e. building coverage must equal loan #1 amount, and contents coverage must equal loan #2 amount)?

[rcooper]

In a separate conversation you mentioned that these two loans are cross collateralized. If that is the case, I would say that you would be required to have content coverage since the buildings where the contents are held is securing technically collateral for the loan as well. In this situation, I would prefer to calculate them separately in order to ensure you have adequate insurance for the contents as well as the buildings.

Jack do you have any other thoughts?

[jholzknecht]

The presence of the cross-collateral clause in a game-changer in this conversation. Assume the following.

Total loan amounts $200,000 (2 loans at $100,000 each)
FEMA’s Max Coverage $1,000,000 ($500,000 on the building and $500,000 on the content)
Insurable value $350,000 (Building – $150,000, contents $200,000)

You need insurance in the amount of $200,000. The coverage would be split between the building and the contents, for example $150,000 on the building and $50,000 on the contents.

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