When considering the amount of flood insurance required, all loan balances secured by a property in a SFHA, including those that are cross-pledged are included.
How does cross collateralization come into play with the flood requirements? If there is cross-collateralization language in a promissory note/security agreement, then all corresponding loan balances should be included when determining the amount of flood insurance required? For example, if a borrower has a R/E loan with a building in a SFHA with a balance of $100,000 and later request an auto loan in the amount of $30,000, and cross-collateralization language is included, then the bank would be required to provide the borrower a flood notice and also consider the auto loan amount in determining flood coverage (total loan amount – $130,000).
Great question. Assuming the R/E loan agreement has broad cross collateral language, then in the described scenario, the borrower would have to increase the flood policy from $100,000 to $130,000 before the auto loan could be made.