[TheBank]

Both our commercial and consumer DOTs include cross-collateralization clauses. How does this impact flood compliance? Would all loan balances to the borrower need to be included when determining the amount of flood insurance covered needed for the improved property located in a SFHA? Would a customer flood notice be required for the new loan secured by the property in a SFHA and all subsequent loans to the customer as long as the property located in a SFHA is collateral for any loan?

Does anyone know how examiners have been looking at this?

[rcooper]

Would all loan balances to the borrower need to be included when determining the amount of flood insurance covered needed for the improved property located in a SFHA?

Yes, you would need to consider the balance of any loans that are secured by the flood property directly or through a cross collateralization clause. I believe some banks, include, as part of their cross collateralization clause, an exemption for flood properties – essentially saying that the cross collateralization does not apply if a property is in a flood zone. You might want to consult an attorney on your options.

12 CFR 339.3 Requirement to purchase flood insurance where available.
(a) In general. An FDIC-supervised institution shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the building or mobile home and any personal property that secures a loan and not the land itself.

12 CFR 339.2: Designated loan means a loan secured by a building or mobile home that is located or to be located in a special flood hazard area in which flood insurance is available under the Act.

Would a customer flood notice be required for the new loan secured by the property in a SFHA and all subsequent loans to the customer as long as the property located in a SFHA is collateral for any loan?

Yes if the loan is cross collateralized which results in the loan being secured by a property in a flood zone, then you would need to provide the SFHA notice even if the property is not directly secured by the property in the flood zone.

12 CFR 333.9 (Other regulators have the same language): “When an FDIC-supervised institution makes, increases, extends, or renews a loan secured by a building or a mobile home located or to be located in a special flood hazard area, the FDIC-supervised institution shall mail or deliver a written notice to the borrower and to the servicer in all cases whether or not flood insurance is available under the Act for the collateral securing the loan.”

Does anyone know how examiners have been looking at this?
Banks have had issues with this. It will depend on the examiner you have and whether he/she/they are looking at this issue.

Here are a few links to outside sources that have brief discussions on this issue: https://biotech.law.lsu.edu/blog/commercial-flood-insurance.pdf
https://www.fdic.gov/news/conferences/NY/2012-12-03-qa.pdf
https://www.kansascityfed.org/~/media/files/publicat/banking/regulatoryseminars/2016-cc-hottopics.pdf (See page 6 – 2016 Top 5 violations)

[TheBank]

If a bank force places flood insurance and adds the cost to the loan, is that considered an increase subject to providing a notice to the borrower that the property is located in a SFHA?

If force placed flood insurance is in place at loan maturity and the loan is renewed, is it acceptable for that same forced placed flood insurance policy to remain in place?

[rcooper]

If a bank force places flood insurance and adds the cost to the loan, is that considered an increase subject to providing a notice to the borrower that the property is located in a SFHA?

We don’t have a definitive answer. We heard different opinions from the regulators, none of them official. We believe the safest course of action, until we have consistent guidance from the regulators is to consider it an increase to the loan.

If force placed flood insurance is in place at loan maturity and the loan is renewed, is it acceptable for that same forced placed flood insurance policy to remain in place?

Again, this is something that isn’t clearing stated. Your regulator may deem it acceptable or they may not. It may be best to talk to your regulator and understand their position. Also, I’m not sure of the circumstances, but consider if you want to renew or refinance the loan if the borrower isn’t willing to purchase flood insurance.

[Author]

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