[TheBank]

We have a loan application in process where the loan will be secured by a property located in a SFHA. There are currently 2 prior liens and the plan is to pay them off with a portion of this new loan. To comply with FDPA should those two prior liens be included in the loan amount calculation when determining the minimum amount of flood insurance required?

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[rcooper]

It sounds like this loan will consolidate the two priors into the new loan – they will be paid off at consummation of this new loan, meaning the new loan will be the only outstanding loan secured by the property. If that assumption is correct, then I think you would not need to include the loans that are being paid off because essentially they are being rolled into the new loan and will be extinguished when the new loan is made, and that new amount is what you would use to calculate required coverage. However, if these loans will be remaining, meaning there will be three loans on the property for some period of time then I do think you need to consider if there is sufficient coverage to cover all three loans.

From current Flood FAQs:
37. If a borrower requesting a loan secured by a junior lien provides evidence that flood insurance
coverage is in place, does the lender have to make a new determination? Does the lender have to adjust
the insurance coverage?
Answer: It depends. Assuming the requirements in Section 528 of the Act (42 U.S.C. 4104b) are met
and the same lender made the first mortgage, then a new determination may not be necessary, when
the existing determination is not more than seven years old, there have been no map changes, and the
determination was recorded on an SFHDF. If, however, a lender other than the one that made the first
mortgage loan is making the junior lien loan, a new determination would be required because this
lender would be deemed to be “making” a new loan. In either situation, the lender will need to
determine whether the amount of insurance in force is sufficient to cover the lesser of the combined
outstanding principal balance of all loans (including the junior lien loan), the insurable value, or the
maximum amount of coverage available on the improved real estate. This will hold true whether the
subordinate lien loan is a home equity loan or some other type of junior lien loan.

[Author]

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