I believe this is what you are referencing:
§ 339.3 Requirement to purchase flood insurance where available.
(a) In general. A bank 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 overall value of the property securing the designated loan minus the value of the land on which the property is located.
I looked in the definition section of the regulation to see if make, increase, extend, or renew were defined and I didn’t find anything. I would agree with your interpretation, which is the most conservative. Waiting till after the note is signed (but not funded) to get insurance, will do nothing but get the bank in trouble, and if found to be a pattern or practice, could lead to CMP’s.
I think you are making the right call on this one.