Yes, a bank may dictate reasonable insurance requirements for loan collateral, including the prohibition or limitation of additional insureds on hazard insurance policies securing the loan collateral.

Requirements for homeowner’s insurance (or “hazard insurance”) likely would be spelled out in your loan agreement or the mortgage instrument. For example, Fannie Mae’s standard security instrument for Illinois requires the borrower to “maintain the types of insurance Lender requires in the amounts (including deductible levels) and for the periods that Lender requires.” Fannie’s standard security instrument allows the lender to force-place insurance when the borrower cannot provide evidence of the required insurance coverage.

Because this homeowner’s insurance policy insures third parties and not the borrowers, we recommend reviewing the loan agreement and mortgage instrument signed by the borrowers to determine whether they have failed to meet their contractual insurance requirements. The rights and obligations of an additional insured under a homeowner’s insurance policy are likely to differ significantly from the rights and obligations of the policyholder (or “primary insured”), and we believe your bank would be within its rights to require borrowers to be listed as the policyholder and to enforce that requirement as outlined in your loan agreement and mortgage instrument.

For resources related to our guidance, please see:

• Fannie Mae, Standard Security Instruments, Illinois (“5. Property Insurance. (a) Insurance Requirement; Coverages. Borrower must keep the improvements now existing or subsequently erected on the Property insured against loss by fire, hazards included within the term ‘extended coverage,’ and any other hazards including, but not limited to, earthquakes, winds, and floods, for which Lender requires insurance. Borrower must maintain the types of insurance Lender requires in the amounts (including deductible levels) and for the periods that Lender requires. What Lender requires pursuant to the preceding sentences can change during the term of the Loan, and may exceed any minimum coverage required by Applicable Law. Borrower may choose the insurance carrier providing the insurance, subject to Lender’s right to disapprove Borrower’s choice, which right will not be exercised unreasonably.”)

• Fannie Mae, Standard Security Instruments, Illinois (“28. Placement of Collateral Protection Insurance. Unless Borrower provides Lender with evidence of the insurance coverage required by Borrower’s agreement with Lender, Lender may purchase insurance at Borrower’s expense to protect Lender’s interests in Borrower’s collateral. . . .”)

• FDIC Supervisory Insights, Wind Hazard Insurance: No Longer Just a Technical Exception (June 6, 2007) (“FDIC Rules and Regulations (see 12 CFR 365) require prudent real estate lending policies, which would include the general requirement of insurance to enhance loan quality.”)

• FDIC Real Estate Lending Standards, 12 CFR 365, Appendix A to Subpart A (“Prudently underwritten real estate loans should reflect all relevant credit factors, including: . . . Any additional collateral or credit enhancements (such as guarantees, mortgage insurance or takeout commitments).”)