Hazard insurance plays a major role in mitigating the risk of loss of collateral in real estate loans, and examiners traditionally cite inadequacies in collateral insurance as technical exceptions on safety and soundness principles when reviewing loan files. However, apart from flood insurance, we are not aware of any banking laws or regulations that expressly require hazard insurance coverage on real estate loans (although many secondary market purchasers and some federally sponsored lending programs, such as FHA loans and Small Business loans, may do so).

If your bank wishes to make a loan to this customer, we believe it could be possible to make an accommodation. For example, some Amish communities are willing to present a letter evidencing support from the church community, with a promise to rebuild the structures securing the loan in the event of a loss. In addition, it may be possible that the value of the underlying land far exceeds the value of the structure that would otherwise be insured, which could mitigate the risk. Whatever course the bank decides to take, it will be important to thoroughly document the reasons for it, as well as the value of any alternative selected, although there may be no guarantee that the loan will escape a citation when the loan file is examined.  You may wish to discuss this question with your field examiner before proceeding to approve the loan.