IBA Compliance Connection

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When taking an assignment of the beneficial interest in a land trust, is a flood certification required, although the collateral is considered personal property?

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Yes, we believe that a flood certification (also known as a flood determination) is required for an assignment of beneficial interest (ABI) in a land trust if a building or mobile home held in the trust is collateral for your loan. However, we are checking with FEMA to see whether they agree with our analysis.

Financial institutions are prohibited from making, increasing, extending, or renewing any “designated loan” unless the property securing the loan is covered by flood insurance. A designated loan is a “loan secured by a building or mobile home that is located . . . in a special flood hazard area in which flood insurance is available under the [National Flood Insurance] Act.”

You are correct that a beneficial interest in a land trust is considered “personal property” and not real property. However, we believe that because your bank would be entitled to foreclose on the real property held in the land trust in the event of a default, this loan should be treated as secured by that real property. We confirmed this conclusion with a flood insurance expert, and as noted above, we also are waiting on confirmation from FEMA. Unless we hear otherwise from FEMA, we recommend treating a loan secured by an ABI in a land trust as a “designated loan” subject to the flood insurance requirements.

For resources related to our guidance, please see:

  • FDIC Flood Insurance Regulations, 12 CFR 339.3  (“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. . . .”)
  • FDIC Flood Insurance Regulations, 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.”)
  • Hoxha v. LaSalle Nat. Bank, 847 N.E.2d 725, 730 (1st Dist. 2006) (“In an Illinois land trust . . . [t]he interest retained by the beneficiary . . . is a personal property interest rather than a real property interest in the legal or equitable title.”)