IBA Compliance Connection

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When we extend a loan secured by a mortgage on a property held in a land trust, we frequently take an assignment of beneficial interest (ABI) in the land trust as additional collateral for the loan, out of an abundance of caution, which allows us to foreclose on the additional properties held in the land trust. In such cases, we obtain a flood certification for the mortgaged property but not for any other properties held in the land trust (which could include as many as fifteen tracts). We also do not obtain appraisals or title work for these additional properties. Are we required to obtain flood certifications for all the buildings held in a land trust when we take an ABI in the land trust as additional collateral for a loan out of an abundance of caution?

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Yes, we believe a flood certification is necessary for every building or mobile home held in a land trust that is security for your loan, even if the assignment of beneficial interest (ABI) in the land trust was taken only out of an abundance of caution. There is no exception to the flood insurance requirements for security interests taken out of an abundance of caution.

Because your bank would be entitled to foreclose on the real property held in the land trust in the event of a default, we believe a loan secured by an ABI in a land trust should be treated as secured by the real property held in the trust. We also confirmed this conclusion with an attorney for the FDIC. Accordingly, we recommend treating the buildings in the land trust that secure your loan through the ABI as properties subject to the flood insurance requirements, even when the ABI is taken as additional collateral out of an abundance of caution.

For resources related to our guidance, please see:

  • Interagency Questions and Answer Regarding Flood Insurance, Question 41 (“Does the Regulation apply where the lender takes a security interest in a building or mobile home located in an SFHA only as an ‘abundance of caution’? Answer: Yes. The Act and Regulation look to the collateral securing the loan. If the lender takes a security interest in improved real estate located in an SFHA, then flood insurance is required.”)
  • FDIC Compliance Examination Manual, Lending – Flood Disaster Protection, V-6.2 (April 2016) (“The FDPA provides that a regulated lending institution may not make, increase, extend, or renew any loan secured by improved real property that is located in an SFHA unless the improved real property is covered by the minimum amount of flood insurance required by statute. This includes situations where a security interest in improved real property is taken only ‘out of an abundance of caution.’”)
  • 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.”)
  • Code of Civil Procedure, Illinois Mortgage Foreclosure Law, 735 ILCS 5/15-1106 (“[T]he following shall be foreclosed in a foreclosure pursuant to this Article: (1) any mortgage . . . . (3) any collateral assignment of beneficial interest . . . (i) which is made with respect to a land trust which was created contemporaneously with the collateral assignment of beneficial interest, (ii) which is made pursuant to a requirement of the holder of the obligation to secure the payment of money or performance of other obligations and (iii) as to which the security agreement or other writing creating the collateral assignment permits the real estate which is the subject of the land trust to be sold to satisfy the obligations.”)