We have a junior mortgage lien secured by single-family residence in a flood zone for which we have force-placed flood insurance. The loan has been charged off and we have obtained a money judgment on the note, which we are attempting to collect and will record against the property. If we release the mortgage on the property, can we cancel the flood insurance? Will recording the judgment and pursuing collection affect our ability to cancel the flood insurance?

Yes, we believe that your bank may cancel the force-placed flood insurance on the property if you release your mortgage. However, it may be prudent for your bank to refrain from recording the judgment lien against the property if you want to cancel the flood insurance.

Flood insurance is required at the time a bank extends a loan secured by a building or mobile home located in a special flood hazard area. Since a loan that is not secured by a building or mobile home is not a “designated loan” and does not require flood insurance, if your bank releases its mortgage on the property, the loan no longer will require flood insurance.

As to recording your judgment, when a party obtains a judgment on a note, the note is merged into the judgment and no longer can be enforced; in other words, the judgment lien secures payment of the judgment and not the underlying note obligation. However, since a judgment creditor can foreclose on a judgment lien that has been recorded against a property in the same manner as a mortgage, it is conceivable that your judgment lien on the home could be viewed by the regulators as “securing” the loan, even though the note obligation no longer is enforceable. While we could not find any regulatory guidance or court decisions indicating whether a judgment lien is sufficient to secure a loan for purposes of the flood insurance regulations, it may be prudent to refrain from recording your judgment if you want to cancel the force-placed flood insurance.

Apart from recording your judgment, we believe your bank may continue its collection efforts on the judgment.

For resources related to our guidance, please see:

FDIC Flood Insurance Regulations, 12 CFR 339.1(c) (“This part, except for §§339.6 and 339.8, applies to loans secured by buildings or mobile homes located or to be located in areas determined by the Administrator of the Federal Emergency Management Agency to have special flood hazards. Sections 339.6 and 339.8 apply to loans secured by buildings or mobile homes, regardless of location.”)

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.”)

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. 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 building or mobile home and any personal property that secures a loan and not the land itself.”)

FDIC Flood Insurance Regulations, 12 CFR 339.7(a) (“If an FDIC-supervised institution, or a servicer acting on its behalf, determines at any time during the term of a designated loan, that the building or mobile home and any personal property securing the designated loan is not covered by flood insurance or is covered by flood insurance in an amount less than the amount required under §339.3, then the FDIC-supervised institution or its servicer shall notify the borrower that the borrower should obtain flood insurance, at the borrower's expense, in an amount at least equal to the amount required under §339.3, for the remaining term of the loan. If the borrower fails to obtain flood insurance within 45 days after notification, then the FDIC-supervised institution or its servicer shall purchase insurance on the borrower's behalf. The FDIC-supervised institution or its servicer may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance, including premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount.”)

Poilevey v. Spivack, 857 N.E.2d 834, 836 (2006) (“The merger doctrine provides that when a judgment based on a contract or instrument is obtained, the instrument becomes entirely merged into the judgment. Doerr v. Schmitt, 375 Ill. 470, 472, 31 N.E.2d 971 (1941). By the judgment of the court, it loses all of its vitality and ceases to bind the parties to its execution. Doerr, 375 Ill. at 472, 31 N.E.2d 971. Once the instrument is merged into the judgment, no further action at law or equity can be maintained on the instrument. Doerr, 375 Ill. at 472, 31 N.E.2d 971. Further, section 18 of the Restatement (Second) of Judgments provides that when a valid judgment is rendered in favor of a plaintiff, the plaintiff cannot maintain an action on the original claim. However, a plaintiff may be able to maintain an action upon the judgment.”)

Schindler v. Watson, 2017 IL App (2d) 73 N.E.3d 1197, 1200 (“‘A judgment lien is a creation of statute in derogation of the common law. . . . Section 12-101 of the Code provides for the creation of liens on real estate by judgments. Pursuant to the statute, ‘a judgment is a lien on the real estate of the person against whom it is entered * * * only from the time a transcript, certified copy or memorandum of the judgment is filed in the office of the recorder in the county in which the real estate is located.’ . . . The lien may be foreclosed in the same manner as a mortgage on real property.”)