Topic: Flood Insurance
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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?
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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…
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We are extending a balloon mortgage loan secured by farmland that includes several grain bins and sheds. Our original flood zone determination had the property as Zone X, meaning that flood insurance was not required. But our new flood determination, prepared by a different vendor, found that one of the metal grain bins sits on the line of a special flood hazard area (SFHA) rated as “Zone AE,” meaning that flood insurance now is required. Other than obtaining a letter of map amendment (LOMA), is there any way remove the grain bin from the SFHA so that flood insurance is not required? The value of the grain bin is not necessary to support the loan amount.
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Yes, there are alternative methods for obtaining a revised map to remove the grain bin from the SFHA. Additionally, your borrower may qualify for a reduced flood insurance premium under the “Grandfather Rule” described below, or your bank may choose to remove the grain bin from the collateral securing the loan to avoid the mandatory…
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Regarding the private flood insurance rule that will take effect on July 1, 2019, are there any third-party vendors who will provide reviews of private flood insurance policies? Given the length and complexity of the policies, we would like to outsource the review of the policies to ensure that they contain the appropriate language.
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Your bank may choose to engage outside counsel or a compliance consulting firm to review the terms of a private flood insurance policy; however, we believe this likely will be unnecessary in many cases. The February 2019 private flood insurance final rule provides that a bank must accept a private flood insurance policy that meets…
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If we obtain a flood determination for a construction loan, the comments section of the flood certification states “land only.” Once the construction is finished, the customer generally converts the construction loan into permanent financing. If we recertify the original flood determination for the new loan, the “land only” comment cannot be removed. Is this acceptable, or do we need to obtain a new flood determination which would result in an additional fee to the borrower?
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We believe that your bank should obtain a new flood determination, as the previous determination related only to the land securing the initial construction loan. The National Flood Insurance Act permits lenders to “rely on a previous determination of whether the building or mobile home is located in an area having special flood hazards.” However, this…
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We have a first mortgage loan that we originated in 2013, so it was exempt from the escrow requirements for flood insurance that became effective in 2016. We now are planning to extend a home equity line of credit (HELOC) to the borrower secured by a second mortgage on the property. I know HELOCs are exempt from the escrow requirement for flood insurance, but since we are advancing new money to the same borrower, are we required to have the customer escrow funds for flood insurance for the first mortgage?
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No, we do not believe that extending a home equity line of credit secured by residential improved real estate will trigger the flood insurance escrow requirements for this borrower. In general, a lender must escrow flood insurance premiums for residential mortgage loans that are made, increased, extended or renewed on or after January 1, 2016.…
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We have a loan secured by a mortgage on a non-residential building and a UCC financing statement covering the contents in the building. The flood insurance policy provides separate categories for the building and the inventory. How do we determine what amount of flood insurance should cover the building and what amount should cover the contents?
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We believe your bank may choose any reasonable allocation of the required flood insurance coverage between the building and its contents, provided that at least some flood insurance coverage is allocated to each category and the total amount of coverage meets the National Flood Insurance Program’s (NFIP) minimum requirements. The minimum amount of flood insurance…
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Do the 45-day notification rules for force-placed insurance apply to commercial property loans or just consumer mortgage loans?
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With respect to force-placed hazard insurance governed by the RESPA servicing rules, the requirement to notify borrowers before charging for force-placed insurance applies only to closed-end consumer mortgage loans. Loans made for a business purpose are exempt. However, with respect to force-placed flood insurance, the requirement to wait 45 days before charging a borrower for…
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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…
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We are extending a second mortgage secured by a property that is located in a flood plain. The first mortgagee did not require flood insurance because the borrower had obtained an elevation certificate for the property, but the borrower did not obtain a letter of map amendment (LOMA). Isn’t a LOMA necessary for the property to be exempted from the flood insurance requirement? Also, if flooding should occur, would we receive insurance proceeds as the only mortgagee named in the policy, or would the proceeds go to the first lienholder?
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Yes, you are correct that if a property is in a FEMA-designated special flood hazard area (SFHA), a borrower must obtain a letter of map amendment (LOMA) for the property to be exempted from the flood insurance requirement. An elevation certificate may be necessary to support an application for a LOMA, but the certificate alone…
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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.…