Topic: Flood Insurance
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We have a commercial loan secured by land with several buildings on it; some of the land is considered a flood zone. The owner recently built two buildings in the flood zone. One building stores sand and salt; it is open on two ends and has a roof. The other building is a prefabricated building. Is flood insurance required for those buildings?
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If both buildings located in the flood zone have at least two rigid walls and a roof and are affixed to the land, then we believe that flood insurance will be required. The flood insurance requirements apply to loans secured by a “building,” defined as “a walled and roofed structure, other than a gas or…
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Which disclosures are required for a loan to purchase a commercial rental property that has one business building and one house on it? The borrower will rent the house out to a third party.
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Since this is a commercial loan, the disclosure requirements under both Regulation Z and Regulation X will not apply provided that the loan is “primarily for a business, commercial or agricultural purpose.” However, even in the context of a commercial loan, as in this case, to the extent that the mortgage covering the dwelling is…
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If a primary residence structure has a letter of map amendment (LOMA) stating that the house does not require flood coverage, does the detached garage require coverage?
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No, flood insurance is not required for any structure that is part of residential property “but is detached from the primary residential structure of such property and does not serve as a residence” — regardless of whether flood insurance is required on the primary residential property. For resources related to our guidance, please see: 42…
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Are we required to escrow for property taxes and insurance for our higher-priced mortgage loans? We qualify as a small creditor serving a rural or underserved area. However, we have started escrowing for flood insurance premiums under the new flood insurance escrow requirements that went into effect on January 1, 2016. Does that disqualify us from small creditor status?
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Yes, we have confirmed with the CFPB that escrowing flood insurance premiums will disqualify your institution from small creditor status. This is due to an apparent oversight in the interaction between the interagency flood insurance escrow rule and the higher-priced mortgage escrow rule. Under the CFPB’s higher-priced mortgage escrow rule, small creditors must meet four…
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We purchase residential mortgage loans from other banks to sell on the secondary market. We make the credit decision, but the loan is closed in the other bank’s name, with that bank’s funds. We purchase the loan a few days later and then sell it on the secondary market. We retain the servicing rights after the sale. Which bank should be pulling the flood certification — the initial lender or us? If the initial lender pulls the flood certification, can that be assigned to our bank when we take the assignment of the mortgage and note?
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The initial lender, and not your bank, is required to make the initial flood determination under these circumstances. The flood insurance rules require banks to ensure that flood insurance is in place only when “making, increasing, renewing or extending” a loan secured by property located in a flood zone. The Interagency Flood Insurance Q&As further…
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We hold a first lien on a commercial property in a flood zone, but we failed to require flood insurance because we did not know the property was in a flood zone. As far as we know, the second lien holder (the Small Business Administration) also did not require flood insurance for its loan. Now that we are making a third loan on the property, do we have to cover the second lien lender’s portion of the insurance, too? In other words, what are our responsibilities regarding flood insurance on the second lien loan? How do we calculate the amount of coverage required, and what is the highest deductible permitted under the flood insurance rules?
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You are required to ensure that the property has the minimum amount of required flood insurance, regardless of whether a previous lender failed to require or obtain such a policy. The Interagency Guidance on flood insurance states that when a lender makes a second (or third) mortgage secured by a building in a flood zone,…
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We are taking a mortgage on farm land that includes grain bins. The property is in a flood zone. Is flood insurance required on the bins?
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Yes, the flood insurance requirement applies to grain bins, unless the security agreement for the loan was structured to exclude the grain bins from the property securing the loan. Any loan secured by a “building” is considered a designated loan that is subject to the flood insurance requirements. The Interagency Questions and Answers Regarding Flood…
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Our auditors told us that when we close a mortgage in our bank’s name and then immediately sell it on the secondary market, the flood determination must be in our name. Is that true?
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Yes, the flood determination should be made in your bank’s name. Under Regulation H, lenders are required to determine whether a building offered as collateral security for a loan requires flood insurance. Interagency guidance has clarified that purchasing a loan does not trigger this requirement. In addition, the standard flood hazard determination form (required by…
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An Amish customer told us that they are not required to pay for hazard insurance protecting the property securing a real estate loan. Is that true?
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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…