Pub. 9 2021 Issue 3

20 The Community Banker mibonline.org Correction: An eagle-eyed reader of our last set of Q&A spotted that our answer to one question left out some detail involved in the situation discussed. The Q&A, as printed, stated the following. Flood Insurance. Q: We have a current loan in process in which the borrower is contesting the flood determination on his property. The situation is a bit unusual for us in that the house itself is not located in the flood area, but other structures on the property are. The flood determination shows the house just out of the flood zone. We are leaning on the side of caution. If we are going to make the loan, flood insurance is required. Is there an exception that we might be missing? A: The lender has the responsibility to make a flood hazard determination (using a third party that guarantees its results is fine) and is permitted to be “cautious.” From your description, it sounds like the outbuildings are clearly in Zone A, so flood insurance is not optional for them. The house is barely out of Zone A, so flood insurance coverage is not mandated by law/regulation – but the bank is not prohibited from requiring it in such a case. For the house, it is up to the lender. For the outbuildings, there is no option (unless you can find some way to exclude them from the security interest – with the bank’s legal counsel). Our reader said they think that is not quite right. They noted that they believed the bank can exclude outbuildings if by due diligence it can show there are Continued from page 19 no living quarters in them (i.e., no bathroom/kitchen/ sleeping areas). Also, they were skeptical that whether the outbuildings are included in the security interest is a consideration for requiring flood insurance. We looked at the issue again and replied that the flood rules could be a bit troublesome at times, and it looks like we trimmed some detail (use of outbuildings, for example) we should have kept. The reader was correct that an outbuilding detached from the dwelling and is part of the residential property (e.g., a detached garage) may be excluded from flood coverage if it is not also a residence (e.g., has an apartment upstairs) or is not used for agricultural or commercial purposes (e.g., storing farm equipment or serving as a workshop for a business, etc.). Although, a lender is always free to require flood coverage to protect all of its collateral, even if the rule does not mandate it in a particular situation (such as this). Regarding the security interest issue, this is the heart of the whole issue concerning the definition of “designated loan.” If a structure is not security for the loan, then flood insurance is not a consideration. However, not being attorneys, we do not know how (or if) a building affixed to a particular parcel of land can be excluded from a security interest (mortgage or deed of trust) encumbering that parcel. If it can be done, then flood insurance would not be required by regulation (though it would still probably be prudent to have). Young & Associates provides banks and thrifts with support for their compliance programs, independent reviews, and in-bank training, as well as a full menu of management consulting, loan review, IT consulting, and policy systems.