I thought I finally got the flood insurance requirement for "abundance of caution" figured out, but I'm not sure on this one.

We have a $100,000 first mortgage on a house in a SFHA. We obtain $100,000 in flood insurance. Later, the loan officer decides to give a $35,000 unsecured loan to the borrower tying it to the existing $100,000 deed as an abundance of caution. My question is do we have to increase the flood insurance to $135,000 since that is now the outstanding balance of the loans? or can we state this second loan is not a designated loan since we are not increasing our security interest?

If these loans are now essentially cross-collateralized, then yes the flood requirements have been triggered. Abundance of caution does not exist as it relates to flood insurance - only for appraisals of real estate.

If this was a primary residence, I hope the loan officer also gave a right of rescission. Also, just because the new note was tied to the deed of trust, unless the deed of trust has a future advance clause, you most likely do not have a valid security interest and your borrower is going to run afoul of the IRS if they plan on deducting the interest and you are going to run afoul also if you report the interest on a 1098.

I think I follow you on the ROR (226.15(a)(1)(i), but can you elaborate on why the security interest wouldn't be valid? (We do a lot of cross-collateralizing, so I want to understand this. Sorry for hijacking the thread!:))

I'm not an attorney, but from what I understand, you have to have two things to have a valid security interest. The note - which refers to the security interest document and the security interest document itself, that can be tied to the note. If you don't have a future advance clause in your deed of trust, it is a one trick pony. So, no matter how many notes you might grant referring back to that specific security interest document, the security interest would not be there as the original security document does not secure future advances.

Cross collateralization in consumer lending is a sword just waiting to be fell upon.

Our deeds do have a future advance clause but we book these cross-colateralized loans as unsecured since the first loan maxes out our security interest. The loan officers do the cross-colateralization simply as a formality to stress the importance of paying back the loan to the borrower. We are not changing our security interest in the home.

So to anticipate the loan officer's question: how could we be required to offer the right to rescind? The borrower has already been given the right to rescind with the first mortgage. Nothing about the borrower's mortgage is being changed because of the cross-colateralization.

You are extending additional funds secured by the primary residence - that requires rescission. Abundance of caution or not, you either have a security interest in the property or not.

Sec. 226.23 Right of rescission.

(a) Consumer's right to rescind. (1) In a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, except for transactions described in paragraph (f) of this section.

I gotcha now. Thanks for your help.

Gotcha! Thanks for clarifying.

To follow up on Randy's comment, in some states you may to file an amendment to a deed of trust or mortgage that states the property now secures an additional debt. In Tennessee, we'd also have to pay a tax on that new money. Without paying that tax, we can't claim the lien.

To my knowledge, the note does not have to refer to the security interest or even state it is secured/unsecured. The security instrument must, however, refer to the debt it secures. That is why you find descriptions of the terms of the note in the deed of trust.