If we have an unsecured line of credit that is cross collateralized with a commercial R/E loan, do we need to obtain a Flood Determination and also provide notice to the customer as part of the documentation of the unsecured line?

I'm assuming that the commercial R/E loan is in a SFHA? Are you going to have to increase the amount of flood insurance on the commercial R/E loan due to this new line of credit?

I'm curious to hear what others think as I'm actually in the process of grappling with our own cross-collateralization clause and I've heard two interpretations. One being that every time you make a loan that is cross-collateralized by R/E in a SFHA it is a triggering event which requires a new determination and notice. I've also heard that a new determination and notice are only required when you are going to have to increase the amount of flood insurance. Personally, I find the latter approach to make more sense because if we start providing flood notices to customers for loans made outside a SFHA that don't require an increase of flood insurance then I forsee mass confusion. Regardless, my understanding is that you are going to have to evaluate if the line of credit is going to require that you carry more flood insruance on your commercial R/E loan.

If you make an "unsecured" loan cross collateralized with another loan/security agreement then the loan is not unsecured.

You can use an existing determination as long as it is less than 7 years old, on the prescribed SFHDF and there have been no map changes since the determination was obtained. If it does not meet all 3 criteria then you must obtain a new determination.

If the cross collateralized property is located in a SFHA then you must follow the notification requirements for each triggering event tied to the property. Making, increasing, renewing/refinancing or extending a cross collateralized loan to the property would be a triggering event.

Dan, thanks for the response. Regarding using the existing determination if we have life of loan coverage does that satisfy the requirement that no map changes since the determination have been made or is something else required?

As far as cross-collateralization is concerned so if we have a loan in a SFHA that has the NFIP max amount of coverage and we make a loan that is not in a SFHA, but is cross-collateralized am I correct that we would have to order a new flood determination (subject to the requirments for using exising ones) and provide a new flood notice despite the fact that no more insurance would be required? I'm already having a difficult time convincing the business line that they have to track and potentially increase the amount of flood insurance becuase of a subsequent loan that is made that isn't in a SFHA so they are really going to resist the idea that we have to do a new determination and provide a new flood notice to a borrower for a loan that is outside a SFHA and doesn't require any increase in flood coverage. I'm interested in hearing how others handle this?

Thanks in advance.

if we have life of loan coverage does that satisfy the requirement that no map changes since the determination have been made or is something else required?

You will have to check the contract with your vendor. Generally you only receive a LOL change notice if the map change affects the status of the property such as placing it in a SFHA or removing it from a SFHA. If the property was not affected by the map change then chances are you won't be notified.

The minimum coverage remains the lesser of:

The insurable value of the property or properties located in a SFHA
The outstanding principal balance of the loan or loans secured by the property or properties located in the SFHA
The maximum coverage available through the NFIP for the property type or types located in the SFHA

If the existing SFHDF does not meet all 3 criteria mentioned above you must obtain a new one.

If any of the loan or loans are secured by a property located in a SFHA then you must provide them the notification each time a MIRE event takes place.

Each violation carries the potential CMP of $2,000. This is per violation, not per loan. Not providing the notice or obtaining a new determination where required would be 2 violations. If a pattern of non compliance is established in a compliance exam an additional CMP can be assessed the financial institution. This one could run into millions of dollars.

Thank you.

[i]You will have to check the contract with your vendor. Generally you only receive a LOL change notice if the map change affects the status of the property such as placing it in a SFHA or removing it from a SFHA. If the property was not affected by the map change then chances are you won't be notified.
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Isn't this the only time we care about map changes for the purpose of ordering a new SFHD when the property is mapped out of or into a SFHA? The guidance I've read states that the requirement is that "there were no map revisions or updates affecting the security property since the orignal determination was made." To me if our life of loan coverage alerts us to changes either into or out of a SFHA then that would tell us that there were no map revisions or updates that affected the security property since the original determination. I guess it depends what they mean by the phrase "affecting the security property." I don't see why the bank should care if they move from one flood zone to a different floo zone if neither zone is a SFHA, but I think that is what you are saying would be the issue for reusing old determinations? That doesn't make much sense to me.

I hear you regarding the cross-collateralization being a triggering event as technically you are increasing the loan amount secured by RE in a SFHA, but I'm curious for others that do this how they handle the customer communication angle. I think it would be very confusing to get a flood notice for a loan I'm getting for an equipment loan that is not located in a SFHA and that doesn't reuire more insurance. Do you send a cover letter explaining that no additional insurance is required or something similar?

If the "old" SFHDF references an outdated map, you can't use it for a new loan. It doesn't matter if the property you have is affected by the map change or not. It also doesn't matter if you have life of loan monitoring.

Thanks David. Another thing to check into.

Any thoughts on sending a cover letter with the notice requirement for cross-collateralization?

You definitely trigger the Notice. I think it would be a good PR issue to explain in a cover letter, but I don't typically see banks do this. It could be explained by the loan officer verbally.

If cross-collateralization is a triggering event for flood insruance do you have to get an updated insurable value for the collateral that is in a SFHA? If so any ideas on how to do that?

The same way you do any other property - existing appraisal, other hazard insurance, etc.

OK thanks Randy. Was just making sure that we were not required to get a new appraisal.

Please confirm that I am understanding this correctly:

SCENARIO 1

Loan A - Mortgage Loan originated Jan 2015, building in a high risk flood zone.

Loan B - An additional loan (any type other than mortgage, such as a line of credit) originated December 2015 and is cross collateralized with the Mortgage Loan.

When making Loan B, since it is cross collateralized with Loan A which is in a flood zone, the lender will be required to (before closing the loan):
-either run a new SFHD or verify there was no map change if the prior was less than 7 years old
-provide the flood hazard notice
-verify flood insurance amount is appropriate coverage taking into account the combined total of both loans

SCENARIO 2

Loan A - Mortgage Loan originated Jan 2015, building is NOT in a high risk flood zone.

Loan B - An additional loan (any type other than mortgage, such as a line of credit) originated December 2015 and is cross collateralized with the Mortgage Loan.

When making Loan B, since it is cross collateralized with Loan A, the lender will be required to (before closing the loan):
-either run a new SFHD or verify there was no map change if the prior was less than 7 years old
-no further action provided the new SFHD also confirms the property is not in a flood zone

SCENARIO 3

Loan B - any type of loan other than mortgage, such as a line of credit, originated January 2015. The loan documents have a wide coverage cross collateralization clause that even includes future loans with the Bank.

Loan B - Mortgage Loan originated December 2015.

When making Loan B, the lender will be required to (before closing the loan):
-run a SFHD
-no further action provided the SFHD also confirms the property is not in a flood zone OR
-provide notice to borrower and ensure flood coverage is obtained sufficient to cover both loans, since loan A would be cross collateralized with the new loan (Loan B).


Thanks.

Sounds good. I doubt that #3 can happen in most jurisdictions.

I also agree.

Let me say it another way:
1. ALL loans secured by improved real estate must play by the flood rules.
2. If a subsequent loan is collateralized by a previous loan's collateral, than the subsequent loan triggers all Flood requirements, as applicable.

Thank you rlcarey and David.