We have a loan that was to purchase 3 acres and a commercial shop located in a flood zone. The property is valued at $252,000. The loan amount is $75,000. We took equipment and inventory as abundance of caution and did not give any value to the contents when making the loan. We have flood insurance coverage for $75,000 but it is not separated out structure and contents.

1. Do we have to have it separated?
2. Since no value was given on the contents how do we determine how much if we split it?

1. From the guidance I have seen and a number of other threads on bankersonline, the expectation is that coverage would be on both the contents and the structure but...
2. The guidance that I have seen is that while coverage is required on both, it would be a credit decision about where it would be best to allocate the majority or any specific amount of the funds.

You are required to make a good faith determination of value. It may not have been given a value for safety and soundness reasons (underwriting), it is a regulatory requirement for Flood Insurance. Someone needs to make an inspection, find out what the hazard insurance is, etc. to determine a value. You'll first want to determine what can be insured as not all equipment and inventory is insurable. Good luck.

Well, the OP has enough insurance to meet the flood insurance requirements, but it just sounds like they need to also have some of that allocated to contents. If they got $100 in contents coverage, they would be done as long as the total remained $75,000 or more. I don't think there is any requirement to do an inventory unless they are going to request some large amount that might be unreasonable based on current knowledge.

The OP asked "how do we determine how much if we split it?" IF they want to split it, they will need to know the value of the contents. That's what I was addressing it. I don't believe I implied they didn't have adequate insurance. Like you said, they need to have some of that allocated to contents. You don't want to insure contents for more than they are worth, so you'll need to have an idea of the value.

Am I missing something?

David - no is was not insinuated that. I was just pointing out that an inspection might not be necessary, as the customer would technically only need $100 in contents coverage in addition to the $75,000 in building coverage they already have to meet the regulatory requirements. There is no requirement for any specific split between the building insurance and contents as long as the contents or the building were not over insured and they meet the $75,000 in total coverage requirement. I assume if they took contents as collateral, they think it is worth more than $100 - or just eliminate contents from your security interest, which is another option.

Agree. I misunderstood the intent of your last post.

Thank you! What about a farm land loan that is secured by the entire farm. In this instance the farm is 10,000 acres which includes a dwelling that is in a flood zone. The loan is for $500,000, but the dwelling is only appraised at $50,000. Our loan amount is $250,000.00. Can they provide $50,000 to cover the dwelling or do they need $250,000 in flood insurance?

Why would you need more insurance on a building than either the RCV or ACV? Land has nothing to do with flood insurance.

Thank you rlcarey - that is what I was wondering as well. One more question, if the loan balance drops below $5,000 do we still need to require flood insurance?

Yes - that was not the original balance. The exclusion is as follows:

Property securing any loan with an original principal balance of $5,000 or less and a repayment term of one year or less;

Thank you so much!