We have just became aware that FDIC put out a newsletter talking about cross collateralization clauses (dragnet or mother hubbard clauses) and how loans with this generalized verbiage collectively incorporates other loans to the same customer with different collateral would also be included. The FDIC Newsletter is Volume 9, Issue 2 issued for 2nd quarter 2021. I copied over two of the paragraphs from the newsletter.

"If the institution’s note or security instrument includes cross-collateralization language, resulting in multiple loans being secured by a property located in a special flood hazard area (SFHA), the collective outstanding principal balance of those loans must be accounted for in the flood insurance calculation pursuant to Pat 339.3(a). It is important to note that in determining the amount of flood insurance required, the flood insurance statute and regulation do not distinguish between commercial and consumer purpose loans."

"Given the information described above and depending on the specific facts and circumstances at a particular institution, it may be a prudent practice for bank management to review the cross-collateralization and contents language in notes and security instruments and consider the impact on flood insurance compliance, as necessary. Non-compliance with flood insurance requirements could result in financial harm to consumers and an institution if adequate flood insurance is not obtained and maintained."

If you have the general cross-collateralization language....what spreader clauses are you also including with it and in residential /commercial RE properties and non-RE loans to ensure that you are not indirectly including other loans?

We are an OCC bank and am being told be OCC when general cross collateralization clauses are included in real estate notes and the property is in a flood zone, then any exiting/future loans to the customer would be included in the insurance calculation even though we did not exclusively take another lien on the flood property.

This make no sense to me that a "car" loan for example would need to be included in that calculation!!!

Why not, if your cross collateralization clauses and State law would technically secure the car loan with the property in a SFHA. This is really nothing new and has been a hot topic for a number of years by the various regulators.

By the way - does anyone have a link to the Newsletter cited above - I cannot seem to locate it.

I couldn't locate it either.

I also cannot find the newsletter. However, the FDIC had mentioned this several years ago, but those comments were limited to considering the impact of cross-collateralization agreements.

2012 FDIC NY Flood Q&A

This might also be useful. National Law Review article

It was the second quarter edition of the 2021 FDIC Dallas Region’s Division of Depositor and Consumer Protection’s (DCP) electronic newsletter sent in an email to our Chief Compliance Officer. The email stated "This publication is produced specifically for you, and we hope the information is helpful to you in managing your Compliance Management System. If you have questions about information in the newsletter, please contact the FDIC Review Examiner or DCP Field Supervisor assigned to your bank."

Is anyone willing to share this Newsletter? Seems like it would be helpful information for all.

All I know is that the FDIC is on a war path on this issue based on feedback from our clients.

Regrading this statement: the collective outstanding principal balance of those loans must be accounted for in the flood insurance calculation pursuant to Pat 339.3(a).

If we use principal balance to calculate insurance wouldn't we be insuring land which is not covered by flood insurance?

Loan balance is only one part of the three prong test. The other parts of the test are the insurable value and the amount of insurance available.