Great question. Two regulatory concerns come to mind, though they may not apply to you.
First, if you are a HMDA reporter, talk to your HMDA team as it appears there could be a "dwelling" for HMDA purposes, meaning this could be HMDA reportable. Secondly, if this is in a high-risk flood zone, you would need flood insurance in order to close the loan and cannot waive that requirement until the residence is torn down.
If you are not giving any value to the property, hazard insurance is a matter of safety and soundness with no technical regulatory requirement that I can think of. Regulation Z will depend whether an exemption (like business/commercial or agricultural purposes) applies, but I don't see enough information to make that determination.
Adam Witmer, CRCM
All statements are my opinion, not those of my employer, and should not be taken as legal advice.www.compliancecohort.com