339.3 Requirement to purchase flood insurance where available.

(a) In general. A bank shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the overall value of the property securing the designated loan minus the value of the land on which the property is located.

If a structure on the lot is not securing the loan, then a determination is NOT required. Right???

Correct, but if the structure is a "fixed" structure on the property then your mortgage MUST specfically exclude the structure.

I'm not sure I follow (sorry, still relatively new to Compliance - especially the lending side). Are you saying, when we file the lien, we would need to include specific verbiage in the mortgage note to exclude the improvements?

Should we have to foreclose, how can we take the real property without the fixed improvements?

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Are you saying, when we file the lien, we would need to include specific verbiage in the mortgage note to exclude the improvements?

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Exactly. That is to prevent you from saying we didn't take the improvements just to avoid the flood requirements.

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Should we have to foreclose, how can we take the real property without the fixed improvements?

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That's a very good question, and one that should be addressed with your attorney.

Here's a section from page 25 of the Mandatory Purchase of Flood Insurance Guidelines .

(4) No Coverage if Land Loan Only
If a lender makes a loan in which there is no lien on any land upon which there is a building, i.e., improved real property, the flood insurance purchase requirement does not apply. The NFIP does not insure land, and the 1994 Reform Act does not address mortgages secured by land alone. Similarly, if the purpose of a loan transaction is to facilitate the purchase of land for subsequent development, and any improvement on the real property is of nominal value, the wording of the mortgage must specifically exclude the building as part of the security for the loan in order to avoid the mandatory purchase requirement. This is consistent with the purposes for which the purchase requirements of the 1994 Reform Act were adopted: to protect lenders and Federal resources against potential losses resulting from uninsured secured loans, and to protect unwary borrowers against financial losses resulting from losses to uninsured buildings.

As a fellow Texas lender, I feel your pain. To inquire about this with counsel, it would have to be a loan I really, really wanted in my portfolio. If you exclude the structure(s) you may also have to provide egress. What does that do to your property and value? Will they put an insurable structure on there later and put you back in the same predicament? Is it worth it?

Bottom line though, as Dan noted, if it isn't your collateral, it won't effect you.