Question 1: We extended a closed-end 3 year loan & the annual flood policy is now getting ready to expire and the loan has not yet matured.

When we request the borrower to renew his flood insurance, do we ask the borrower to renew for the ORIGINAL loan amount ($100,000) or the outstanding PRINCIPAL loan amount ($75,000)? (The appraised value & maximum available under NFIP is higher.)

Question 2: New scenario. If we take a closed-end second lien on a property ($50,000) and the borrower has a closed-end first lien of $100,000 with a current balance of $75,000, do we need to ensure the customer has flood coverage of $150,000 or $125,000?

For our future reference, can you provide us with a regulatory cite?

Thanks for your help.

You are required to maintain flood insurance in the lessor amount of:

1. The outstanding principal balance of the loan(s);
2. The value of the structure (property value less land value); or
3. The maximum coverage available under the NFIP.

Dan - This caught my interest because of a discussion I had with another bank. What if the Borrower has a house worth $1,000,000 (just the building) and you are second lienholder for $250,000? Do you just verify that the Borrower has the maximum flood insurance, which would show the first lienholder?

In order for you to meet the requirements the policy would have to be amended to show you as a subordinate lien holder.

From page 28 of the Yellow Book:

. . . A home equity and secondary lienholder’s interest is accomplished by endorsement to the policy.

Dan, what is the yellow book and where can I find one.

Mandatory Purchase of Flood Insurance Guidelines

Thanks for your help.