My question is if we are extending a loan where the piece of collateral property has a building on it and is in a flood zone do we need flood insurance if the purpose of this loan is to tear down the building and there will never be a building rebuilt for as long as we have the loan. We are using the value of the land not the building as our security value.

Any help would be greatly appreciated.

Jamie

I would say no. This would be similar to having a building of nominal value on the property. The Mandatory Guidelines indicate that:

"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."

I think I have also previous read about the specific instance your describing, but can't put my finger on it.

Thank you-I had heard similar situation in the past as well, I just couldn't remember the outcome. I'll double check on how the mortgage is being worded.

In reply to:

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I think I have also previous read about the specific instance your describing, but can't put my finger on it.

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Randy I also read this not too long ago when I was looking up a quote for another flood question, but I'm like you I can't seem to find it now and I agree that Flood Ins is not required. However, I would caution that the structure should be demolished in a timely manor and not drag out, otherwise I might consider requiring Flood Ins until the structure was demolished.

I'd document those facts in the loan file and even go so far as to have the customers written statement that it will be demolished. These things have a way of being forgotten and then cropping up in an examination.