Flood

We are doing a loan where our collateral is an assignment of note and deed of trust. Do we need to do a flood determination on the property we are taking the assignment of and if so and it is in a flood zone, how do we determine how much flood insurance to obtain?

If your collateral is the note receivable your customer has with someone else, you do not. I had to research this before, but I can't put my hands on the source document right now.

Personally, from a safety and soundness perspective, that dirt may be your underlying collateral and should, in my opinion, be checked and insured if need be.

But since that dirt is not your actual collateral, the answer is no.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

We asked our attorney about this a while back and they agreed with Andy. Strictly speaking, an assignment of note and deed of trust does not require flood insurance. However, the more conservative, and possibly more prudent approach is to require it. Our bank does. Just be consistent. Otherwise questions may be raised when flood insurance is required for one loan and not for another.

You would determine how much flood insurance to require in the same way you would if you took a trust deed rather than an assignment.

Flood is a topic that is not always wise or safe to follow the finely reasoned legal opinions. Andy's lawyer is probably right, BUT your examiner's opinion is the one that counts. I have recently heard of several instances where examiners have written up banks for not having flood cert forms in the loan participation file. The examiners have penalized the banks and required the participating bank to perform a flood cert if the loan originator will not provide it. This clearly goes beyond the regulation's literal requirements but illustrates the level of importance Flood is being given by the regulators. The wisest policy is to require the cert and, if appropriate, proof of insurance.