Question: Would we need to pull a flood certificate if we have knowledge that there is a grain bin on the lot we are financing?
Answer: Assuming the grain bin meets the definition of a building for flood purposes, the interagency guidance on this subject indicates that a grain bin meets the requirements of a “non-residential building” under the regulations and, thus, requires a flood determination if it is collateral securing the loan.
“What are examples of nonresidential buildings?
Answer: Nonresidential buildings include those used for small businesses, churches, schools, farm activities (including grain bins and silos), pool houses, clubhouses, recreation, mercantile structures, agricultural and industrial structures, warehouses, hotels and motels with normal room rentals for less than six months’ duration, 5 FEMA, Mandatory Purchase of Flood Insurance Guidelines, at GLS 1. nursing homes, and mixed-use buildings with less than 75 percent residential square footage.” FDIC, Compliance Examination Manual, p. V – 6.21: https://www.fdic.gov/resources/supervision-and-examinations/consumer-compliance-examination-manual/documents/5/v-6-1.pdf”
Unfortunately, if a building is located in a SFHA, the general rule is that flood insurance is required regardless of whether the building is considered to be residential or non-residential, if it is securing the loan then flood insurance is required.
The guidance does contemplate “carving out” a building from the collateral on the loan, in the event only the land where a building is located is being utilized as collateral on a loan. However, how the bank should exclude the structure in its security instrument is not set out in the flood rules, but rather, should be done by the bank’s legal counsel since it involves the legal contract. As long as it is not securing the loan by way of the security instrument, the flood requirements technically would not apply. If the bank will consider this approach, we also recommend applying this consistently to similarly situated borrowers and documenting why carving out the building was justifiable in your loan file for fair lending purposes. As always, it is important to review your internal/investor policies as well, as some will restrict the ability to do this. The interagency questions and answers provide additional guidance on “carving out” collateral, here: FAQ #24: Flood Insurance Requirements for Non-Residential Buildings
Additionally, we offer a convenient flowchart, outlining when it is necessary for a mandatory purchase of flood insurance at loan origination, which can be accessed here: Mandatory Purchase at Loan Origination Flowchart | Compliance Alliance
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