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#2209763 - 03/28/19 02:13 PM Assignment of note and deed of trust - flood?
CalifDreamin Offline
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On a Notes Receivable loan: If the bank If the bank ONLY takes an assignment of note, then flood regulations do not apply. I’m good there.

However, if the bank takes an assignment of the note and an assignment of the deed of trust, does flood apply? I feel like a conservative approach is best here - consider it subject to the flood regulations. As Dan worded so well in a previous older post - If the mortgage is assigned to the Bank as security for the loan, then the loan is secured by that security agreement (mortgage). The mortgage now secures the original note plus the Bank’s note – the Bank is now the mortgage holder. This is how we have been doing these. However, perhaps this is just no different than a purchased loan, and the FAQs state that flood does not apply in the case of a purchased loan??? Thoughts?

From the FAQs:

3. Does a lender’s purchase of a loan, secured by a building or mobile home located in an SFHA in which flood insurance is available under the Act, from another lender trigger any requirements under the Regulation?
Answer: No. A lender’s purchase of a loan, secured by a building or mobile home located in an SFHA in which flood insurance is available under the Act, alone, is not an event that triggers the Regulation’s requirements, such as making a new flood determination or requiring a borrower to purchase flood insurance. Requirements under the Regulation, generally, are triggered when a lender makes, increases, extends, or renews a designated loan. A lender’s purchase of a loan does not fall within any of those categories. However, if a lender becomes aware at any point during the life of a designated loan that flood insurance is required, the lender must comply with the Regulation, including force placing insurance, if necessary. Depending upon the circumstances, safety and soundness considerations may sometimes necessitate such due diligence upon purchase of a loan as to put the lender on notice of lack of adequate flood insurance. If the purchasing lender subsequently extends, increases, or renews a designated loan, it must also comply with the Regulation.

4. How do the Agencies enforce the mandatory purchase requirements under the Act and Regulation when a lender participates in a loan syndication or participation?
Answer: As with purchased loans, the acquisition by a lender of an interest in a loan either by participation or syndication after that loan has been made does not trigger the requirements of Act or Regulation, such as making a new flood determination or requiring a borrower to purchase flood insurance. Nonetheless, as with purchased loans, depending upon the circumstances, safety and soundness considerations may sometimes necessitate that the lender undertake due diligence to protect itself against the risk of flood or other types of loss. Lenders who pool or contribute funds that will be simultaneously advanced to a borrower or borrowers as a loan secured by improved real estate would all be subject to the requirements of Act or Regulation. Federal flood insurance requirements would also apply to those situations where such a group of lenders decides to extend, renew or increase a loan. Although the agreement among the lenders may assign compliance duties to a lead lender or agent, and include clauses in which the lead lender or agent indemnifies participating lenders against flood losses, each participating lender remains individually responsible for ensuring compliance with the Act and Regulation. Therefore, the Agencies will examine whether the regulated institution/participating lender has performed upfront due diligence to ensure both that the lead lender or agent has undertaken the necessary activities to ensure that the borrower obtains appropriate flood insurance and that the lead lender or agent has adequate controls to monitor the loan(s) on an ongoing basis for compliance with the flood insurance requirements. Further, the Agencies expect the participating lender to have adequate controls to monitor the activities of the lead lender or agent to ensure compliance with flood insurance requirements over the term of the loan.

42. If a borrower offers a note on a single-family dwelling as collateral for a loan but the lender does not take a security interest in the dwelling itself, is this a designated loan that requires flood insurance?
Answer: No. A designated loan is a loan secured by a building or mobile home. In this example, the lender did not take a security interest in the building; therefore, the loan is not a designated loan.
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Flood Compliance
#2209764 - 03/28/19 02:18 PM Re: Assignment of note and deed of trust - flood? CalifDreamin
rlcarey Offline
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Lending to the current note and security instrument holder and taking both as collateral is not purchasing the loan. The person on the note continues to pay the original note holder and not you. You need to follow Q&A #42
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#2209765 - 03/28/19 02:19 PM Re: Assignment of note and deed of trust - flood? CalifDreamin
Dan Persfull Offline
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However, if the bank takes an assignment of the note and an assignment of the deed of trust, does flood apply?

Yes. The assignment of the mortgage/DOT makes the loan secured by the specific property covered by the mortgage/DOT.
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#2209766 - 03/28/19 02:23 PM Re: Assignment of note and deed of trust - flood? CalifDreamin
CalifDreamin Offline
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That's how I was looking at it and just wanted to be sure. Thank you both!
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#2285971 - 06/26/23 09:18 PM Re: Assignment of note and deed of trust - flood? Dan Persfull
CP1stclass Offline
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What if the loan is excluded under the call report - RC-C category Loans and Leases Financing Receivable - for loans secured by assignment of note and deed of trust because it is made to an investment LLC that makes mortgage loans to other property LLCs and home developers? Does the flood requirement apply?

FFIEC 031 and 041 RC-C - LOANS AND LEASES
Part I. (cont.)
Item No.
1 Caption and Instructions
Exclude from loans secured by real estate:
(cont.)

(3) Loans to real estate companies, real estate investment trusts, mortgage lenders, and
foreign non-governmental entities that specialize in mortgage loan originations and that
service mortgages for other lending institutions when the real estate mortgages or similar
liens on real estate are not sold to the bank but are merely pledged as collateral (report in
Schedule RC-C, part I, item 2, "Loans to depository institutions and acceptances of other
banks," or as all other loans in Schedule RC-C, part I, item 9).

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#2285973 - 06/26/23 09:25 PM Re: Assignment of note and deed of trust - flood? CalifDreamin
rlcarey Offline
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If you take both the note and the mortgage/deed of trust, you have a covered loan, regardless of how you report it in the Call Report. From the Flood FAQs.


OTHER SECURITY INTERESTS 11. If a borrower offers a note on a single-family dwelling as collateral for a loan but the lender does not take a security interest in the dwelling itself, is this a designated loan that requires flood insurance?

No. A designated loan is a loan secured by a building or mobile home that is located or to be located in an SFHA in which flood insurance is available under the Act. In this example, the lender did not take a security interest in the building; therefore, the loan is not a designated loan
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#2285987 - 06/27/23 01:26 PM Re: Assignment of note and deed of trust - flood? CalifDreamin
CP1stclass Offline
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Thank you. So if the assignment of the note and deed is not yet exercised (due to no default on the loan to the investment LLC) the lender has no security interest in the building and it would not be a covered loan. But once an assignment is exercised, the bank becomes the lender/mortgagee for a covered loan by taking the note and mortgage.

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#2285995 - 06/27/23 02:55 PM Re: Assignment of note and deed of trust - flood? CalifDreamin
rlcarey Offline
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I do not understand what you are saying. You already said that you were taking an assignment of the note and deed of trust as collateral for your loan to the LLC? What does that have to do with a default?
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#2285998 - 06/27/23 03:23 PM Re: Assignment of note and deed of trust - flood? CalifDreamin
CP1stclass Offline
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I reviewed an earlier thread and found what I believe to be the flood requirement trigger - if we record the assignment of the DOT it becomes a covered loan and I agree with Dan P. that an assignment of the note is not the trigger. Your suggestion was to not record the DOT but the loan becomes unsecured, so we'll see what the situation really is. Thank you for your information.
Last edited by CP1stclass; 06/27/23 07:22 PM.
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#2285999 - 06/27/23 03:35 PM Re: Assignment of note and deed of trust - flood? CalifDreamin
rlcarey Offline
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Yes - if you have an assignment of the deed of trust, your loan is secured by the real property and it is a covered loan under the flood insurance regulations. This is an issue for a lot of warehouse line lenders, as you have no control over monitoring or force placement. Your warehouse lender may not even be subject to the flood insurance regulations. Many banks will not take such property as collateral for this purpose if the property is in a SFHA.
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#2286023 - 06/27/23 08:44 PM Re: Assignment of note and deed of trust - flood? CalifDreamin
Dan Persfull Offline
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I agree with Dan P. that an assignment of the note is not the trigger.

The assignment of the note is not a trigger but the assignment of the mortgage/DOT is regardless if that assignment is recorded. Once you take the assignment of the mortgage/DOT the loan becomes secured by the property listed in the Mortgage/DOT.

Not recording it does not negate your security interest, it simply allows other financial institutions to jump in front of you.
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#2286024 - 06/27/23 09:10 PM Re: Assignment of note and deed of trust - flood? CP1stclass
rlcarey Offline
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Originally Posted by CP1stclass
Your suggestion was to not record the DOT .

Where did I ever say that?
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#2286057 - 06/28/23 03:11 PM Re: Assignment of note and deed of trust - flood? CalifDreamin
rainman Offline
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Step back a second and ask the question posed by the FAQ: does the bank now have a security interest in the dwelling to secure an obligation owed by the bank? That depends on the nature of the transaction, and the status of the transaction.

Let's call the original note and DOT the "mortgage loan." If the bank is only taking a security interest in the mortgage loan as collateral for a loan made by the bank to the lender on the mortgage loan, the bank does not have a security interest in the property. It has a security interest in the note that is secured by the property. That security interest might or might not include an assignment of the trust deed. It's not necessary in order to perfect the bank's security interest in the trust deed that accompanies the note, but in many jurisdictions, it might be necessary as a practical matter in order for the bank to exercise rights as lender on the mortgage loan if it forecloses its security interest in the mortgage loan. But until that happens, the bank has no security interest in property that secures a loan owed to the bank. The if the mortgage loan lender defaults on its loan from the bank, the bank cannot foreclose the DOT, because the mortgage loan borrower is not in default. The only thing the bank can do is require the borrower to begin making payments to the bank. None of this is affected by whether the assignment of DOT is recorded.

On the other hand if the assignment of the note and DOT to the bank is an actual sale of the mortgage loan to the bank, then the bank now holds a security interest in property to secure a loan owed to the bank and must ensure flood insurance is placed if necessary.
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#2286061 - 06/28/23 03:36 PM Re: Assignment of note and deed of trust - flood? CalifDreamin
rlcarey Offline
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"Let's call the original note and DOT the "mortgage loan." If the bank is only taking a security interest in the mortgage loan as collateral "

I do not understand what you are saying. How are you taking the DOT as collateral for a loan without an assignment? What documents do you file in your State to accomplish that? It comes down to, if you have a security interest in the DOT, you have real property as collateral for the loan. How you can have a DOT as collateral without having a security interest is a little beyond me.

If you are only taking the notes, similar to accounts receivable, would this loan be exempt from the flood insurance requirements.
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#2286067 - 06/28/23 04:46 PM Re: Assignment of note and deed of trust - flood? CalifDreamin
rainman Offline
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The security interest follows the note. If you take a note as collateral for the loan, perfection of your security interest in the note also perfects your security interest in the loan. UCC 9-203(g).

State law (or title companies) might require recording an assignment of the DOT in order for the lender to enforce it if the lender has foreclosed its security interest in the note, but that is a different issue than whether the security interest in the note and DOT is perfected.

If the mortgage lender files bankruptcy, the bank that made the loan to the mortgage lender will be recognized as the secured party with a perfected interest in the note and DOT if the bank has taken possession of the note. (It can also be perfected by filing a UCC, but possession trumps filing with respect to notes.) You can see a good discussion of this issue from the UCC Permanent Editorial Board here:
https://www.ali.org/media/filer_pub...6b7b2b054/peb_report_-_november_2011.pdf

And no, if you have a security interest in the DOT, you do not have real property as collateral for your loan. If the mortgage lender defaults on your loan, you can't foreclose the DOT and sell the property, because there's no default on the mortgage loan. Only if you assume the rights of the lender under the mortgage loan (by assuming the rights as holder of the note) do you have a security interest in the property. But even then, the property only secures the mortgage loan, it still doesn't secure the loan from the bank to the mortgage lender. But at that point, you've taken over ownership of the mortgage loan and now have a mortgage loan secured by the property, which could trigger flood insurance.

There are two types of assignment. An absolute assignment is a permanent transfer, i.e., a sale. An assignment intended as security is essentially a security agreement. It's the same as the difference between a deed and a deed of trust.
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#2286071 - 06/28/23 05:50 PM Re: Assignment of note and deed of trust - flood? CalifDreamin
rlcarey Offline
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That makes it a little hard to reconcile with the flood FAQ, don't you think?
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#2286083 - 06/28/23 06:58 PM Re: Assignment of note and deed of trust - flood? rlcarey
rainman Offline
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1) Whether it's hard to reconcile or not, it is the law.

2) No, I don't. I think the FAQ isn't super-detailed but it does draw the distinction between taking a security interest in a loan (which includes a security interest in the trust deed securing the loan), and taking an assignment of the loan outright, which means you now own the loan.

3) It would certainly be wise to at least consider from a credit perspective whether the bank wants to take a security interest in loans on properties in a SFHA without requiring flood insurance on those loans as a condition of making the loan.

Would it be possible for the regulators to require insurance in this situation? Sure. Does the regulation as interpreted by the FAQ currently do so? I don't think so. To put it simply, the bank isn't "MIRE ing" a loan secured by property in a SFHA. It's making a loan that secured by other loans which are secured by properties in an SFHA.
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#2286084 - 06/28/23 07:36 PM Re: Assignment of note and deed of trust - flood? CalifDreamin
rlcarey Offline
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It's making a loan that secured by other loans which are secured by properties in an SFHA.

That is a pretty fine line. I know of at least one bank in which the regulators do not agree, but I believe they are getting actual assignments of both the note and DOT, rather than just the note, which under the UCC you would have the DOT trail it, as you described.
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