Loan Taking Land As Collateral But Not Mobile Home

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Question:

We have a loan where we are taking the land as collateral but NOT the mobile homes on the land. The property is in a flood zone but should we require flood insurance since we have no interest in the mobile homes?

Answer:

The land is not insurable for flood insurance. Since you are not taking the mobile homes as collateral, you have no requirement to have flood insurance coverage in place. So from a regulatory perspective, flood insurance would not be a requirement.

Now, let's talk about credit risk. Does your borrower own the mobile homes and derive rental income from those that will serve as a source of repayment for the loan? If the answer to that is yes, you may very well want to require that your borrower maintain flood insurance on the mobile homes as a matter of prudent underwriting for the loan.