Must We Use the FEMA SFHDF Document?

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Question:

Is the FEMA SFHDF document required when the use of credit is in the form of an issued Letter of Credit drawn under a Letter of Credit and Reimbursement Agreement and secured by the Mortgage and Security Agreement's collateral? The collateral is stated in the Mortgage and Security Agreement as real property (identified building address and location).

Answer:

As I understand your question the Letter of Credit is secured by a guaranty which is secured by structures.

The closest thing I could find is the following:

[Federal Register: July 23, 1997 (Volume 62, Number 141)]
[Notices]
[Page 39523-39530]

10. A lender makes a loan (not secured by real estate) on the condition that a third party personally guarantees the loan and permits the lender to take a security interest in improved real estate owned by the third party. Is this a ``designated loan'' to which the Regulation applies if the guarantor's property is located in an SFHA in a community that participates in the NFIP?

Answer: Yes. The making of a loan on condition of a personal guarantee by a third party and further secured by improved real estate owned by that third party is so closely tied to the making of the loan that it is considered a ``designated loan'' under the Regulation.

However, I do not think the issuance of a Letter of Credit would be a designated loan until it was exercised. At that time you would, in my opinion, have to require flood insurance on the property securing the guaranty if located in a SFHA.

I would advise you to talk with FEMA or your Regulator for a definitive answer.

First published on BankersOnline.com 1/2/06