Compliance concern of the month: Is a customer needed to acquire flood insurance coverage even if the bank is not taking a structure situated in an unique flood risk location as security?

The Small Business Administration just recently provided Standard Operating Procedure 50 10 Version 7 that worked August 1, 2023. It states in Section A, Chapter 5, Paragraph C, Item 3.c that for SBA 7(a) and 504 loans the loan recipient must acquire flood insurance coverage if any “machinery, or equipment acquired, installed, improved, constructed, or renovated with the proceeds… is located in a special flood hazard area.” It continues that the requirement likewise uses “to any inventory (business loan program), fixtures or furnishings contained or to be contained in the building.”

Q Does this mean that the bank must need the customer acquire flood insurance coverage even if the bank is not taking a structure situated in an unique flood risk location as security? If so, would this then undergo flood guidelines (12 CFR §§ 25, 208.25, and 339)?

A Yes, flood insurance coverage would be needed as part of the SBA’s 7(a) or 504 loan program requirements. However, the loan would not be a “designated loan” as specified under flood guidelines due to the fact that it is not protected by a structure (or mobile house) situated in an unique flood risk location and therefore exempt to the flood policy’s requirements. See Q&A Other Security Interests 6 of the Interagency Questions and Answers Regarding Flood Insurance suggesting that a loan protected by “inventory alone” and not a structure is not a designated loan.

For more details, contact ABA’s Teshale Smith or Rhonda Castaneda.
Please note that this area is not an alternative to expert legal suggestions.