We frequently make rental property loans where part of the loan funds are to purchase the rental property and a portion are used to make improvements. In these cases where the properties are in special flood hazard areas, I have a question about determining the amount of insurance to require. An appraiser will often establish a value as is and a value with improvements. Assuming the amount of the loan does not come into play (the loan is to purchase several properties also, which are not in special flood hazard areas therefore the loan amount is much higher than the property value) is the bank required per the regulation to increase the amount required on the 1 property due to the increase in property value after the improvements have been made?
§22.7 Forced placement of flood insurance. If a bank, or a servicer acting on behalf of the bank, determines at any time during the term of a designated loan that the building or mobile home and any personal property securing the designated loan is not covered by flood insurance or is covered by flood insurance in an amount less than the amount required under §22.3, then the bank or its servicer shall notify the borrower that the borrower should obtain flood insurance, at the borrower’s expense, in an amount at least equal to the amount required under §22.3, for the remaining term of the loan. If the borrower fails to obtain flood insurance within 45 days after notification, then the bank or its servicer shall purchase insurance on the borrower’s behalf. The bank or its servicer may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance.