The Small Business Administration recently issued Standard Operating Procedure 50 10 Version 7 that was effective 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 obtain flood insurance if any “machinery, or equipment acquired, installed, improved, constructed, or renovated with the proceeds… is located in a special flood hazard area.” It also states that the requirement applies “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 require the borrower obtain flood insurance even if the bank is not taking a building located in a special flood hazard area as collateral? If so, would this then be subject to flood regulations (12 CFR §§ 25, 208.25, and 339)?
A Yes, as noted in the SOP quoted above, the SBA’s 7(a) or 504 loan program requires flood insurance in designated circumstances. However, the loan would not be a “designated loan” as defined under flood regulations because it is not secured by a building (or mobile home) located in a special flood hazard area. Thus, the loan would not be subject to the flood regulation’s requirements. See Q&A Other Security Interests 6 of the Interagency Questions and Answers Regarding Flood Insurance indicating that a loan secured by “inventory alone” and not a building is not a designated loan.