[TheBank]

We have a loan in process that is to build a duplex, in a SFHA, where the borrower will live in one of the units and rent the other unit. How should we look at this in regards to the maximum amount of insurance available under NFIP since it is part rental and part home owner occupied and there are 2 units?

[rcooper]

The NFIP residential policy will cover 1-4 family dwellings and that is what would be used for this property. I’m not aware of any clear guidance on this so I’ll offer my thoughts which I suggest you confirm with FEMA… It seems that if this is a single property with two units one policy would be acceptable. However, if these are considered two separate pieces of property then I think two policies would likely be required. It needs to be clear that both units are covered by flood insurance – FEMA should be able to advise.

When determinig how much insurance is required and looking at the insurable value part of the equation, if you look at the NFIP dwelling policy it states that replacement cost value applies to single family dwellings that meet certain requirements; RCV would not apply to anything other than a single family dwelling. So if the units a are insured separately, RCV would not be available on the non-owner occupied unit and if insured as a combined unit it would not qualify as a single family dwelling and RCV would not be available.

Again, since it isn’t clearly stated anywhere that I’m aware of, I’d talk with FEMA to confirm how they insure these types of buildings.

I’ll ask Jack to weigh in with any additional information he might have.

[jholzknecht]

IMO the maximum coverage from FEMA would be $250,000 for this 1 – 4 family dwelling.

[Annmichele]

I am new to compliance and we have a similar situation where applicants are wanting to buy land to build a duplex on it and live in one of the units and rent the other. Did you use consumer or commercial purpose for this loan?
Thanks!

[TheBank]

Consumer

[jholzknecht]

Annmichele – The short answer from The Bank appears accurate. It is not clear which regulation you are evaluating. If you are looking at Regulation Z, Comment 3(a)-5 states, “5. Owner-occupied rental property. If credit is extended to acquire, improve, or maintain rental property that is or will be owner-occupied within the coming year, different rules apply:

i. Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than 2 housing units.

ii. Credit extended to improve or maintain the rental property is deemed to be for business purposes if it contains more than 4 housing units. Since the amended statute defines dwelling to include 1 to 4 housing units, this rule preserves the right of rescission for credit extended for purposes other than acquisition. Neither of these rules means that an extension of credit for property containing fewer than the requisite number of units is necessarily consumer credit. In such cases, the determination of whether it is business or consumer credit should be made by considering the factors listed in comment 3(a)–3.”

The loan is covered by regulation Z unless there are more than two units.

[Author]

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