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If the appraisal for property located in a positive flood zone notes that on the day of inspection a family member’s manufactured doublewide home and a small storage building was situated on the land being appraised. The improvements of the manufactured home and small storage building were not given a value or reflected on this appraisal, due to the borrower having no interest in and only allowing use of his land without charging any fees.
We would not use the titled manufactured home, but since the small storage building is attached to the real property wouldn’t it require flood coverage? This loan is on the borrower’s primary residence and they do not charge for the use of this land, so could the small storage building be excluded per the detached structure rule?
It sounds like it could meet the exemption. Is it part of the residential property securing the loan? Is it detached from the residence? Have you confirmed it is not being used as a residence? Based on the information you’ve given, if you answer yes to all of those then it seems as though it could be excluded. If you don’t have a security interest in the mobile home flood insurance wouldn’t be required.
(a) In general. An FDIC-supervised institution shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the building or mobile home and any personal property that secures a loan and not the land itself.
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(c) Any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence. For purposes of this paragraph (c):(1) “A structure that is a part of a residential property” is a structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes;
(2) A structure is “detached” from the primary residential structure if it is not joined by any structural connection to that structure; and
(3) “Serve as a residence” shall be based upon the good faith determination of the FDIC-supervised institution that the structure is intended for use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities.
On the land, there is a house, a manufactured home (not used), and a small outbuilding next to the manufactured home. The owner of the property is the borrower and is living in the house. The manufactured home is owned by the daughter (not on loan), and the owner/borrower of the house/land says the small outbuilding is the daughters, not his (even though the outbuilding is attached to his real property). What concerned me is since the owner/borrower says the outbuilding is not his, would it be considered a detached structure of his primary residence. The outbuilding is beside the manufactured home, not next to the house, but within a visible range.
It’s definitely a scenario I don’t think the regulators anticipated. However, in looking at the exception language I don’t see anything that would preclude it from applying. With that said, you can always require insurance if you choose to do so. And of course, reaching out to your regulator is always an option in situations where you feel like they are open for interpretation.
From what you’ve described it seems to check all the boxes (in bold): c) Any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence. For purposes of this paragraph (c):
(1) “A structure that is a part of a residential property” is a structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes;
(2) A structure is “detached” from the primary residential structure if it is not joined by any structural connection to that structure; and
(3) “Serve as a residence” shall be based upon the good faith determination of the FDIC-supervised institution that the structure is intended for use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities.
Good Afternoon Mr. Jack,
This is Paul Melancon and I attend the annual LBA seminars you host in Baton Rouge. I hope you are dealing well with all of these obstacles the universe has been throwing our way.
I have a question about force placing flood coverage on a loan with two structures (both in flood zone A) on the same parcel of land…The two building in question are both rental homes and one has a NFIP flood policy for $30,000 of coverage (we’ll call it Building A) and the other has no flood coverage in place (Building B). The loan balance is $29,630 so the one flood policy covers the loan amount, but I am aware EACH structure must have some coverage in order to be compliant to the regs. The bank is aware that building B is in poor condition and is currently unoccupied. I did verify with our force-place provider that the force-place flood deductible is $1,000. I’m trying to force-place as little flood coverage as possible, while being compliant. I’m thinking we can force-place building B for $2,000 (the deductible amount plus $1,000). Do you think this is acceptable or do you have any suggestions on how you’d proceed?
***Also, I know flood exemption rules (item C) allows exemption on any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence. Does this exemption apply when the main structure is a rent houses or homes that are not a borrower’s primary residence? ***
Many thanks for your time and consideration and have a great weekend.
See p. 40463, “Amount 6”, of the proposed revisions to the flood faqs.https://www.govinfo.gov/content/pkg/FR-2020-07-06/pdf/2020-14015.pdf
Amount 6. Is flood insurance required
for each building when the real estate
security contains more than one
building located in an SFHA in a
participating community? If so, how
much coverage is required?
Yes. The lender must determine the
amount of insurance required on each
building and add these individual
amounts together.82 The total amount of
required flood insurance is the lesser of:
• The outstanding principal balance
of the loan(s); or
• The maximum amount of insurance
available under the NFIP, which is the
lesser of:
Æ The maximum limit available for
the type of structures; or
Æ The ‘‘insurable value’’ of the
structures.
The amount of total required flood
insurance can be allocated among the
secured buildings in varying amounts,
but all buildings in an SFHA must be
covered in accordance with the
statutory requirement.
Example: Lender makes a loan in the
principal amount of $150,000 secured
by five nonresidential buildings, only
three of which are located in SFHAs
within participating communities.
• Outstanding loan principal is
$150,000.
• Maximum amount of insurance
available under the NFIP.
Æ Maximum limit available for the
type of structure is $500,000 per
building for nonresidential buildings (or
$1.5 million total); or
Æ Insurable value ($100,000 for each
nonresidential building for which
insurance is required, or $300,000 total).
Amount of insurance required for the
three buildings is $150,000. This
amount of required flood insurance
could be allocated among the three
buildings in varying amounts, so long as
each is covered in accordance with the
statutory requirement.As you currently have the flood insurance, it sounds like you have met the minimum coverage amount, but it isn’t allocated among both buildings as it should be. You have discretion in how the insurance is allocated among the buildings and your proposed allocation seems to satisfy the requirement. Considering the deductible, and factoring it into the required amount, is prudent for both you and the borrower.
As for the detached structure exemption, even if the residential property is a rental you should be able to use the detached structure exemption if the structure is detached from the primary residential structure and it isn’t used a residence (https://www.fdic.gov/regulations/laws/rules/2000-6100.html#fdic2000part339.3). The preamble to the final ruledetached structure rule included the following statement:
Although the Agencies decline to
adopt the FDPA’s definition of
‘‘residential improved real estate’’ for
‘‘residential property,’’ the Agencies
agree with commenters that ‘‘residential
property’’ should be interpreted as
broadly as ‘‘residential improved real
estate’’ as set forth in the Interagency
Questions and Answers Regarding
Flood Insurance (Q&As). Commenters in
particular referenced Q&A 51, which
indicates that ‘‘residential improved real
estate’’ does not distinguish whether a
building is single- or multi-family, or
owner- or renter-occupied, and includes
single-family dwellings, two- to fourfamily dwellings, multi-family
dwellings containing five or more
residential units, and mixed-use
buildings, so long as the building is
used primarily for residential
purposes.
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