Is there a Flood exemption for detached properties?
Yes there is. Here's the scoop!
So by now you've heard the long-awaited Flood regulations are finalized. this comes to us from the Biggert-Waters Act and the Homeowner Flood Insurance Affordability Act if you're keeping track. What's the big deal? One major change is that escrowing for all Flood insurance fees and premiums loans made, increased, or extended post January 1, 2016 is mandatory. Note that the penalties have also increased - maximum civil penalties are now $2,000, and, perhaps more importantly, there's no longer any maximum penalty cap. Our friends over at K&L Gates seem to have a pretty good summary of these changes, if interested.
We know that any compliance officer should make sure you're not breaking any rules. But a better compliance officer will also understand the rule well enough to know when enough is enough -- they will pay close attention to the exemptions, so that your institution isn't unnecessarily over-compliant (the cost of compliance is high- I wonder if there is any data on over-compliance?)
So let's discuss one exemption from the new Flood rule that we here at Spillane Consulting find pretty interesting.
Exemption for "Detached" Structures
Flood insurance is already high. So don't overdo it by requiring Flood insurance on certain detached structures.
The new Flood rule does not require insurance on a detached structure where:
It is detached from the primary residence
The structure does not serve as a residence
Structure is consumer-purpose (as opposed to business-purpose).
This is exemption is extended to multi-family properties but not commercial loans.
Define "Detached"
So what does it mean to be detached?
The rule says (Read: your lending policy) that a "structure is 'detached' from the primary residential structure if it is not joined by any structural connection to that structure."
So- a breezeway to the garage? I think that's attached (i.e. not detached). But if there's no breezeway? Then the garage is detached. What about the storage shed for the lawn mower and garden equipment? Detached.
What about the warehouse in back that the owner uses for his small engine repair business? Trick question- the structure has to be used for consumer purposes (see prong 3 above) so it doesn't matter that this is detached.
Define "Residence"
What does it mean to not "serve as a residence?"
Now- typically it will be easy to tell if the structure "serves as a residence" or not. But let's use our imagination just to test the limits: What if the owner bought a house and built a non-compliant cabana or guest house on the property -- it has a bedroom, kitchen, bathroom, dining area, and small porch. The structure is detached and not actually used as a residence because the owner never received the appropriate permits - he hopes to get approval at some point, but not for the foreseeable future.
Well- the Rule defines "serve as residence" as follows: "the structure is intended for use or actually used a residence, which generally include sleeping, bathroom, or kitchen facilities." The standard here is just good faith - so don't feel that there's any bright line rule.
So my opinion on the Cabana example? The exemption does not apply - the rule says "intended" to be used a residence - not "is actually being used as" a residence. Even though the Cabana isn't actually being lived in, that's what it was built for.
In Other News:
Have a free day tomorrow? Well there are two mortgage banking events to choose from:
The Mortgage Advisory Board is holding its annual Fall Symposium tomorrow at 9:30 am at the Bank of Canton. Topic is "Executing Maximum Efficiencies & Profitability in Mortgage Banking." You can still register today by emailing dastuto@scapartnering.com.
Also tomorrow in Worcester - MMBA is hosting a two-part TRID program, which includes a morning session to help with any last minute issues related to preparing Closing Disclosures, and an afternoon session to work through issues related to Construction Loans. Here's the information if you haven't heard already.
If your IT people haven't gone through the FFIEC's Cybersecurity Assessment Tool yet, you better send it along to them now.
"Dad Joke" - Style of joke often limited to the dads of the world because anyone else would be able to see how embarrassing the punch-line and response will be.
Did you hear about Fifth Third settling a whistle-blower action for $85 million over claims that it ignored an appraiser's claim that many of its mortgages originated between 2003 and 2013 were "lemons"? Ouch. And look out - the attorneys representing the whistle-blower are encouraging all appraisers to come forward and report misconduct.
People ask why mortgage companies seem to gain market share over depository institutions (very generally speaking) during time of sudden upticks or industry changes. Why is that?! Well- here's a thought to start the conversation: how easy is it for a privately owned mortgage company to make a change to procedures, products, or people, as compared to a typical depository. One may require approval from a board skittish after decades of close regulatory scrutiny. The other need only get approval from the owner, often actively involved in the day-to-day business. So that might be one issue - just that depository institutions generally have more bureaucracy hindering its ability to change quickly.
But not all banks are slow to act. Some are innovative, curious, quick-moving, and ready to pounce on opportunities presented by change. Many think of Umpqua Bank as a good example of such an institution. Here's a passage from their CEO Ray Davis on this issue:
Bureaucracy is the enemy of change, and it is guaranteed to limit your organization's ability to adapt quickly to fast-changing conditions in your markets. Bureaucracy isn't the result of having ten thousand people working for you. Your organization can be bureaucratic with only ten employees, or even fewer. If your organization isn't agile, you could lose tremendous opportunity to take advantage of something that would have been in your favor, but because you weren't quick enough or agile enough, you missed it. Situations like this are particularly sad because it's not that you didn't think about taking proactive action; your company was just unable to act because it couldn't move quickly enough. You can't afford to stand still. Changes and revolutions are coming at you every day.
"I have always believed, and I still believe, that whatever good or bad fortune may come our way we can always give it meaning and transform it into something of value?"
- Hermann Hesse
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**These are our opinions. We're not authorized, or willing, to express those of others.**