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A. Lender and Agency Responsibilities
After closing, the lender must compare the deed of trust or real estate mortgage with the title opinion to assess lien priority, assure the collateral is accurately covered, verify the date and time of recording, and ensure that the loan closing instructions have been followed. The Agency does not set policy for survey requirements; however, it is the lender’s responsibility to ensure that ownership interest that protects the security property has been obtained after the loan is closed. If the borrower defaults on the loan, the lender must be able to foreclose on the property to settle the debt. If the lender failed to obtain all required security, the originating lender may be subject to indemnification if a loss claim request is made to reflect the lender’s failure to meet the lien requirements.
B. Acceptable Forms of Ownership
The two forms of ownership acceptable to the Agency are fee-simple and secure leasehold.
1. Fee-Simple Ownership
Acceptable fee-simple ownership is evidenced by a fully marketable title with a deed
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vesting a fee-simple interest in the property to the borrower.
2. Secure Leasehold Interest
Although fee-simple ownership is preferable, the borrower may have a secure leasehold interest in the property. Leasehold interests are acceptable when all the following conditions are met:
x The applicant must be unable to obtain fee-simple title to the property;
x The rent charged for the lease must not exceed the rate paid for comparable
leases; and
x The appraisal documents these conditions.
The lessor must own the fee-simple title. This provision does not apply to a lessor who is a Native American possessing a leasehold interest on restricted land. Trust or restricted land must remain in trust or restricted status. In these cases, the mortgage, deed of trust, leasehold interest, or other security interest must be approved by the Secretary of the Interior. For those loans to Native Americans on restricted or trust land, the lender must obtain:
x Evidence that the tribe has enacted legally binding and effective foreclosure
procedures and will enforce those procedures upon notice of default from a lender.
x Evidence that the tribe has enacted legally binding and effective eviction
procedures and will enforce those procedures upon notice of default from a lender.
x Evidence that the tribe has adopted procedures ensuring that the guaranteed
loan will always have first lien priority (if applicable) and will be satisfied before all other property debts (excepting tribal taxes) OR has adopted legislation requiring the tribe to follow state or local priority of lien procedures.
x A copy of the tribe’s lease for use on residential land.
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x The lender will adhere to the tribe’s mortgage, foreclosure and eviction
ordinances and the terms of the lease and the lender can only sell the leasehold interest to the tribe, the tribally designated housing entity, or another tribal member. The lender and RD staff should consult with the tribe to ensure they adhere to the tribe’s ordinances, the terms of the lease, and may exercise flexibility as directed by the tribe. The Agency’s Native American Coordinators should also be contacted for additional assistance.
For all other leasehold interest:
x Leasehold estates are an accepted practice and readily marketable in the area
where the subject property is located.
x Neither the leasehold nor the fee-simple title may be subject to a prior lien
unless the Agency authorizes acceptance of the prior lien before loan approval.
x The lease must be in writing, recorded, and contain all the following
provisions:
o The lessor’s consent to allow the lender’s mortgage.
o The right of the lender to foreclose and sell the property without
restrictions that adversely affect the market value of the property.
o The right of the lender to bid at a foreclosure sale or to accept voluntary
conveyance of the property in lieu of foreclosure.
o The right of the lender to occupy, sublet, or sell the property should the
leasehold be acquired through foreclosure, voluntary conveyance, or abandonment.
o The right of the borrower to transfer the leasehold and lender mortgage to
an eligible transferee who will assume the lender’s debt if the borrower defaults or is unable to continue with the lease.
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o A negotiated agreement with the lessor before the leasehold interest is
approved regarding the lender’s obligation to satisfy unpaid rent or other charges accrued before or during the time the lender has possession of or title to the leasehold. During negotiations, the lender should consider the length of time it will take to foreclose, how much the Agency would be responsible for, and when the lender would have to pay.
o Fair compensation to the borrower for any part of the property taken by
condemnation.
o The unexpired term of the lease must be at least 150 percent of the term of
the mortgage.
x The language regarding amendments to mortgages with leasehold interests,
specified in Attachment 16-A of this Chapter, must be inserted in the mortgage.
C. Insurance Policy Requirements
1. Hazard Insurance
Until loans are paid in full, lenders must ensure that borrowers continuously maintain hazard insurance on the collateral to protect against fire and weather- related damage. A hazard insurance policy must be in force at the time the loan is closed. A policy must document if the dwelling is on a leasehold to ensure state laws regarding insurance requirements are met.
Lenders should adopt accepted industry standards for hazard insurance as noted below:
x Hazard insurance providers should have ratings in accordance with the most recent Government Sponsored Enterprise (GSE) requirements. x Hazard insurance policies should conform to the GSE coverage requirements of “the standard extended coverage endorsement,” which states that a policy cannot be accepted that in whole or part excludes wind, hurricane, or catastrophe insurance unless the coverage is provided in another policy with
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the same coverage limits as the hazard policy.
Properties should have replacement cost coverage in an amount that is at least equal to the guaranteed value of the improvements or the unpaid principal balance. Deductible(s) should not exceed 5% of the total coverage amount.
When using a high deductible, lenders must be mindful of the applicant’s repayment ability and ensure that chosen deductibles are reasonable for the applicant and will not cause undue hardship on the borrower.
2. Flood Insurance
If a dwelling is in a Special Flood Hazard Area (SFHA) as identified by the FEMA, the property must be located within a National Flood Insurance Program
(NFIP) participating community and the borrower must obtain flood insurance. The lender must ensure the borrower continuously maintains flood insurance for the life of the loan and that the policy is in force at the time of loan closing.
Flood insurance must cover the lesser of the outstanding principal balance of the loan or the maximum amount of coverage allowed under NFIP. Unless a higher amount is allowed by state or federal law (which includes FEMA policies), the maximum deductible clause for a flood insurance policy should not exceed $10,000. Existing dwellings are eligible for the SFHGLP if flood insurance is available.
When using a high deductible, lenders must be mindful of the applicant’s repayment ability and ensure that chosen deductibles are reasonable for the applicant and will not cause undue hardship on the borrower.
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